ECON_1550_W2

8/17/2019 ECON_1550_W2

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Consumer Demand andSupply

Week: 2

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A MarketInteraction between

buyers and sellers

Buyers demand goods

Sellers supply goods

AssumptionsStandardized good

Competitive market

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DemandSchedule or curve

Amount consumerswilling and able to

purchase at a given price

Other things eualIndividual demand

Market demand

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!aw o" DemandOther things eual# as

price "alls uantitydemanded rises

$%planations&Diminishing marginal

utility

Income e'ect

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Individual Demand 6

5

4

3

2

1

010 20 30 40 50 60 70 80

Quantity Demanded !us"els per #eek$

% r i & e

p e r ! u s

" e l $

% Qd'5

4

3

2

1

10

20

35

55

80

Individual

Demand

%

Q

D

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Determinants o" DemandIncome*ormal goods

In"erior goods+rice o" related goodsSubstitute good

Complementary good,nrelated goods

Consumer e%pectations

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Individual Demand 6

5

4

3

2

1

0

Quantity Demanded !us"els per #eek$

% r i & e

p e r ! u s

" e l $

% Qd'5

4

3

2

1

10

20

35

55

80

Individual

Demand

%

Q

D1

2 4 6 8 10 12 14 16 18

Demand Can Increase or Decrease

Decrease in Demand

D2

D3

Change inDemand

Change inQuantity

Demanded

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SupplySchedule or curve

Amount producerswilling and able to sell at

a given price

Individual supply

Market supply

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!aw o" SupplyOther things eual# as

price rises the uantitysupplied rises

$%planations&-evenue implications

Marginal cost

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Individual Supply 6

5

4

3

2

1

0

Quantity Supplied !us"els per #eek$

% r i & e

p e r ! u s

" e l $

% Qs'5

4

3

2

1

60

50

35

20

5

Individual

Supply

%

Q

S1

10 20 30 40 50 60 70

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Determinants o" Supply-esource prices

)echnology

)a%es and subsidies+rices o" -elated goods

Substitute in +roduction . i" price o" energy gel rises# /rms switch production "rom bars to gel0 )he SS o"

energy bars decreases01 Complements in +roduction

. i" price o" Bee" rises# supply o" cowhide increases01

+roducer e%pectations

*umber o" sellers

)he State o" *ature

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Individual Supply 6

5

4

3

2

1

0


% r i & e

p e r ! u s

" e l $

% Qs'5

4

3

2

1

60

50

35

20

5

Individual

Supply

%

Q

S1

Supply Can Increase or Decrease

S2

S3

10 20 30 40 50 60 70

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Individual Supply 6

5

4

3

2

1

0


% r i & e

p e r ! u s

" e l $

% Qs'5

4

3

2

1

60

50

35

20

5

Individual

Supply

%

Q

S1

Supply Can Increase or Decrease

S2

S3

10 20 30 40 50 60 70

Change inQuantity Supplied

Change inSupply

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$%ercise 2

)he demand schedules o" three individuals3)om# Dick# and 4arry5 are shown0 I" they arethe only three buyers o" D6Ds# complete themarket demand schedule "or D6Ds0

7raphically# is the market demand "or aproduct the horizontal or vertical sum o" theindividual demand schedules8

9uantity demanded# D6Ds+rice )om Dick 4arry )otal:2;0<< 2 = < >>>>> 2?0<<? ; 2 >>>>> 220<<@ @ ; >>>>> 0<< 2< 2< >>>>>

0<< 2; 2@ >>>>>

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Answer 2 )he market demand is the horizontal

sum o" the individual schedules0

9uantity demanded# D6Ds+rice )om Dick 4arry )otal:2;0<< 2 = < ;2?0<<? ; 2

220<<@ @ ; 20<< 2< 2< 0<< 2; 2@ ?

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$%ercise

("e demand )or i&e*&ream &onesis%+800*2Qd ,- ./- 1

rom t"is ./- prepare DDs&"edule and dra# t"e DD &urein a rap"

)he Supply o" iceEcream cones is+F<< G 29s H0 $0 (rom this $0 prepare SS schedule anddraw the SS curve in the same graph

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Market $uilibrium$uilibrium price and uantity

Surplus and shortage +rice as a -egulator

$cient allocation+roductive eciency

Allocative eciency

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+roductive vs allocative eciency+roductive eciency can be de/ned as

producing goods and services "or the lowestcost0 +$ is said to occur on the ++(0 On the ++(curve# it is impossible to produce more o" onegood without producing less o" another0

%oint C in rap" is produ&tielyine&ient !e&ause you &an

produ&e more oods orseri&es #it"out anopportunity &ost-

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+roductive vs allocative eciencyAllocative eciency is more concerned with the distribution and allocation o" resources in society0

(or e%ample# there is no point in being productively ecient i" all resources are diverted to making guns0

Je could be producing on a ++( but# i" it is all guns# society may not have enough "ood and health care0

An anecdote& the Soviet ,nion under Communist days tells how "actories were given targets to produce certainuantities o" goods0 )hey o"ten did this with great vigor and were productively ecient# but# o"ten they wereproducing goods which werenKt needed by society0

A$ looks at the marginal bene/t 3MB5 o" consumption compared to marginal cost 3MC50A$ will occur when MBF MC0

Je can assume price F MC0 So we also say

A$ occurs where price F MC0

Monopolies are o"ten said to be allocatively inecient because they are able to set the priceL MC 0

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Market $uilibrium 6

5

4

3

2

1

02 4 6 8 10 12 14 16 18

us"els o) Corn t"ousands per #eek$

% r i & e

p e r ! u s " e l $

% Qd

'5

4

3

2

1

2000

4000

7000

11000

16000

Market

Demand

200 Buyers

% Qs

'5

4

3

2

1

12000

10000

7000

4000

1000

Market

Supply

200 Sellers

200 Buyers & 200 Sellers

7

3

D

S

$4 Price Floor

6,000 u!hel Surplu!

$2 Price Ceiling

",000 u!hel Shortage

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Market $uilibriumChange in demandShi"t o" the demand curve

Change in supplyShi"t o" the supply curve

Change in euilibrium priceand uantity

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Market $uilibrium

Supply increaseDemand decrease

Supply decreaseDemand increaseSupply increase

Demand increaseSupply decreaseDemand decrease

%ri&eQuantity

8

8

8

8

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7overnmentESet +rices+rice ceilings ongasoline-ationing problemBlack markets

-ent controls+rice Noors on wheatOptimal allocation o"resources

mpor an e n ons or

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mpor an e n ons or$%am

demanddemand schedulelaw o" demanddiminishing marginal utilityincome e'ect

substitution e'ectdemand curvedeterminants o" demandnormal goods

in"erior goodssubstitute goodcomplementary goodchange in demandchange in uantity

demanded

supplysupply schedulelaw o" supplysupply curve

determinants o" supplychange in supplychange in uantity

supplied

euilibrium priceeuilibrium uantitysurplusshortageprice ceiling

price Noor

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ECON_1550_W2