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Chapter 2

Chapter 2. Demand, Supply, & Market Equilibrium. Demand. Quantity demanded ( Q d ) Amount of a good or service consumers are willing & able to purchase during a given period of time. Demand. Six variables that influence Q d Price of good or service (P) Incomes of consumers (M)

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Chapter 2

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  1. Chapter 2 Demand, Supply, & Market Equilibrium

  2. Demand • Quantity demanded (Qd) • Amount of a good or service consumers are willing & able to purchase during a given period of time

  3. Demand • Six variables that influence Qd • Price of good or service (P) • Incomes of consumers (M) • Prices of related goods & services (PR) • Expected future price of product (Pe) • Number of consumers in market (N) • Generalized demand function

  4. Generalized Demand Function • b, c, d, e, f, & g are slope parameters • Measure effect on Qdof changing one of the variables while holding the others constant • Sign of parameter shows how variable is related to Qd • Positive sign indicates direct relationship • Negative sign indicates inverse relationship

  5. e = Qd/is positive Generalized Demand Function Inverse for complements P b = Qd/P is negative Inverse c = Qd/Mis positive Direct for normal goods M c = Qd/Mis negative Inverse for inferior goods d = Qd/PRis positive Direct for substitutes PR d = Qd/PRis negative Direct Pe f = Qd/Peis positive Direct N g = Qd/Nis positive Direct

  6. Demand Function • Demand function, or demand, shows relation between P & Qdwhen all other variables are held constant • Qd = f(P) • Law of Demand • Qdincreases when P falls & Qddecreases when P rises, all else constant • Qd/P must be negative

  7. Graphing Demand Curves • Traditionally price (P) is plotted on the vertical axis & quantity demanded (Qd) is plotted on the horizontal axis • The equation plotted is the inverse demand function • P = f(Qd)

  8. Graphing Demand Curves • A point on a demand curve shows either: • Maximum amount of a good that will be purchased for a given price • Maximum price consumers will pay for a specific amount of the good

  9. 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

  10. P 80 D1 70 Price (dollars) Demand increase 60 D0 $50, 300 • • $50, 600 50 D2 • • 40 $40, 500 $40, 200 30 Demand decrease 20 10 Qd 900 1,300 300 100 700 1,500 500 1,100 0 Quantity Shifts in Demand (Figure 2.2)

  11. Supply • Quantity supplied (Qs) • Amount of a good or service offered for sale during a given period of time

  12. Supply • Six variables that influence Qs • Price of good or service (P) • Input prices (PI ) • Prices of goods related in production (Pr) • Technological advances (T) • Expected future price of product (Pe) • Number of firms producing product (F) • Generalized supply function

  13. Generalized Supply Function • k, l, m, n, r, & s are slope parameters • Measure effect on Qsof changing one of the variables while holding the others constant • Sign of parameter shows how variable is related to Qs • Positive sign indicates direct relationship • Negative sign indicates inverse relationship

  14. Generalized Supply Function Direct for complements P k = Qs/P is positive Direct PI l = Qs/PIis negative Inverse m = Qs/Pris negative Inverse for substitutes Pr m = Qs/Pris positive T n = Qs/Tis positive Direct Pe r = Qs/Peis negative Inverse F s = Qs/Fis positive Direct

  15. Supply Function • Supply function, or supply, shows relation between P & Qswhen all other variables are held constant • Qs = g(P)

  16. 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

  17. 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

  18. S2 S0 S1 $60, 700 • $60, 400 • • • $40, 500 $40, 650 Supply increase Shifts in Supply (Figure 2.4) P 80 70 Price (dollars) 60 Supply decrease 50 40 30 20 10 Qs 900 300 100 700 500 0 Quantity

  19. Market Equilibrium • Equilibrium price & quantity are determined by the intersection of demand & supply curves • At the point of intersection, Qd = Qs • Consumers can purchase all they want & producers can sell all they want at the “market-clearing” price

  20. S0 • • • • • D0 Market Equilibrium (Figure 2.5) P 80 70 Price (dollars) 60 50 40 30 20 10 Qd , Qs 900 1,300 300 100 700 1,500 500 1,100 0 Quantity

  21. S0 B • • • C • D1 D2 Demand Shifts (Supply Constant)(Figure 2.6) P 80 70 Price (dollars) 60 50 A • 40 30 20 10 D0 Qd , Qs 900 1,300 300 100 700 1,500 500 1,100 0 Quantity

  22. S2 S1 T • • • • S Supply Shifts (Demand Constant)(Figure 2.7) P S0 80 70 Price (dollars) 60 50 R • 40 30 20 10 D0 Qd , Qs 900 1,300 300 100 700 500 1,100 0 Quantity

  23. Simultaneous Shifts • When demand & supply shift simultaneously • Can predict either the direction in which price changes or the direction in which quantity changes, but not both • The change in equilibrium price or quantity is said to be indeterminate when the direction of change depends on the relative magnitudes by which demand & supply shift

  24. S S’ S’’ B • P’ • C P’’ D’ D Q’ Q’’ Simultaneous Shifts: (D, S) P A • P Q Q Price may rise or fall; Quantity rises

  25. S S’ S’’ B • P’ • C P’’ D’ D Q’ Q’’ Simultaneous Shifts: (D, S) P A • P Q Q Price falls; Quantity may rise or fall

  26. S’’ S • S’ C P’’ B • P’ D’ D Q’ Q’’ Simultaneous Shifts: (D, S) P A • P Q Q Price rises; Quantity may rise or fall

  27. S’’ S S’ • C P’’ • B P’ D’ D Q’’ Q’ Simultaneous Shifts: (D, S) P A • P Q Q Price may rise or fall; Quantity falls

  28. Ceiling & Floor Prices • Ceiling price • Maximum price government permits sellers to charge for a good • When ceiling price is below equilibrium, a shortage occurs • Floor price • Minimum price government permits sellers to charge for a good • When floor price is above equilibrium, a surplus occurs

  29. Sx 3 2 2 1 Dx 62 50 50 84 22 32 Panel B – Floor price Ceiling & Floor Prices (Figure 2.11) Px Px Price (dollars) Price (dollars) Sx Dx Qx Qx Quantity Quantity Panel A – Ceiling price

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