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Supply and Demand: An Introduction

Supply and Demand: An Introduction. Supply and Demand:. How do consumers get the goods and services they want in the right quantities and qualities? Some goods and services are allocated by the market forces of supply and demand. Supply and Demand:.

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Supply and Demand: An Introduction

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  1. Supply and Demand: An Introduction

  2. Supply and Demand: • How do consumers get the goods and services they want in the right quantities and qualities? • Some goods and services are allocated by the market forces of supply and demand Supply and Demand

  3. Supply and Demand: • Why do some goods and services have shortages or surpluses and others do not? • Some good and supplies services are regulated by government Supply and Demand

  4. What, How, and for Whom? Central Planning Versus the Market • Three Problems All Economic Systems Must Address • What should be produced? • How should it be produced? • For whom will it be produced? Supply and Demand

  5. Centralized Economic Organizations • Agrarian society • Former Soviet Union • Cuba, North Korea • China? • Bureaucracy Havana Supply and Demand

  6. What, How, and for Whom? Central Planning Versus the Market • Free-Market or Capitalist Economic Systems • Individual choices determine • Which careers to pursue • Which products to produce or buy • When to start and shut-down a business • Who gets what, which is decided by individual preferences and purchasing power Supply and Demand

  7. Buyers and Sellers in Markets • A Market • Consists of all buyers and sellers of a good or service • What do you think? • What determines the price of pizza, gasoline, a car wash, or other goods and services? Supply and Demand

  8. The Demand Curve • A schedule or graph that tells us the quantity of a good that buyers wish to buy at each price Supply and Demand

  9. A Property of Demand • As price of a good or service goes down the quantity consumers wish to buy will increase • Therefore, the demand curve is downward-sloping Supply and Demand

  10. The Daily DemandCurve for Pizza in Chicago Price ($ per slice) 4 3 2 Demand Quantity (1000s of slices per day) 8 12 16 Supply and Demand

  11. Price per Bottle When the price is $40 per bottle, 40,000 bottles are demanded (point A). At $30 per bottle, 60,000 bottles are demanded (point B). Number of Bottles per Month The Demand Curve—Taiwan Beer A $40 B 30 D 40,000 60,000 Supply and Demand

  12. 薄利多銷? Supply and Demand

  13. Using Price Elasticity of Demand: Mass Transit • Elasticity studies show that long-run demand for mass transit is inelastic • Therefore, a rise in fare would increase revenues Supply and Demand

  14. However, most cities do not raise transit fares due to • Desire to provide low-income households with affordable transportation • Desire to manage traffic congestion • Desire to limit air pollution in the city • An increase in fares would increase revenue • Would also decrease ridership and require the city to sacrifice these other goals Supply and Demand

  15. Buyers and Markets • The Demand Curve • Why do buyers purchase a greater quantity at lower prices and vice-versa? • The substitution effect • The income effect Supply and Demand

  16. Substitution Effect • The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes Supply and Demand

  17. Income Effect • The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power Supply and Demand

  18. The Cost-Benefit Principle • The reservation price is the benefit the buyer receives from the good • The cost of the good is its market price • If the reservation price (benefit) exceeds the market price (cost) the consumer will purchase the good • At higher prices, benefit will exceed cost for a smaller quantity than at lower prices Supply and Demand

  19. The buyers reservation price:The largest dollar amount the buyer would be willing to pay for a good 4 3 2 Demand 8 12 16 WTP Price ($ per slice) Quantity (1000s of slices per day) Supply and Demand

  20. Horizontal Interpretation Price ($ per slice) Price determines quantity demanded 4 3 2 Demand 8 12 16 Supply and Demand

  21. Vertical Interpretation Price ($ per slice) Quantity measures the marginal buyer’s reservation price 4 3 2 Demand 8 12 16 Supply and Demand

  22. The Supply Curve • A curve or schedule showing the quantity of a good that sellers wish to sell at each price Supply and Demand

  23. Question • Will the opportunity cost of producing additional units of pizza increase or decrease? • Hint: Low-hanging-fruit principle Supply and Demand

  24. The Supply Curve • Sellers must receive a higher price to produce additional units of a product to cover the higher opportunity costs of each additional unit Supply and Demand

  25. Supply 4 3 2 8 12 16 The Daily SupplyCurve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) Supply and Demand

  26. The Daily SupplyCurve for Pizza in Chicago Horizontal Interpretation Price ($ per slice) Supply 4 Shows the quantity produced for each price 3 2 Quantity (1000s of slices per day) 8 12 16 Supply and Demand

  27. The Daily SupplyCurve for Pizza in Chicago Vertical Interpretation Price ($ per slice) Supply 4 Shows the marginal cost (reservation price) for producing each additional unit 3 2 Quantity (1000s of slices per day) 8 12 16 Supply and Demand

  28. Market Equilibrium • Seller’s Reservation Price • The smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost Supply and Demand

  29. Market Equilibrium • Equilibrium • A system is in equilibrium when there is no tendency for it to change • Market Equilibrium • Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price Supply and Demand

  30. Supply Equilibrium at $3 Quantity Demanded = Quantity Supplied Demand The Equilibrium Price and Quantity of Pizza in Chicago Price ($ per slice) 4 3 2 Quantity (1000s of slices per day) 8 12 16 Supply and Demand

  31. Equilibrium Price and Equilibrium Quantity • The values of price and quantity for which quantity supplied and quantity demanded are equal Supply and Demand

  32. What Do You Think? • Would buyers prefer a lower price than the equilibrium price? • Would sellers prefer a higher price than the equilibrium price? Supply and Demand

  33. Excess supply = 8,000 slices per day Supply Demand Excess Supply Price ($ per slice) 4 3 2 Quantity (1000s of slices per day) 8 12 16 Supply and Demand

  34. Excess Demand Price ($ per slice) Supply 4 Excess demand = 8,000 slices per day 3 2 Demand Quantity (1000s of slices per day) 8 16 Supply and Demand

  35. Points Along the Demand and Supply Curves of a Pizza Market Supply and Demand

  36. Graphing Supply and Demand and Finding the Equilibrium Price and Quantity Price ($per slice) Supply 5 4 The Equilibrium Price = $2.50 The Equilibrium Quantity = 5 3 2.50 2 1 Demand Quantity (1000s of slices per day) 0 2 4 6 8 10 5 Supply and Demand

  37. What Do You Think? • Is the market equilibrium always an ideal outcome for all market participants? Supply and Demand

  38. An Unregulated Housing Market Monthly Rent ($/apartment) Supply What Do You Think? Is $1600 more than some people can afford? 1600 Demand Quantity (Millions of apartments/day) 2 Supply and Demand

  39. Rent Controls Monthly Rent ($/apartment) Supply 2400 Excess demand = 2 million apartments per month 1600 Controlled = 800 Demand Quantity (Millions of apartments/day) 0 1 2 3 Supply and Demand

  40. Market Equilibrium • Rent Controls Reconsidered • Other consequences of rent controls • Maintenance will decline and housing quality will fall • Illegal payments • Creation of co-ops and conversion to condominiums • Reduction in household mobility • Discrimination Supply and Demand

  41. Case study: • What do you think? • How can we make housing affordable for poor people without using rent ceilings? • Health insurance • Tuition fee • Fruit/Rice export • High-speed railway KTR THR Supply and Demand

  42. Rent Controls What is the impact of a rent control set at $1,200/month? Monthly Rent ($/apartment) Supply 1200 What is the impact of a rent control set at $600/month? 800 600 Demand Quantity (Millions of apartments/day) 0 1 2 3 Supply and Demand

  43. Price Controls in the Pizza Market Price ($ per slice) Supply 4 Excess demand = 8,000 slices per day 3 Price ceiling = 2 Demand Quantity (1000s of slices per day) 8 12 16 Supply and Demand

  44. Rental control in Paris or NCCU Supply and Demand

  45. Market Equilibrium • Pizza Price Controls? • Market responses to a pizza price ceiling • Long lines • Preferential treatment to selected customers • Alternative pricing strategies • Poorer quality ingredients • Black-market pizzas Supply and Demand

  46. Predicting and Explaining Changes in Prices and Quantities • Distinguishing Between • A change in the quantity demanded • A movement along the demand curve that occurs in response to a change in price • A change in demand • A shift of the entire demand curve Supply and Demand

  47. D Increase in quantity demanded D An Increase in Quantity Demanded Price ($/can) 6 5 4 3 2 1 Quantity (1000s of cans/day) 0 2 4 12 Supply and Demand

  48. an Increase in Demand Price ($/can) D’ D 6 5 4 Increase in demand 3 2 D’ 1 D Quantity (1000s of cans/day) 0 12 Supply and Demand

  49. An increase in income shifts the demand curve for beers from D1 to D2. At each price, more bottles are demanded after the shift Price per Bottle D2 D1 Number of Bottles per Month A Shift of The Demand Curve B C $2.00 60,000 80,000 Supply and Demand

  50. Predicting and Explaining Changes in Prices and Quantities • Change in the quantity supplied • A movement along the supply curve that occurs in response to a change in price • Change in supply • A shift of the entire supply curve Supply and Demand

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