Demand, Supply, & Market Equilibrium

Bidding! How much will you pay for a 3 D Movie Theatre Ticket?

Price : Market Forces ka Kamaal Hain 3

Demand Quantity demanded ( Q d ) Amount of a good or service consumers are willing & able to purchase during a given period of time 4

Demand Six variables that influence Q d Price of good or service (P) Incomes of consumers (M) Prices of related goods & services (P R ) 5 Expected future price of product (P e ) Number of consumers in market (N) Generalized demand function

Competition in the market Airtell Vs. Vodafone How do you choose? - price - brand (quality) - distance - service

Supply and Demand DEMAND - from consumer's point of view SUPPLY - from producer's point of view

Demand Quantity demanded: the amount of a good that households want to consume given their income and prices in a given time period

Question How does what we "demand" differ from what we "want"? demand is what you are willing and able to buy given your income and the price of the good (limited) a want is a desire, but not necessarily something you have the resources to buy (unlimited)

Generalized Demand Function Inverse for complements 10 VariableRelation to Q d P PePe N M PRPR Inverse Direct Direct for normal goods Inverse for inferior goods Direct for substitutes

The Law of Demand As the price of a good increases, the quantity demanded falls, holding all else constant, (ceteris paribus) Ceteris Paribus - holding all else constant in real world many variables change simultaneously However, in order to understand the economy we must first understand each variable separately.

Graphing Demand Curves Change in quantity demanded Occurs when price changes Movement along demand curve Change in demand Occurs when one of the other variables, or determinants of demand, changes Demand curve shifts rightward or leftward 12

The Demand Curve The market demand curve (or just demand curve) shows the relationship between the price of a good and the quantity demanded, holding constant all other variables that influence demand Each point on the curve shows the total buyers would choose to buy at a specific price Law of demand tells us that demand curves virtually always slope downward

Figure 1: The Demand Curve Number of Bottles per Month Price per Bottle A B $ D 40,00060,000 At $2.00 per bottle, 60,000 bottles are demanded (point B). When the price is $4.00 per bottle, 40,000 bottles are demanded (point A).

Figure 2: A Shift of The Demand Curve BC $ ,00080,000 D1D1 D2D2 An increase in income shifts the demand curve from D 1 to D 2. Number of Bottles per Month Price per Bottle At each price, more bottles are demanded after the shift

Income: Factors That Shift The Demand Curve An increase in income has effect of shifting demand for normal goods to the right However, a rise in income shifts demand for inferior goods to the left A rise in income will increase the demand for a normal good, and decrease the demand for an inferior good

Wealth: Factors That Shift The Demand Curve Your wealth—at any point in time—is the total value of everything you own minus the total dollar amount you owe An increase in wealth will Increase demand (shift the curve rightward) for a normal good Decrease demand (shift the curve leftward) for an inferior good

Prices of Related Goods: Factors that Shift the Demand Curve Substitute—good that can be used in place of some other good and that fulfills more or less the same purpose A rise in the price of a substitute increases the demand for a good, shifting the demand curve to the right Complement—used together with the good we are interested in A rise in the price of a complement decreases the demand for a good, shifting the demand curve to the left

Complements V.S.

Other Factors That Shift the Demand Curve Population As the population increases in an area Number of buyers will ordinarily increase Demand for a good will increase Tastes Combination of all the personal factors that go into determining how a buyer feels about a good When tastes change toward a good, demand increases, and the demand curve shifts to the right When tastes change away from a good, demand decreases, and the demand curve shifts to the left

Movements Along and Shifts of The Demand Curve Quantity Price D1D1 D2D2 Entire demand curve shifts leftward when: income or wealth ↓ price of substitute ↓ price of complement ↑ population ↓ expected price ↓ tastes shift toward good Taxes ↑ or subsidies ↓

Supply Quantity supplied ( Q s ) Amount of a good or service offered for sale during a given period of time 22

Supply Six variables that influence Q s Price of good or service (P) Input prices (P I ) Prices of goods related in production (P r ) Technological advances (T) Expected future price of product (P e ) Number of firms producing product (F) Generalized supply function 23

Generalized Supply Function Direct for complements 24 VariableRelation to Q s P PePe F PIPI PrPr Direct Inverse Inverse for substitutes T

Supply Function Supply function, or supply, shows relation between P & Q s when all other variables are held constant Q s = g(P) 25

Graphing Supply Curves A point on a supply curve shows either: Maximum amount of a good that will be offered for sale at a given price Minimum price necessary to induce producers to voluntarily offer a particular quantity for sale 26

Graphing Supply Curves Change in quantity supplied Occurs when price changes Movement along supply curve Change in supply Occurs when one of the other variables, or determinants of supply, changes Supply curve shifts rightward or leftward 27

The Supply Schedule and The Supply Curve Supply schedule—shows quantities of a good or service firms would choose to produce and sell at different prices, with all other variables held constant Supply curve—graphical depiction of a supply schedule Shows quantity of a good or service supplied at various prices, with all other variables held constant

Figure 4: The Supply Curve F G 2.00 S 40,00060,000 $4.00 At $4.00 per bottle, quantity supplied is 60,000 bottles (point G). When the price is $2.00 per bottle, 40,000 bottles are supplied (point F). Number of Bottles per Month Price per Bottle

Shifts vs. Movements Along the Supply Curve A change in the price of a good causes a movement along the supply curve In Figure 4 A rise (fall) in price would cause a rightward (leftward) movement along the supply curve A drop in transportation costs will cause a shift in the supply curve itself In Figure 5 Supply curve has shifted to the right of the old curve (from Figure 4) as transportation costs have dropped A change in any variable that affects supply—except for the good’s price—causes the supply curve to shift

Factors That Shift the Supply Curve Input prices A fall (rise) in the price of an input causes an increase (decrease) in supply, shifting the supply curve to the right (left) Price of Related Goods When the price of an alternate good falls(rises), the supply curve for the good in question shifts rightward (leftward) Technology Cost-saving technological advances increase the supply of a good, shifting the supply curve to the right

Factors That Shift the Supply Curve Number of Firms An increase (decrease) in the number of sellers—with no other changes—shifts the supply curve to the right (left) Expected Price An expectation of a future price increase (decrease) shifts the current supply curve to the left (right)

Factors That Shift the Supply Curve Changes in weather Favorable weather Increases crop yields Causes a rightward shift of the supply curve for that crop Unfavorable weather Destroys crops Shrinks yields Shifts the supply curve leftward Other unfavorable natural events may effect all firms in an area Causing a leftward shift in the supply curve

Figure 5: A Shift of The Supply Curve S2S2 G J S1S1 60,000 $ ,000 A decrease in transportation costs shifts the supply curve from S 1 to S 2. Number of Bottles per Month Price per Bottle At each price, more bottles are supplied after the shift

Figure 6(a): Changes in Supply and in Quantity Supplied P2P2 Q3Q3 Q1Q1 Q2Q2 P1P1 P3P3 Quantity Price Price increase moves us rightward along supply curve S Price increase moves us leftward along supply curve

Figure 6(b): Changes in Supply and in Quantity Supplied Quantity Price S2S2 S1S1 Entire supply curve shifts rightward when: price of input ↓ price of alternate good ↓ number of firms ↑ expected price technological advance favorable weather

Figure 6(c): Changes in Supply and in Quantity Supplied Quantity Price S1S1 S2S2 Entire supply curve shifts rightward when: price of input ↑ price of alternate good ↑ number of firms ↓ expected price ↑ unfavorable weather

Market Equilibrium Equilibrium price & quantity are determined by the intersection of demand & supply curves At the point of intersection, Q d = Q s Consumers can purchase all they want & producers can sell all they want at the “market-clearing” price 38

Market Equilibrium (Figure 2.5) P 39 S0S0 Q d, Q s 0 1, Quantity Price (dollars) ,500 1, D0D0

Exercise Write down a list of 5 things you did yesterday (e.g., had breakfast, attended Econ 110 lecture, went to the gym, talked to friend X, wrote an essay, etc.). Next to each event, give examples of opportunity costs associated with doing it 40

Discussion Discussion of Demand and Supply cases. 41