Demand and Supply Lecture 4

In This Lecture 1.Prices and Competitive Conditions 2.The meaning of demand and demand schedules and curves 3.The difference between a shift in demand and a change in the the quantity demanded 4.The meaning of supply and supply schedules and curves 5.The difference between shifts in supply and a change in the quantity supplied

Prices Prices represent the term of trade between individuals In a barter economy, prices could be expressed as how many coconuts are required in a trade for each fish. In a monetary economy, prices are expressed as the number of units of currency (dollar, euro, peso, etc.) required in trade for a unit of a ‘good.’ Note the ratio of the currency price of a fish to the currency price of a coconut tells you how many coconuts you have to give up to get a fish (same as in the barter economy) Relative prices (ratios of one price to another) represent opportunity costs!

Competitive Conditions If trading relationships between individuals are competitive, then no one individual or group of individuals through their actions can influence the price of a good. Individuals in competitive situations will take the price as given.

Trade: It takes two to tango At a given price, I could decide to acquire ownership of a good -- I would be a ‘demander’ in this situation At a given price, I could decide to sell my ownership of the good to another individual -- in this situation I would be a ‘supplier’

ND Football Tickets Value of Ticket to: Peter$200 Paul$150 Mary$100 Jack$100 Jill $50 The value to the potential buyer of the good is the maximum amount he or she is willing and able to pay to good. Don’t currently have a ticket but will demand a ticket only if the value to the individual exceeds their opportunity cost (relative price) Demand a ticket if Benefit ≥ Cost

ND Football Tickets Value of Ticket Peter$200 Paul$150 Mary$100 Jack$100 Jill $ Price Tickets Demand Curve Peter Paul Mary and Jack Jill Demand Schedule

Donuts Quantity of Donuts JillJackTotal Price $ ¢033 50¢156 25¢279 Why must the price decline for the individuals to demand more? –As the individual consumes more of the good, the value they place on the next unit of consumption declines (diminishing marginal utility). –Individuals will increase their demand only if the price falls.

Donuts Quantity of Donuts JillJackTotal Price $ ¢033 50¢156 25¢ $1 75¢ 50¢ 25¢ Price Donuts

When Price of the Good Falls More of the good is demanded because Individuals who at the original price demanded the good may demand more Individuals who at the original price didn’t demand any of the good may start demanding the good Remember this represents movement along a Demand Curve

Continuous Demand Smooth Demand Curve Because: Many individuals Ask at any price Can demand fractions of units Price Quantity

Shifts in Demand Curve Change in Other Factors: Increase in Population Changes in Income –Normal good (income rises) –Inferior good (income rises) Change in prices of other goods –Substitutes (price rises) –Complements (price rises) Changes in Tastes Changes in Expectations Changes in Weather Shifts Demand Outward Inward Outward Inward

Supply In the football tickets example, ND allocates the tickets according to some procedure but then the individuals who receive tickets may sell them or keep them In the donut example, donuts are produced and then sold to customers In either example, the question is what quantity of the goods will offered for sale at a given price

ND Football Tickets Value to: Professor W$150 Professor X $100 Professor Y$50 Professor Z$50 Value to an owner of an object or good is the minimum price at which they would be willing to part with the good. They would ‘supply’ the good (be willing and able to sell the good) if the price they could get for the good exceeded the value they placed on the good Sell if: PRICE ≥ Value to individual

Z and Y Price Tickets ND Football Tickets Value to: Professor W$150 Professor X$100 Professor Y$50 Professor Z$50 X W Supply Function

Donuts Quantity of Donuts TastyDunkingTotal Price $ ¢358 50¢246 25¢000 Why do firms require a hirer price to supply more? –As they produce more, the cost of production rises (diminishing returns to scale). –Consequently as their costs rise they will only be willing to supply more if the price rises.

Donuts $1 75¢ 50¢ 25¢ Price Donuts Quantity of Donuts TastyDunkingTotal Price $ ¢358 50¢246 25¢000

As the Price of the Good Rises More is supplied because Existing suppliers provide more New suppliers start producing and supplying the good This occurs with movement along a supply curve!

Shifts in Supply Curve Change in Other Factors: Changes in Input Prices (increases) Changes in Technology Change in Expectations Shifts Supply Inward Outward

Assignment for Next Lecture Do Homework 3 on ‘Homework Assignment’ by Wednesday, September 6 at 5 pm ReRead Chapter 3 Topics Next Time –Markets and Competitive Equilibrium