Economics 101 Lecturer: Jack Wu Demand and Supply Economics 101 Lecturer: Jack Wu

RISING GASOLINE PRICES Between September 2004 and September 2005, the monthly average retail price of gasoline jumped from $1.85 per gallon to $3.08 per gallon. Sales of full-size SUVs dropped 16.8% over the same time period (with a particularly sharp 42.5% drop for full-size GM SUVs).

ECONOMIC QUESTIONS Why did the gasoline price rise at that time? Why did the sale of full-size SUVs drop?

Demand and Supply Demand and supply are the two words that economists use most often. Demand and supply are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium.

Market A market is a group of buyers and sellers of a particular good or service. Can be highly organized E.g.: agricultural commodities Can be less organized E.g.: ice cream Buyers determine demand. Sellers determine supply

Competitive Market A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

PERFECT COMPETITION完全競爭 Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers

No Competition Monopoly獨佔: One seller, and seller controls price Monopsony獨買: One buyer, and buyer controls price

IMPERFECT COMPETITION不完全競爭 Oligopoly寡佔 Few sellers Not always aggressive competition Monopolistic Competition獨佔競爭 Many sellers Slightly differentiated products Each seller may set price for its own product

DEMAND需求 Quantity demanded 需求量is the amount of a good that buyers are willing and able to purchase. Law of Demand The law of demand 需求法則states that, other things equal, the quantity demanded of a good falls when the price of the good rises.

DEMAND SCHEDULE需求表 Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

Example of Demand Schedule Price Quantity ($ per movie) (movies per month) 10.00 0 7.50 1 5.00 2 2.50 4 0.00 7

DEMAND CURVE需求曲線 Demand Curve The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

INDIVIDUAL DEMAND CURVE 10 7.50 Price ($ per movie) 5 individual demand curve 2.50 In simplest form, graph will be series of steps; with large number of buyers combined, the graph will smoothen. Practically, market researchers will perform this on large scale for many potential consumers. Same construction for goods/services, consumer/industrial demand 1 2 4 7 Quantity (Movies a month)

Two Views for every possible price, it shows the quantity demanded for each unit of item, it shows the maximum price that the buyer is willing to pay

Another Example of Demand Schedule

Another Way of Demand Curve Price of Ice-Cream Cone $3.00 2.50 1. A decrease in price ... 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of 2. ... increases quantity of cones demanded. Ice-Cream Cones Copyright © 2004 South-Western

A negative price case: Negative Price? Hoover’s special promotion -- two free air tickets (worth more than £400) for purchase of appliance over £100. promotion attracted over 100,000 customers Hoover incurred £48 million loss

Ceteris Paribus When a demand curve is drawn, everything but price and quantity demanded is held constant. Definition: a Latin phrase, translated as “other things being equal”.

Market Demand Market demand refers to the sum of all individual demands for a particular good or service. Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

Market demand as the sum of individual demands (demand schedule) Price of ice-cream cone Catherine Nicholas Market $0.00 0.50 1.00 1.50 2.00 2.50 3.00 12 10 8 6 4 2 + 7 5 3 1 = 19 16 13

Market demand as the sum of individual demands Catherine’s demand + Nicholas’s demand = Market demand $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones DCatherine DNicholas DMarket 12 10 11 9 1 2 3 4 5 6 7 8 Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 Quantity of Ice-Cream Cones 18 2 4 6 8 10 12 14 16 Quantity of Ice-Cream Cones

Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product.

Changes in Quantity Demanded Price of Ice-Cream Cones A tax that raises the price of ice-cream cones results in a movement along the demand curve. B $2.00 A 1.00 D 4 8 Quantity of Ice-Cream Cones

Change in Demand Change in Demand A shift in the demand curve, either to the left or right. Caused by any change that alters the quantity demanded at every price.

Change in Demand Price of Ice-Cream Cone Increase in demand Decrease curve, D 2 Demand curve, D 1 Demand curve, D 3 Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning

Shift in the Demand Curve Consumer income Prices of related goods Tastes Expectations Number of buyers

normal good正常財 – demand increases with income Demand and Income Changes in income normal good正常財 – demand increases with income inferior good劣等財 – demand falls with income -- example: potato

Inferior Good v.s. Bads Inferior good is different from “bads”. Examples of “bads”: pollution or garbage

Demand and Prices of Related Goods When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes替代品. When a fall in the price of one good increases the demand for another good, the two goods are called complements互補品.

Case Study Two ways to reduce the quantity of smoking demanded: -- Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on TV (shift demand curve) -- Raising the price of cigarettes through tobacco taxes (move along demand curve)

Shifts in demand curve vs. movements along demand curve (a) A Shift in the Demand Curve (b) A Movement along the Demand Curve Price of Cigarettes, per Pack A policy to discourage smoking shifts the demand curve to the left Price of Cigarettes, per Pack A tax that raises the price of cigarettes results in a movement along the demand curve D1 D1 D2 $4.00 C 12 B A $2.00 2.00 10 20 A 20 Number of Cigarettes Smoked per Day Number of Cigarettes Smoked per Day

Summary variable change Demand Shift Income (Normal) Rise (fall) Right (left) Income (Inferior) Fall (rise) Left (right) Price of substitute Price of complement Taste Expected Price Number of buyers

SUPPLY供給 Quantity supplied供給量 is the amount of a good that sellers are willing and able to sell. Law of Supply The law of supply供給法則 states that, other things equal, the quantity supplied of a good rises when the price of the good rises.

SUPPLY SCHEDULE供給表 Supply Schedule The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

Example of Supply Schedule

SUPPLY CURVE供給曲線 Supply Curve The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

increases quantity of cones supplied. Price of Ice-Cream Cone $3.00 2.50 1. An increase in price ... 2.00 1.50 1.00 0.50 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of Ice-Cream Cones 2. ... increases quantity of cones supplied. Copyright©2003 Southwestern/Thomson Learning

Two Views For every possible price, it shows the production rate For each unit of item, it shows the minimum price that the seller is willing to accept

Market Supply Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

Market supply as the sum of individual supplies (supply schedule) Price of ice-cream cone Ben Jerry Market $0.00 0.50 1.00 1.50 2.00 2.50 3.00 1 2 3 4 5 + 6 8 = 7 10 13

Market supply as the sum of individual supplies Ben’s supply + Jerry’s supply = Market supply $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones SBen SMarket SJerry 12 10 11 9 1 2 3 4 5 6 7 8 Quantity of Ice-Cream Cones 1 2 3 4 5 6 7 Quantity of Ice-Cream Cones 18 2 4 6 8 10 12 14 16 Quantity of Ice-Cream Cones

Change in Quantity Supplied Movement along the supply curve. Caused by a change in price.

Change in Quantity Supplied Price of Ice-Cream Cone S C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. A 1.00 Quantity of Ice-Cream Cones 1 5 30

Change in Supply Change in Supply A shift in the supply curve, either to the left or right. Caused by a change in a determinant other than price.

Figure 7 Shifts in the Supply Curve Price of Supply curve, S 3 Ice-Cream curve, Supply S 1 Cone Supply curve, S 2 Decrease in supply Increase in supply Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning

Shift in the Supply Curve Input prices Technology Expectations Number of sellers

Summary variable change Supply Shift Input (factor) price Rise (fall) Fall (rise) Left (right) Technology Right (left) Expected Price Number of sellers

EQUILIBRIUM均衡 Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

Equilibrium Price and Quantity The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

Quantity of Ice-Cream Cones Price of Ice-Cream Cone Supply Demand Equilibrium Equilibrium price $2.00 Equilibrium quantity 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning

Surplus and Shortage Surplus Shortage When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium. Shortage When price < equilibrium price, then quantity demanded > the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

Markets not in equilibrium (a) Excess Supply (b) Excess demand Price of Ice Cream Cones Price of Ice Cream Cones Supply Supply Surplus Demand Demand $2.50 4 Quantity demanded 10 Quantity supplied 2.00 $2.00 7 7 1.50 4 Quantity supplied 10 Quantity demanded Shortage Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

Alternative Example: #2 Lead Pencils Price Quantity demanded Quantity supplied 0.05 1000 400 0.10 800 500 0.15 600 0.20 700 0.25 200

Quick Quiz 1 Draw demand and supply curves Find equilibrium price and quantity

Quick Quiz 2 How would following events shift either the demand or the supply of #2 lead pencil? -- an increase in the use of standardized exams (using opscan forms) -- a decrease in the price of ink pens -- a start of a school year

Increase in Demand Price of Ice-Cream 1. Hot weather increases the demand for ice cream . . . Cone D D Supply New equilibrium $2.50 10 2. . . . resulting in a higher price . . . 2.00 7 Initial equilibrium Quantity of 3. . . . and a higher quantity sold. Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning

Decrease in Supply Price of 1. An increase in the price of sugar reduces the supply of ice cream. . . Ice-Cream Cone S2 S1 Demand New equilibrium $2.50 4 2. . . . resulting in a higher price of ice cream . . . Initial equilibrium 2.00 7 Quantity of 3. . . . and a lower quantity sold. Ice-Cream Cones Copyright©2003 Southwestern/Thomson Learning

Summary

Discussion Each of the events listed below has an impact on the market for bicycles. 1.An increase in the price of automobile. 2.A decrease in incomes of consumers if bicycles are a normal good.

Discussion-continued 3.An increase in the price of steel used to make bicycle frames. 4.An environmental movement shifts tastes toward bicycling.

Discussion-continued 5.Consumers expect the price of bicycles to fall in the future. 6.A technological advance in the manufacture of bicycles.

Discussion-continued 7.A reduction in the price of bicycle helmets and shoes. 8.A decrease in incomes of consumers if bicycles are an inferior good.