The Market Forces of Supply and Demand

1
Chapter 4

• The Market Forces of Supply and Demand

2
Ch 4 Outline

• Notes on Market Structure
• Demand
• Supply
• Market Equilibrium
• SD as Econ Model
• Apps

3
Market any institution that facilitates exchange.
Yeah! We like Aldos Pizza

• .

4
Demand

• Schedule showing quantities of a good that
  consumers are willing able to buy,other things
  equal.

5
Ceteris Paribus . . .

• .
• Other things equal

6
Demand Schedule For Pizzas

• Price Quantity Demanded
• 20 0
• 15 5
• 10 10
• 5 15
• 0 20

7
Demand Curve for Pizza
P
20
10
20
10
Q
8
Held Constant Along Demand Curve

• Income
• Prices of Related Goods
• Expectations of Buyers
• Number of Buyers

9
Change in Demand
P
Increase in Demand
20
10
20
10
Q
10
Increases Demand Income Rises Normal Good
11
Increases Demand Income Falls Inferior Good
12
Increases Demand Income Falls Inferior
GoodExample Used Clothing
P
Q
13
Increases Demand Price of Complement Falls
14
Increases Demand
Price of Substitute Rises
15
Increases Demand Tastes Change
Good Becomes More Popular
16
Increases Demand Expectations Expect Price to
Rise
17
Increases Demand Number of Buyers Rises
18
Change in Quantity Demanded versus Change in
Demand
Say What?
19
Changes in Quantity Demanded
Price
12
Quantity
8
20
Changes in Quantity Demanded
Price
12
6
Quantity
8
14
21
Change in Demand
Price
12
Quantity
8
22
Change in Demand
Price
12
Quantity
8
14
23
Supply

• Schedule showing quantities of a good that
  sellers are willing able to supply other
  things equal.

24
Supply Schedule For Pizzas

• Price Quantity Supplied
• 20 20
• 15 15
• 10 10
• 5 5
• 0 0

Ive regurgitated better pizza than that
25
Supply Curve
P
20
10
0
20
10
Q
26
Supply Curve
P
C
20
Change in Quantity Supplied
10
B
0
20
10
Q
27
Change in SupplySupply Rises
P
20
10
0
20
10
Q
28
Held Constant Along Supply Curve

• Prices of Resources
• Technology
• Expectations of Producers
• Number of Producers

29
Increase in SupplyResource Prices Fall
30
Increase in SupplyResource Prices Fall
31
Increase in SupplyTechnology Advances
32
Increase in SupplyProducers Expect Goods Price
to Fall
33
Change in SupplyNumber of Producers Rises
34
Change in Quantity Supplied versus Change in
Supply
35
Changes in Quantity Supplied
Price
12
Quantity
12
36
Changes in Quantity Supplied
Price
12
6
Quantity
12
6
37
Change in Supply
Price
12
Quantity
12
38
Change in Supply
Price
12
Quantity
12
18
39
Equilibrium For Pizza Market

• Price Qd Qs
• 20 0 20
• 15 5 15
• 10 10 10
• 5 15 5
• 0 20 0

40
Market Equilibrium in Graph
Price
10
Pe
Equilibrium
Quantity
Qe
10
41
Surplus Price above Equilibrium
Excess Supply
Price
15
10
Equilibrium
Quantity
10
15
5
42
Shortage When Price below Equilibrium
Price
10
Equilibrium
5
Quantity
Excess Demand
10
15
5
43
Analyzing Changes in Equilibrium

• Step 1 Which Curve Shifts?
• Step 2 Left or Right?
• Step 3 What happens to Pe Qe?
• ExampleScientists Discover that a Pizza Diet
  causes Weight Loss

44
Amazing Weight Loss Pizza
Price
Pe
Quantity
Qe
45
Amazing Weight Loss Pizza
Price
Pe
Pe
Quantity
Qe
46
Amazing Weight Loss Pizza
Price
New Equilibrium
Pe
Pe
Quantity
Qe
Qe
47
Suppose the Price of Meatball Subs Falls?
Price
Pe
Quantity
Qe
48
Suppose the Price of Meatball Subs Falls
Price
Pe
Pe
Quantity
Qe
Qe
49
Suppose the Prices of Tomato Paste, Mozzarella
Cheese Dough Rises
Pe
Price
Pe
Quantity
Qe
Qe
50
Drug Bust Situation...

• Two Crack Dealers
• Each Supplies Half Market
• Your Job Reduce Crime in Erie

51
Drug Bust
Price
New Equilibrium
Pe100
Quantity
Qe6
52
Drug Bust
Price
New Equilibrium
Pe100
Quantity
Qe6
Qe3
53
Drug Bust
Pe 500
Price
New Equilibrium
Pe 100
Quantity
Qe6
Qe3
54
Drug Bust
Pe500
Total Rev After Bust 1500 After Bust
Price
New Equilibrium
Pe100
Total Revenue Initially 600
Quantity
Qe6
Qe3
55
Operating Deficit for NYC Subway

• All Costs Have Been Incurred for 1999 Operation
  --24.5 million
• When Price Lowered from 6 to 4 Still Deficit
• Your Job Reduce Defict

56
Operation Deficit TR lt TC
57
Demand For Subway
Price Per Day Pass
10
6
TR 24M
10
4
Millions of Riders Per Day
58
Operating Deficit

• TR - TC 24M - 24.5M
• TR - TC -0.5M
• ..Hence the Operating Deficit

59
Demand For Subway
Price Per Day Pass
10
6
4
6
10
4
Millions of Riders Per Day
60
Demand For Subway
Price Per Day Pass
10
6
4
TR24M
6
10
4
Millions of Riders Per Day
61
Demand For Subway
Price Per Day Pass
10
6
5
4
6
10
4
5
Millions of Riders Per Day
62
Demand For Subway
Price Per Day Pass
10
6
5
TR25M
4
6
10
4
5
Millions of Riders Per Day
63
Demand For Subway
Price Per Day Pass
10
6

5
4
6
10
4
5
Millions of Riders Per Day
64
Demand For Subway
Price Per Day Pass
10
6
t
5
4
6
10
4
5
Millions of Riders Per Day
65
Demand For Subway
Price Per Day Pass
When Price Falls TR First Rises. Then Falls...
10
6
t
24M
5
25M
4
24M
6
10
4
5
Millions of Riders Per Day