## Chapter 4: The Market Forces of Supply and Demand. Ch. 4: The Market Forces of Supply and Demand

Chapter 4: The Market Forces of Supply and Demand Ch. 4: The Market Forces of Supply and Demand Chapter 4: The Market Forces of Supply and Demand A...
Chapter 4: The Market Forces of Supply and Demand Ch. 4: The Market Forces of Supply and Demand

Chapter 4: The Market Forces of Supply and Demand

A market is a group of buyers and sellers of a particular product. (Trading places: 1:45-3:15) A competitive market is one with many buyers and sellers, each has a negligible effect on price. In a perfectly competitive market • All goods are exactly the same • Buyers and sellers are so numerous that no one can affect

market price - each is a “price taker”.

Chapter 4: The Market Forces of Supply and Demand

Quantity demanded: the total quantity of a good that buyers are willing and able to purchase. Law of demand: the claim that the quantity demanded of a good falls when the price of the good rises, other things equal. Giffen good: a good that violates the law of demand. A possible Giffen good: rice among poor Chinese consumers.

Chapter 4: The Market Forces of Supply and Demand Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded. Jake’s demand schedule for movies Price for a movie ticket

Number of movies seen per month

\$0

6

\$2

5

\$4

4

\$6

3

\$8

2

\$10

1

\$12

0

Chapter 4: The Market Forces of Supply and Demand Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded. Jake’s demand schedule for movies

Jake’s demand curve for movies Price for a movie ticket

Price for a movie ticket

Number of movies seen per month

\$0

6

\$12

\$2

5

\$10

\$4

4

\$8

\$6

3

\$8

2

\$10

1

\$12

0

*Notice my demand schedule, which obeys the Law of Demand, results in a downward sloping demand curve.*

\$6 \$4 \$2

\$0 0

1

2

3

4

5

Jake’s number of movies seen per month

6

Chapter 4: The Market Forces of Supply and Demand Demand schedule: a table that shows the relationship between the price of a good and the quantity demanded. Jake’s demand schedule for movies

Jake’s demand curve for movies Price for a movie ticket

Price for a movie ticket

Number of movies seen per month

\$0

6

\$12

\$2

5

\$10

\$4

4

\$8

\$6

3

\$8

2

\$10

1

\$12

0

This solid line is Jake’s demand curve… but Jake’s preferences do not represent market preferences. Therefore, this is not a market demand curve.

\$6 \$4 \$2

\$0 0

1

2

3

4

5

Jake’s number of movies seen per month

6

Chapter 4: The Market Forces of Supply and Demand Market demand versus individual demand • The quantity demanded in the market is the sum of all quantities demanded by all buyers for each price. • Suppose the market for movies includes this entire class. The

market demand is the number of movies I would go see and the number of movies each of you would go see.

Individual demand Market demand

Chapter 4: The Market Forces of Supply and Demand “Shifting” the demand curve: In the prior movie example, we traced out our demand schedules based on the current state of the world (all other things being equal). Other factors, besides price, influence individuals’ (and market) quantity demanded... Changes in these factors will “shift” the demand curve.

Chapter 4: The Market Forces of Supply and Demand

Factors that shift a demand curve. • The number of buyers. • Income. • Price of related goods. • Tastes. • Expectations.

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the number of buyers..

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the number of buyers.. More college students living at home... Apartment price \$900

Demand for apartments in a college town

Apartment rental demand curve in 2011

\$700

\$500

\$300

0

0

1000

2000

3000

Quantity of apartments

4000

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the number of buyers.. More college students living at home... Apartment price \$900

Demand for apartments in a college town

Apartment rental demand curve in 2011

\$700

\$500

In 2012, we discovered that more students were living at home when attending college. Apartment rental demand curve in 2012

\$300

0

0

1000

2000

3000

Quantity of apartments

4000

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the number of buyers.. More college students living at home... Apartment price \$900

Demand for apartments in a college town

Apartment rental demand curve in 2011

\$700

Market demand for apartments shifted left, it decreased, in response to fewer students in the market for apartments.

\$500

In 2012, we discovered that more students were living at home when attending college. Apartment rental demand curve in 2012

\$300

0

0

1000

2000

3000

Quantity of apartments

4000

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the number of buyers.. More college students living at home... Apartment price \$900

Demand for apartments in a college town

Apartment rental demand curve in 2011

\$700

Market demand for apartments shifted left, it decreased, in response to fewer students in the market for apartments.

\$500

In 2012, we discovered that more students were living at home when attending college. Apartment rental demand curve in 2012

\$300

0

0

1000

2000

3000

Quantity of apartments

4000

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: income.. Graduating from college and finding a full-time job...

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: income.. Graduating college and finding a good job is a positive income shock... Nutritious Food price \$9

Demand for nutritious food

\$7

\$5

\$3

0

Nutritious food demand curve for a college student 0

10

30 20 Quantity of nutritious food demanded

40

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: income.. Graduating college and finding a good job is a positive income shock... Nutritious Food price \$9

Demand for nutritious food Nutritious food demand curve for a college graduate (with a better job)

\$7

With a higher income, we will likely purchase more nutritious food.

\$5

When we graduate college, we either find a better job or receive a raise. This is a positive income shock.

\$3

0

Nutritious food demand curve for a college student 0

10

30 20 Quantity of nutritious food demanded

40

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: income.. Normal goods and inferior goods: In the previous example, I assumed that increasing income would lead to an increase in demand for nutritious food. That is, I assumed nutritious food is a normal good. A good for which, other things equal, an increase in income leads to a decrease in demand is an inferior good. Inferior goods:

Normal goods: Recreational equipment

Electricity

Gas/fuel

Jewelry

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the price of related goods.. Train ticket \$20 prices

Demand for train tickets Demand for train tickets in 2008 – with high gas prices.

\$15

\$10

In 2008, gas prices were extremely high. Those prices dropped in 2009, making driving less expensive. \$5

0

0

100

200 Quantity of train tickets sold

300

400

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the price of related goods.. Train ticket \$20 prices

Demand for train tickets Demand for train tickets in 2008 – with high gas prices.

\$15

\$10

In 2008, gas prices were extremely high. Those prices dropped in 2009, making driving less expensive. \$5

0

Demand for train tickets in 2009 – with low gas prices. 0

100

200 Quantity of train tickets sold

300

400

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the price of related goods.. Price of a package \$20 of Oreos

Demand for Oreos

Demand for Oreos when milk is cheap. \$15

Rising milk prices will decrease demand for milk… what will happen to the demand for Oreos?

\$10

\$5

0

0

100

200 Quantity of Oreos sold

300

400

Chapter 4: The Market Forces of Supply and Demand Factors that shift a demand curve: the price of related goods.. Price of a package \$20 of Oreos

Demand for Oreos

Demand for Oreos when milk is cheap. \$15

\$10

Rising milk prices will decrease demand for milk… what will happen to the demand for Oreos?

Demand for Oreos when milk is expensive.

\$5

0

When milk becomes less affordable, demand for Oreos decreases! 0

100

200 Quantity of Oreos sold

300

400

Chapter 4: The Market Forces of Supply and Demand

Factors that shift a demand curve: the price of related goods.. In the first example, lower gasoline prices decreased demand for train tickets. In the second example, higher milk prices decreased demand for Oreos.

Chapter 4: The Market Forces of Supply and Demand

Factors that shift a demand curve: the price of related goods.. In the first example, lower gasoline prices decreased demand for train tickets. In the second example, higher milk prices decreased demand for Oreos. This is because gasoline and train tickets are substitute goods while Oreos and milk are complementary goods; or complements.

Chapter 4: The Market Forces of Supply and Demand Substitutes: two goods for which an increase in the price of one leads to an increase in demand for the other (like gasoline and train tickets). Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other (like Oreos and milk). Complements

Chapter 4: The Market Forces of Supply and Demand Substitutes: two goods for which an increase in the price of one leads to an increase in demand for the other (like gasoline and train tickets). Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other (like Oreos and milk). Substitutes

Chapter 4: The Market Forces of Supply and Demand

Up to this point, we have only discussed demand, which is created by consumers. Supply is created by firms that produce goods and services. The quantity supplied of any good is the amount that sellers are willing and able to sell. Law of supply: the claim that the quantity supplied of a good rises when the price of that good rises, other things equal.

Chapter 4: The Market Forces of Supply and Demand Law of supply: the claim that the quantity supplied of a good rises when the price of that good rises, other things equal. Movie theater’s supply schedule for movies Price for a movie ticket

Number of movies provided per month

\$0

0

\$2

1

\$4

2

\$6

3

\$8

4

\$10

5

\$12

6

Chapter 4: The Market Forces of Supply and Demand Law of supply: the claim that the quantity supplied of a good rises when the price of that good rises, other things equal. Jake’s demand curve for movies

Movie theater’s supply schedule of movies Price for a movie ticket

Price for a movie ticket

Number of movies provided per month

\$0

0

\$12

\$2

1

\$10

\$4

2

\$6

3

\$8

4

\$10

5

\$12

6

This solid line is the theater’s supply curve… but the theater’s supply curve may not be representative of the entire market. Therefore, this is not a market supply curve.

\$8 \$6 \$4

\$2 \$0 0

1

2

3

4

5

Number of movies provided per month

6

Chapter 4: The Market Forces of Supply and Demand “Shifting the supply curve: many factors will shift the supply curve increase or decreasing the quantity produced for a given price. Gold jewelry?

Chapter 4: The Market Forces of Supply and Demand Factors that shift a supply curve: price of inputs. Price electricity

Supply of Electricity

Supply 1

Quantity of electricity

Supply 2

Q

Chapter 4: The Market Forces of Supply and Demand Supply and demand together: back to the movies example A market for movies with two firms and two consumers Movie theater’s supply schedules for movies Consumers’ demand schedules for movies

Price for a movie ticket

Wyo Theater

Fox Theater

Market Supply

Price for a movie ticket

Barack

George

Market Demand

\$0

0

0

0

\$0

9

9

18

\$2

2

1

3

\$2

7

8

15

\$4

4

2

6

\$4

6

6

12

\$6

6

3

9

\$6

3

6

9

\$8

8

4

12

\$8

2

4

6

\$10

10

5

15

\$10

1

2

3

12

6

18

\$12

0

0

0

\$12

These are theaters’ individual supply curves

These are consumers’ individual demand curves

Chapter 4: The Market Forces of Supply and Demand Supply and demand together: back to the movies example Price of movies

Market supply and demand of movies

\$12

\$10 Recall: by the Law of Demand, the demand curve is always downward sloping.

\$8

\$6

\$4

\$2

0

0

3

6

9

12 Quantity of movies

15

18

Chapter 4: The Market Forces of Supply and Demand Supply and demand together: back to the movies example Price of movies

Market supply and demand of movies

\$12

\$10

Recall: by the Law of Supply, the supply curve is always upward sloping.

\$8

\$6

\$4

\$2

0

0

3

6

9

12 Quantity of movies

15

18

Chapter 4: The Market Forces of Supply and Demand Supply and demand together: back to the movies example Price of movies

Market supply and demand of movies

\$12 Supply curve

Demand curve \$10 \$8

\$6

\$4

\$2

0

0

3

6

9

12 Quantity of movies

15

18

Chapter 4: The Market Forces of Supply and Demand Equilibrium: a situation in which the market price has reached the level at which quantity supplied equals quantity demanded. Equilibrium price: the price that balances quantity supplied and quantity demanded Equilibrium quantity: the quantity supplied and the quantity demanded at the equilibrium price. Price of movies

Market supply and demand of movies

\$12 Supply curve

Demand curve \$10 \$8 Equilibrium Equilibrium \$6 price \$4

\$2

0

0

3

6

9 12 Equilibrium quantity Quantity of movies

15

18

Chapter 4: The Market Forces of Supply and Demand Suppose the government imposes a price floor on movies: movies cannot be sold for any less than \$8 per ticket. How does this affect our market for movies?

Chapter 4: The Market Forces of Supply and Demand Suppose the government imposes a price floor on movies: movies cannot be sold for any less than \$8 per ticket. How does this affect our market for movies? Price of movies

Market supply and demand of movies

\$12 Demand curve \$10

Surplus: quantity supplied exceeds quantity demanded

Supply curve

Price floor \$8 Equilibrium \$6 price \$4

\$2

0

0

3

6 Quantity demanded

9

Equilibrium Quantity

12 Quantity supplied

15

18

Quantity of movies

Chapter 4: The Market Forces of Supply and Demand Suppose the government imposes a price ceiling on movies: movies cannot be sold for any more than \$4 per ticket. How does this affect our market for movies?

Chapter 4: The Market Forces of Supply and Demand Suppose the government imposes a price ceiling on movies: movies cannot be sold for any more than \$4 per ticket. How does this affect our market for movies? Price of movies

Market supply and demand of movies

\$12 Supply curve

Demand curve \$10 \$8 Equilibrium \$6 price Price ceiling \$4

Shortage: quantity demanded exceeds quantity supplied.

\$2

0

0

3

6 Quantity supplied

9

Equilibrium Quantity

12 Quantity demanded

15

18

Quantity of movies

Chapter 4: The Market Forces of Supply and Demand

The law of supply and demand: the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into equilibrium. What happens if a new university opens in town doubling the number of students who go to the movie theater?

Chapter 4: The Market Forces of Supply and Demand What happens to equilibrium price and equilibrium quantity demanded if a new university opens in town, doubling the number of students who go to the movie theater? Price of movies

Market supply and demand of movies: a new university opens and the number of students in-town doubles.

\$12 Supply curve

Demand curve \$10 \$8 Equilibrium \$6 price \$4

\$2

0

0

3

6

9

Equilibrium Quantity

12

15

18

Quantity of movies

Chapter 4: The Market Forces of Supply and Demand Demand shifts to the right because there are more buyers in the market. This increases the equilibrium price and the equilibrium quantity demanded. Price of movies

Market supply and demand of movies: a new university opens and the number of students in-town doubles.

\$12

New demand curve

Old demand curve

Supply curve

\$10 New equilibrium \$8 price Equilibrium \$6 price \$4

\$2

0

0

3

6

9 15 12 Equilibrium New equilibrium Quantity quantity

18

Quantity of movies

Chapter 4: The Market Forces of Supply and Demand What happens to equilibrium price and equilibrium quantity demanded if legislation makes it cheaper for theater to purchase movies for showing? Price of movies

Market supply and demand of movies: a new legislation makes it cheaper for theaters to purchase movies for showing (decrease price of an input into production).

\$12

Demand curve

Supply curve

\$10 \$8 Equilibrium \$6 price \$4

\$2

0

0

3

6

9

Equilibrium Quantity

12

15

18

Quantity of movies

Chapter 4: The Market Forces of Supply and Demand Supply shifts to the right because an input price into production has decreased. This decreased the equilibrium price and increases equilibrium quantity demanded. Price of movies

Market supply and demand of movies: a new legislation makes it cheaper for theaters to purchase movies for showing (decrease price of an input into production).

\$12

Demand curve

Old supply curve

\$10 \$8 New supply curve

Equilibrium \$6 price New equilibrium \$4 price

\$2

0

0

3

6

9 15 12 Equilibrium New equilibrium Quantity quantity

18

Quantity of movies