chapter 2 - for student

7/23/2019 Chapter 2 - For Student

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Chapter 2Chapter 2

DEMAND AND SUPPLY DEMAND AND SUPPLY

Content

+ Demand

+ Supply

+ Market equilibrium



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I. Demand

1. Definitions

2. The law of demand

3. Demonstrating demand

4. Determinants in demand function

5. Movement and shift of demand curve

I. Demand1. Definitions

- Demand (D): The quantity of goods and services that consumer iswilling to buy and afford to buy at various price level in a certain time,ceteris paribus.

- Quantity demanded (QD): The quantity of goods and services thatconsumer is willing to buy and afford to buy at a price level in a certaintime, ceteris paribus.

- Individual demand

- Market demand



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I. Demand

2. The law of demand

P

QDP

QD

I. Demand

3. Demonstrating demand

- Demand schedule

- Demand curve

- Demand function

P = - aQD + b

QD = - aP + b

QD = f (Px, Py, I, T, E, N)

P

Q

P1

P2

Q1 Q2

A

B



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I. Demand


4.1. Price of related goods (PY)

- Substitutes goods: A and B are substitutes if the usage of A can

be replaced by the usage of B, provided that the initial

consumption target is unchanged

I. Demand


4.1. Price of related goods (PY)

- Complements goods: A and B are complements if the usage of

A must go together with the usage of B to ensure the initial

utility of both goods



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I. Demand


4.2. Income of consumer (I)

I QD

I QD

I QD

I QD

Normal goods

Inferior goods

I. Demand


4.2. Income of consumer (I)

- Engel curve: Attitude

toward any goods

depends on buyer’s

income, not on goods’

quality

I

Q



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I. Demand


4.3. Taste of consumer (T)

4.4. Expectation of consumer (E)

4.5. Number of consumer (N)

I. Demand

5. Movement and shift of the demand curve

- Movement: PX

- Shift: The rest determinants

P P

Q Q



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Question

1. Chicken and fish are substitutes goods.

a. The decrease in chicken’s price causes a

movement in fish’s demand curve

b. The increase in chicken’s price causes a left

shift in fish’s demand curve

II. Supply

1. Definitions

2. The law of supply

3. Demonstrating supply

4. Determinants in supply function

5. Movement and shift of supply curve



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II. Supply

1. Definitions

- Supply (S): The quantity of goods and services thatsupplier is willing to supply and able to supply at various price level in a certain time, ceteris paribus.

- Quantity supplied (QS): The quantity of goods andservices that supplier is willing to supply and able to supplyat a price level in a certain time, ceteris paribus.

- Individual’s supply (firm’s supply)

- Market supply

II. Supply

2. The law of supply

P QS

P QS



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II. Supply

3. Demonstrating supply

- Supply schedule

- Supply curve

- Supply function

P = aQS + b

QS=aP + b

QS = f (Px, Pi, G, Te, E, N)

P

Q

P1

P2

Q1 Q2

II. Supply

4. Determinants in supply function

4.1. Price of inputs (Pi)

4.2. Government’s policies

4.3. Technology

4.4. Expectation

4.5. Number of supplier

Pi

C Profit QS

Pi C Profit Q

S



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II. Supply

5. Movement and shift of the supply curve

- Movement: PX:

- Shift: The rest determinants

-

P P

Q Q

SS

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III. Market equilibrium

1. Equilibrium status

2. Surplus and shortage

3. Price controlling



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1. Equilibrium status

- Status in which quantity

demanded equals to

quantity supplied

- - Merger demand schedule

and supply schedule

P = -aQD + b

P = cQS + dE (PE, QE)

- Intersection of (S) and (D)

-

D

S

EPE

QE

P

Q



- Shortage

+ P2 < P E

+ QS < Q D => shortage

+ Appear market’s

pressure to make P2

return to the equilibrium price

Shortage

PE

QE



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- Surplus:

+ P1 > P E

+ QS > Q D => surplus

+ Appear market’s

pressure to make P2

return to the equilibrium price

Surplus

PE

P1

QE



- Controlled by the Government

- Ceiling price (PC)

+ The highest price allowed

in the market

+ For the sake of buyer

+ Appear shortage

+ Government’s responsibility

EPE

QE



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- Floor price (PF)

+ The lowest price allowed

in the market

+ For the sake of supplier

+ Appear surplus

+ Government’s responsibility

PE

QE

chapter 2 - for student

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