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

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

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

Demand Supply Equilibrium and

Disequilibrium

Starring Starring

Featuring Featuring

• The Law of Demand

The Law of Demand

• D = D(PENTE)

D = D(PENTE)

• The Tendency of Supply

The Tendency of Supply

• S = S(PENT)

S = S(PENT)

• Equilibrium/Disequilibrium

Equilibrium/Disequilibrium

In Three Parts In Three Parts

Demand Demand Supply Supply Equilibrium/Disequilibrium Equilibrium/Disequilibrium

What is Demand? What is Demand?

• It is the relationship between

It is the relationship between quantity demanded and quantity demanded and price, c.p., within a specific price, c.p., within a specific period period

• Or, it is the relationship

Or, it is the relationship between the maximum between the maximum willingness to pay in return willingness to pay in return for something of value for something of value

Part 1

Individual vs. Individual vs. Market Demand Market Demand

• Market demand is the

Market demand is the horizontal sum of individual horizontal sum of individual demands demands

• It is market demand that

It is market demand that commands our interest commands our interest

But Start with Individual But Start with Individual Demand Demand

• Consider your demand for

Consider your demand for peanuts per semester (This is peanuts per semester (This is called “Quantity Demanded, called “Quantity Demanded, q qd

d”)

”)

• We will first look at this

We will first look at this information in a table called a information in a table called a “Demand Schedule” “Demand Schedule”

Your Demand Schedule Your Demand Schedule

Price of Peanuts ($) Quantity Demanded per semester

Demand Schedule - a table showing the relationship between the price of a good and the quantity demanded per period of time, ceteris paribus. Peanuts are measured in pounds.

Your Demand Schedule Your Demand Schedule

P ($) qd $2.00 5

Your Demand Schedule Your Demand Schedule

P ($) qd $2.00 5 $1.50 7

Your Demand Schedule Your Demand Schedule

P ($) qd $2.00 5 $1.50 7 $1.00 15

10

Law of Demand Law of Demand

• The price (willingness to pay) of

The price (willingness to pay) of a product, service, or activity is a product, service, or activity is inversely related to the quantity inversely related to the quantity demanded, ceteris paribus. demanded, ceteris paribus.

• Applies to Market Demand (but

Applies to Market Demand (but notice your demand for peanuts notice your demand for peanuts

• beyed the law)
• beyed the law)

Demand Schedules and Demand Schedules and Curves Curves

• Demand Curve

Demand Curve -

• a graph of

a graph of the demand schedule showing the demand schedule showing the relationship between the the relationship between the price of a good and the price of a good and the quantity demanded per period quantity demanded per period

• f time, ceteris paribus.
• f time, ceteris paribus.

Individual Demand Curve Individual Demand Curve

P($) qd per semester Note: ALWAYS label your axes!

Individual Demand Curve Individual Demand Curve

P($) qd per semester 0.50 1.00 1.50 2.00 5 10 15

Individual Demand Curve Individual Demand Curve

P($) qd per semester 0.50 1.00 1.50 2.00 5 10 15 A

Individual Demand Curve Individual Demand Curve

P($) qd per semester 0.50 1.00 1.50 2.00 5 10 15 A B 7

Individual Demand Curve Individual Demand Curve

P($) qd per semester 0.50 1.00 1.50 2.00 5 10 15 A B C 7

Individual Demand Curve Individual Demand Curve

P($) qd per semester 0.50 1.00 1.50 2.00 5 10 15 A B C d 7

Market Demand Curve Market Demand Curve

• The demand curve we just

The demand curve we just drew was the Demand for drew was the Demand for Peanuts by Peanuts by one

• ne person.

person.

• We want an aggregate

We want an aggregate measure of the price, measure of the price, quantity demanded quantity demanded relationship relationship--

• -a market

a market demand demand

Two Views of Demand Two Views of Demand

• WTP

WTP -

• Maximum

Maximum willingness to pay for a willingness to pay for a given unit of a good given unit of a good (marginal WTP) or for a (marginal WTP) or for a number of units of a good number of units of a good

• The Law of Demand

The Law of Demand -

• P, Q

P, Qd

d

relationship relationship

WTP and the Law of WTP and the Law of Demand Demand

P Qd/t D $2.00 15 $1.50 23

The max. WTP for the 23rd unit is $1.50. The quantity demanded at $2.00 is 15 units per period

Market Demand Schedule Market Demand Schedule

• Market Demand Schedule

Market Demand Schedule -

• a

a table showing the relationship table showing the relationship between the price of a good between the price of a good and the total quantity and the total quantity demanded by all consumers demanded by all consumers in the market per period of in the market per period of time, ceteris paribus. time, ceteris paribus.

Market Demand Schedule Market Demand Schedule

• Market Demand is obtained

Market Demand is obtained by summing horizontally the by summing horizontally the quantity demanded by each quantity demanded by each person at each price person at each price

Market Demand Schedule Market Demand Schedule

P($) Mary’s qd 5 3 10 2 15 1

Market Demand Schedule Market Demand Schedule

P($) Mary’s qd John’s qd 5 3 12 10 2 8 15 1 3

Market Demand Schedule Market Demand Schedule

P($) Mary’s qd John’s qd Ling’s qd 5 3 12 7 10 2 8 5 15 1 3 4

Market Demand Schedule Market Demand Schedule

P($) Mary’s qd John’s qd Ling’s qd Market Qd 5 3 12 7 22 10 2 8 5 15 15 1 3 4 8

Demand Curve Demand Curve

P Qd/t D $15 8 $10 15 $5 22

Note: the linear demand is used for convenience

Change in D vs. Change in Change in D vs. Change in Q Qd

d

• Change in Demand

Change in Demand -

• a change in a factor

a change in a factor that effects demand other than the price of that effects demand other than the price of the good, thus there is a change in quantity the good, thus there is a change in quantity demanded at EVERY price. demanded at EVERY price.

• Change in Quantity Demanded

Change in Quantity Demanded -

• a

a movement along a given demand curve movement along a given demand curve-

• due

due only

• nly to a change in the price of the

to a change in the price of the good itself good itself

Change in Demand Change in Demand

• Increase in demand

Increase in demand -

• demand

demand curve shifts to the right (or up curve shifts to the right (or up -

• an increase in WTP)

an increase in WTP)

• Decrease in demand

Decrease in demand -

• demand

demand curve shifts to the left (or down curve shifts to the left (or down

• a decrease in WTP

a decrease in WTP)

)

Increase in Demand Increase in Demand

P Qd/t D D’

Increase in Q Increase in Qd

d

P($) D A B Qd/t

Behind the Demand Curve Behind the Demand Curve

A demand curve is drawn under

the assumption of ceteris paribus - all other important factors remaining unchanged

Factors to be considered may be

remembered by D = D(PINTE)

Factors affecting market Factors affecting market demand, demand, PINTE PINTE

• P

P = Prices = Prices

• I

I = income = income

• N

N = number of buyers = number of buyers

• T

T = tastes or preferences = tastes or preferences

• E

E = expectations about = expectations about future prices and market future prices and market conditions conditions

P Price of Other Goods

rice of Other Goods

• The price of substitutes

The price of substitutes

• The price of complements

The price of complements

P Price of Substitutes

rice of Substitutes

• What would happen to the

What would happen to the demand for Peanuts if the price demand for Peanuts if the price

• f pretzels fell?
• f pretzels fell?
• The demand for Peanuts would probably

The demand for Peanuts would probably fall since people would buy pretzels instead. fall since people would buy pretzels instead.

• There is a positive relationship

There is a positive relationship between the demand for a good between the demand for a good and the price of its substitutes and the price of its substitutes

P Price of Substitutes

rice of Substitutes

• Thus an increase in the price

Thus an increase in the price

• f a substitute will increase
• f a substitute will increase

the demand for the good the demand for the good

• And a decrease in the price

And a decrease in the price

• f a substitute will decrease
• f a substitute will decrease

the demand for the good the demand for the good

P Price of Complements

rice of Complements

• Complementary goods are

Complementary goods are goods used together goods used together

• What if the price of beer

What if the price of beer goes up? What ought to goes up? What ought to happen to the demand for happen to the demand for Peanuts? Peanuts?

• It ought to go down, since people want

It ought to go down, since people want beer to drink with Peanuts. If the price of beer to drink with Peanuts. If the price of beer rises, the demand for Peanuts will fall. beer rises, the demand for Peanuts will fall.

P Price of Complements

rice of Complements

• Thus an increase in the price

Thus an increase in the price

• f a complement will decrease
• f a complement will decrease

the demand for the good the demand for the good

• And a decrease in the price of

And a decrease in the price of a complement will increase a complement will increase the demand for the good the demand for the good

P Price of Other Goods

rice of Other Goods -

• Summary

Summary

• Thus, either of the following

Thus, either of the following will increase Demand will increase Demand

• Price of a substitute good increases

Price of a substitute good increases

• Price of a complement good decreases

Price of a complement good decreases

• And either of the following

And either of the following will decrease Demand will decrease Demand

• Price of a substitute good decreases

Price of a substitute good decreases

• Price of a complement good increases

Price of a complement good increases

I Income

ncome

• For most goods there is a

For most goods there is a positive relationship between positive relationship between income and demand. These are income and demand. These are defined as defined as normal

normal goods.

goods.

• For

For inferior

inferior goods, there is an

goods, there is an inverse relationship between inverse relationship between income and demand. income and demand.

Normal and Inferior Goods Normal and Inferior Goods

• Are Peanuts a

Are Peanuts a normal normal good? good? Are they for you? If they Are they for you? If they are, upon graduation and a are, upon graduation and a higher salary you would buy higher salary you would buy more peanuts. more peanuts.

• The question is empirical

The question is empirical -

• how do people react?

how do people react?

Normal and Inferior Goods Normal and Inferior Goods

• What about Spam? Is the

What about Spam? Is the relationship between income relationship between income and demand positive or and demand positive or negative, c.p.? negative, c.p.?

• Cheaper food products are

Cheaper food products are examples of inferior goods examples of inferior goods

N Number of Buyers

umber of Buyers

• A positive relationship

A positive relationship -

• the greater

the greater the number of buyers, the larger the the number of buyers, the larger the total total quantity demanded of the good quantity demanded of the good at a given price. Demand increases, at a given price. Demand increases,

• r the demand curve shifts to the
• r the demand curve shifts to the

right. right.

• Likewise, if there are fewer buyers in

Likewise, if there are fewer buyers in the market there is less quantity the market there is less quantity demanded at every price, so demand demanded at every price, so demand has decreased. has decreased.

T Tastes and Preferences

astes and Preferences

• If we find out Peanuts improves

If we find out Peanuts improves

• ur attractiveness to others, our
• ur attractiveness to others, our

willingness to pay for Peanuts willingness to pay for Peanuts would increase (an upward shift would increase (an upward shift

• f the demand curve)
• f the demand curve)
• If we find out Peanuts are

If we find out Peanuts are unhealthy the demand for the unhealthy the demand for the good decreases (a leftward shift good decreases (a leftward shift

• f the curve)
• f the curve)

E Expectations

xpectations

• If we were to hear a new

If we were to hear a new story about how Peanut story about how Peanut prices were going to go up prices were going to go up would you stock up? would you stock up?

• If you expect your employer

If you expect your employer to begin downsizing would to begin downsizing would you reduce your demand for you reduce your demand for goods now? goods now?

Demand Reminders Demand Reminders

• Demand curves downward and to the

Demand curves downward and to the right. right.

• Changes in only the price of a good

Changes in only the price of a good cause changes in the quantity cause changes in the quantity demanded. demanded.

• The only demand factor that cannot

The only demand factor that cannot cause a change in the demand of a good cause a change in the demand of a good is a change in its own price. is a change in its own price.

• PINTE

PINTE factors may alone or jointly

factors may alone or jointly change the demand for a good. change the demand for a good.

The End

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