Supply and Demand: Price Supply and Demand: Price and Quantity - - PowerPoint PPT Presentation

Supply and Demand: Price Supply and Demand: Price and Quantity and Quantity Determination in Determination in Competitive Markets Competitive Markets

The Economics The Economics Department, UMR Department, UMR Presents: Presents:

N Changes in

Equilibrium

Starring Starring

Featuring Featuring

N NIncreases in Demand,

Increases in Demand, c.p.

c.p.

N NIncreases in Supply,

Increases in Supply, c.p

c.p

N NDecreases in Demand,

Decreases in Demand, c.p.

c.p.

N NDecreases in Supply,

Decreases in Supply, c.p.

c.p.

N NSimultaneous Changes

Simultaneous Changes

Changes in Equilibrium Changes in Equilibrium

N N Remember that Supply and Demand

Remember that Supply and Demand are drawn under the are drawn under the ceteris paribus

ceteris paribus

assumption. assumption.

N N Any factors which cause Supply and/ or

Any factors which cause Supply and/ or Demand to change will affect Demand to change will affect equilibrium price and quantity. equilibrium price and quantity.

Change in Demand Change in Demand

N N Demand will change for any of the

Demand will change for any of the factors discussed previously. factors discussed previously.

N N Remember

Remember PINTE PINTE (except for the price (except for the price

• f the good itself)
• f the good itself)

N N For instance, let’s say the demand for

For instance, let’s say the demand for CDs increased due to an increase in CDs increased due to an increase in income income

Increase in Demand Increase in Demand

P Q/t S D E P* Q* D’ E’ P*’ Q*’

Change in Supply Change in Supply

N N Supply will change for any of the

Supply will change for any of the factors discussed previously factors discussed previously

N N Remember

Remember PENT PENT (except for the price (except for the price

• f the good itself)
• f the good itself)

N N For instance, let’s say that the

For instance, let’s say that the government lowers taxes on CDs government lowers taxes on CDs

Increase in Supply Increase in Supply

P Q/t S D E P* Q* S’ P*’ Q*’ E’

Changes in Demand and Changes in Demand and Supply Supply

To determine the impact of both supply To determine the impact of both supply and demand changing: and demand changing:

N N First examine what happens to

First examine what happens to equilibrium price and quantity when equilibrium price and quantity when just demand shifts. just demand shifts.

N N Second, examine what happens to

Second, examine what happens to equilibrium price and quantity when equilibrium price and quantity when just supply changes just supply changes

N N Finally, add the two effects together.

Finally, add the two effects together.

Changes in Demand and Supply Changes in Demand and Supply

N N When supply and demand move in the same

When supply and demand move in the same direction equilibrium price is ambiguous direction equilibrium price is ambiguous

N N When supply and demand move in opposite

When supply and demand move in opposite directions equilibrium quantity is ambiguous directions equilibrium quantity is ambiguous

N N If P and Q both increase the dominant force

If P and Q both increase the dominant force must have been an increase in D must have been an increase in D

N N If P and Q both decrease the dominant force

If P and Q both decrease the dominant force must have been an decrease in D must have been an decrease in D

N N If P increases and Q decreases, the dominant

If P increases and Q decreases, the dominant force must have been a decrease in S force must have been a decrease in S

N N If P decreases and Q increases the dominant

If P decreases and Q increases the dominant force must have been an increase in S force must have been an increase in S

Explaining Changes in Explaining Changes in Equilibrium Price and Quantity Equilibrium Price and Quantity

A B C F P

Q/t Initial equilibrium Another equilibrium Moving to quadrant B implies the dominate force was an increase in demand. To quadrant C, the dominate force is a decrease in demand. Moving to quadrants A or F implies the dominate force was supply (decrease for A, and increase for F)

Increase in Supply and Increase in Supply and Demand: Q, Demand: Q, )

)P ?

P ?

Q* Q*’ P Q/t S D P* D’ P*’ S’ P Q/t S D P* Q* D’ S’ P*’ Q*’

) )D > ) )S > 0

0 < )

)D < ) )S

Q

Decrease in Supply and Decrease in Supply and Demand: Q, Demand: Q, )

)P ?

P ?

Q* Q*’ P Q/t S D P* D’ P*’ S’ P Q/t S D P* Q* D’ S’ P*’ Q*’

) )D > ) )S > 0

0 < )

)D < ) )S

Q

Increase in Supply and Increase in Supply and Decrease in Demand: P, Decrease in Demand: P, )

)Q ?

Q ?

Q* Q*’ P Q/t S D P* D’ P*’ S’ P Q/t S D P* Q* D’ S’ P*’ Q*’

) )D dominates, ) )Q < 0

Q

) )S dominates, ) )Q > 0

Decrease in Supply and Decrease in Supply and Increase in Demand: P, Increase in Demand: P, )

)Q ?

Q ?

Q*Q*’ P Q/t S D P* D’ P*’ S’ P Q/t S D P* Q* D’ S’ P*’ Q*’

) )D dominates, ) )Q < 0

Q

) )S dominates, ) )Q > 0

Helpful Hints Helpful Hints

N N Know how each of the main Demand

Know how each of the main Demand Shifters, Shifters, PINTE PINTE, and Supply Shifters, , and Supply Shifters, PENT PENT, excluding the price of the good , excluding the price of the good itself, effect equilibrium price and quantity itself, effect equilibrium price and quantity

N N For an income change, you also need to

For an income change, you also need to know whether the good is “normal” or know whether the good is “normal” or “inferior” “inferior”

N N Be able to show graphically how a change

Be able to show graphically how a change in one of these shifters affects equilibrium in one of these shifters affects equilibrium

N N Practice,

Practice, Practice,

Practice,

Practice,

Practice, Practice,

Practice, Practice

Practice

The End