Supply and Demand

The Market -- Basic Model A1. Buyers are price takers. A2. An increase in the price will reduce quantity demanded by consumers A3. Sellers are price takers A4. An increase in the price will increase quantity supplied by producers A5. Buyers and sellers have perfect information

Market Equilibrium 7

Market Equilibrium

Market Equilibrium If price above the equilibrium, quantity supplied will be greater than quantity demanded. Gains from trade are possible at lower price. If price is below the equilibrium, quantity supplied will be less than quantity demanded. Gains from trade are possible at a higher price.

Market Equilibrium 7

How Do P & Q Change? A Shift in Demand A Shift in Supply A shift up to the right (an increase) will increase P & Q. A shift down to the left (a decrease) will decrease P&Q A Shift in Supply A shift out to the right (an increase) will decrease P and increase Q A shift in to the left (a decrease) will increase P and decrease Q.

Increase in Demand 9

What Factors Shift Demand ? TASTES INCOME Normal good Inferior good PRICE OF SUBSTITUTE PRICE OF COMPLEMENT EXPECTATIONS

Increase in Supply 10

What Factors Shift Supply? Input Prices Technological Change Acts of God/Weather Change in Number of Suppliers

Movement Along vs. Shift A shift of the supply curve leads to an increase in quantity demanded. This is a movement along the demand curve A shift of the demand curve leads to an increase in quantity supplied. This is a movement along the supply curve.

Examples “Crude Oil, Petroleum Products Rise after Explosion at Large Shell Refinery.” “Digital Camera Prices Fall As More People Buy, Contradicting the Laws of Supply and Demand.” “Demand is increasing moderately, but with yields per acre rising, farmers have seen little change in prices.”

“Crude Oil, Petroleum Products Rise after Explosion at Large Shell Refinery.”

“Digital Camera Prices Fall As More People Buy, Contradicting the Laws of Supply and Demand.”

“Demand is increasing moderately, but with yields per acre rising, farmers have seen little change in prices.”

Shifts in Both Supply and Demand An increase in both supply and demand will increase Q but effects on P are ambiguous. An increase in supply with a decrease in demand will reduce P, but effects on Q are ambiguous. A decrease in both supply and demand will decrease Q but effects on P are ambiguous. A decrease in supply with an increase in demand will increase P, effects on Q are ambiguous.

If price increases by 10%, will total revenue increase or decrease? What’s Next? If price increases by 10%, will total revenue increase or decrease? 12