Supply and Demand. Supply and Demand Demand Relationship between demand and price  the law of demand  the income effect  the substitution effect The.

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Presentation transcript:

Supply and Demand

Supply and Demand Demand

Relationship between demand and price  the law of demand  the income effect  the substitution effect The demand curve  assumptions  other things being equal (ceteris paribus)  a given time period  the axes  individual's and market demand curves

The demand curve: The demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) 20 Market demand (tonnes 000s) 700 A Point A Demand Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABAB Point A B Demand Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCABC Point A B C Demand Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCDABCD Point A B C D Demand Market demand for potatoes (monthly)

Quantity (tonnes: 000s) Price (pence per kg) Price (pence per kg) Market demand (tonnes 000s) ABCDEABCDE Point A B C D E Demand Market demand for potatoes (monthly)

Demand Other determinants of demand  tastes  number and price of substitute goods  number and price of complementary goods  income  distribution of income  expectations

Demand Movements along and shifts in the demand curve  change in price  movement along D curve  change in any other determinant of demand  shift in D curve  increase in demand  rightward shift  decrease in demand  leftward shift

D1D1 Price P OQ0Q0 Q1Q1 Quantity An increase in demand D0D0 Possible causes of a rise in demand Tastes shift towards this product Rise in price of substitute goods Fall in price of complementary goods Rise in income Expectations of a rise in price

Demand Demand functions  simple demand functions Q d = a – bP  more complex demand functions Q d = a – bP + cY + dP s – ePc  estimated demand equations  problems of estimating demand equations  demand functions and the demand curve

D P Q (000s) Demand curve for equation: Q d = – 200P

P 5 Q d (000s) 9 D P Q (000s) Demand curve for equation: Q d = – 200P

P 5 10 Q d (000s) 9 8 D P Q (000s) Demand curve for equation: Q d = – 200P

P Q d (000s) D P Q (000s) Demand curve for equation: Q d = – 200P

P Q d (000s) D P Q (000s) Demand curve for equation: Q d = – 200P

Supply and Demand Supply

Relationship between supply and price  short-run supply  long-run supply The supply curve  assumptions  other things remain equal (ceteris paribus)  a given time period  the axes  individual's and market supply curves

The supply curve: The supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a P 20 Q 100 a Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b P Q abab Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c P Q abcabc Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d P Q abcdabcd Market supply of potatoes (monthly)

Price (pence per kg) Quantity (tonnes: 000s) Supply a b c d e P Q abcdeabcde Market supply of potatoes (monthly)

Supply Relationship between supply and price  short-run supply  long-run supply The supply curve  assumptions  other things remain equal (ceteris paribus)  a given time period  the axes  individual's and market supply curves  why supply curves generally slope up

Supply Other determinants of supply  costs of production  profitability of alternative products (substitutes in supply)  profitability of goods in joint supply  nature and other random shocks  aims of producers  expectations of producers

Supply Movements along and shifts in the supply curve  change in price  movement along S curve  change in any other determinant of supply  shift in S curve  increase in supply  rightward shift  decrease in supply  leftward shift

Supply Supply functions  simple supply functions Q s = a + bP  more complex supply functions Q s = a + bP + cC + dP s – eP j  non-linear functions  estimated supply equations  problems of estimating supply equations

P QO S0S0 Increase S1S1 Possible causes of a rise in supply Fall in costs of production Reduced profitability of alternative products that could be supplied Increased profitability of goods in joint supply Benign shocks Expectations of a fall in price Shifts in the supply curve

P QO S2S2 S0S0 S1S1 IncreaseDecrease Shifts in the supply curve

Supply and Demand Price and output determination

Equilibrium price and output  response to shortages and surpluses  shortage (D > S)  price rises  surplus (S > D)  price falls  significance of ‘equilibrium’

Equilibrium price and output: The Market Demand and Supply of Potatoes (Monthly)

Quantity (tonnes: 000s) E D C A a c d e Supply Demand Price (pence per kg) B b The determination of market equilibrium (potatoes: monthly)

Quantity (tonnes: 000s) E D C B A a b c d e Supply Demand Price (pence per kg) SHORTAGE ( ) The determination of market equilibrium (potatoes: monthly)

Quantity (tonnes: 000s) E C B A a b c e Supply Demand Price (pence per kg) D d SURPLUS ( ) The determination of market equilibrium (potatoes: monthly)

D d QeQe Quantity (tonnes: 000s) E B A a b e Supply Demand Price (pence per kg) The determination of market equilibrium (potatoes: monthly)

Effects of shifts in the demand curve  movement along the supply curve and the new demand curve Price and output determination

P Q O Pe1Pe1 Qe1Qe1 S D1D1 g Initial equilibrium at point g Effect of a shift in the demand curve

P Q O Pe1Pe1 Qe1Qe1 S D1D1 g

P Q O Pe1Pe1 Qe1Qe1 S D1D1 D2D2 g

P Q O Pe1Pe1 Qe1Qe1 S g h D1D1 D2D2 Pe2Pe2 Qe2Qe2 i New equilibrium at point i Effect of a shift in the demand curve

Effects of shifts in the demand curve  movement along the supply curve and the new demand curve Effects of shifts in the supply curve  movement along demand curve and new supply curve Price and output determination

P Q O Pe1Pe1 Qe1Qe1 D S1S1 g Initial equilibrium at point g Effect of a shift in the supply curve

P Q O Pe1Pe1 Qe1Qe1 D S1S1 g

P Q O Pe1Pe1 Qe1Qe1 D S1S1 S2S2 g

P Q O Pe1Pe1 Pe3Pe3 Qe3Qe3 Qe1Qe1 D S1S1 S2S2 jg k New equilibrium at point k Effect of a shift in the supply curve

Effects of shifts in the demand curve  movement along the supply curve and the new demand curve Effects of shifts in the supply curve  movement along demand curve and new supply curve Identifying the position of demand and supply curves Price and output determination

P OQ S1S1 S2S p p b a What has caused a movement from point a to point b? Problems in identifying the position and shape of the demand curve: shift in supply curve

P OQ D S1S1 S2S p 30p b a Shift in supply alone. Problems in identifying the position and shape of the demand curve: shift in supply curve

P OQ S1S p a D1D1 D2D2 S2S p b Shift in both supply and demand. Problems in identifying the position and shape of the demand curve: shift in supply and demand curves

Supply and Demand The Control of Prices

The control of prices Equilibrium price and the absence of shortages and surpluses Minimum prices  justification  effects

P QO PePe S D Minimum price: price floor

P QO PePe minimum price QdQd QsQs S D surplus Minimum price: price floor

The control of prices Minimum prices  justification  effects  dealing with resulting surpluses Maximum prices  justification  effects

P QO PePe S D Maximum price: price ceiling

P QO PePe S D QsQs QdQd maximum price shortage Maximum price: price ceiling

The control of prices Minimum prices  justification  effects  dealing with resulting surpluses Maximum prices  justification  effects  dealing with resulting shortages  rationing  black markets

P Q O PgPg PePe QsQs QdQd D S Price ceiling No black market Effect of price control on black-market prices

P Q O PgPg PePe QsQs QdQd D S PbPb If black marketeers buy all the supplies at P g, the black market equilibrium price will be P b. Effect of price control on black-market prices