Demand, Supply, and Equilibrium
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1 Spring, 2017 Demand, Supply, and Equilibrium Economic Department, Saint Louis University Instructor: Xi Wang
2 RoadMap Introduction to Market Demand Supply Equilibrium Equilibrium Change
3 Introduction Introduction to Market Demand Supply Equilibrium Equilibrium Change
4 What happens in a market? What is a Market? You walked into a farmers' market There stand a lot of buyers and sellers Trading happens, Maybe Cash only!
5 What is a market? A market is a group of buyers and sellers of a particular good or service As long as you have buyers and sellers, that is market. No matter whether trading happens or not! Buyers as a group determine the demand, to purchase this good or service Sellers as a group determine the supply of the product, to provide this good or service
6 What is a market?
7 What is a market? Markets take many forms Sometimes, people meet together and negotiate the price, say famers' mkt
8 What is a market? Counterexample? Gas Store But most of the time, we cannot negotiate the price. In this kind of market, everyone seems to be a tiny participant, none can move the price alone. Take it or leave it!
9 Competitive Market We call this kind of market, in which we as an individual cannot move the price, to be competitive market. Why we or firms cannot move the price? There are so many buyers and so many sellers that each has a negligible impact on the market price. Cannot is a simplfied assumption:) You can always find some coupon for discount
10 What is a competitive market? When we really cannot move the price around, we will call this market to be perfect competitive market To reach this perfect competitiveness, a market must have two characteristics, Or we define Competitive market to be a market having following properties: (1) The goods offered for sale are all exactly the same, so you evaluate them the same (2) buyers and sellers are so numerous that no single buyer or seller has any influence over the market price
11 Counter example to Competitive market? ---- Given we have numerous consumer, Some markets have only one seller, and this seller sets the price. Say, Laclede gas,----we call it to be monopoly What if there are several, not too many supplier, say, 3? Oligopoly --- AT&T, Sprint, T-mobile Many supplier but similar goods? Samsung, Apple, Huawei, HTC, Moto, Nokia... Monopolistic competition
12 Counter example to Competitive market? Yes, we have many kinds of market structure! Despite the diversity of market types we find in the world, assuming perfect competition is a useful simplification and, therefore, a natural place to start and learn how market works.
13 Demand Introduction to Market Demand Supply Equilibrium Equilibrium Change
14 Demand: Intuition How shall we think about consumers? How do they represent the purchasing power? Intuitively, when I walk into a super market, I saw the price of Cherry, say. $8.99/lb Then I will decide how much cherry to purchse. Give me a price, I will decide how many/much to buy It is a Plan!
15 Demand The quantity demanded (corresponding to a price) of any good is the amount of the good that buyers are willing and able to purchase at this price Law of demand: Other things being equal, when the price of a good rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises I may decide to buy 2 lb at the price of $8.99, maybe 3 at the price of $6
16 Law of Demand: Example Law of demand: when the price falls, the quantity demanded rises In English, when the price of some good falls, Nothing else changes! People will have more intend to purchase. Black Friday... Cyber Monday...
17 Appendix: How to plot a point on x-y plane How we are to plot a point on x-y plane, say (3,2)? y=2 x=3 x=3
18 Law of Demand: Explaination? Question: Is there any deep reason underlying law of demand? One answer is in our Note.
19 Demand Schedule
20 Market Demand and individual Demand To analyze how markets work, we need to determine the market demand, the sum of all the individual demands for a particular good or service
21 Supply Introduction to Market Demand Supply Equilibrium Equilibrium Change
22 Supply Similar to Demand, Producer will decide how much/ many to produce given the price. The quantity supplied(corresponding to a price) of any good is the amount of the good that buyers are willing to produce and sell at this price Give me a price, I will decide how many to produce---- Also a plan Law of supply(property of this plan): Other things being equal, when the price of a good rises, the quantity supplied of the good also rises, and when the price falls, the quantity supplied falls as well.
23 Supply Why are suppliers willing to produce more when price is higher? Check out the note
24 Supply Schedule
25 Market Supply and individual Supply Just as market demand is the sum of the demands of all buyers, market supply is the sum of the supplies of all sellers.
26 Equilibrium Introduction to Market Demand Supply Equilibrium Equilibrium Change
27 Equilibrium When we put Demand (plan) and Supply (plan) Together
28 Equilibrium Notice that there is one point at which the supply and demand curves intersect. This point is called the market s equilibrium. The price at this intersection is called the equilibrium price, and the quantity is called the equilibrium quantity.
29 Equilibrium Why is it named to be equilibrium? Equilibrium means Balance Balance means none would like to move away from it! What if...
30 Disequilibrium
31 Equilibrium Change Introduction to Market Demand Supply Equilibrium Equilibrium Change
32 Equilibrium Change Case 1: Demand moves Case 2: Supply moves
33 Equilibrium Move: When Demand curve shift What if Demand Curve moves? In another word, what if we got a new demand curve? For example what if it shift to right? What will happen to Equilibrium?
34 Equilibrium Move: When Demand curve shift Next question would be: why did it get moved? Who or what kind of factors can change our demand curve? Intuitively, what does a curve shift mean? I means given the price, you would like to consume more or less Then, Why?
35 Equilibrium Move: why Demand curve shift
36 Equilibrium Move: why Demand curve shift An intuitive answer would be : you like it more or you are now able to affort it. Given that it is sunny today, you may not want to purchase a umbrella at price $5 How about it is showering now? Would you like to purchase one at price 5? How about you are holding a Macbook Pro?
37 Equilibrium Move: factors moves demand curve Income, Normal goods How? Remember the price our classmates are willing to give? They are counting, comparing the price of diamond to their income. Price of other goods, complements/ Substitutes More consumption of Substitute will decrease your evaluation to the goods(i.e one would be enough) Coca v.s Pepsi More consumption of Complement will increase your evaluation.(i.e they have to be used together) gasoline and automobiles
38 Equilibrium Change Case 1: Demand moves Case 2: Supply moves
39 Equilibrium Move: When Supply curve shift What if Supply Curve moves? What will happen to Equilibrium?
40 Equilibrium Move: Why Supply curve shift Supply curve represents the willing of production If production can bring more profit? If production can bring less profit? For example what if cost of production change?
41 Equilibrium Move: Why Supply curve shift If people has better technology to produce Michelle: $2 Katty: $3 King: $4 Katharina: $3.5 Blake: $2.5
42 Equilibrium Move: Why Supply curve shift Price of Apple Quantities to sell(quantity supplied) $2/each 1 $2.5/each 2 $3/each 3 $3.5/each 4 $4/each 5
43 Equilibrium Move: Why Supply curve shift
44 Equilibrium Move: Why Supply curve shift If people has better technology to produce Michelle: $2----->$1.5 Katty: $3----->$2.5 King: $4----->$3.5 Katharina: $ >$3 Blake: $ >$2
45 Equilibrium Move: Why Supply curve shift Price of Apple Quantities to sell(quantity supplied) $2/each 2 $2.5/each 3 $3/each 4 $3.5/each 5
46 Equilibrium Move: Why Supply curve shift
47 Equilibrium Move: Why Supply curve shift
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