Supply and Demand: Chiang Microeconomics Lecture Slides PDF

Supply and Demand CHAPTER 3  HOMEWORK ACHIEVE HOMEWORK – CHAPTERS 1, 2 & 3 Take Home Assignment #1 – Question 1-10 Quiz 1 (Ch. 1, 2 & 3) - Wed, September 25 40 Minutes – Beginning of Class 2  QU...

Supply and Demand CHAPTER 3  HOMEWORK ACHIEVE HOMEWORK – CHAPTERS 1, 2 & 3 Take Home Assignment #1 – Question 1-10 Quiz 1 (Ch. 1, 2 & 3) - Wed, September 25 40 Minutes – Beginning of Class 2  QUIZ #1 - FORMAT Covers lecture material from Ch. 1, 2 and 3 Combination of multiple-choice, matching and short answer/calculation questions (25 marks total) – includes use of models discussed in lecture. PLEASE BRING A PEN/PENCIL AND A BASIC NON- GRAPHING CALCULATOR (No phones for doing calculations) 3 4 | CHAPTER 3  CHAPTER OBJECTIVES  Describe the characteristics and purposes of markets.  Describe the nature of demand, demand curves, and the law of demand.  Describe the determinants of demand, and be able to forecast how a change in one or more of these determinants will change demand.  Explain the difference between a change in demand and a change in quantity demanded.  5 | CHAPTER 3  CHAPTER OBJECTIVES  Describe the nature of supply, supply curves, and the law of supply.  Describe the determinants of supply, and be able to forecast how a change in one or more of these determinants will change supply.  Determine market equilibrium price and output.  Determine and predict how price and output will change given changes to supply and demand in the market.  Production Possibilities OPPORUNITY COST INCREASES WITH Frontier (PPF) SPECIALIZATION POIN BACKPACKS TABLETS OPPORTUNITY T COST of 1 Tablet (Give Up/Gain) a 12,000 0 — b 10,000 3,200 2,000/3,200 = 0.625 c 6,000 5,200 4,000/2,000 = 2.00 PPF d 0 6,000 6,000 / 800 = 7.50 MARKET: A place SELLERS/ where BUYERS/Consumers Producers people What to buy? What to sell? exchange a How much? How much? What method? good or CONSUMERS create DEMAND PRODUCERS create SUPPLY service Real Flow – Goods & Services ® Money Flow - ($)  Real Flow is exchanged for ® ® supplied bought Money Flow (Inputs) (resource s) ®  Markets are where ® exchanges are made – buyers and sellers interact THE PRICE SELLERS/ SYSTEM: BUYERS/Consumers Producers Prices send Prices signal: Prices signal: signals in free- What to buy? What to sell? How much? How much? Production method? market economies CONSUMERS create DEMAND PRODUCERS create SUPPLY  The Market Economy: The Price PRICE System SYSTEM: MARKET ECONOMIES USE PRICES TO ALLOCATE Prices give buyers an easy way to compare goods that RESOURCES, can be substituted for each other. In turn, sellers can GOODS, AND determine what goods to sell by comparing their prices – SERVICES. when prices rise, this tells sellers that the public wants more and will react by increasing the quantity they 10 produce LAW PRICE  PRICE  OF AS PRICE INCREASES, AS PRICE DECREASES, QUANTITY DEMANDED DEMAN QUANTITY DEMANDED FALLS. RISES. QUANTITY QUANTITY D DEMANDED  DEMANDED  HOLDING ALL OTHER RELEVANT FACTORS CONSTANT “Ceteris Paribus” THE BUILDING BLOCK OF MARKET DEMAND - WTP CONSUMERS Willingness-to-pay (WTP) – an individual’s CAN valuation of AFFORD a good or service. It is equal to the MOST an individual is willing to pay and MORE GOODS varies by personal circumstances. Your WTP WHEN isPRICES $10 for a sandwich likely much higher if AREthan you are hungry LOWER. if you are not. 12   Market demand: a horizontal summation of all individual MARKET demand curves DEMAND  Horizontal summation: adding the number of units of the product that will be purchased at each price by all consumers DEMAND BINAH’S DEMAND CURVE AHMAD’S DEMAND CURVE SCHEDU 12 + = LE Price $12 Ahmad 0 Binah 0 Market 0 10 MARKET DEMAND CURVE PRICE ($) 8 10 10 0 10 8 15 5 20 6 6 20 10 30 4 4 25 15 40 2 30 20 50 2 DBinahDAhmad DMarket 10 20 30 40 50 QUANTITY (GAMES) DEMAND Demand slopes downwards – CURVE 100 inverse relationship Market for Coffee between P and Qd Makers 80 A MOVEMENT along the demand curve is caused by a change in the Coffee Maker’s PRICE ($) 60 price (the good’s price) and Price Quantity Demand results in a change in ed QUANTITY DEMANDED 40 $100 0 80 5 20 60 10 D 40 15 0 5 10 15 20 25 20 20 QUANTITY 15  A change in demand occurs when one or CHANGE more of the determinants of IN demand changes; DEMAND shifts the entire demand curve. A change in demand is NOT the same as a  CHANGE IN CHANGE IN QUANTITY DEMAND DEMANDED 80 80 PRICE ($) PRICE ($) D1 40 D0 D0 20 40 20 40 QUANTITY (GAMING APPS) QUANTITY (GAMING APPS)   5 Nonprice factors that DETERMINANT affect demand. They include: S OF DEMAND  Consumers’ tastes and preferences  Consumers’ income Cause shifts of  Prices of related goods— substitutes and complements the Demand   Number of buyers Consumers’ expectations Curve about future prices 1. TASTES AND PREFERENCES: DEMAND FOR PRODUCTS THAT COME INTO FASHION WILL INCREASE (AND VICE VERSA). 19  AN INCREASE IN THE DEMAND FOR IPHONE 16: TASTES AND PREFERENCES AN INCREASE IN THE DEMAND FOR IPHONE 16: 1. DEMAND CURVE SHIFTS AWAY FROM THE ORIGIN 1. DEMAND CURVE SHIFTS AWAY FROM THE ORIGIN A DECREASE IN DEMAND FOR THE IPHONE 15: 2. DEMAND CURVE SHIFTS TOWARDS THE ORIGIN A DECREASE IN DEMAND FOR THE IPHONE 15: 20  NORMAL Increase in income that GOOD results in increased 2. demand for a good = NORMAL GOOD (and vice versa) Consume Vacation, cars, jewellery, steak INFERIOR GOOD rs’ Income Increase in income that results in decreased demand for a good = “store brand” INFERIOR GOOD (and vice products, beans, versa) bread, rice, pasta  PRICE INCREASE OF GOOD A… 3a. PRICE OF SUBSTITUT ES …INCREASES DEMAND FOR GOOD B   Graph = Movement vs. Shift PRICE OF SUBSTITUTES AN INCREASE IN THE PRICE OF CHIPS: 1. DECREASES THE QUANTITY DEMANDED (Movement along D) FOR CHIPS 2. INCREASES THE DEMAND (Shift of D) FOR PRETZELS (AND VICE VERSA) 3b. PRICE OF COMPLEMENTS Complements are typically consumed together IF THE PRICE OF A COMPLEMENT DECREASES, THE DEMAND FOR THE RELATED GOOD INCREASES (AND VICE VERSA).  Graph – Movement vs. Shift PRICE OF COMPLEMENTS THE PRICE OF COMPUTERS DECREASES WHICH 1. INCREASES THE QUANTITY DEMANDED FOR COMPUTERS; AND 2. INCREASES THE DEMAND FOR HEADPHONES (AND VICE VERSA). 4. NUMBER  More buyers in a market OF BUYERS increases demand for the good (and vice versa) 5. CONSUMERS’  Consumers’ expectation EXPECTATIONS of prices increases in ABOUT the future increases FUTURE demand for the good PRICES now (and vice versa)  INCREASE INCREASE IN QUANTITY IN DEMAND DEMANDED 80 80 PRICE ($) PRICE ($) D1 40 D0 D0 20 40 20 40 QUANTITY (GAMING APPS) QUANTITY (GAMING APPS)  DECREASE DECREASE IN QUANTITY IN DEMAND DEMANDED 80 80 PRICE ($) PRICE ($) 40 D0 D0 D1 2 40 20 40 0 QUANTITY (GAMING APPS) QUANTITY (GAMING APPS)  PRICE  PRICE  LAW OF AS PRICE INCREASES, AS PRICE DECREASES, QUANTITY SUPPLIED QUANTITY SUPPLIED INCREASES FALLS SUPPLY QUANTITY SUPPLIED  QUANTITY SUPPLIED  HOLDING ALL OTHER RELEVANT FACTORS CONSTANT  Movement along the supply curve SUPPLY is caused by a change in the good’s price and results in a Change in Quantity Supplied S 100 SCHEDU 80 LE PRICE ($) Price Quantity 60 Supply slopes upwards – $20 10 positive 40 20 40 relationship between P 60 30 and Qs 20 80 40 100 50 0 10 20 30 40 50 QUANTITY  CHANGE IN CHANGE IN SUPPLY QUANTITY SUPPLIED S0 S1 S0 80 80 PRICE ($) PRICE ($) 40 20 40 20 40 QUANTITY (GAMING APPS) QUANTITY (GAMING APPS)   5 Nonprice factors that DETERMINAN affect supply include:  cost of resources TS OF SUPPLY change  price of related commodities Cause shifts  production technology of the Supply  expectations Curve  number of sellers 1. COST OF RESOURCES: SUPPLY INCREASES IF THE COST OF RESOURCES USED DECREASES, AND VICE VERSA. (Example of resource costs: wages paid to labour or cost of raw materials) 2. PRICES AN INCREASE IN PRICES OF ELECTRIC OF CARS... RELATED COMMODITI ES …WILL DECREASE THE SUPPLY OF GAS CARS  EFFECT OF 3. PRODUCTION SUBSIDIES TECHNOLOGY: : IMPROVED TECHNOLOGY MAKES IT CHEAPER TO PRODUCE A GOOD WHEN SUBSIDIES ON LEADING TO AAND SOLAR DECREASE WIND IN ENERGYCOSTS PRODUCTION EXPIRE, SUPPLY DECREASES. 36 TAXES AND HIGHER EXPECTED 4. SELLERS PRICES IN THE FUTURE SUBSIDIES EXPECTATIO MEANS LESS SUPPLY IN AFFECT COSTS THE CURRENT PERIOD NS AND THEREFORE SUPPLY. EXAMPLE: A 10% YACHT TAX REDUCES THE SUPPLY OF YACHTS. 37 TAXES AND 5. NEW PRODUCERS SUBSIDIES NUMBER ENTERING A MARKET INCREASE THE SUPPLY OF AFFECT OF COSTS AND THEREFORE A GOOD SELLERS SUPPLY. EXAMPLE: A 10% YACHT TAX REDUCES THE SUPPLY OF YACHTS. 38  INCREASE IN INCREASE IN SUPPLY QUANTITY SUPPLIED S0 S1 S0 80 80 PRICE ($) PRICE ($) 40 20 40 20 40 QUANTITY (GAMING APPS) QUANTITY (GAMING APPS)  DECREASE DECREASE IN QUANTITY IN SUPPLY S 1 SUPPLIED S0 S0 80 80 PRICE ($) PRICE ($) 40 2 40 20 40 0 (GAMING APPS) QUANTITY QUANTITY (GAMING APPS) EQUILIBRIU S M Where Qd PRICE ($) = Qs Pe  Market clears at the equilibrium price (Pe) D The quantity 0 Qe demanded at Pe is Qd = Qs equal to QUANTITY 41 the quantity supplied  WHEN Surplus S PRICES 5 ARE TOO PRICE ($) 4 HIGH If P = $5, Qd = 10 and Qs = 20. A surplus of 10 units results. Producers are encouraged to reduce price to sell excess inventory and reduce production until Qd = Qs = 15. Equilibrium price = $4. D At P = $5, what quantity leaves the 0 market? 10 15 20 QUANTITY Calculating S = Qs = 180 + 25 P Equilibrium PRICE ($) and Surplus 15 To solve of Equilibrium (Pe) & Qe: Pe = 12 1. Set Qs = Qd and solve for P 2. Substitute P in Part. 1 into Supply and Demand equations to get equilibrium quantity (Qe) To solve for Surplus: 3. Substitute P= 15 into Supply D = Qd = 600 - 10 P and Demand equations to get 0 quantities Qd and Qs Qe Qs Qd 450 480 555 4. Qs – Qd = Quantity of Surplus QUANTITY  Calculating Qs = 180 + 25 P Qd = 600 - 10 P Equilibrium Price & Quantity and amount To solve of Equilibrium (Pe)of & Qe: 1. 2. Surplus Set Qs = Qd and solve for P Substitute P in Part. 1 into Supply and Demand equations to get equilibrium quantity (Qe) To solve for Surplus: 3. Substitute P= 15 into Supply and Demand equations to get quantities Qd and Qs 4. Qs – Qd = Quantity of Surplus 44 EXAMPLE – CALCULATING EQUILIBRIUM PRICE AND QUANTITY + GRAPH Demand: Qd = 50 – 2 Linear Equations – Constant Slope P Supply: Qs = -10 + P Calculate Equilibrium P & Q 45  Sample Setup for Take Home Assignment #1 - Question #8 Equilibrium with Wages & Income The demand for product X depends on the price of product X as well as the average household income (Y) according to the following relationship Qdx = 500 - 25 P + 0.001Y The supply of product X is positively related to own price of product X and negatively dependent upon W, the price of some input. This relationship is expressed as: Qsx = 180 + 20 P - 5 W Given that Y = 50,000 and W = 4, Simplify functions: 1. (.001Y =.001 * 50,000 = 50) Qdx = 500 – 25P + 50 AND 2. (-5W = -.5 * 4 = -20) Qsx = 180 + 20P - 20 Simplification leads to P being the only variable. 1. Solve for equilibrium price by making Qdx = Qsx (550 – 25P) = (160 + 20P) 46  WHEN S PRICES ARE TOO PRICE ($) 4 LOW At P = $3, Qd = 20 and Qs = 10. A shortage of 10 units results. Consumers begin bidding up the price 3 as they are willing to pay more than $3. Producers are encouraged to increase Shortage production until Qd = Qs = 15. D Equilibrium price = $4. 0 10 15 20 At P = $3, what quantity leaves the market? QUANTITY Calculating the amount of a S = Qs = 180 + 25 P Shortage To calculate the amount of the Shortage (Excess Demand): PRICE ($) 1. Substitute P= 10 into Supply and Demand equations to get quantities Qd Pe and Qs 2. Qs – Qd = Quantity of Surplus 3. Qs is what will leave the market (what 10 will be purchased). Consumers would like to buy Qd but they can’t buy what isn’t being supplied. 4. The shortage signals to producers that D = Qd = 600 - 10 P some consumers are willing to pay more. Excess consumer demand 0 pushes prices up. At a price of Pe Qe Qd producers will produce at Qe where Qd Qs = Qs (equilibrium). QUANTITY 48  5 Nonprice factors that affect DEMAND (shift  5 Nonprice factors that demand) include: affect SUPPLY (shift supply) include: Consumers’ tastes and preferences  cost of resources Consumers’ income change Prices of related goods—  price of related substitutes and commodities complements  production Number of buyers technology  expectations Consumers’ expectations about future prices  number of sellers 49  S0 DEMAND An An increase in increase in demand… demand… P1 SHIFTS …causes …causes thethe PRICE ($) equilibrium equilibrium to to P0 change change toto aa AND higher P higher and Q. P and Q. MARKET D0 D1 EQUILIBRI 0 Q0 Q1 QUANTITY OF ENERGY DRINKS UM DEMAND S0 A A decrease decrease SHIFTS in in demand… demand… …causes …causes the AND the PRICE ($) P0 equilibrium equilibrium to to change change toto aa P1 lower P lower and Q. P and Q. MARKET EQUILIBRI D1 D0 0 UM Q1 Q0 QUANTITY OF ENERGY DRINKS  An An increase increase S0 in in supply… supply… S1 SUPPLY SHIFTS PRICE ($) P0 AND P1 …causes …causes the equilibrium the equilibrium to change change toto aa to MARKET D0 lower P lower higher P and and aa higher Q. Q. EQUILIBRI 0 Q0 Q1 QUANTITY OF ENERGY DRINKS  S1 S0 SUPPLY A A decrease decrease in in supply… supply… P1 PRICE ($) …causes …causes thethe SHIFTS P0 equilibrium equilibrium to change change to higher P higher to aa P and and aa to AND lower Q. lower Q. MARKET 0 Q1 Q0 D0 EQUILIBRI QUANTITY OF ENERGY DRINKS  S0 S1 WHEN BOTH PRICE ($) P0 CURVES If demand and supply both increase, the equilibrium quantity rises, but the equilibrium price SHIFT depends on the relative magnitude of the shifts. D0 D1 0 Q0 Q1 QUANTITY OF ENERGY DRINKS 1. If demand and supply both increase, the equilibrium quantity rises, but the equilibrium price is indeterminate – the equilibrium price depends on the relative magnitude (size) of the shifts. Example: 55 2. If demand and supply both decrease, the equilibrium quantity falls, but the equilibrium price is indeterminate – the equilibrium price depends on the relative magnitude (size) of the shifts. Example: 56 3. If demand increases and supply decreases, the equilibrium price rises, but the equilibrium quantity is indeterminate – the equilibrium quantity depends on the relative magnitude (size) of the shifts. Example: 57 4. If demand decreases and supply increases, the equilibrium price falls, but the equilibrium quantity is indeterminate – the equilibrium quantity depends on the relative magnitude (size) of the shifts. Example: 58  Change in Change in Change in Change in Demand Supply Equilibrium Equilibrium Price Quantity One Curve No change Increase Decrease Increase Shifting One Curve No change Decrease Increase Decrease Shifting REVIEW One Curve Shifting Increase No change Increase Increase OF One Curve Shifting Decrease No change Decrease Decrease SHIFTS Two Curves Shifting Two Curves Increase Decrease Increase Decrease Indeterminate Indeterminate Increase Decrease Shifting Two Curves Increase Decrease Increase Indeterminat Shifting e Two Curves Decrease Increase Decrease Indeterminat Shifting e 60 | CHAPTER 3 Practice Question:  Demand: Qd = 240 – 30P  Supply: Qs = -60 + 20P Calculate:  Pe =  Qe = 61 | CHAPTER 3 Practice Question:  Demand: Qd = 150 – 15P  Supply: Qs = -25 + 20P Calculate:  Pe =  Qe =