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Lecture

Chapter 4_Slides.ppt

64 Pages
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Department
Economics
Course Code
ECN 104
Professor
Tsogbadral Galaabaatar

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Chapter 4 The Market Forces of Supply and Demand Copyright © 2011 Nelson Edu1ation Limited In this chapter, look for the answers to these questions:  What factors affect buyers’ demand for goods?  What factors affect sellers’ supply of goods?  How do supply and demand determine the price of a good and the quantity sold?  How do changes in the factors that affect demand or supply affect the market price and quantity of a good?  How do markets allocate resources? Copyright © 2011 Nelson Education Limited Markets and Competition  A market is a group of buyers and sellers of a particular product.  A competitive market is one with many buyers and sellers, each has a negligible effect on price.  In a perfectly competitive market:  All goods exactly the same  Buyers & sellers so numerous that no one can affect market price – each is a “price taker”  In this chapter, we assume markets are perfectly competitive. Copyright © 2011 Nelson Education Limited Demand  The quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.  Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises, other things equal Copyright © 2011 Nelson Education Limited The Demand Schedule  Demand schedule: Price Quantity a table that shows the of of lattes relationship between the lattes demanded price of a good and the $0.00 16 quantity demanded 1.00 14  Example: 2.00 12 Helen’s demand for lattes. 3.00 10 4.00 8  Notice that Helen’s 5.00 6 preferences obey the 6.00 4 Law of Demand. Copyright © 2011 Nelson Education Limited Helen’s Demand Schedule & Curve Price of Price Quantity Lattes of of lattes lattes demanded $6.00 $5.00 $0.00 16 1.00 14 $4.00 2.00 12 $3.00 3.00 10 4.00 8 $2.00 5.00 6 $1.00 6.00 4 $0.00 Quantity 0 5 10 15 of Lattes Copyright © 2011 Nelson Education Limited Market Demand versus Individual Demand  The quantity demanded in the market is the sum of the quantities demanded by all buyers at each price.  Suppose Helen and Ken are the only two buyers in the Latte market. (Q = quantity demanded) Price Helen’s Qd Ken’s Qd Market Qd $0.00 16 + 8 = 24 1.00 14 + 7 = 21 2.00 12 + 6 = 18 3.00 10 + 5 = 15 4.00 8 + 4 = 12 5.00 6 + 3 = 9 6.00 4 + 2 = 6 7 The Market Demand Curve for Lattes d P Q P (Market) $6.00 $0.00 24 $5.00 1.00 21 $4.00 2.00 18 3.00 15 $3.00 4.00 12 $2.00 5.00 9 $1.00 6.00 6 $0.00 Q 0 5 10 15 20 25 Copyright © 2011 Nelson Education Limited Demand Curve Shifters  The demand curve shows how price affects quantity demanded, other things being equal.  These “other things” are non-price determinants of demand (i.e., things that determine buyers’ demand for a good, other than the good’s price).  Changes in them shift the D curve… Copyright © 2011 Nelson Education Limited Demand Curve Shifters: # of Buyers  Increase in # of buyers increases quantity demanded at each price, shifts D curve to the right. Copyright © 2011 Nelson Education Limited10 Demand Curve Shifters: # of Buyers Suppose the number P $6.00 of buyers increases. Then, at each P, $5.00 d Q will increase $4.00 (by 5 in this example). $3.00 $2.00 $1.00 $0.00 Q 0 5 10 15 20 25 30 Copyright © 2011 Nelson Education Limited Demand Curve Shifters: Income  Demand for a normal good is positively related to income. • Increase in income causes increase in quantity demanded at each price, shifts D curve to the right. (Demand for an inferior good is negatively related to income. An increase in income shifts D curves for inferior goods to the left.) Copyright © 2011 Nelson Education Limited Demand Curve Shifters: Prices of Related Goods  Two goods are substitutes if an increase in the price of one causes an increase in demand for the other.  Example: pizza and hamburgers. An increase in the price of pizza increases demand for hamburgers, shifting hamburger demand curve to the right.  Other examples: Coke and Pepsi, laptops and desktop computers, CDs and music downloads Copyright © 2011 Nelson Education Limited Demand Curve Shifters: Prices of Related Goods  Two goods are complements if an increase in the price of one causes a fall in demand for the other.  Example: computers and software. If price of computers rises, people buy fewer computers, and therefore less software. Software demand curve shifts left.  Other examples: college tuition and textbooks, bagels and cream cheese, eggs and bacon Copyright © 2011 Nelson Education Limited Demand Curve Shifters: Tastes  Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the right.  Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right. Copyright © 2011 Nelson Education Limited Demand Curve Shifters: Expectations  Expectations affect consumers’ buying decisions.  Examples: • If people expect their incomes to rise, their demand for meals at expensive restaurants may increase now. • If the economy sours and people worry about their future job security, demand for new autos may fall now. Copyright © 2011 Nelson Education Limited Summary: Variables That Influence Buyers Variable A change in this variable… Price …causes a movement along the D curve # of buyers …shifts the D curve Income …shifts the D curve Price of related goods …shifts the D curve Tastes …shifts the D curve Expectations …shifts the D curve Copyright © 2011 Nelson Education Limited A C T I V E L E A R N I N G 1 Demand Curve Draw a demand curve for music downloads. What happens to it in each of the following scenarios? Why? A. The price of iPods falls B. The price of music downloads falls C. The price of CDs falls Copyright © 2011 Nelson Education Limited A C T I V E L E A R N I N G 1 A. Price of iPods falls Music downloads Price of and iPods are music complements. down- loads A fall in price of iPods shifts the P1 demand curve for music downloads to the right. D 1 D2 Q Q Quantity of 1 2 music downloads Copyright © 2011 Nelson Education Limited A C T I V E L E A R N I N G 1 B. Price of music downloads falls Price of music The D curve down- does not shift. loads Move down along P curve to a point with 1 lower P, higher Q. P2 D1 Q 1 Q 2 Quantity of music downloads Copyright © 2011 Nelson Education Limited0 A C T I V E L E A R N I N G 1 C. Price of CDs falls Price of CDs and music music downloads down- loads are substitutes. A fall in price of CDs P shifts demand for 1 music downloads to the left. D2 D 1 Q2 Q 1 Quantity of music downloads Copyright © 2011 Nelson Education Limited1 Supply  The quantity supplied of any good is the amount that sellers are willing and able to sell.  Law of supply: the claim that the quantity supplied of a good rises when the price of the good rises, other things equal Copyright © 2011 Nelson Education Limited The Supply Schedule  Supply schedule: Price Quantity of of lattes A table that shows the lattes supplied relationship between the $0.00 0 price of a good and the 1.00 3 quantity supplied. 2.00 6  Example: 3.00 9 Starbucks’ supply of lattes. 4.00 12 5.00 15  Notice that Starbucks’ 6.00 18 supply schedule obeys the Law of Supply. Copyright © 2011 Nelson Education Limited Starbucks’ Supply Schedule & Curve Price Quantity of of lattes P $6.00 lattes supplied $0.00 0 $5.00 1.00 3 $4.00 2.00 6 $3.00 3.00 9 4.00 12 $2.00 5.00 15 $1.00 6.00 18 $0.00 Q 0 5 10 15 Copyright © 2011 Nelson Education Limited Market Supply versus Individual Supply  The quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.  Suppose Starbucks and Jitters are the only two sellers in this market. (Q = quantity supplied) Price Starbucks Jitters Market Qs $0.00 0 + 0 = 0 1.00 3 + 2 = 5 2.00 6 + 4 = 10 3.00 9 + 6 = 15 4.00 12 + 8 = 20 5.00 15 + 10 = 25 6.00 18 + 12 = 30 25 The Market Supply Curve P QS (Market) P $6.00 $0.00 0 1.00 5 $5.00 2.00 10 $4.00 3.00 15 $3.00 4.00 20 $2.00 5.00 25 6.00 30 $1.00 $0.00 Q 0 5 10 15 20 25 30 35 Copyright © 2011 Nelson Education Limited Supply Curve Shifters  The supply curve shows how price affects quantity supplied, other things being equal.  These “other things” are non-price determinants of supply.  Changes in them shift the S curve… Copyright © 2011 Nelson Education Limited Supply Curve Shifters: Input Prices  Examples of input prices: wages, prices of raw materials.  A fall in input prices makes production more profitable at each output price, so firms supply a larger quantity at each price, and the S curve shifts to the right. Copyright © 2011 Nelson Education Limited Supply Curve Shifters: Input Prices Suppose the P price of milk falls. $6.00 At each price, $5.00 the quantity of $4.00 Lattes supplied will increase $3.00 (by 5 in this $2.00 example). $1.00 $0.00 Q 0 5 10 15 20 25 30 35 Copyright © 2011 Nelson Education Limited Supply Curve Shifters: Technology  Technology determines how much inputs are required to produce a unit of output.  A cost-saving technological improvement has the same effect as a fall in input prices, shifts S curve to the right. Copyright © 2011 Nelson Education Limited Supply Curve Shifters: # of Sellers  An increase in the number of sellers increases the quantity supplied at each price, shifts S curve to the right. Copyright © 2011 Nelson Education Limited 31 Supply Curve Shifters: Expectations Example:  Events in the Middle East lead to expectations of higher oil prices.  In response, owners of Texas oilfields reduce supply now, save some inventory to sell later at the higher price.  S curve shifts left. * In general, sellers may adjust supply when their expectations of future prices change. ( If good not perishable) Copyright © 2011 Nelson Education Limited2 Summary: Variables that Influence Sellers Variable A change in this variable… Price …causes a movement along the S curve Input Prices …shifts the S curve Technology …shifts the S curve # of Sellers …shifts the S curve Expectations …shifts the S curve Copyright © 2011 Nelson Education Limited A C T I V E L E A R N I N G 2 Supply Curve Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios? A. Retailers cut the price of the software. B. A technological advance allows the software to be produced at lower cost. C. Professional tax return preparers raise the price of the services they provide.
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