Demand and Supply PDF

Welcome Economics Lucerne School of Business Prof Gour Saraff Demand and Supply Page 1  CHAPTER CHAPTER 3 Where Prices Come From: The Interaction of Demand and Suppl...

Welcome Economics Lucerne School of Business Prof Gour Saraff Demand and Supply Page 1  CHAPTER CHAPTER 3 Where Prices Come From: The Interaction of Demand and Supply Chapter Outline and Learning Objectives 3.1 The Demand Side of the Market 3.2 The Supply Side of the Market 3.3 Market Equilibrium: Putting Demand and Supply Together 3.4 The Effect of Demand and Supply Shifts on Equilibrium © 2015 Pearson Education, Inc. 2 What Determines the Price of a Smartphone? Demand for smartphones How many smartphones do consumers want to buy? Affected by price of the smartphones Affected by other factors, including prices of other goods Supply of smartphones How many smartphones are producers willing to sell? Affected by price of the smartphones Affected by other factors, including prices of other goods We will analyze these in a perfectly competitive market: a market with (1) many buyers and sellers, (2) all firms selling identical products, and (3) no barriers to new firms entering the market. © 2015 Pearson Education, Inc. 3 Demand Schedules and Quantity Demanded Demand schedule: A table that shows the relationship between the price of a product and the quantity of the product demanded. Quantity demanded: The amount of a good or service that a consumer is willing and able to purchase at a given price. Figure 3.1 A demand schedule and a demand curve © 2015 Pearson Education, Inc. 4 Demand Curve and Market Demand Demand curve: A curve that shows the relationship between the price of a product and the quantity of the product demanded. Market demand: the demand by all the consumers of a given good or service. Figure 3.1 A demand schedule and a demand curve © 2015 Pearson Education, Inc. 5 Ceteris Paribus When drawing the demand curve, we assume ceteris paribus. Ceteris paribus (“all else equal”) condition: The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant. Figure 3.1 A demand schedule and a demand curve © 2015 Pearson Education, Inc. 6 The Law of Demand Law of demand: The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease. Implication: Demand curve slopes downward Figure 3.1 A demand schedule and a demand curve © 2015 Pearson Education, Inc. 7 What Explains the Law of Demand? When the price of a product falls, two effects cause consumers to purchase more of it: The product has become cheaper relative to other goods, so consumers substitute toward it. This is the substitution effect. The consumer now has greater purchasing power and elects to purchase more goods overall. This is income effect. Substitution effect: The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. Income effect: The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power. © 2015 Pearson Education, Inc. 8 Increase and Decrease in Demand A change in something other than price that affects demand causes the entire demand curve to shift. A shift to the right (D1 to D2) is an increase in demand. A shift to the left (D1 to D3) is a decrease in demand. Figure 3.2 Shifting the demand curve © 2015 Pearson Education, Inc. 9 Shifts of the Demand Curve As the demand curve shifts, the quantity demanded will change, even if the price doesn’t change. The quantity demanded changes at P1 every possible price. Q2 Q1 Q3 Figure 3.2 Shifting the demand curve © 2015 Pearson Education, Inc. 10 What Factors Influence Market Demand? Discuss with students' examples as it may apply to tourism in the following slides Income of consumers Increase in income increases demand if product is normal, decreases demand if product is inferior. Prices of related goods Increase in price of related good increases demand if products are substitutes, decreases demand if products are complements Tastes Population and demographics Expected future prices We will discuss how each of these affect demand. © 2015 Pearson Education, Inc. 11 Change in Income of consumers Normal good: A good for which the demand increases as income rises and decreases as income falls. Examples: Clothing Restaurant meals Vacations Effect of increase in income, if good is normal Inferior good: A good for which the demand decreases as income rises and increases as income falls. Examples: Second-hand clothing Ramen noodles Couch Surfing Effect of increase in income, if good is inferior Are smartphones normal or inferior goods? © 2015 Pearson Education, Inc. 12 Change in the Price of Related Goods Substitutes: Goods and services that can be used for the same purpose. Examples: Big Mac and Whopper Ford F-150 and Dodge Ram Hotel rooms and Airbnb Effect on demand for Big Macs, if price of Whopper increases Complements: Goods and services that are used together. Examples: Big Mac and McDonald’s fries Hot dogs and hot dog buns Hotel rooms and room service Effect on demand for Big Macs, if price of McDonald’s fries increases © 2015 Pearson Education, Inc. 13 Change in Tastes or Population/demographics Tastes If consumers’ tastes change, they may buy more or less of the product. Example: If consumers become more concerned about eating healthily, they might decrease their demand Effect on demand for fast food, if consumers want to eat healthy for fast food. Solo travel Population and demographics Increases in the number of people buying something will increase the amount demanded. Example: An increase in the elderly population increases the demand for senior travel. Increase in single households Effect on demand for medical care, as the population ages © 2015 Pearson Education, Inc. 14 Change in Expectations about Future Prices Consumers decide which products to buy and when to buy them. Future products are substitutes for current products An expected increase in the price tomorrow increases demand today. Effect on today’s gasoline An expected decrease in the price demand, if price will rise tomorrow tomorrow decreases demand today. Example: If you found out the price of gasoline would go up tomorrow, you would increase your demand today. Airfare going up due to fuel tax © 2015 Pearson Education, Inc. 15  Making the Apple’s Policy on Product Speculation Connection Apple strongly discourages its employees from speculating about when a new model will appear. Why? Suppose a customer learns that a new iPad model will be available next month. The new model is a potential substitute for the current model. The price of the current model will likely fall next month. Both effects decrease current demand (bad for Apple!). © 2015 Pearson Education, Inc. 16 Change in Demand vs. Change in Quantity Demanded A change in the price of the product being examined causes a movement along the demand curve. This is a change in quantity demanded. Any other change affecting demand causes the entire demand curve to shift. This is a change in demand. Figure 3.3 A change in demand versus a change in quantity demanded © 2015 Pearson Education, Inc. 17  The Supply Side of the Market 3.2 LEARNING OBJECTIVE Discuss the variables that influence supply. © 2015 Pearson Education, Inc. 18 Supply Schedules and Supply Curves Supply schedule: A table that shows the relationship between the price of a product and the quantity of the product supplied. Quantity supplied: The amount of a good or service that a firm is willing and able to supply at a given price. Supply curve: A curve that shows the relationship between the price of a product and the quantity of the product supplied. Figure 3.4 A supply schedule and a supply curve © 2015 Pearson Education, Inc. 19 The Law of Supply The law of supply: The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied. Implication: supply curves slope upward. Figure 3.4 A supply schedule and a supply curve © 2015 Pearson Education, Inc. 20 Increase and Decrease in Supply A change in something other than price that affects supply causes the entire supply curve to shift. A shift to the right (S1 to S3) is an increase in supply. A shift to the left (S1 to S2) is a decrease in supply. Figure 3.5 Shifting the supply curve © 2015 Pearson Education, Inc. 21 Shifts of the Supply Curve As the supply curve shifts, the quantity supplied will change, even if the price doesn’t change. The quantity supplied changes at every P1 possible price. Q2 Q1 Q3 Figure 3.5 Shifting the supply curve © 2015 Pearson Education, Inc. 22 Variables that Shift Market Supply Discuss with students' examples as it may apply to tourism in the following slides Prices of inputs Technological change Prices of substitutes in production Number of firms in the market Expected future prices We will discuss how each of these affect supply. © 2015 Pearson Education, Inc. 23 Changes in Prices of Inputs Inputs are things used in the production of a good or service. Examples of inputs for smartphones: Computer processor Plastic housing Effect of an increase in the price of input goods Labor Labor costs increase due to inflation An increase in the price of an input decreases the profitability of selling the good, causing a decrease in supply. A decrease in the price of an input Effect of a decrease in the price of input goods increases the profitability of selling the good, causing an increase in supply. © 2015 Pearson Education, Inc. 24 Technological Change A firm may experience a positive or negative change in its ability to produce a given level of output with a given quantity of inputs. This is a technological change. Changes raise or lower firms’ costs, hence Effect of a positive change their supply of the good. in technology Examples: A new, more productive variety of wheat would increase the supply of wheat. Governmental restrictions on land use for agriculture might decrease the supply of wheat. Effect of a negative change in technology Airbnb increasing accommodation through use of aggregation technology © 2015 Pearson Education, Inc. 25 Prices of Substitutes, and Number of Firms Many firms can produce and sell more than one product. Example: An Illinois farmer can plant corn or soybeans. If the price of soybeans rises, he will plant Effect on the supply of corn, (supply) less corn. of an increase in the price of soybeans More firms in the market will result in more product available at a given price (greater supply). Fewer firms → supply decreases. Effect of a increase in the Ecotourism tours vs Beach holidays number of firms © 2015 Pearson Education, Inc. 26 Change in Expected Future Prices If a firm anticipates that the price of its product will be higher in the future, it might decrease its supply today in order to increase it in the future. What types of products could be “stored” Effect of an increase in like this? future expected price of a Perishable products, or good Non-perishable products Cant store a service like tourism © 2015 Pearson Education, Inc. 27 Change in Supply vs. Change in Quantity Supplied A change in the price of the product being examined causes a movement along the supply curve. This is a change in quantity supplied. Any other change affecting supply causes the entire supply curve to shift. This is a change in supply. Figure 3.6 A change in supply versus a change in quantity supplied © 2015 Pearson Education, Inc. 28  Market Equilibrium: Putting Demand and Supply Together 3.3 LEARNING OBJECTIVE Use a graph to illustrate market equilibrium. © 2015 Pearson Education, Inc. 29 Market Equilibrium At a price of $200, consumers want to buy 10 million smartphones, and producers want to sell 10 million smartphones. This is a market equilibrium: a situation in which quantity demanded equals quantity supplied. A market equilibrium with many buyers and sellers is a Figure 3.7 Market equilibrium competitive market equilibrium. © 2015 Pearson Education, Inc. 30 Market Equilibrium Price and Quantity In this market: The equilibrium price of a smartphone is $200, and The equilibrium quantity of a smartphone is 10 million smartphones per week. Since buyers and sellers want to trade the same quantity at the price of $200, we do not expect the price to change. Figure 3.7 Market equilibrium © 2015 Pearson Education, Inc. 31 A Surplus in the Market for Smartphones At a price of $250, consumers want to buy 9 million smartphones, while producers want to sell 11 million. This gives a surplus of 2 million smartphones: a situation in which quantity supplied is greater than quantity demanded. Prediction: sellers will compete amongst themselves, driving Figure 3.8 The effect of surpluses and the price down. shortages on the market price © 2015 Pearson Education, Inc. 32 A Shortage in the Market for Smartphones At a price of $100, consumers want to buy 12 million smartphones, while producers want to sell 8 million. This gives a shortage of 4 million smartphones: a situation in which quantity demanded is greater than quantity supplied. Prediction: sellers will realize they can increase the price and still sell as many smartphones, so the price will Figure 3.8 The effect of surpluses and rise. shortages on the market price © 2015 Pearson Education, Inc. 33 Demand and Supply Both Count Price is determined by the interaction of buyers and sellers. Neither group can dictate price in a competitive market (i.e. one with many buyers and sellers). However, changes in supply and/or demand will affect the price and quantity traded. © 2015 Pearson Education, Inc. 34  The Effect of Demand and Supply Shifts on Equilibrium 3.4 LEARNING OBJECTIVE Use demand and supply graphs to predict changes in prices and quantities. © 2015 Pearson Education, Inc. 35 The Effect of Shifts in Supply on Equilibrium Suppose Amazon enters the smartphone market: More smartphones are supplied at any given price —an increase in supply from S1 to S2. Equilibrium price falls from P1 to P2. Equilibrium quantity rises Figure 3.9 The effect of an from Q1 to Q2 increase in supply on equilibrium © 2015 Pearson Education, Inc. 36 How Much Will Price and Quantity Change? By how much will price fall? By how much will quantity rise? We cannot say, without knowing more information. For now, we can only predict that price will fall and quantity traded will rise. Figure 3.9 The effect of an increase in supply on equilibrium © 2015 Pearson Education, Inc. 37 The Effect of Shifts in Demand on Equilibrium Suppose incomes increase. What happens to the equilibrium in the smartphone market? Smartphones are a normal good, so as income rises, demand shifts to the right (D1 to D2). Equilibrium price rises (P1 to P2). Figure 3.10 The effect of an Equilibrium quantity rises increase in demand on (Q1 to Q2). equilibrium © 2015 Pearson Education, Inc. 38 Shifts in Demand and Supply over Time Over time, it is likely that both demand and supply will change. For example, as new firms enter the market for smartphones and incomes increase, we expect The supply of smartphones will shift to the right, and The demand for smartphones will shift to the right. Figure 3.11a Shifts in demand and supply over time: demand shifting more than supply © 2015 Pearson Education, Inc. 39 Demand Shifting More Than Supply What does our model predict? S↑  ( P↓ and Q↑ ) D↑  ( P↑ and Q↑ ) So we can be sure equilibrium quantity will rise; but the effect on equilibrium price is not clear. This panel shows demand shifting more than supply: Figure 3.11a Shifts in demand and equilibrium price and quantity supply over time: demand shifting more both rise. than supply © 2015 Pearson Education, Inc. 40 Supply Shifting More Than Demand This panel shows supply shifting more than demand: quantity rises, but equilibrium price falls. Without knowing the relative size of the changes, the effect on equilibrium price is ambiguous. It is possible, but unlikely, that the equilibrium price will remain unchanged. Figure 3.11b Shifts in demand and supply over time: supply shifting more than demand © 2015 Pearson Education, Inc. 41 30.10.2024 Seite 42