micro economics- demand and supply

8/3/2019 Micro Economics- Demand and Supply

1/54

MICROECONOMICS

P R O F . R U S H E N C H A H A L

Demand and Supply

Prof. Rushen Chahal


2/54

Learning Objectives

y 1. Understand the economic definitions of supplyand demand.

y 2. Understand what demand shift is and why ithappens.

y 3. Describe how the market reaches equilibriumprice and quantity.

y 4. Describe how shifts in demand and supply causeequilibriums to change.

y 5. Describe what happens to an equilibrium ifdemand and supply shift and the same time.

Prof. Rushen Chahal


3/54

y Definitionsy Demandy Quantity Demandedy Law of Demandy Shifting the Demand Curvey Supplyy Quantity Suppliedy L

aw of Supplyy Shifting the Supply Curvey Market Demand and Supplyy Market Equilibriumy Changes in Market Equilibrium

Prof. Rushen Chahal


4/54

Demand

y Demand relates the quantity of a good thatconsumers would purchase at each of variouspossible prices, over some period of time, ceteris

paribus.

y In other words: For ALL possible prices, demand consists of the

quantities that people want in a defined amount of time.

On a graph, demand is many points.

Prof. Rushen Chahal


5/54

Demand

Price perPrice perpizza ($)pizza ($)

QuantityQuantityof pizzasof pizzas

per monthper month22 1313

44 1010

66 7788 44

1010 11

Ademand schedulea table that showspossible prices andtheir quantitiesdemanded.

Prof. Rushen Chahal


6/54

Demand

Individual Demand Curve for pizza

(monthly):

1 4 7 10 13

2

$10

8

6

4

Price

Quantity

D

Ademandcurve the

graph of ademandschedule.Notice that the

demand curveslopes downand to the right.This is a

negative slope.Prof. Rushen Chahal


7/54

Quantity Demanded

y Quantity demanded the quantity that consumerswould purchase at a given price.

y In other words: For ONE (and only ONE) price, quantity demanded is the

amount that people want.

On a graph, quantity demanded is ONE point.

Prof. Rushen Chahal


8/54

Quantity Demanded

y A change in price causes the quantity demanded tochange.

y When this happens, we move ALONG the demand

curve (the demand curve does NOT move).

Prof. Rushen Chahal


9/54

Quantity Demanded

Demand Curve for pizza (monthly):

1 4 7 10 13

2

$10

8

6

4

Price

Quantity

D

If the price changesfrom $8 to $4, wemove

ALONG the demandcurve. The pricechangecaused a change inthe quantity

demanded. Thedemand curve didNOT move.

Prof. Rushen Chahal


10/54

Law of Demand

y Law of Demand as price falls, the quantity demandedincreases.

If your favorite car cost 720,000 RMB, how many would you buy?

What if it cost 72,000 RMB? What if it cost 72 RMB?

y What happens to quantity demanded if price rises? Quantity demanded falls.

Prof. Rushen Chahal


11/54

Shifting the Demand Curve

yWe do NOT move ALONG the demand curve.Instead, we move the demand curve.

yAn INCREASE in demand: demand shifts to theRIGHT.

y

A DECREASE in demand: demand shifts to theLEFT.

Prof. Rushen Chahal


12/54


$

Q

8

10

4

6

2

100 125 150 175 20050

D21

An increase in

demand is

represented by arightward shift in

the demand curve.

D1

Prof. Rushen Chahal


13/54


$

Q

8

10

4

6

2

100 125 150 175 20050

D1D2

Conversely, a

decrease in

demand will causea leftward shift on

the demand curve.

Hence, fewer

units will be

demanded atevery given price.

Prof. Rushen Chahal


14/54


y Shift factors (cause a change in demand):

Tastes and preferences

Substitutes

Complements Income

Normal goods and inferior goods

Population

Expectation of future price

Prof. Rushen Chahal


15/54


y Substitutes something that takes the place ofsomething else, such as one brand of cola foranother.

y Examples: You always drink green tea. The price of green tea doubles.You change to black tea (demand for black tea increases).Black tea is a substitute for green tea.

Prof. Rushen Chahal


16/54


y Compliments goods or services that go well witheach other, such as cream with coffee.

y Example: You ketchup with french fries. The cost of french fries

goes down by half. This causes you to eat more ketchup(demand for ketchup increases). Ketchup is a

compliment of french fries.

Prof. Rushen Chahal


17/54


y Normal goods demand for these goods variesdirectly with income.

y In other words: If you have more money, you buy MORE normal goods

(demand increases).

y Examples: Housing, jewelry, new clothes.

Prof. Rushen Chahal


18/54


y Inferior goods demand for these goods variesinversely with income.

y In other words: If you have more money, you buyLESS inferior goods

(demand decreases).

y Examples: Cold showers, bad tasting cheap food, old clothes.

Prof. Rushen Chahal


19/54

Shifting theDemand Curve

Demand ShiftsDemand ShiftsRIGHTRIGHT When:When:

Prices of substitutesPrices of substitutes

increaseincrease

Prices of complementsPrices of complements

decreasedecrease

Normal goodNormal good--incomeincome

increasesincreases Inferior goodInferior good--incomeincome

decreasesdecreases

Population increasesPopulation increases

Tastes & preferences turnTastes & preferences turn

in favor of the productin favor of the product

It is believed that pricesIt is believed that prices

will rise in the futurewill rise in the future

QuantityQuantity

D1D1

D2D2

Price

Price

Prof. Rushen Chahal


20/54

Demand ShiftsDemand Shifts LEFTLEFT

When:When:

Prices of substitutesPrices of substitutesdecreasedecrease

Prices of complementsPrices of complements

increaseincrease

Normal goodNormal good--incomeincome

decreasesdecreases

Inferior goodInferior good--incomeincome

increasesincreases

Population decreasesPopulation decreases

Tastes & preferences turnTastes & preferences turn

against the productagainst the product

It is believed that in theIt is believed that in the

future prices will fallfuture prices will fall

D1D1

Price

Price

QuantityQuantity

D2D2

Shifting theDemand Curve

Prof. Rushen Chahal


21/54

Supply

y Supply relates the quantity of a good that will beoffered for sale at each of various possible prices,over some period of time, ceteris paribus.

y In other words:

For ALL possible prices, supply consists of the quantitiesthat people will produce in a defined amount of time.

On a graph, supply is many points.

Prof. Rushen Chahal


22/54

SupplyPrice perPrice per

box ofbox ofCigarettesCigarettes

($)($)

QuantityQuantitysuppliedsupplied(millions(millions

of boxesof boxesper year)per year)

55 1010

44 8833 66

22 44

11 22

Asupplyschedule a

table thatshows possibleprices and

their quantitiessupplied.

Prof. Rushen Chahal


23/54

Supply

Supply Curve for cigarettes (daily)Supply Curve for cigarettes (daily)::

2 4 6 8 10

1

$5

4

3

2

Price

Quantity

Qs

Asupply curve the graph of a

supplyschedule.Notice that thesupply curve

slopes up andto the right.This is a

positive slope.Prof. Rushen Chahal


24/54

Quantity Supplied

y Quantity supplied the quantity that will be offeredfor sale at a given price.

y In other words: For ONE (and only ONE) price, quantity supplied is the

amount that people will sell.

On a graph, quantity supplied is ONE point.

Prof. Rushen Chahal


25/54

Quantity Supplied

y A change in price causes the quantity supplied tochange.

y When this happens, we move ALONG the supply

curve (the supply curve does NOT move).

Prof. Rushen Chahal


26/54

Quantity Supplied

Supply Curve for cigarettes (daily)Supply Curve for cigarettes (daily)::

2 4 6 8 10

1

$5

4

3

2

Price

Quantity

Qs

If the price changesfrom $2 to $5, we

moveALONG the supplycurve. The pricechangecaused a change in

the quantitysupplied. Thesupply curve didNOT move.

Prof. Rushen Chahal


27/54

Law of Supply

y Law of Supply as price rises, the quantitysupplied increases.

If your tutor someone in English for 10RMB per hour,

how many hours will you work?What if it pays 100 RMB per hour?What if pays 1000 RMB per hour?

y

What happens to quantity supplied if price falls? Quantity supplied falls.

Prof. Rushen Chahal


28/54

Shifting the Supply Curve

yWe do NOT move ALONG the supply curve.Instead, we move the supply curve.

yAn INCREASE in supply: supply shifts to theRIGHT.

y

A DECREASE in supply: supply shifts to theL

EF

T.

Prof. Rushen Chahal


29/54

Changes in Supply vs. Changes inQuantity Supplied

QuantityQuantity

Price(

$s)

Price(

$s)

55

44

33

22

11

0011 22 33 44 55

SupplySupply

MovementMovement

ALONG theALONG the

supplycurv

esupplycurv

e

IncreaseIncrease

DecreaseDecrease

Prof. Rushen Chahal


30/54

Shifting the Supply Curve

y Shift Factors: Prices of Inputs

Technological Change

Government or Union Restrictions (pollution)

Prices of Substitutes in Production (would you make moremoney if you made a different good?)

Prices of JointlyProduced Goods (beef and leather)

Expected Future Prices

Number of sellers (suppliers)

Prof. Rushen Chahal


31/54

Changes in Supply - Decrease

Supply Shifts LEFTWhen:

Sellers expect price torise in future.

Price of labor or any

input rises. Government or union

restrictions increasecost.

Price of substitute inproduction rises.

Price of productproduced jointly falls.

Number of sellers

declines

QuantityQuantity

$$ S2S2

S1S1

Prof. Rushen Chahal


32/54

Changes in Supply - Increase

Supply ShiftsSupply ShiftsRIGHTRIGHT When:When:

Sellers expect price toSellers expect price todecline in future.decline in future.

Price of labor or any inputPrice of labor or any input

falls.falls.

Technological change lowersTechnological change lowerscost.cost.

Price of substitute inPrice of substitute inproduction falls.production falls.

Price of product producedPrice of product producedjointly rises.jointly rises.

Number of sellers increasesNumber of sellers increases

QuantityQuantity

$$

S2S2

S1S1

Prof. Rushen Chahal


33/54

Market Demand and Supply

y The market is made up of individual firms(businesses) as well as individual costumers.

y How do you thing we measure market supply and

demand?y Market demand is the horizontal summation of

each individuals demand curve.

y Market supply is the horizontal summation of the

supply of each sellers supply curve.

Prof. Rushen Chahal


34/54

Market Demand

Price ($) Jack's Quantity Demanded mark's Quantity DemandedMarket Q Demanded

5 1 0 1

4 2 1 33 3 2 5

2 4 3 7

1 5 4 9

0 6 5 11

Demand can beoneindividualsDemand can beoneindividuals

orthemarketasa wholeorthemarketasa whole

Prof. Rushen Chahal


35/54

Quantity

Individual As Demand CurveIndividual As Demand Curve

Price ($)

5

4

3

2

10

JillsDemand

MarksQuantityDemanded

0

1

2

3

45

6

5

4

3

2

1

01 2 3 4 5 6 7 8 9 10 11

Atapriceof$5Atapriceof$5

Mark' quantityMark' quantity

demanded is 0 pailsdemanded is 0 pails

ofwaterofwater


Mark' quantityMark' quantity

demanded is4pailsdemanded is4pails

ofwaterofwater

Prof. Rushen Chahal


36/54

Quantity

Individual Bs Demand CurveIndividual Bs Demand Curve

Price ($)

5

4

3

2

10

Jacks

Demand

JacksQuantityDemanded

1

2

3

4

56

6

5

4

3

2

1

01 2 3 4 5 6 7 8 9 10 11


Jacks quantityJacks quantity

demanded is 1 pailsdemanded is 1 pails

ofwaterofwater


Jill' quantityJill' quantity

demanded is4pailsdemanded is4pails

ofwaterofwater

Prof. Rushen Chahal


37/54

Quantity

Market Demand Curve (Individual AMarket Demand Curve (Individual Aand Bs demand curves together)and Bs demand curves together)

6

5

4

3

2

1

01 2 3 4 5 6 7 8 9 10 11

Atapriceof$5,themarket

quantity demanded is 1+0=1

pailofwater.

Market Demand


quantity demanded is5+4=9

pailsofwater.

Prof. Rushen Chahal


38/54

Market SupplyPrice ($) Coke's Quantity Supplied Pepsi's Quantity Supplied Market Q Supplied

5 4 5 9

4 3 4 73 2 3 5

2 1 2 3

1 0 1 1

0 0 0 0

Supplycan befromonefirmSupplycan befromonefirm

orallfirmsinthemarket.orallfirmsinthemarket.

Prof. Rushen Chahal


39/54

Company As Supply CurveCompany As Supply Curve

QuantityQuantity

55

44

33

22

11

0011 22 33 44 55 7766 88 99

CokesCokes

SupplySupply

Atapriceof$5 DaZhongAtapriceof$5 DaZhong

supplies4 Pailsofwatersupplies4 Pailsofwater

Atapriceof$1 CokeAtapriceof$1 Coke

supplies 0 pailsofwatersupplies 0 pailsofwater

Prof. Rushen Chahal


40/54

Company Bs Supply CurveCompany Bs Supply Curve

QuantityQuantity

55

44

33

22

11

0011 22 33 44 55 7766 88 99

WandasWandas

SupplySupply

Atapriceof$5 PepsiAtapriceof$5 Pepsi

supplies5pailsofwater.supplies5pailsofwater.

Atapriceof$1 PepsiAtapriceof$1 Pepsi

supplies 1 pailsofwater.supplies 1 pailsofwater.

Prof. Rushen Chahal


41/54

Market Supply Curve (Individual AMarket Supply Curve (Individual Aand Bs supply curves together)and Bs supply curves together)

QuantityQuantity

55

44

33

22

11

0011 22 33 44 55 7766 88 99

MarketSupplyMarketSupply

Atapriceof$5,themarketquantitysupplied is4+5=9

pailsofwater.


quantitysupplied is 0+1=1

pailsofwater.

Four by CokeFour by Coke

Five by PepsiFive by Pepsi

Prof. Rushen Chahal


42/54

Market Equilibrium

y Market Equilibrium a situation in which there isno tendency for either price or quantity to change.

y In other words: The quantity supplied equals the quantity demanded.

There is only one price where this happens; we say themarket clears.

Prof. Rushen Chahal


43/54

Market Equilibrium

y Surplus the excess of quantity supplied overquantity demanded, which occurs when price is

ABOVE equilibrium.

y Shortage the excess of quantity demanded overquantity supplied, which occurs when price isBELOW equilibrium.

Prof. Rushen Chahal


44/54

Market Equilibrium

Price ($) Quantity Demanded Quantity Supplied Surplus orShortage

5 1 9 8

4 3 7 43 5 5 0

2 7 3 -4

1 9 1 -8

0 11 0 -11

ThereisonlyonepricethatclearsThereisonlyonepricethatclears

themarket,meaningthatthe quantitythemarket,meaningthatthe quantity

supplied equalsthe quantity demanded.supplied equalsthe quantity demanded.

Prof. Rushen Chahal


45/54

Market Equilibrium

PailsofWater

1 2 3 4 5 76 8 9

5

4

3

2

1

0QQ*

PP**

Surplusof4 PailsSurplusof4 Pails

Shortageof4 PailsShortageof4 Pails

TooHighTooHigh

Too LowToo Low

Marketequilibriumoccurs where

demand and supplyintersect.

SupplySupply

DemandDemand

Producers compete for customers,Producers compete for customers,lowering the pricelowering the price

Costumers compete for the product, raisingCostumers compete for the product, raisingthe pricethe price

Prof. Rushen Chahal


46/54

Changes in Market Equilibrium

oAdjustment from one equilibrium tothe next can be thought of as a four stepprocess:

o For some reason, a shift occurs in eithersupply or demand.

o The price that had been equilibrium nowcauses either a surplus or shortage.

o If there is a surplus, price adjusts down; if ashortage, price adjusts up.

o In response to changes in price, consumersadjust their quantities demanded andproducers their quantity supplied until thetwo are equal and the market is again in

equilibrium.Prof. Rushen Chahal


47/54


SSSSnewnew

DD

Q*Q*

P*P*

An increase in supply.

Price(

$s)

Quantity

Step #1Step #1 -- Supply shifts to the right.Supply shifts to the right.Step #2Step #2 A surplus occurs at theA surplus occurs at the

starting price.starting price.

Step #3Step #3 Competition among theCompetition among the

producers causes the price to fall.producers causes the price to fall.

Step #4Step #4 -- As price falls, theAs price falls, the

quantityquantity

demanded increases and thedemanded increases and the

quantityquantity

supplied decreases until the twosupplied decreases until the two

become equal, after which there isbecome equal, after which there is

no more tendency for either priceno more tendency for either priceoror

quantity to change.quantity to change.

AA

BB

CC

Prof. Rushen Chahal


48/54


Quantity

Price(

$s)

SSnewnewSS

DD

SSnewnew

Q*

P*P*

A decrease in supply.

Step #1Step #1 -- Supply shifts to the left.Supply shifts to the left.

Step #2Step #2 A shortage occurs at theA shortage occurs at the

starting price.starting price.

Step #3Step #3 Competition among theCompetition among the

consumers causes the price to rise.consumers causes the price to rise.Step #4Step #4 -- As price rises, theAs price rises, the

quantityquantity

demanded decreases and thedemanded decreases and the

quantityquantity

supplied increases until the twosupplied increases until the two

become equal, after which there isbecome equal, after which there isno more tendency for either priceno more tendency for either price

oror

quantity to change.quantity to change.

AABB

CC

Prof. Rushen Chahal


49/54


S

Quantity

Price(

$s)

SS

D

DD

DDnewnew

Q*Q*Q*Q*

P*P*

P*

An increase or decrease in demand.

DDnewnew

Quantity

Price(

$s)

CC

BBAA

AABB

CC

Prof. Rushen Chahal


50/54

Changes in

Market Equilibrium

Case Demand Supply Equilibrium P Equilibrium Q

1 No change Right Fall Rise2 No change Left Rise Fall

3 Right No change Rise Rise

4 Left No change Fall Fall

Note: In Cases 1-4 only one of the two

curves is shifting.

Prof. Rushen Chahal


51/54


SSSSnewnew

DD

Q*Q*

Shift in demand equal to shift in supply

Price(

$s)

Quantity

DDnewnew

P*P*Same Equilibrium PriceSame Equilibrium Price

Higherequilibrium quantityHigherequilibrium quantity

Prof. Rushen Chahal


52/54


SSSSnewnew

DD

Q*Q*

Shift in demand less than shift in supply

Price(

$s)

Quantity

DDnewnew

P*P* New Equilibrium PriceNew Equilibrium Price


Prof. Rushen Chahal


53/54


SS

DD

Q*Q*

Shift in demand greater than shift in supply

Price(

$s)

Quantity

P*P*

New Equilibrium PriceNew Equilibrium Price


SSnewnew

DDnewnew

Prof. Rushen Chahal


54/54

Changes inMarket Equilibrium

Case Demand Supply EquilibriumP EquilibriumQ

5 Shiftsright Shiftsright Directionuncertain Rises

6 Shiftsleft Shiftsleft Directionuncertain Falls

7 Shiftsright Shiftsleft Rises Directionuncertain

8 Shifts left Shifts right Falls direction uncertain

Note: In Cases 5-8 both of the curves

are shifting.

Prof Rushen Chahal

micro economics- demand and supply

Documents