1. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Market Demand, Supply and Equilibrium

2. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Markets and Competition Market – a group of buyers and sellers of a good or service Competitive market Can be highly organized (Corn, Wheat) Can be less organized (Television) Many buyers and many sellers Each has a negligible impact on market price

3. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Demand Quantity demanded – the amount of a good buyers are willing and able to purchase Law of demand – other things equal, when the price of the good rises the quantity demanded of a good falls Demand schedule – a table illustrating the relationship between a price of a good and quantity demanded Demand curve – a graph illustrating the relationship between price of a good and quantity demanded Individual demand – Demand of one individual

4. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Demand curve Demand schedule and demand curve demand curve – illustrates how the quantity demanded of the good changes as its price varies. Because a lower price increases the quantity demanded, the demand curve slopes downward. Price of hamburgers Quantity of hamburgers demanded $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 12 10 8 6 4 2 0 0121011912345678 Quantity $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 Price decrease in price increases quantity of hamburgers demanded. Hamburger Demand Curve demand schedule – a table that shows the quantity demanded at each price.

5. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Market Demand Schedule Price of hamburgerBobSamMarket $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 12 10 8 6 4 2 0 +76543217654321 =19 16 13 10 7 4 1 The quantity demanded in a market is the sum of the quantities demanded by all the buyers at each price. Thus, the market demand curve is found by adding horizontally the individual demand curves. At a price of $2.00 Bob demands 4 hamburgers, and Sam demands 3. The quantity demanded in the market at this price is 7 hamburgers. Market demand – the sum of all individual demand schedules for a good or service

6. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Market Demand Curve D Bob 0121011912345678 Quantity $3.00 2.50 2.00 1.50 1.00 0.50 Price Bob’s demand D Sam 01234567 Quantity $3.00 2.50 2.00 1.50 1.00 0.50 Price Sam’s demand + D Market 018246810121416 Quantity $3.00 2.50 2.00 1.50 1.00 0.50 Price = Market demand

7. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Determinants of Demand – Consumer Income Normal good – an increase in income will cause an increase in demand, all else equal Inferior good – an increase in income a decrease in demand, all else equal Hamburger? Inferior Steak? Normal D1D1 Q1Q1 Price Quantity 0 D0D0 P0P0 Q0Q0 Hamburger Market D2D2 Q2Q2 For Hamburger increase in income (D 1 ) decrease in income (D 2 )

8. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Determinants of Demand – Prices of related goods Substitutes an increase in the price of one leads to an increase in the demand for the other Complements an increase in the price of one leads to a decrease in the demand for the other chicken, steak & fish Substitutes buns, cheese & soda Compliments D1D1 Q1Q1 Price Quantity 0 D0D0 P0P0 Q0Q0 Hamburger Market D2D2 Q2Q2 Increase in bun price (D 1 ) Increase in chicken price (D 2 )

9. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Determinants of Demand – Tastes News story Advertisement Oprah “all burgers are evil”, Mad cow (D 1 ) Beef, It’s What’s for Dinner Diets Adkins Diet (D 2 ) D1D1 Q1Q1 Price Quantity 0 D0D0 P0P0 Q0Q0 Hamburger Market D2D2 Q2Q2

10. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Determinants of Demand D1D1 Q1Q1 Price Quantity 0 D0D0 P0P0 Q0Q0 Hamburger Market – Expectations about future prices, quality and availability New tax on hamburgers next month to promote health (D 2 ) Leaner, healthier, meat announcement (D 1 ) D2D2 Q2Q2

11. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Determinants of Demand – Tastes – Expectations about future prices, quality and availability – Number of buyers – Prices of related goods Substitutes an increase in the price of one leads to an increase in the demand for the other Complements an increase in the price of one leads to a decrease in the demand for the other – Consumer Income Normal good – an increase in income will cause an increase in demand, all else equal Inferior good – an increase in income causes a decrease in demand, all else equal

12. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us As incomes increase, the demand curve for hamburger shifts to the left. Note the left graph: the demand curve shifts from D 0 to D 1. At price of $2.00, the quantity demanded falls from 20 to 10 hamburgers. Price Quantity 0 D0D0 20 D1D1 10 $2.00 12 B D0D0 Price Quantity 0 20 $2.00 A $4.00 An increase in the price of hamburgers causes a movement to a different point on a given demand curve. Note the right graph: when the price rises from $2.00 to $4.00, the quantity demanded falls from 20 to 12 hamburgers, as reflected by the movement from point A to point B. Change in Quantity Demanded is a movement along a given demand curve caused by a change in own price Change in Demand is a shift in the demand curve resulting from a change in one of the determinants of demand Demand Terminology

13. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Price Quantity 0 D0D0 D1D1 Increase in Demand D2D2 Decrease in Demand Demand Terminology Increase in demand – any change that increases the quantity at every price Demand curve shifts right (D 1 ) Decrease in demand – any change that decreases the quantity at every price Demand curve shifts left (D 1 )

14. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Demand Review VariableA Change in This Variable... Change in Quantity Demanded Price of the good itself Change in Demand Income Prices of related goods Tastes Expectations Number of buyers Movement along the demand curve Shift in demand curve

15. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Supply Quantity supplied – the amount of a good sellers are willing and able to sell Law of supply – other things equal, when the price of the good changes quantity supplied of a good moves in the same direction Increase in Supply – when the price of the good rises quantity supplied of a good go up Decrease in Supply – when the price of the good falls quantity supplied of a good drops

16. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Supply schedule and supply curve Supply curve supply curve – a graphic representation of the relationship between price of a good and quantity supplied, higher price increases the quantity supplied, so the supply curve slopes upward. Price of hamburger Quantity of hamburger supplied $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 00123450012345 0121011912345678 Quantity $3.00 $2.50 $2.00 $1.50 $1.00 $0.50 Price increase in price increases quantity of hamburger supplied supply schedule – a table that shows the quantity supplied at each price.

17. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Market Supply Price of hamburgerJanAlMarket $0.00 $0.50 $1.00 $1.50 $2.00 $2.50 $3.00 00123450012345 +00024680002468 =0 1 4 7 10 13 The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price. Thus, the market supply curve is found by adding horizontally the individual supply curves. At a price of $2.00, Bob supplies 3 hamburgers, and Al supplies 4 hamburgers. The quantity supplied in the market at this price is 7 hamburgers. Market supply – sum of the supply schedules of all sellers for a good or service

18. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us S Jan 0121011912345678 Quantity $3.00 2.50 2.00 1.50 1.00 0.50 Price Jan’s supply S Al 01234567 Quantity $3.00 2.50 2.00 1.50 1.00 0.50 Price Al’s supply + S Market 018246810121416 Quantity $3.00 2.50 2.00 1.50 1.00 0.50 Price =Market supply

19. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Shifts in Supply – Increase in supply: any change that increases the quantity supplied at every price Supply curve shifts right – Decrease in supply: any change that decreases the quantity supplied at every price Supply curve shifts left Shift in Supply or “Change in Supply”

20. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us ` Price Quantity 0 Supply curve, S 0 Supply curve, S 1 Increase in Supply curve, S 2 Decrease in supply Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right. Any change that lowers the quantity that sellers wish to produce at any given price shifts the supply curve to the left. Shifts in Supply

21. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Determinants of Supply Variables that can shift the supply curve – Input Prices (negatively related to increased prices of inputs) – Technology (positively related to improved technology) – Expectations about future – Price of other goods being produced (negatively related to increased prices of other goods) – Number of sellers

22. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Determinants of Demand S1S1 Q1Q1 Price Quantity 0 S0S0 P0P0 Q0Q0 Hamburger Variables that can shift the supply curve – Input Prices (negatively related to increased prices of inputs) Employees always want a wage increase. How will a wage increase impact the market for Hamburger? (S 1 ) A wage decrease? (S 2 ) S2S2 Q2Q2

23. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Determinants of Demand S2S2 Q2Q2 Price Quantity 0 S0S0 P0P0 Q0Q0 Dog Food Variables that can shift the supply curve – Price of other goods being produced (negatively related to increased prices of other goods) In economic recession households demand more cats and fewer dogs ―Cats (inferior goods) Cat food prices increase ―Dogs (normal goods)

24. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Variables that influence sellers Supply Review VariableA Change in This Variable... Change in Quantity Supplied of the good itself Change in Supply Input prices Technology Expectations Number of sellers movement along the supply curve Shifts the supply curve

25. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us 25 Supply 0121011912345678 Quantity $3.00 2.50 2.00 1.50 1.00 0.50 Price Demand Equilibrium price Equilibrium quantity Equilibrium price is $2.00. At this price, 7 hamburgers are supplied, and 7 hamburgers are demanded. Equilibrium Equilibrium – where market price achieves the condition quantity supplied equals quantity demand

26. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Equilibrium Price Quantity 0 Demand $2.50 Excess Supply Suppose market price is $2.50, the quantity supplied (10 burgers) exceeds the quantity demanded (4 burgers). Suppliers will increase sales by cutting the price which causes an increase in quantity demand and moves the price toward its equilibrium level. Supply 7 $2.00 Surplus 4 10 Price Excess Demand Quantity 0 Demand Supply 7 $2.00 Shortage 10 4 $1.50 Suppose market price is $1.50, the quantity demanded (10 burgers) exceeds the quantity supplied (4 burgers). With more buyers and goods available, suppliers take advantage of the shortage by raising the price. The price adjustment moves the market toward the equilibrium.

27. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Surplus (Excess supply) – Quantity supplied > quantity demanded – Downward pressure on price Shortage (Excess demand) – Quantity demanded > quantity supplied – Upward pressure on price Equilibrium

28. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Law of supply and demand – states that price of any good adjusts bringing the quantity supplied and the quantity demanded into balance In most markets surpluses and shortages are temporary Supply and Demand

29. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Three steps to analyzing changes in equilibrium 1.Decide if the event shifts the supply curve, the demand curve, or both curves 2.Decide if curve shifts to right or to left 3.Use supply-and-demand diagram Compare initial and new equilibrium How the shift affects equilibrium price and quantity Supply and Demand

30. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Example: A change in market equilibrium due to a shift in demand A cool summer effect on the hamburger market 1.Cool weather - demand curve (tastes) 2.Demand curve shifts to the left (down) 3.Lower equilibrium price; lower equilibrium quantity Supply and Demand

31. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Supply D0D0 An abnormally cool summer causes buyers to demand less hamburger (less grilling). The demand curve shifts from D 0 to D 1, which causes the equilibrium price to lower from $2.50 to $2.00 and the equilibrium quantity to lower from 10 to 7 hamburgers Quantity Price 0 $2.50 10 New equilibrium D1D1 1. Cool weather decreases the demand for hamburger... 7 3. …and a lower quantity sold. Supply and Demand 2. resulting in a lower price... 2.00

32. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Example: A change in market equilibrium due to a shift in supply – Technology improves hamburger processing 1.Change in technology impacts the supply curve 2.Supply curve shifts to the right 3.Lower equilibrium price; higher equilibrium quantity Supply and Demand

33. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us 33 S0S0 A technology improvement causes sellers to supply more hamburger. The supply curve shifts from S 0 to S 1, which causes the equilibrium price of hamburger to lower from $2.50 to $2.00 and the equilibrium quantity to increase from 4 to 7 hamburgers Quantity Price 0 $2.50 New equilibrium S1S1 1. an improvement in Technology 4 7 3. and a higher quantity sold Demand Supply and Demand 2.00 2. results in a lower price

34. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Example: A change in market equilibrium due to a shift in supply – Labor wages increase – Effect on the market for hamburger? 1.Change in input price impacts the supply curve 2.Supply curve - shifts to the left 3.Higher equilibrium price; lower equilibrium quantity Supply and Demand

35. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us S0S0 New equilibrium An increase in labor wages (an input price) causes sellers to supply less hamburger. The supply curve shifts from S 0 to S 1, which causes the equilibrium price of hamburger to rise from $2.00 to $2.50 and the equilibrium quantity to fall from 7 to 4 hamburgers Price Quantity 0 7 2.00 Demand 1. an increase in labor wages S1S1 4 3. a smaller quantity sold $2.50 2. results in a higher price Supply and Demand

36. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Example: shifts in both supply and demand – Increase in labor wages and increase in fish price 1.Higher fish price shifts demand curve for hamburger to the right 2.Higher labor wages will shift supply to the left 3.Equilibrium price raises 4.Equilibrium quantity depends on relative shifts in demand and supply – If demand increases substantially while supply falls just a little: equilibrium quantity rises – If supply falls substantially while demand rises just a little: equilibrium quantity falls Supply and Demand

37. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us Price Quantity of Hamburgers 0 D0D0 P1P1 Price Rises, Quantity Rises Observe a simultaneous increase in demand and decrease in supply with two possibly outcomes. To the left, equilibrium price rises from P 0 to P 1, and the equilibrium quantity rises from Q 0 to Q 1. To the right, equilibrium price again rises from P 0 to P 1, but the equilibrium quantity falls from Q 0 to Q 1. Price Rises, Quantity Falls P0P0 S0S0 Q0Q0 Q1Q1 D1D1 S1S1 New equilibrium Small decrease in supply Large increase in demand Price Quantity of Hamburgers 0 D0D0 P1P1 P0P0 S0S0 Q0Q0 Q1Q1 D1D1 S1S1 New equilibrium Large decrease in supply Small increase in demand Supply and Demand

38. copyright © michael.roberson@eStudy.us 2010, All rights reserved eStudy.us What happens to price and quantity when supply or demand shifts? No change In Supply An increase In Supply A decrease In supply No change In demand An increase In demand A decrease In demand P same Q same P up Q up P down Q down P down Q up P ambiguous Q up P Down Q ambiguous P up Q down P up Q ambiguous P ambiguous Q down Supply and Demand