Chapter 3 Supply Demand and Price Determinates

Chapter 3 Supply, Demand, and Price

Determinates of Demand • Income – Normal good – Inferior good • Preferences • Prices of Related Goods – Substitutes – Compliments

Determinates Continued… • Number of Buyers • Expectations of Future

Change in Demand vs. Change in Quantity Demanded • Change in Demand – SHIFT OF CURVE • Due to any non-price determinate • Change in Quantity demanded – MOVEMENT ON ORIGINAL CURVE • Due only to a change in price

Change in Demand versus Change in Quantity Demanded

Change in Demand • SHIFT OF CURVE • SHIFT LEFT? ? – DECREASE IN DEMAND • SHIFT RIGHT? ? – INCREASE IN DEMAND

Shifts in the Demand Curve

Shifts in the Demand Curve

• Change in price of related goods Substitutes – Something used in replace of another good • Compliments – Something used with another good

Substitutes and Complements

Substitutes and Complements

SELF TEST-Do we understand? ? • Substitutes – Coke vs. Pepsi --- what happens if the price of Coke increases? – Qd of Pepsi? • NOTHING – Qd of Coke? • DECREASES – Demand for Coke? • NOTHING – Demand for Pepsi? • INCREASES

• Compliments – Tennis Balls and Tennis Rackets --- what happens if the price of Tennis Rackets increase? – Qd of Tennis Balls? • NOTHING – Qd of Tennis Rackets? • DECREASES – Demand for Tennis Balls? • DECREASES – Demand for Tennis Rackets? • NOTHING

Examples • The housing market: Consumer’s income increases • The sugar market: Saccharine is found to lead to cancer • The jelly market: The price of peanut butter increases • The beer market: The price of beer decreases

Does the Law of Demand Hold? • The price of eating out increases from $10 to $15 and the quantity demanded of restaurants increases from 10 to 14 meals.

The Law of Demand Holds

The other side…supply • Quantity supplied – Amount of a good that producers are willing and able to sell at a particular point in time at a particular price

Important Parts • • Able Willing Particular price Particular point in time

Supply • Quantity Supplied at all prices during a specific time period • Thus…

Law of Supply • As the price of a good increases (decreases) the quantity supplied of that good increases (decreases)

Supply Schedule • Numerical table of quantity supplied at different prices Price 4 3 2 1 Quantity 40 30 20 10

Supply Curve • Supply Curve – Graphical representation of the relationship between price and quantity supplied • What type of relationship do we have between price and quantity supplied?

Supply Curve Exhibit 7

Stuff continued… • Change in supply – SHIFT OF SUPPLY CURVE • Change in quantity supplied – MOVEMENT ALONG ORIGINAL SUPPLY CURVE • Increase in supply --- shift right • Decrease in supply --- shift left

Change in Supply versus Change in Quantity Supplied

Shifts in the Supply Curve

Shifts in the Supply Curve

Question? ? ? • Can the supply curve ever be vertical? • First…what does a vertical curve indicate about the relationship between price and quantity supplied?

Supply Curves When There Is No Time to Produce More or No More Can Be Produced

Determinates of Supply • • • Price of inputs Technology Number of sellers Price expectations Taxes and subsidies

Examples • The computer market: The price of computer chips decreases • The fast food market: Mc. Donalds opens three new stores in Bakersfield • The pencil market: The price of pencils increases • The gasoline market: A tax is imposed on gas station owners for each gallon of gas pumped out of their station

Market Supply Curves • Previous supply curve was for an individual – Single seller • How can we get the market curve from individual supply curves? – All sellers • Sum the individual supply curves…

Therefore….

Deriving a Market Supply Schedule & Curve

Deriving a Market Supply Schedule & Curve

Next Step…. Putting Supply and Demand Together

Auction Model Can think of supply and demand as an auction where buyers bid the price down and sellers bid the price up until Qs and Qd are equal at the same price

But… • There is only one price where Qs=Qd • This is called the equilibrium price • The market is always working towards this price

Scissors and economics? • Alfred Marshall compared Supply and demand to a pair of scissors – “It is impossible to say which blade is actually doing the cutting just like it is impossible to say whether demand or supply is responsible for the price

What determines the price? • The interaction of supply and demand

Equilibrium • Also called the market clearing price – When Qs=Qd • Disequilibrium – When Qs=Qd

At Disequilibrium can have… • Shortage (excess demand) – Qd > Qs – Price too low – Price must increase to rid shortage • Surplus (excess supply) – Qd < Qs – Price too high – Price must decrease to rid surplus

Moving to Equilibrium

Moving to Equilibrium • If we have a surplus, price must _______ to get to equilibrium. • Decrease • If we have a shortage, price must _______ to get to equilibrium. • Increase

Do Shortage and Scarcity refer to the same thing? ? ? • NO!! • Shortage is only when price is less than the equilibrium price • Scarcity is always present (at all prices)

Applications of Supply and Demand • Romanee-Conti Wine – Dated back to 1990 and sells for $800 a bottle or $8 a sip…why? • Ticket scalping – Why would people pay higher prices to see an event? – Prices must have been below equilibrium. • Freeway – Why would people be willing to pay a toll to use a road?

Remember. . • Equilibrium price and quantity are determined by the INTERACTION of supply and demand • A change in supply, demand, or both will change the equilibrium price • Exception: If supply and demand move in same direction and magnitude so changes are offset

Change in Supply and Demand but no change in equilibrium price

What Happens? ? ? • • Increase D and S constant? Decrease D and S constant? D constant and increase S? D constant and decrease S? D increase and S decreases by equal amounts? D decrease and S increases by equal amounts? D increases more than S decreases? D increases less than S decreases?

A Summary Exhibit of a Market

Price Controls • Produces a barrier to which the economy can no longer operate freely – Can’t get to equilibrium price • Two types – Price ceiling – Price Floor

Price Ceiling • Government mandated maximum price above which legal trades cannot be made • Price ceiling is below equilibrium price.

Price Ceiling

Impacts of Price Ceilings • Shortage sustained • Fewer exchanges • Non-price rationing schemes – First come first served • Buying & selling at prohibited prices – Black markets • Tie in Sales – Pay certain amount for rent of the house and an amount for renting the refrigerator • Distort normal economic information and incentives – Lower prices is supposed to mean greater availability

Price Floor • Government mandated minimum price below which legal trades cannot be made • Price floor is above equilibrium price

Price Floor

Impacts of Price Floors • Sustained surpluses • Fewer exchanges • Example: Minimum wage

Minimum Wage • In California the minimum wage is $6. 75 per hour – Increased from $6. 26 on January 1, 2002 • Government mandated minimum wage is $5. 15 – Last increase was on September 1, 1997

Impacts of Minimum Wage • Surplus of unskilled • Fewer workers overall employed • Supply and Demand would determine wage • Minimum wage doesn’t guarantee better standards of living for low wage employees

5. 75 Effects of the Minimum 4. 25 Wage

Homework #4 Chapter 3 Numbers: 1, 4, 8, 10, and 14

Did we understand Chapter 3? ? ? In-class exercise 4