1. Supply and Demand
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2. Drawing on Chapter 2 McGraw-Hill/Irwin
Graphics copyright © The McGraw-Hill Companies, Inc. All rights reserved.

3. Steps in Analysis Define market Characterize S & D functions
Product, participants, geography, time period, etc.
Characterize S & D functions
PQ or QP, and Laws of S & D
Observe status of market
(dis)equilibrium and/or government interventions
Track and predict changes
In determinants of S &/or D, and their effects on S &/or D, disequilibrium, and P & Q

4. 1. Defining a market Product Participants Geography & communication
One, or related types?
Participants
Actual and potential
Geography & communication
From agora to Ebay
Time period
Institutions
Rules  Organizations

5. 2. Supply Function Supply of a product Focus on QS-PS relationship
QS = S(PS, E, Pi, NS, Pf, W, T)
QS = quantity supplied
PS = price to suppliers
E = efficiency of technology (costs, productivity)
Pi = prices of inputs (factors, intermediate products)
NS = number of suppliers
Pf = expected future price
W = measure of other “shocks,” such as weather
T = excise tax on suppliers (?)
Focus on QS-PS relationship
PQ or QP, and Law of Supply

6. Figure 2. 2: A Supply Schedule for Lobsters in Hyannis, MA
Figure 2.2: A Supply Schedule for Lobsters in Hyannis, MA., July 20, 2006
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7. 2. Demand Function Demand for product Focus on QD-PD relationship
QD = D(PD, M, ND, A, PZ, Pf, T)
QD = quantity demanded
PD = price to demanders (buyers)
M = incomes (per potential buyer)
ND = population
A = measure of tastes (preferences)
PZ = prices of substitutes or complements
Pf = expected future price
T = excise tax on demanders (buyers) (?)
Focus on QD-PD relationship
PQ or QP, and Law of Demand

8. Figure 2. 1: The Demand Curve for Lobsters in Hyannis, MA
Figure 2.1: The Demand Curve for Lobsters in Hyannis, MA., July 20, 2006 P0 Q1 Q0 P1
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9. Equilibrium Quantity and Price
Equilibrium quantity and price: it is the price-quantity pair at which both buyers and sellers are satisfied.
Excess supply: the amount by which quantity supplied exceeds quantity demanded.
Excess demand: the amount by which quantity demanded exceeds quantity supplied.
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10. 3. Status of Market: Equilibrium
Attractor or destination, usually not current status
Stable in short run

11. Figure 2.3: Equilibrium in the Lobster Market
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12. 3. Status of Market: Disequilibrium
Unstable
Excess supply or demand
Usually temporary unless …
Government controls
Price ceiling
Price support (such as a floor)
Production quota
Potential for welfare improvement

13. Figure 2.4: Excess Supply and Excess Demand
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14. Figure 2.5: An Opportunity for Improvement in the Lobster Market
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15. Figure 2.6: Rent Controls
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16. Figure 2.7: A Price Support in the Soybean Market
Optionally see linked 2000 USDA ERS analysis for a description of basic aspects of supports [p.1], a price chart [Fig.3], and more complex details.
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17. 4. Track and Predict Changes
For each event,
Which does it affect: S &/or D?
Which way?
What type of disequilibrium?
What changes in P & Q?
Write and graph

18. Figure 2.9: Factors that Shift Supply Schedules
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19. Figure 2.8: Factors that Shift Demand Curves
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20. Figure 2.12: Graphs of Equations 2.1 and 2.2
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21. Figure 2.11: The Effect of Soybean Price Supports on the Equilibrium Price and Quantity of Beef
As you can see from the historical price chart (you can’t lengthen the time frame without a subscription) linked to “Price”, prices did rise in the early 2010’s, though mainly due to China’s economic growth and rising incomes. Why?
A 2010 article from The Economist about the soybean market is linked to “Soybean.” Try to explain the effects on the price and quantity of soybeans of the main event(s) it describes.
In other cases – such as the news stories discussed earlier – we lack numerical information on the curves. Still, under the assumption that the Laws of Supply and Demand hold, we can predict the directions of change in both price and quantity … unless both supply and demand shifts. For example, what if the Chinese and Brazilian events happened simultaneously?
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22. The market for cheap whiskey in Wisconsin
Supply: PS = QS
(Units: 1,000s of bottles/week, $/bottle)
Demand: PD = – QD
Equilibrium: Q1 = Qs = QD, P1 = PS = PD
Solve for (Q1,P1) and graph