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EWMBA201a: Introduction to Supply and Demand

EWMBA201a: Introduction to Supply and Demand. Buyers Consumers: finished goods and services. Firms: raw materials, labor, intermediate goods. Sellers Firms: finished goods. Workers: skilled and unskilled labor. Resource owners: land, raw materials. Economic units come in two classes.

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EWMBA201a: Introduction to Supply and Demand

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  1. EWMBA201a: Introduction to Supply and Demand

  2. Buyers Consumers: finished goods and services. Firms: raw materials, labor, intermediate goods. Sellers Firms: finished goods. Workers: skilled and unskilled labor. Resource owners: land, raw materials. Economic units come in two classes. MARKET: A collection of economic units resulting in the possibility of exchange. - Can be a physical location: NYSE floor, Fulton Street Fish market. - Can be a related set of transaction that are not in the same geographical location: Berkeley housing market, labor market for IT professionals. EWMBA201a - Fall 2006

  3. Demand, the buyer side of the market • Demand: the quantities of a good or service that people are willing to buy at various prices within some given time period, other factors besides price held constant. • Willing to buy: a consumer would both like to (i.e., has the taste for it) and is able to (i.e., have sufficient income to pay for it) buy the good. • Time period: especially for non-durables, the amount I’m willing to buy depends on the time period. • Other factors: the focus of demand is on the relationship between price and quantity. • A demand curve describes the relationship between the price and the quantity customers are ready to purchase at that price. EWMBA201a - Fall 2006

  4. A demand curve example • How do buyers respond to a change in price? • Lower price buyers willing to purchase more. • Higher price  buyers willing to purchase less. The daily demand for pizza in Berkeley: EWMBA201a - Fall 2006

  5. The demand for pizza in Berkeley graphically $6 $4.5 Price $3 $1.5 0 1000 5000 6000 7000 Quantity EWMBA201a - Fall 2006

  6. Demand versus quantity demanded Demand “Demand” describes the entire curve. Price 0 Quantity Quantity demanded “Quantity demanded” describes a particular point, corresponding to a particular price. Price $1.5 0 6000 Quantity EWMBA201a - Fall 2006

  7. P Demand Curve B Demand Curve A Q What, other than price, drives demand? • - TASTES (e.g. advertising) • - PRICES OF RELATED • PRODUCTS (substitutes and • complements) • INCOME • DEMOGRAPHICS EWMBA201a - Fall 2006

  8. A supply curve summarizes the supply side of the market. • Supply: the quantities of a good or service that firms are willing to sell at various prices within some given time period, other factors besides price held constant. • This definition is identical to the definition of demand, except that we’ve substituted the word “sell” for the word “buy.” • A supply curve describes the relationship between the price and the quantity firms are willing to supply at that price. EWMBA201a - Fall 2006

  9. A supply curve example • How do firms respond to a change in price? • Lower price firms willing to supply less. • Higher price  firms willing to supply more. The daily supply of pizza in Berkeley: EWMBA201a - Fall 2006

  10. The supply of pizza in Berkeley graphically $6 $4.5 Price $3 $1.5 0 1000 5000 6000 7000 Quantity EWMBA201a - Fall 2006

  11. Demand and supply on the same graph S $6 $4.5 Price $3 $1.5 D 0 1000 5000 6000 7000 Quantity EWMBA201a - Fall 2006

  12. What happens if the price is $4.50? S $6 $4.5 Price $3 $1.5 D 0 1000 5000 6000 7000 Quantity EWMBA201a - Fall 2006

  13. What happens if the price is $4.50? S $6 $4.5 Price $3 $1.5 D 0 1000 5000 6000 7000 Quantity QS QD EWMBA201a - Fall 2006

  14. What happens if the price is $4.50? S $6 Surplus $4.5 Price $3 $1.5 D 0 1000 5000 6000 7000 Quantity QS QD EWMBA201a - Fall 2006

  15. What happens if the price is $4.50? S $6 Surplus $4.5 Price $3 $1.5 D 0 1000 5000 6000 7000 Quantity QS QD EWMBA201a - Fall 2006

  16. What happens if the price is $1.50? S $6 $4.5 Price $3 $1.5 D 0 1000 5000 6000 7000 Quantity EWMBA201a - Fall 2006

  17. What happens if the price is $1.50? S $6 $4.5 Price $3 $1.5 Shortage D 0 1000 5000 6000 7000 QS Quantity QD EWMBA201a - Fall 2006

  18. What happens if the price is $1.50? S $6 $4.5 Price $3 $1.5 Shortage D 0 1000 5000 6000 7000 QS Quantity QD EWMBA201a - Fall 2006

  19. What happens if the price is $3.00? S $6 $4.5 Price $3 $1.5 D 0 1000 5000 6000 7000 Quantity EWMBA201a - Fall 2006

  20. The market mechanism • If the market price is above the equilibrium price (P>P*), there will be a surplus until: • producers tend to lower their prices, and • quantity demanded tends to expand. • If the market price is below the equilibrium price (P<P*), there will be a shortage until: • producers tend to raise their prices, and • quantity demanded tends to contract. • At the market clearing price (P = P*),, there is no tendency for the price to change and the market is in equilibrium. • Consumers can buy all they want, given the price. • Firms can sell all they want, given the price. EWMBA201a - Fall 2006

  21. Supply versus quantity supplied Supply “Supply” describes the entire curve. Price 0 Quantity “Quantity supplied” describes a particular point, corresponding to a particular price. Quantity supplied Price $1.5 0 6000 Quantity EWMBA201a - Fall 2006

  22. What, other than price, drives supply? P • PRICE OF INPUTS (both • substitutes and complements) • - TECHNOLOGY Supply Curve B Supply Curve A Q EWMBA201a - Fall 2006

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