Economics Ch3 PDF

1 =Chapter (3) Demand, supply and Market Equilibrium The main points in this chapter: First: Demand : Defination of quantity demanded. Determinations of quantity demanded. Law of demand. Demand schedule. Demand curve. Movement along demand curve and sh...

1 =Chapter (3) Demand, supply and Market Equilibrium The main points in this chapter: First: Demand : Defination of quantity demanded. Determinations of quantity demanded. Law of demand. Demand schedule. Demand curve. Movement along demand curve and shift of demand curve. Market demand curve. Second: supply: Defination of quantity supplied. Deter minations of quantity supplied. Law of supply. Supply schedule. Supply curve. Movement along supply curve and shift of supply curve. Market supply curve.  2 Third: Equilibrium: Defination of market equilibrium and its condition. Determination of market equilibrium, graphically. Excess demand and excess supply. Changes in equilibrium, changes in demand and supply.  3 First : Demand The defination (Q.D.): ❖ It is the amount of a product that a consumer would buy at the current market price. Determinations of demand (Q.D.): 1- the price of the product it self → P.1 2- the price of alternative product. → P.2 3- the price of complementary products. → P.3 4- the income of consumer. → I 5- the wealth of consumer. → W 6- the taste of consumer. → T 7- the expectations about future for prices. → F ❑We can write these determinations of demand in demand function as:  4 Demand function: Q.D.1= f (P.1, P.2, P.3, I, W, T, f). 1-The relation between P.1, & Q.D.1: - QD1, f(P1)= negative, it means if P1 Q.D.1 and vice versa. The law of demand: ▪ There is negative relation between price of product (P.1) and its quantity demanded (Q.D.1), while other things being equal (constant). ex. Demand schedule: P1 Q.D.1 ▪ It is a table shows how of a given product a consumer would be willing 10 15 to buy at different prices. 9 22 8 25  5 Demand curve: It is a graph which illustrates how much of agiven product a consumer would be willing to buy at different prices. p.1 Demand curve 10 B (movements a long 9 A demand curve) 8 c 15 22 25 Q.D.1 Note: Demand curve has negative slope, because there is negative relation between P.1 & Q.D.1, and this is the general case, it means this product is normal (ordinary) product. Exception is inferior product, where there is positive relation between P., & Q.D., and here demand curse has positive slope.  6 If P.1 is 9 Q.D., is 22 and this represented by A. If P.1 increased to 10, Q.D. decreased to 15, this represented by B, here we move from point A to B on the same demand curse, and the distance from 22 to 15 we call it decrease in quantity demanded. If P1, decreased to 8, Q.D., increased to 25, this represented by point C, here we move from point A to C on the same demand curve, and the distance from 22 to 25 we call it increase in quantity demand. 2) The relation between P.2 & Q.D1: Q.D.1 = f (P.2) → positive, it means if P2 Q.D1 and vice versa. P2 is price of alternative (substitute) product, it is the product which can replace the other product and satisfy the consumer’s desires.  Ex.: fish & meat, when price of meat (P.2) Q.D from 7 meat decreases ,Q.D from fish (Q.D.1). Here the demand curse for fish shifts to the right side from D1 to D2 and we move from point A to À, and this distance from 22 to 30 we call it increase in demand and vice versa. D1 D2 D3 Shift in demand curve P.1 A A A q 15 22 30 Q.D.1 Decrease in demand Increase in demand If P.2 Q.D of it Q.D of alternative product (fish) (Q.D.1) so the demand curve for fish shifts to the left side from D1, to D3 and move from point A to A‘‘, Q.D decreases from 22 to 15, we call this distance a decrease in demand. This graph represents changes in demand; shift in demand, shift in demand curve.  8 3) The relation between P.3 & Q.D.1 Q.D1, = f (p.3) → negative, it means P3 Q.D.1 and vice versa. P.3 is the price of complement product, it is the product which must use with the other product to satisfy together the desires of consumer. Ex.: gasoline, car (price of gasoline: P3, Q.D. of using car Q.D.1) If P.3 Q.D1 increases so demand curve for car shift to right side from D1 to D2, from point A to A`, and the distance from 22 to 30 we call it an increase in demand, this is the same previous graph.  9 4) The relation between I. & Q.D.1 Q.D.1 = f (I) → positive, it means I. Q.D.1 and vice versa, the same graph. 5) The relation between W. & Q.D: Q.D.1= f (w) → positive, if w Q.D.1 and vice versa, the same graph. 6)The relation between T & Q.D.1 : Q.D.1 = f (T QD1 ) →positive, the same graph. 7)The relation between F. & Q.D.1 : Q.D.1 = f (F QD1 ) → positive, the same graph  10 ❖ Market demand curve: It is the sum of all individual quantities of good demanded at each price. It is horizontal summation of demand curves of all consumers in the market It is negative slope. P. P. P. 10 10 10 9 9 9 20 30 Q 0 5 Q 20 35 Q Demand curve Demand curve Market demand for first for second curve consumer consumer  11 Second : Supply: Quantity supplied (Q.S.): Is the amount of a product that a firm would be willing and able to offer for sale at a certain price during a given time peroid. Supply schedule: Is a table showing the quantity supplied of a product at different prices. Low of supply: Means there is positive relation between price and quantity supplied (Q.S.). i.e if P. → Q S and vice versa. Supply curve : Is a graph illustrating how much of a product a firm will sell at different prices  12 Determinations of supply (Q.S.): 1. price of product it self → P1. 2. Price of other products P2. 3. Price of Factor of production (cost of production) → P.3 4. Technology. → T 5. Goal of producer → G - We can write these determinations in: supply function, where: Q.S.1= F (P1, P2, P3, T, G) - We say: Q.S.1 = F (P.1)→ positive relation, i.e. P. → Q.S1. , where other things being equal.  13 Example: P. Q.S1. Supply curve P1 10 20 9 15 10 B 8 12 9 A (Movements along 8 Supply curve) C 12 15 20 Q.S1 If (P1) = 9, Q.S1= 15, this represents by point A. If (P1) decreases to 8, Q.S1 decreases to 12, we move from point A to point C on the same supply curve, we call this movement a long supply curve, and distance from 15 to 12 we say this a decrease in Q.S., and vice versa. If P1increases to 10, Q.S1 increases to 20, we move from point A to B on the same supply curve, the distance from 15 to 20, we call it icrease in Q.S.  14 Q.S.1 = f (P.2) → Negative relation i.e., when P.2 → Q.S1 , So, if P1 = 9 and Q.S1 = 15, when P2 → Q.S.1 so we move from point A to point À, here there is shift in supply curve to left from 1 to 2 there is decrease in supply, and vice versa. (Shifts in Supply) P1 2 1 3 A‘ A 9 A‘‘ 10 15 Q.S1 decrease in supply Increase in supply  15 Q.S.1 = f (P.3) → Negative relation i.e: P3 → Q.S11 , and shift in supply curve to left from (1) to (2), the same previous graph. Q.S.1 = f (T) → Positive relation., i.e : T → Q.S1, and shift in supply curve to right from (1) to (3), the same graph. Q.S.1, = f (G) → positive relation. i.e.: G → Q.S.1 and the same graph.  16 Third: Market Equilibrium: Condition of equilibrium: Q.D. = Q.S., here there is no tendency for price to change. Graph : P. F B Supply (S) P1 (equilibrium) P’ equilibrium point price C P.2 Demand (D) E Q’ Q (equilibrium quantity) At p’, Q.D.= Q.S., this is equilibrium. If price P.1, here Q.S.> Q.D., there is excess supply (surplus) equal FB, it leads to decrease the price.  17 If price P.2, here Q.D.> Q.S., there is excess demand (shortage) equal CE, it leads to increase the price. Changes in equilibrium: These results from changes in: (1)demand or (2) in supply or (3) in both. 1-chabes in demand: If there is increase in demand, it shifts to right, here equilibrium quantity increase and equilibrium price increases. D 1 S P. D P1 P‘ Q’ Q1 Q  18 If there is decrease in demand, it shifts to left, the equilibrium quantity and price decreases P. D D S 2 P‘ P.2 Q2 Q‘ Q. 2-Change in supply: If there is increase in supply, it shifts to right, here equilibrium quantity increases and equilibrium price decreases. P. D S S1 P‘ P.1 Q‘ Q Q.  19 If there is decrease in supply, it shifts to left, here equilibrium quantity decreases and equilibrium price increases. P. D S2 P2 S P‘ Q2 Q‘ Q. 2-Changes in supply and demand: It means both of them will change, where: Demand increases and supply increases. Demand decrease and supply decreases. Demand increases and supply decreases. Demand decrease and supply increases.