Supply and Demand: Price Supply and Demand: Price and Quantity - PowerPoint PPT Presentation

The Economics The Economics Department, UMR Department, UMR Presents: Presents: Supply and Demand: Price Supply and Demand: Price and Quantity and Quantity Determination in Determination in Competitive Markets Competitive Markets

Starring Starring N Changes in Equilibrium

Featuring Featuring Increases in Demand, c.p. N Increases in Demand, c.p. N Increases in Supply, c.p N Increases in Supply, c.p N Decreases in Demand, c.p. N Decreases in Demand, c.p. N Decreases in Supply, c.p. N Decreases in Supply, c.p. N Simultaneous Changes N Simultaneous Changes N

Changes in Equilibrium Changes in Equilibrium N Remember that Supply and Demand Remember that Supply and Demand N are drawn under the are drawn under the ceteris paribus ceteris paribus assumption. assumption. N Any factors which cause Supply and/ or Any factors which cause Supply and/ or N Demand to change will affect Demand to change will affect equilibrium price and quantity. equilibrium price and quantity.

Change in Demand Change in Demand N Demand will change for any of the Demand will change for any of the N factors discussed previously. factors discussed previously. N Remember Remember PINTE PINTE (except for the price (except for the price N of the good itself) of the good itself) N For instance, let’s say the demand for For instance, let’s say the demand for N CDs increased due to an increase in CDs increased due to an increase in income income

Increase in Demand Increase in Demand P S P*’ E’ P* E D’ D Q/t 0 Q* Q*’

Change in Supply Change in Supply N Supply will change for any of the Supply will change for any of the N factors discussed previously factors discussed previously N Remember Remember PENT PENT (except for the price (except for the price N of the good itself) of the good itself) N For instance, let’s say that the For instance, let’s say that the N government lowers taxes on CDs government lowers taxes on CDs

Increase in Supply Increase in Supply P S S’ P* E E’ P*’ D Q/t 0 Q* Q*’

Changes in Demand and Changes in Demand and Supply Supply To determine the impact of both supply To determine the impact of both supply and demand changing: and demand changing: N First examine what happens to First examine what happens to N equilibrium price and quantity when equilibrium price and quantity when just demand shifts. just demand shifts. N Second, examine what happens to Second, examine what happens to N equilibrium price and quantity when equilibrium price and quantity when just supply changes just supply changes N Finally, add the two effects together. Finally, add the two effects together. N

Changes in Demand and Supply Changes in Demand and Supply N When supply and demand move in the same When supply and demand move in the same N direction equilibrium price is ambiguous direction equilibrium price is ambiguous N When supply and demand move in opposite When supply and demand move in opposite N directions equilibrium quantity is ambiguous directions equilibrium quantity is ambiguous N If P and Q both increase the dominant force If P and Q both increase the dominant force N must have been an increase in D must have been an increase in D N If P and Q both decrease the dominant force If P and Q both decrease the dominant force N must have been an decrease in D must have been an decrease in D N If P increases and Q decreases, the dominant If P increases and Q decreases, the dominant N force must have been a decrease in S force must have been a decrease in S N If P decreases and Q increases the dominant If P decreases and Q increases the dominant N force must have been an increase in S force must have been an increase in S

Explaining Changes in Explaining Changes in Equilibrium Price and Quantity Equilibrium Price and Quantity Initial equilibrium P A B Another equilibrium C F Q/t Moving to quadrant B implies the dominate force was an increase in demand. To quadrant C, the dominate force is a decrease in demand. Moving to quadrants A or F implies the dominate force was supply (decrease for A, and increase for F)

Increase in Supply and Increase in Supply and ) P ? Demand: Q, ) P ? Demand: Q, Q P S D’ P S S’ S’ P*’ P* P* P*’ D’ D D Q/t 0 Q/t 0 Q* Q*’ Q* Q*’ 0 < ) ) D < ) ) S ) D > ) ) ) S > 0

Decrease in Supply and Decrease in Supply and ) P ? Demand: Q, ) P ? Demand: Q, Q S’ P S’ P S S D’ P* P*’ P*’ P* D D D’ Q/t 0 Q/t 0 Q*’ Q* Q*’ Q* 0 < ) ) D < ) ) S ) D > ) ) ) S > 0

Increase in Supply and Increase in Supply and ) Q ? Decrease in Demand: P, ) Q ? Decrease in Demand: P, Q P S D P S S’ S’ D’ P* P* P*’ P*’ D’ D Q/t 0 Q/t 0 Q*’ Q* Q* Q*’ ) S dominates, ) ) ) Q > 0 ) D dominates, ) ) ) Q < 0

Decrease in Supply and Decrease in Supply and ) Q ? Increase in Demand: P, ) Q ? Increase in Demand: P, Q P D’ S’ P S’ D S S P*’ P*’ P* D’ P* D Q/t Q*’ 0 Q/t 0 Q*Q*’ Q* ) S dominates, ) ) ) Q > 0 ) D dominates, ) ) ) Q < 0

Helpful Hints Helpful Hints N Know how each of the main Demand Know how each of the main Demand N Shifters, PINTE Shifters, PINTE, and Supply Shifters, , and Supply Shifters, PENT, excluding the price of the good PENT , excluding the price of the good itself, effect equilibrium price and quantity itself, effect equilibrium price and quantity N For an income change, you also need to For an income change, you also need to N know whether the good is “normal” or know whether the good is “normal” or “inferior” “inferior” N Be able to show graphically how a change Be able to show graphically how a change N in one of these shifters affects equilibrium in one of these shifters affects equilibrium N Practice, Practice, Practice, Practice, Practice, N Practice, Practice, Practice, Practice Practice

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