Supply and Demand: Slides by John F. Hall
Supply and Demand: Slides by John F. Hall
Supply and Demand: Slides by John F. Hall
model
Markets
Competition in Markets
Demand
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Quantity Demanded
Implies a choice
How much households would like to buy when they take into account
the opportunity cost of their decisions?
Is hypothetical
Makes no assumptions about availability of the good
How much would households want to buy, at a specific price, given
real-world limits on their spending power?
Stresses price
Price of the good is one variable among many that influences
quantity demanded
Well assume that all other influences on demand are held constant,
so we can explore the relationship between price and quantity
demanded
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Demand schedule
A list showing the quantity of a good that consumers would
choose to purchase at different prices, with all other
variables held constant
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$4.00
2.00
40,000
60,000
Number of Bottles
per Month
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15
Price per
Bottle
$2.00
60,000
Lieberman & Hall; Introduction to Economics, 2005
C
D1
D2
80,000
Number of Bottles
per Month
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price
It is a number represented by a single point on a demand curve
When a change in the price of a good moves us along a demand
curve, it is a change in quantity demand
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Population
As the population increases in an area
Expected Price
An expectation that price will rise (fall) in the future shifts the current
demand curve rightward (leftward)
Tastes
Combination of all the personal factors that go into determining how
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2
Lieberman & Hall; Introduction to Economics, 2005
Q1
Q3
Quantity
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D2
D1
Quantity
Lieberman & Hall; Introduction to Economics, 2005
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D1
D2
Quantity
Lieberman & Hall; Introduction to Economics, 2005
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Supply
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Quantity Supplied
Implies a choice
Quantity that gives firms the highest possible profits when they take
account of the constraints presented to them by the real world
Is hypothetical
Does not make assumptions about firms ability to sell the good
How much would firms managers want to sell, given the price of the
good and all other constraints they must consider?
Stresses price
The price of the good is just one variable among many that
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simultaneously
However, in order to understand the economy we
must first understand each variable separately
We assume everything else remains the same in
order to understand how supply reacts to price
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$4.00
2.00
G
At $4.00 per bottle,
quantity supplied is
60,000 bottles (point G).
40,000
Lieberman & Hall; Introduction to Economics, 2005
60,000
Number of Bottles
per Month
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A decrease in transportation
costs shifts the supply curve for
maple syrup from S1 to S2.
S1
S2
60,000
Lieberman & Hall; Introduction to Economics, 2005
80,000
Number of Bottles
per Month
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Input prices
A fall (rise) in the price of an input causes an increase
(decrease) in supply, shifting the supply curve to the right
(left)
Technology
Cost-saving technological advances increase the supply
of a good, shifting the supply curve to the right
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Number of firms
Expected price
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Changes in weather
Favorable weather
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P2
P1
P3
Q3
Lieberman & Hall; Introduction to Economics, 2005
Q1
Q2
Quantity
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S1
S2
Quantity36
S2
S1
Quantity37
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3. shrinking the
excess demand . . .
S
E
$3.00
1.00
H
Excess Demand
D
Number of Bottles
per Month
40
demand
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$5.00
2. causes the
price to drop,
3.00
K
E
3. shrinking the
excess supply . . .
Number of Bottles
per Month
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Excess Supply
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4. Equilibrium
price
increases
3. to a new
equilibrium.
S
F'
$4.00
3.00
2. moves us along
the supply
curve . . .
1. An increase in
demand . . .
D2
D1
50,000 60,000
Number of Bottles of
Maple Syrup per Period
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3.00
S2
S1
E'
D
35,000 50,000
Lieberman & Hall; Introduction to Economics, 2005
Number of Bottles
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4. Price
decreased . . .
$500
S2002
S2003
1. An increase in
supply . . .
$400
D2002
5. and quantity
decreased as well.
D2003
2.45 3.33
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shifts by more
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Price Ceilings
price
When quantity supplied and quantity demanded differ, short side of
market will prevail
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Price per
Bottle
3. and decreases
quantity supplied.
$4.00
3.00
2.00
E
V
2. increases quantity
demanded
D
Number of Bottles of
Maple Syrup per Period
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Price Floors
question
Prevents excess supply from doing what it would ordinarily do
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And normative
Suggesting what sorts of polices we should or should not pursue
However, when you finish your introductory study of economics, you will
know why economists treat supply and demand with such respect
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S2
S1
E'
P2
E
P1
D
Q2
Lieberman & Hall; Introduction to Economics, 2005
Q1
Barrels of Oil
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F'
P4
P3
D2
D1
Q3
Lieberman & Hall; Introduction to Economics, 2005
Q4
Cubic Feet of
Natural Gas
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