Date post: | 01-Jan-2016 |
Category: |
Documents |
Upload: | stanley-howard |
View: | 212 times |
Download: | 0 times |
Lecture 3
Supply and Demand
Theory of Supply• A thought experiment with the following assumptions:
– All apartments are identical– Each apartment has a different owner– There are 10 owners interested in selling their
apartments– Owners are intelligent, well-informed people; they
weigh the costs and benefits of their actions– Owners care only about their own monetary interests
(self-interested rational behavior)– They are only interested in price, but they have
different ideas about what is an acceptable price
Theory of Supply
• Supply scheduleA table showing the quantity of a good or service that would
be offered by the sellers at each possible price
• Supply curveShows the same information in a graph
A Supply Schedule for Apartments Price ($1000s) 100 99 98 97 96 95 94 93 92 91 90 Quantity of Apartments Supplied 10 9 8 7 6 5 4 3 2 1 0
At a price of$96,000...
(7, 97)
Supply
(6, 96)
...6 apartmentsare offered forsale.
0 1 2 63 875 11109
91
99
97
98
96
90
94
95
92
93
4
Quantity of Apartments
Pri
ce o
f Ap
art
me
nts
($
10
00
s)
101
100
A Supply Schedule for Apartments Price ($1000s) 100 99 98 97 96 95 94 93 92 91 90 Quantity of Apartments Supplied 10 9 8 7 6 5 4 3 2 1 0
Theory of Supply• Change in quantity suppliedMovement along a supply curve in response to a price change• Change in supplyA shift of the supply curve in response to a determinant other
than price• Ceteris paribus«All else constant» or «other things equal»• Market supplyThe supply from all sellers in the market• Individual supplyThe supply from one individual seller
At a price of$96,000...
S1 S2
...8 apartments areoffered for sale.
0 1 2 63 875 1310 11 129
91
99
97
98
96
90
94
95
92
93
4
Quantity of Apartments
Pri
ce o
f Ap
art
me
nts
($
10
00
s)
101
When does the supply curve shift to the right (outward)?
S1S2
0 10 3020 5040
20
80
60
40
Quantity of Belts (number per month)
Pri
ce o
f B
elts
($
)When does the supply curve shift
to the left (inward)?
Nonprice determinants of supply
1. Available technology of production
2. Resource prices
3. The number of producers
4. Producer expectations about future prices and technology
5. Prices of related goods and services
Theory of Demand
• Assumptions:– 10 potential buyers for these apartments– They are well-informed – They make decisions based on rational self-
interest– They regard $100,000 as too high, but some of
them are willing to buy the apartments as price falls
Theory of Demand
• Demand scheduleA table showing the quantity of a good or service that
buyers are willing to purchase at each possible price
• Demand curveShows the same information in a graph
A Demand Schedule for Apartments Price ($1000s) 100 99 98 97 96 95 94 93 92 91 90 Quantity of Apartments Demanded 0 1 2 3 4 5 6 7 8 9 10
At a price of$96,000...
(3, 97)
Demand
(4, 96)
...4 apartmentsare desired bybuyers.
0 1 2 63 875 11109
91
99
97
98
96
90
94
95
92
93
4
Quantity of Apartments
Pri
ce o
f Ap
art
me
nts
($
10
00
s)
101
100
A Demand Schedule for Apartments Price ($1000s) 100 99 98 97 96 95 94 93 92 91 90 Quantity of Apartments Demanded 0 1 2 3 4 5 6 7 8 9 10
Theory of Demand• Change in quantity demandedMovement along a demand curve in response to a price change• Change in demandA shift of the demand curve in response to some determinant other than price• Effective demandThe desire for a product combined with a purchasing ability on side of the
consumer• Market demandThe demand from all buyers in the market• Individual demandThe demand from one individual buyer• Derived demandDemand for an input based on demand for the output it will help to produce
At a price of$96,000...
D1
D2
...8 apartmentsare desired bybuyers.
0 1 2 63 875 11109
91
99
97
98
96
90
94
95
92
93
4
Quantity of Apartments
Pri
ce o
f Ap
art
me
nts
($
10
00
s)
101
When does the demand curve shift to the right (outward)?
0 5 1510 2520
25
40
45
35
30
Quantity of Tables (number per month)
Pri
ce o
f Ta
ble
s ($
)
50
D2
D
When does the demand curve shift to
the left (inward)?
Nonprice determinants of demand
1. Tastes and preferences
2. Incomes and/or available assets
3. Availability and prices of related goods and services
4. Consumer expectations about future prices and incomes
5. The number of consumers
The theory of market adjustmentCombined Supply and Demand Schedules for Apartments Price ($1000s) 100 99 98 97 96 95 94 93 92 91 90 Quantity of Apartments Supplied 10 9 8 7 6 5 4 3 2 1 0 Quantity of Apartments Demanded 0 1 2 3 4 5 6 7 8 9 10
Surplus
Shortage
(1, 91) (9, 91)
(1, 99) (9, 99)
D
S
0 1 2 63 875 11109
91
99
97
98
96
90
94
95
92
93
4
Quantity of Apartments
Pri
ce o
f Ap
art
me
nts
($
10
00
s)
101
100
Market adjustment• SurplusA situation in which the quantity that sellers wish to sell at the stated price
is greater than the quantity that buyers will buy at that price
• ShortageA situation in which the quantity that buyers wish to buy at the stated price
is greater than the quantity that sellers are willing to sell at that price
• EquilibriumA situation that has reached a resting point, where there are no forces that
create change
Market adjustment
• Market-clearing equilibriumA situation in which the quantity supplied is equal to the
quantity demanded
• Theory of market adjustmentThe theory that market forces will tend to make price and
quantity to move toward the equilibrium point
• Market disequilibriumA situation of either shortage or surplus
(5, 95)
D
E
S
0 1 2 63 875 11109
91
99
97
98
96
90
94
95
92
93
4
Quantity of Apartments
Pri
ce o
f Ap
art
me
nts
($
10
00
s)
101
100
Market clearing equilibrium
Market adjustment
• Static modelA model that ignores time, implicitly assuming that all
adjustments occur anonymously
• Dynamic modelA model that takes into account the passage of time
required for changes to occur
Shifts in SupplySupply and Demand Schedules After an Increase in Supply (Only)
Price ($1000s) 100 99 98 97 96 95 94 93 92 91 90 Quantity of Apartments Supplied 12 11 10 9 8 7 6 5 4 3 2 Quantity of Apartments Demanded 0 1 2 3 4 5 6 7 8 9 10
D
Surplus
0 1 2 63 875 11109
91
99
97
98
96
90
94
95
92
93
4
Quantity of Apartments
Pri
ce o
f Ap
art
me
nts
($
10
00
s)
101
100 S1
E1
E2
S
Shifts in DemandSupply and Demand Schedules After an Increase in Demand (Only) Price ($1000s) 100 99 98 97 96 95 94 93 92 91 90 Quantity of Apartments Supplied 10 9 8 7 6 5 4 3 2 1 0 Quantity of Apartments Demanded 4 5 6 7 8 9 10 11 12 13 14
Shortage
0 1 2 63 875 11109
91
99
97
98
96
90
94
95
92
93
4
Quantity of Apartments
Pri
ce o
f Ap
art
me
nts
($
10
00
s)
101
100 S
D1
E1
E2
D
Explaining real-world prices and quantities
Price
Quantity
Year
Pric
e (2
000
dolla
rs p
er b
arre
l)
Qua
ntity
(m
illio
ns o
f ba
rrel
s pe
r da
y)
2006
1986
1981
19781973
19741979
1996
1995 2001
Pric
e (2
000
dolla
rs p
er b
arre
l)
Quantity (millions of barrels per day)
1969 1995
1979
1981
2006
1996
1986
197820041985
1980
S
E
D
15
$52
Quantity
Pri
ce
S
D
15
$52
Quantity
(b)(a)
Can the empirical data from the year 2006 be represented as an equilibrium in the oil market?
Or is it a disequilibrium?
13 1514
30
40
50
60
Quantity
1979
1980
1981
Pri
ce (
$)
Quantity
Pri
ce (
$)
(b)(a)
D
S2
S1
Oil market: 1979-1981
1514
18
22
Quantity
1996
1995Pri
ce (
$)
QuantityP
rice
($
)
(b)(a)
S
D2
D1
Oil market: 1995-1996
Price floor
E
S
D
Quantity
QD QE QS
Pfloor
PE
A law or agreement that puts a lower limit on prices
Price ceiling
E
S
D
Quantity
QS QE QD
Pceiling
PE
A law or agreement that puts a upper limit on prices