1. Lecture 4: Demand, Supply and Equilibrium
Required Text: Chapter 2

2. Quantity Demanded (cups)
Law of Demand
When price of a good goes up, people buy less of that good
Leads to downward sloping demand curve
Price ($/cup)
Quantity Demanded (cups)
0.50 5
0.75 4
1.00 3
1.25 2
1.50 1

3. Demand versus Quantity Demanded
Amount of a good consumed at a given price
Change in price means a change in quantity demanded
Movement along the demand curve
Demand
A family of numbers that lists the quantity demanded corresponding to each possible price
Demand Schedule
Demand Curve

4. Demand Schedule and Demand Curve
Demand Schedule - Refers to the demand table that shows quantity demanded at each price
Demand Curve - Graph illustrating demand - Graphical representation of the demand schedule
Price on the vertical axis
Quantity demanded on the horizontal axis
Demand Equation
Qd = (price, income, tastes and preferences, expectations, and prices of other goods)

5. Changes in Demand Price change does not lead to change in demand
Change in anything other than price lead to demand changes - Entire curve shifts
Income
Price of related goods
Substitutes
Complements
Taste (preference)
Sales Tax
Number of consumers

6. Shifting Demand Fall in Demand Rise in Demand
Decision made by demanders to buy a smaller quantity at each given price
Leftward shift of demand curve
Rise in Demand
Decision made by demanders to a buy a larger quantity at each given price
Rightward shift of demand curve

7. Sales Tax Example Paid directly to the government
Sales Tax – A tax imposed on consumers
Paid directly to the government
Does not affect the price
Consumers pay “Price plus sales tax”
Less desirable to buy the taxed good or service at every given price
Demand shifts downward and to the left

8. Effect of a Sales Tax on Demand
A new law requires $0.25 sales tax per cup of coffee
Price ($/cup)
Quantity (cups) before Tax
Quantity (cups)
after tax
0.50 5 4
0.75 3
1.00 2
1.25 1
1.50

9. Shape of the Demand Curve
Steeply-sloped demand curve
Large change in price leads to small change in quantity demanded
Flat demand curve
Small change in price leads to large change in the quantity demanded
Important to producers of goods and services

10. Econometrics
Statistical techniques used by economist to resolve questions about slopes of various demand curves
Based on direct observations in marketplace
Ex. Demand for murder
Ex. Demand for reckless driving
Wide scope of economics
Allows for other investigations as well

11. Market (Aggregate) Demand
Aggregate quantity of a good demanded by all consumers in a community (market) at each given price
The aggregate or market demand is obtained by the horizontal summation of all individual consumer’s demand curves.
Similar to the individual demand curve - Slopes downward

12. Market (Aggregate) Demand
Suppose, there are 10,000 SB coffee consumers in Lubbock
Each individual consumer’s demand for SB coffee is the same
Price ($/cup)
Ind. Quantity (cups)
Ag. Quantity (cups)
0.50 5
50,000
0.75 4
40,000
1.00 3
30,000
1.25 2
20,000
1.50 1
10,000

13. Law of Supply
When the price of a good goes up, the quantity supplied goes up
Leads to a upward sloping supply curve
Price ($)
Quantity (cups)
0.25
0.50
100
0.75
200
1.00
300
1.25
400
1.50
500

14. Supply versus Quantity Supplied
Amount of a good that suppliers will provide at a given price
Changes if the price changes
Movement along the curve
Supply
Family of numbers giving the quantities supplied at each price
Change in anything other than price changes supply
Shifts the entire curve

15. Changes in Supply Supply Equation
Qs =  (price, expectations, input prices, prices of other goods, technological change, number of producers)
Rise in Supply
Increase in quantities that supplier will provide at each price
Rightward shift of supply
Fall in Supply
Decrease in quantities that supplier will provide at each price
Leftward shift of supply

16. Changes in Supply Price change does not lead to change in supply
Factors that lead to supply changes - Entire curve shifts
Production costs
Improvement in production technology
Change in the wage rate
Changes in the Prices of other goods (subs. or comps.)
Excise Tax
Number of Producers

17. Excise Tax Example Producers pay the tax directly to the government
The government imposes a tax on producers
Producers pay the tax directly to the government
Price does not change, but the cost
Less desirable to produce the taxed good or service at every given price
Supply shifts to the left and upward

18. Effect of an Excise Tax on Supply
An excise tax of $0.25 per cup of coffee
Price ($/cup)
Quantity Supplied before tax
Quantity Supplied after tax
0.25
0.50
100
0.75
200
1.00
300
1.25
400
1.50
500

19. Market (Aggregate) Supply
Aggregate quantity of a good supplied by all producers in a community (market) at each given price
The aggregate or market supply is obtained by the horizontal summation of all individual producer’s supply curves.
Similar to the individual producer’s supply curve – Market supply curve slopes upward

20. Market (Aggregate) Supply
Suppose, there are 10 SB coffee sellers in Lubbock
Each individual seller’s supply for SB coffee is the same
Price ($/cup)
Ind. Quantity (cups)
Ag. Quantity (cups)
0.50
1,000
10,000
0.75
2,000
20,000
1.00
3,000
30,000
1.25
4,000
40,000
1.50
5,000
50,000

21. Market Equilibrium
Actual price and Quantity determined by interactions between demanders (consumers) and suppliers (sellers)
Demanders cannot purchase more than suppliers willing to sell
Suppliers cannot sell more than demanders willing to buy

22. Point where the market demand and supply curves intersect
Equilibrium Point
Point where the market demand and supply curves intersect
Price at which quantity demanded equals quantity supplied
Demanders and suppliers are satisfied
Able to behave as one wants to, taking market prices as given

23. Market Equilibrium for SB Coffee
Equilibrium price – $1.00 per cup
Equilibrium quantity – 30,000 cups per day
Price ($/cup)
Ag. Quantity Demanded
Ag. Quantity Supplied
0.50
50,000
10,000
0.75
40,000
20,000
1.00
30,000
1.25
1.50

24. Changes in the Equilibrium Point
The only way that anything can affect the equilibrium price and quantity is by causing a shift in either the supply curve or the demand curve
Never look at price and quantity
Look at the effect of the change has on demand curve and/or supply curve
The factors that shifts the demand and supply curves affect the equilibrium price and quantity

25. The Effects of Supply and Demand Shifts
Landsburg, Price Theory and Applications, 7th edition

26. Effect of Sales Tax
Sales tax of x¢ per item causes equilibrium price to fall by some amount less than x¢ per item
Price to suppliers not same as price to demanders (price plus sales tax)

27. Effect of Excise Tax
Excise tax of x¢ per item causes the equilibrium price to rise by some amount less than x¢ per item
Price to suppliers (price minus excise tax) not same as price to demanders

28. Comparing Two Taxes
Economic Incidence – the division of a tax burden according to who actually pays the tax
Legal Incidence – the division of a tax burden according to who is required under the law to pay the tax
The economic incidence of a tax independent of its legal incidence
Ex. Social Security tax

29. A Sales Tax versus an Excise Tax
Landsburg, Price Theory and Applications, 7th edition

30. Aggregated Effects of a Demand Curve Shift (for example change in income)
Price S D D’ P1 P0 Q Q0 Q1

31. Firm’s response to increased demand
What steps could a firm manager take to react to a shift in the demand curve to the right for an agricultural/food product?
For a competitive (atomistic) firm manager
Knowledge of the increase in demand is first seen by a noticed increase in price received.
Usual reaction is to increase output.
Other firm managers see that above normal profits are being earned and enter the market thus putting some upward pressure on input costs.
The increased production lower prices to an equilibrium price (where price = average cost) that is somewhat higher than the initial price.

32. Firm’s response to increased demand …
For the firm in monopolistic competition
the firm manager (remember the firm is a price maker) would first be aware of the increase in demand by an increase in sales or product orders.
The firm’s reaction would be to increase output and/or increase price.
Seeing the above normal profits, other firms would enter and increase the supply.
The firm would experience a weakened demand for its product with the resulting equilibrium price a little higher that the initial price.
This higher price is due to the increased average costs.

33. Firm’s response to increased demand
For the oligopolistic firm manager
The increase in demand would be recognized by an increase in sales/orders.
Reaction would be to increase output and price.
Entry is possible, but more difficult.
With entry, demand would weaken. The resulting price is not predictable.

34. Impacts of Large Decline in Demand in Alternative Market Models
Situations
Atomistic
Monopolist Competition
Oligopoly
First indication
Price falls
Orders/Sales decline
First Reaction
Cut output
Cut output, change promotion
Long run
Many firms exit
A few firms exit
Possibly an exit
Impact of Exits
Price raises
Increase sales

35. Domestic Demand vs. Export Demand
Consideration of demand for the farm commodity must consider total demand where total demand equals domestic demand plus export demand.
Domestic food demand is fairly stable with little change from year to year. However, droughts and other disasters that occur in foreign countries can create large swings in foreign demand from year to year.
Question
What can be the major result of these often-unexpected shifts in foreign demand?

36. Agricultural/Food Sector Trends
Moving from atomistic markets towards monopolistic competition:
How: creating differentiation: regional (California fruit), branding (Dole, green giant, Del Monte)
Why: more alternative marketing strategies
For example rice, bananas, tomatoes, lettuce, beef?