Supply and Demand Together

Transcription

1 Supply and Demand Together $6.00 $5.00 $4.00 $3.00 $2.00 D S Equilibrium: has reached the level where quantity supplied equals quantity demanded $1.00 $ CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 0

2 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Equilibrium price: The price that equates quantity supplied with quantity demanded D S D S $ CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 1

3 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Equilibrium quantity: The quantity supplied and quantity demanded at the equilibrium price D S D S $ CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 2

4 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Surplus: when quantity supplied is greater than quantity demanded D Surplus S Example: If = $5, then D and S = 9 lattes = 25 lattes resulting in a surplus of 16 lattes CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 3

5 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 Surplus: when quantity supplied is greater than quantity demanded D Surplus S Facing a surplus, sellers try to increase sales by cutting price. This causes D to rise and S to fall which reduces the surplus. $ CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 4

6 $6.00 $5.00 Surplus: when quantity supplied is greater than quantity demanded D Surplus S Facing a surplus, sellers try to increase sales by cutting price. $4.00 $3.00 $2.00 $1.00 This causes D to rise and S to fall. rices continue to fall until market reaches equilibrium. $ CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 5

7 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $0.00 Shortage: when quantity demanded is greater than quantity supplied D Shortage S Example: If = $1, then D and S = 21 lattes = 5 lattes resulting in a shortage of 16 lattes CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 6

8 $6.00 $5.00 $4.00 $3.00 $2.00 Shortage: when quantity demanded is greater than quantity supplied D S Facing a shortage, sellers raise the price, causing D to fall and S to rise, which reduces the shortage. $1.00 $0.00 Shortage CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 7

9 $6.00 $5.00 $4.00 Shortage: when quantity demanded is greater than quantity supplied D S Facing a shortage, sellers raise the price, causing D to fall and S to rise. $3.00 $2.00 $1.00 $0.00 Shortage rices continue to rise until market reaches equilibrium. CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 8

10 Three Steps to Analyzing Changes in Eq m To determine the effects of any event, 1. Decide whether event shifts S curve, D curve, or both. 2. Decide in which direction curve shifts. 3. Use supply-demand diagram to see how the shift changes eq m and. CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 9

11 Terms for Shift vs. Movement Along Curve Change in supply: a shift in the S curve occurs when a non-price determinant of supply changes (like technology or costs) Change in the quantity supplied: a movement along a fixed S curve occurs when changes Change in demand: a shift in the D curve occurs when a non-price determinant of demand changes (like income or # of buyers) Change in the quantity demanded: a movement along a fixed D curve occurs when changes

12 EXAMLE: The Market for Hybrid Cars price of hybrid cars S D 1 CHATER 4 THE MARKET FORCES OF SULY AND DEMAND quantity of hybrid cars 11

13 EXAMLE 1: A Change in Demand EVENT TO BE ANALYZED: Increase in price of gas. S 1 STE 1: D curve shifts because STE 2: price of gas affects demand for D shifts right hybrids. because SSTE curve 3: high gas price makes does hybrids not shift, The shift because causes price an more attractive of increase relative gas does in price to other not cars. affect and quantity cost of of producing hybrid cars. hybrids D 1 D 2 CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 12

14 EXAMLE 1: A Change in Demand Notice: When rises, producers supply a larger quantity of hybrids, even though the S curve has not shifted. 2 1 S 1 Always be careful to distinguish b/w a shift in a curve and a movement along the curve. 1 2 D 1 D 2 CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 13

15 EXAMLE 2: A Change in Supply EVENT: New technology reduces cost of producing hybrid cars. S 1 S 2 STE 1: S curve shifts because STE 2: event affects cost of production. S shifts right D because curve does not shift, STE because 3: event reduces cost, production The shift causes makes production technology is price not to more profitable one fall of the at factors and quantity any given that price. affect to rise. demand. 1 2 D CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 14

16 EXAMLE 3: A Change in Both Supply and Demand EVENTS: price of gas rises AND new technology reduces production costs S 1 S 2 STE 1: Both curves shift. STE 2: Both shift to the right. 2 1 STE 3: rises, but effect on is ambiguous: If demand increases more than supply, rises. 1 2 D 1 D 2 CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 15

17 EXAMLE 3: A Change in Both Supply and Demand EVENTS: price of gas rises AND new technology reduces production costs S 1 S 2 STE 3, cont. But if supply increases more than demand, falls D 1 2 D 2 CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 16

18 A C T I V E L E A R N I N G 3: Changes in supply and demand Use the three-step method to analyze the effects of each event on the equilibrium price and quantity of music downloads. Event A: A fall in the price of compact discs Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell. Event C: Events A and B both occur. 17

19 A C T I V E L E A R N I N G 3: A. fall in price of CDs STES The market for music downloads S 1 1. D curve shifts 2. D shifts left and both fall. 2 1 D 2 D 1 18

20 A C T I V E L E A R N I N G 3: B. fall in cost of royalties The market for music downloads STES S 1 S 2 1. S curve shifts (royalties are part 2. S shifts right of sellers costs) 3. falls, rises D 1 19

21 A C T I V E L E A R N I N G 3: C. fall in price of CDs AND fall in cost of royalties STES 1. Both curves shift (see parts A & B). 2. D shifts left, S shifts right. 3. unambiguously falls. Effect on is ambiguous: The fall in demand reduces, the increase in supply increases. 20

22 CONCLUSION: How rices Allocate Resources One of the Ten rinciples from Chapter 1: Markets are usually a good way to organize economic activity. In market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources. CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 21

23 CHATER SUMMARY A competitive market has many buyers and sellers, each of whom has little or no influence on the market price. Economists use the supply and demand model to analyze competitive markets. The downward-sloping demand curve reflects the Law of Demand, which states that the quantity buyers demand of a good depends negatively on the good s price. CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 22

24 CHATER SUMMARY Besides price, demand depends on buyers incomes, tastes, expectations, the prices of substitutes and complements, and # of buyers. If one of these factors changes, the D curve shifts. The upward-sloping supply curve reflects the Law of Supply, which states that the quantity sellers supply depends positively on the good s price. Other determinants of supply include input prices, technology, expectations, and the # of sellers. Changes in these factors shift the S curve. CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 23

25 CHATER SUMMARY The intersection of S and D curves determine the market equilibrium. At the equilibrium price, quantity supplied equals quantity demanded. If the market price is above equilibrium, a surplus results, which causes the price to fall. If the market price is below equilibrium, a shortage results, causing the price to rise. CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 24

26 CHATER SUMMARY We can use the supply-demand diagram to analyze the effects of any event on a market: First, determine whether the event shifts one or both curves. Second, determine the direction of the shifts. Third, compare the new equilibrium to the initial one. In market economies, prices are the signals that guide economic decisions and allocate scarce resources. CHATER 4 THE MARKET FORCES OF SULY AND DEMAND 25