The Economics The Economics Department, UMR Department, UMR Presents: Presents: Supply and Demand: Supply and Demand: Price and Quantity Price and Quantity Determination in Determination in Competitive Markets Competitive Markets
Starring Starring � Demand � Supply � Equilibrium and Disequilibrium
Featuring Featuring The Law of Demand � The Law of Demand � D = D(PENTE) � D = D(PENTE) � The Tendency of Supply � The Tendency of Supply � S = S(PENT) � S = S(PENT) � Equilibrium/Disequilibrium � Equilibrium/Disequilibrium �
In Three Parts In Three Parts Demand Demand Supply Supply Equilibrium/Disequilibrium Equilibrium/Disequilibrium
Part 1 What is Demand? What is Demand? It is the relationship between � It is the relationship between � quantity demanded and quantity demanded and price, c.p., within a specific price, c.p., within a specific period period Or, it is the relationship � Or, it is the relationship � between the maximum between the maximum willingness to pay in return willingness to pay in return for something of value for something of value
Individual vs. Individual vs. Market Demand Market Demand Market demand is the � Market demand is the � horizontal sum of individual horizontal sum of individual demands demands It is market demand that � It is market demand that � commands our interest commands our interest
But Start with Individual But Start with Individual Demand Demand Consider your demand for � Consider your demand for � peanuts per semester (This is peanuts per semester (This is called “Quantity Demanded, called “Quantity Demanded, q d ”) q d ”) We will first look at this � We will first look at this � information in a table called a information in a table called a “Demand Schedule” “Demand Schedule”
Your Demand Schedule Your Demand Schedule Demand Schedule - a table showing the relationship between the price of a good and the quantity demanded per period of time, ceteris paribus. Peanuts are measured in pounds. Price of Peanuts ($) Quantity Demanded per semester
Your Demand Schedule Your Demand Schedule P ($) q d $2.00 5
Your Demand Schedule Your Demand Schedule P ($) q d $2.00 5 $1.50 7
Your Demand Schedule Your Demand Schedule P ($) q d $2.00 5 $1.50 7 $1.00 15 10
Law of Demand Law of Demand The price (willingness to pay) of � The price (willingness to pay) of � a product, service, or activity is a product, service, or activity is inversely related to the quantity inversely related to the quantity demanded, ceteris paribus. demanded, ceteris paribus. Applies to Market Demand (but � Applies to Market Demand (but � notice your demand for peanuts notice your demand for peanuts obeyed the law) obeyed the law)
Demand Schedules and Demand Schedules and Curves Curves Demand Curve - - a graph of a graph of � Demand Curve � the demand schedule showing the demand schedule showing the relationship between the the relationship between the price of a good and the price of a good and the quantity demanded per period quantity demanded per period of time, ceteris paribus. of time, ceteris paribus.
Individual Demand Curve Individual Demand Curve P($) Note: ALWAYS label your axes! q d per semester
Individual Demand Curve Individual Demand Curve P($) 2.00 1.50 1.00 0.50 q d per semester 0 5 10 15
Individual Demand Curve Individual Demand Curve P($) A 2.00 1.50 1.00 0.50 q d per semester 0 5 10 15
Individual Demand Curve Individual Demand Curve P($) A 2.00 B 1.50 1.00 0.50 q d per semester 0 5 10 15 7
Individual Demand Curve Individual Demand Curve P($) A 2.00 B 1.50 C 1.00 0.50 q d per semester 0 5 10 15 7
Individual Demand Curve Individual Demand Curve P($) A 2.00 B 1.50 C 1.00 d 0.50 q d per semester 0 5 7 10 15
Market Demand Curve Market Demand Curve The demand curve we just � The demand curve we just � drew was the Demand for drew was the Demand for Peanuts by one one person. person. Peanuts by We want an aggregate � We want an aggregate � measure of the price, measure of the price, quantity demanded quantity demanded relationship-- --a market a market relationship demand demand
Two Views of Demand Two Views of Demand WTP - - Maximum Maximum � WTP � willingness to pay for a willingness to pay for a given unit of a good given unit of a good (marginal WTP) or for a (marginal WTP) or for a number of units of a good number of units of a good The Law of Demand - - P, Q P, Q d � The Law of Demand d � relationship relationship
WTP and the Law of WTP and the Law of Demand Demand The max. WTP for the 23rd P unit is $1.50. The quantity demanded at $2.00 is 15 units per period $2.00 $1.50 D Q d /t 15 23
Market Demand Schedule Market Demand Schedule Market Demand Schedule - - a a � Market Demand Schedule � table showing the relationship table showing the relationship between the price of a good between the price of a good and the total quantity and the total quantity demanded by all consumers demanded by all consumers in the market per period of in the market per period of time, ceteris paribus. time, ceteris paribus.
Market Demand Schedule Market Demand Schedule Market Demand is obtained � Market Demand is obtained � by summing horizontally the by summing horizontally the quantity demanded by each quantity demanded by each person at each price person at each price
Market Demand Schedule Market Demand Schedule P($) Mary’s q d 5 3 10 2 15 1
Market Demand Schedule Market Demand Schedule P($) Mary’s John’s q d q d 5 3 12 10 2 8 15 1 3
Market Demand Schedule Market Demand Schedule P($) Mary’s John’s Ling’s q d q d q d 5 3 12 7 10 2 8 5 15 1 3 4
Market Demand Schedule Market Demand Schedule P($) Mary’s John’s Ling’s Market q d q d q d Q d 5 3 12 7 22 10 2 8 5 15 15 1 3 4 8
Demand Curve Demand Curve P Note: the linear demand is used for convenience $15 $10 $5 D Q d /t 8 15 22
Change in D vs. Change in Change in D vs. Change in Q d Q d Change in Demand - - a change in a factor a change in a factor � Change in Demand � that effects demand other than the price of that effects demand other than the price of the good, thus there is a change in quantity the good, thus there is a change in quantity demanded at EVERY price. demanded at EVERY price. Change in Quantity Demanded - - a a � Change in Quantity Demanded � movement along a given demand curve- - movement along a given demand curve due only only to a change in the price of the to a change in the price of the due good itself good itself
Change in Demand Change in Demand Increase in demand - - demand demand � Increase in demand � curve shifts to the right (or up - - curve shifts to the right (or up an increase in WTP) an increase in WTP) Decrease in demand - - demand demand � Decrease in demand � curve shifts to the left (or down curve shifts to the left (or down ) a decrease in WTP ) - a decrease in WTP -
Increase in Demand Increase in Demand P D’ D Q d /t
Increase in Q d Increase in Q d P($) A B D Q d /t
Behind the Demand Curve Behind the Demand Curve � A demand curve is drawn under the assumption of ceteris paribus - all other important factors remaining unchanged � Factors to be considered may be remembered by D = D(PINTE)
Factors affecting market Factors affecting market demand, PINTE PINTE demand, P = Prices = Prices � P � I = income = income � I � N = number of buyers = number of buyers � N � T = tastes or preferences = tastes or preferences � T � E = expectations about = expectations about � E � future prices and market future prices and market conditions conditions
P rice of Other Goods P rice of Other Goods The price of substitutes � The price of substitutes � The price of complements � The price of complements �
P rice of Substitutes P rice of Substitutes What would happen to the � What would happen to the � demand for Peanuts if the price demand for Peanuts if the price of pretzels fell? of pretzels fell? � The demand for Peanuts would probably The demand for Peanuts would probably � fall since people would buy pretzels instead. fall since people would buy pretzels instead. There is a positive relationship � There is a positive relationship � between the demand for a good between the demand for a good and the price of its substitutes and the price of its substitutes
P rice of Substitutes P rice of Substitutes Thus an increase in the price � Thus an increase in the price � of a substitute will increase of a substitute will increase the demand for the good the demand for the good And a decrease in the price � And a decrease in the price � of a substitute will decrease of a substitute will decrease the demand for the good the demand for the good
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