1. Lecture 3 Supply and Demand

2. Theory of Supply A thought experiment with the following assumptions: – All apartments are identical – Each apartment has a different owner – There are 10 owners interested in selling their apartments – Owners are intelligent, well-informed people; they weigh the costs and benefits of their actions – Owners care only about their own monetary interests (self-interested rational behavior) – They are only interested in price, but they have different ideas about what is an acceptable price

3. Theory of Supply Supply schedule A table showing the quantity of a good or service that would be offered by the sellers at each possible price Supply curve Shows the same information in a graph

5. Theory of Supply Change in quantity supplied Movement along a supply curve in response to a price change Change in supply A shift of the supply curve in response to a determinant other than price Ceteris paribus «All else constant» or «other things equal» Market supply The supply from all sellers in the market Individual supply The supply from one individual seller

6. When does the supply curve shift to the right (outward)?

7. When does the supply curve shift to the left (inward)?

8. Nonprice determinants of supply 1.Available technology of production 2.Resource prices 3.The number of producers 4.Producer expectations about future prices and technology 5.Prices of related goods and services

9. Theory of Demand Assumptions: – 10 potential buyers for these apartments – They are well-informed – They make decisions based on rational self- interest – They regard $100,000 as too high, but some of them are willing to buy the apartments as price falls

10. Theory of Demand Demand schedule A table showing the quantity of a good or service that buyers are willing to purchase at each possible price Demand curve Shows the same information in a graph

12. Theory of Demand Change in quantity demanded Movement along a demand curve in response to a price change Change in demand A shift of the demand curve in response to some determinant other than price Effective demand The desire for a product combined with a purchasing ability on side of the consumer Market demand The demand from all buyers in the market Individual demand The demand from one individual buyer Derived demand Demand for an input based on demand for the output it will help to produce

13. When does the demand curve shift to the right (outward)?

14. When does the demand curve shift to the left (inward)?

15. Nonprice determinants of demand 1.Tastes and preferences 2.Incomes and/or available assets 3.Availability and prices of related goods and services 4.Consumer expectations about future prices and incomes 5.The number of consumers

16. The theory of market adjustment

17. Market adjustment Surplus A situation in which the quantity that sellers wish to sell at the stated price is greater than the quantity that buyers will buy at that price Shortage A situation in which the quantity that buyers wish to buy at the stated price is greater than the quantity that sellers are willing to sell at that price Equilibrium A situation that has reached a resting point, where there are no forces that create change

18. Market adjustment Market-clearing equilibrium A situation in which the quantity supplied is equal to the quantity demanded Theory of market adjustment The theory that market forces will tend to make price and quantity to move toward the equilibrium point Market disequilibrium A situation of either shortage or surplus

19. Market clearing equilibrium

20. Market adjustment Static model A model that ignores time, implicitly assuming that all adjustments occur anonymously Dynamic model A model that takes into account the passage of time required for changes to occur

21. Shifts in Supply

22. Shifts in Demand

24. Explaining real-world prices and quantities Price Quantity Year Price (2000 dollars per barrel) Quantity (millions of barrels per day) 2006 1986 1981 1978 1973 1974 1979 1996 1995 2001

25. Price (2000 dollars per barrel) Quantity (millions of barrels per day) 19691995 1979 1981 2006 1996 1986 1978 2004 1985 1980

26. Can the empirical data from the year 2006 be represented as an equilibrium in the oil market? Or is it a disequilibrium?

27. Oil market: 1979-1981

28. Oil market: 1995-1996

29. Price floor A law or agreement that puts a lower limit on prices

30. Price ceiling A law or agreement that puts a upper limit on prices