What We re Doing Today

Transcription

1 What We re Doing Today Quan3ty demanded versus demand Moving along versus shi9ing the demand curve Quan3ty supplied versus supply A look ahead: next lecture on shi9ing supply curves, price determina3on and S- D equilibrium

2 Demand If you demand something, then you 1. Want it, 2. Can afford it, and 3. Have made a definite plan to buy it. Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy. The quantity demanded; the amount that consumers plan to buy during a particular time period, and at a particular price.

3 Demand Substitution Effect When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases. Income Effect When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases.

4 Demand curve A demand curve is also a willingness-andability-to-pay curve Willingness to pay measures marginal benefit

5 Demand Figure 3.1 shows a demand curve for energy bars.

6 Movements along vs shi9s in a curve When price changes, move along the curve When anything other than price changes, the curve shi9s True for demand and supply curves

7 Law of Demand A law is a regularity If price rises, quan3ty demanded falls If price falls, quan3ty demanded rises Move along a demand curve

8 Adding to Get Market Demand For an economy with 2 people At p (price) = 3, person 1 demands 3 units and person 2, 1 unit. This gives a total market demand at p=3 of 4 units

9 Demand Curve: Move Along When p Changes For a price fall, move down the demand curve NOTE: for simplicity using straight line curves today Price D D Quan3ty

10 Demand Curve: Move Along When p Changes For a price fall, move down the demand curve NOTE: for simplicity using straight line curves today Price Quan3ty

11 The role of prices

12 Price Has the Starring Role Quan3ty demanded changes in response to the price changes A price change will only cause a move along an exis,ng demand curve as the quan3ty demanded changes with price

13 Ice Cream Example: Compare Two Fixed Temperatures Demand curve shi9s outward with higher temp. Price Temp = 90 Temp = 70 D 1 D 2 Quan3ty

14 Ice Cream Example: Compare Two Fixed Temperatures Demand curve shi9s outward with higher temp. Price Temp = 90 Temp = 70 Quan3ty

15 Demand: Supporting Roles Six main factors that change demand are The prices of related goods Expected future prices Income Expected future income and credit Population Preferences

16 Demand Expected Future Prices If the expected future price of a good rises, current demand for the good increases and the demand curve shifts rightward. Income When income increases, consumers buy more of most goods and the demand curve shifts rightward. A normal good is one for which demand increases as income increases. An inferior good is a good for which demand decreases as income increases.

17 Normal or inferior?

18 Normal or inferior?

19 Normal or inferior?

20 Normal and Inferior Goods Normal (most goods): you buy more of most things if your income rises Inferior: you tend to buy these only because they are cheap (hamburger vs steak; a clunker car instead of a Mercedes) With more income, can afford the beaer good so buy less of the inferior good

21 Compare Two Incomes: Normal Good Case Demand curve shi9s outward with higher income Demand increases Price Income Income 2 D 1 Quan3ty

22 Compare Two Incomes: Normal Good Case Demand curve shi9s outward with higher income Demand increases Price Income = 90 Income = 70 D 2 D 1 Quan3ty

23 Role of Expecta3ons Expect prices to rise At any current price, do you buy more or less of the good? If the price of rahmen is $1 now but you expect it to rise, what do you do?

24 Rahmen Example: Expect Rising Price Demand curve shi9s outward: Demand Increases Price D 1 D 2 Quan3ty

25 Rahmen Example: Expect Rising Price Demand curve shi9s outward: Demand Increases Price 1 Quan3ty

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28 Preview of coming aarac3ons: Prices of related goods Two kinds of rela3onships involved here Goods that go together: hamburger and fried; shoes and shoelaces Complements Goods that can be subs3tuted for each other: Coke and Pepsi Subs,tutes

29 Demand Change and Curve Shi9 with Price Change of Related Goods Price of a complement rises: shoes are the complement and their price rises Buy fewer shoes, the complement Therefore buy fewer shoelaces Demand for shoelaces decreases; demand curve shi9s le= (inward)

30 Price of a Complement (Fries) Falls Burger demand curve shi9s : Demand creases Price 1 Quan3ty

31 Price of a Subs3tute (Pepsi) Falls Coke demand curve shi9s : Demand creases Price 1 Quan3ty

32 Preferences change: Read in the Collegian that Coke improves the memory for studying Coke demand curve shi9s : Demand creases Price 1 Quan3ty

33 Supply Resources and technology determine what it is possible to produce. Supply reflects a decision about which technologically feasible items to produce. The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.

34 The Law of Supply Supply Other things remaining the same, the higher (lower) the price of a good, the greater (smaller) is the quantity supplied; and Why? Marginal cost of producing a good or service (MC) tends to increase as the quantity produced increases (Chapter 2, page 35). Producers are willing to supply a good only if they can at least cover their MC.

35 Supply Supply Curve and Supply Schedule The term supply refers to the entire relationship between the quantity supplied and the price of a good. The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers planned sales remain the same.

36 Price of a Subs3tute (Pepsi) Falls Coke demand curve shi9s : Demand creases Price 1 Quan3ty

37 Supply: Drawing the curve

38 Supply: Explaining the slope and intercept Minimum Supply Price Also minimumsupply-price curve. As the Q ñ MC ñ. The lowest price at which someone is willing to sell an additional unit ñ. This lowest price is MC.

39 Supply Minimum Supply Price Also minimumsupply-price curve. As the Q ñ MC ñ. The lowest price at which someone is willing to sell an additional unit ñ. This lowest price is MC.