Chap003 Miller Meiners

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Chapter 3

Supply and Demand

Intertwined

McGraw-Hill/Irwin Copyright 2009 by The McGraw-Hill Companies, Inc !ll


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3-2

Learning Objectives

!w d! supply and demand determineprices"

#hat is e$uilibrium"

#hat is surplus"

#hat is sh!rtage"

#hat is the e%%ect !% a change in demand"

#hat is the e%%ect !% a change in supply"


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&'

()*

+uantity !% ,pples

Demand

#hen Supply and Demand Intersect

Supply

+uantitysupplied at

()*

+uantitydemanded at

()*

.2/

,t &()*0

C!nsumers want .2/apples(

1irms want t! pr!duce.2/ apples(

+uantity demanded

+uantity supplied(

Supply and demandintersect(

$uilibrium


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3-)

&'

(4

+uantity !% ,pples

Demand

Surplus

Supply

+uantitysupplied at

(4

+uantitydemanded at

(4

./ .)/5

,t &(40

C!nsumers want ./apples(

1irms want t! pr!duce.)/5 apples(

+uantity supplied

6 $uantity demanded

Surplus( 'rice will %all(


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3-*

&'

(2*

+uantity !% ,pples

Demand

Sh!rtage

Supply

+uantitysupplied at

(2*

+uantitydemanded at

(2*

7/ .*/

,t &(2*0

1irms want t! pr!duce7/ apples(

C!nsumers want .*/apples(

+uantity supplied

8 $uantity demanded

Sh!rtage(

'rice will rise(


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3-5

$uilibrium

, mar9et at e$uilibrium is stable unlessdisturbed by shi%t !% supply !r demandcurves(

, mar9et n!t at e$uilibrium m!ves t!wardse$uilibrium with change in price(


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3-4

$uilibrium

Demand Supply

'rice

+uantity

'rice ab!vee$uilibrium

Surplus(1all in price

'rice bel!we$uilibrium Sh!rtage(:ise in price

$uilibrium$uantity s!ld

$uilibrium

$uilibrium

price


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3-;

D!

#hen price is ab!ve e$uilibrium where$uantity supplied e>ceeds $uantitydemanded(

#hen d!es a sh!rtage arise"

#hen price is bel!w e$uilibrium where$uantity demanded e>ceeds $uantitysupplied(


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3-7

+uantity

Demand

?!ving @!wards Aew $uilibrium

,n increase in supply0

, new e$uilibrium at al!wer price and a

higher $uantity(

OldSupply

'rice

AewSupply

Olde$uilibrium

Aewe$uilibrium


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3-.

+uantity

OldDemand


,n increase indemand0

, new e$uilibrium at a

l!wer price and ahigher $uantity(

'rice

Supply

Olde$uilibrium

Aewe$uilibrium

AewDemand


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3-..

+uantity

Demand


, decrease in supply0

, new e$uilibrium at ahigher price and a

l!wer $uantity(

AewSupply

'rice

OldSupply

Aewe$uilibrium

Olde$uilibrium


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3-.2

+uantity

AewDemand


, decrease indemand0

, new e$uilibrium at a

higher price and al!wer $uantity(

'rice

Supply

Aewe$uilibrium

Olde$uilibrium

OldDemand


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3-.3

?ar9et 1!rces in a 1icti!nal @ale

In anticipati!n !% the bl!c9adeB

Increase in demand %!r %!!d and hence its price(

Smuggler transp!rts %!!d rather than lu>ury

g!!ds(

,%ter the bl!c9adeB

#ith higher %!!d prices/ the smuggler is willing

t! ta9e the ris9 !% shipping %!!d(,%ter g!vernment c!ntr!l !ver %!!d pricesB

A! incentive %!r the smuggler t! ship %!!d(


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3-.)

Invisible and

Invisible hand!% the mar9et pushessel%-interested pe!ple t! act %!r theg!!d !% s!ciety(

It is not from the benevolence of thebutcher, the brewer or the baker, that

we expect our dinner, but from their

regard to their own interest.


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3-.*

+uantity !% %ish

Demandbe%!re

?ar9ets in @imes !% Crisis

'ets destr!y wheatcr!p(

Increase in demand

%!r a substitute/ i(e(%ish(

Increase in price !%%ish(

1ishermen catchm!re %ish(

'rice

SupplyOld

e$uilibrium

Aewe$uilibrium

Demanda%ter

&4

&)

5 ;


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3-.5

+uantity !% !il

Demand


#ar in the ?iddleast reduces supply!% !il(

'rice !% !il rises( igher price causes

pe!ple t! use less !il(

?ar9et !%%ers the bests!luti!n am!ng all thealternatives(

Supplya%ter

&'rice

Supplybe%!re

Aewe$uilibrium

Olde$uilibrium

.*

4


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3-.4


urricane damage a%%ects the supply anddemand %!r b!ttled water(

Decrease in supply

Increase in demand

!w will it a%%ect new e$uilibrium price"

!w will it a%%ect new e$uilibrium $uantity"Only !ne can be determined/ the !ther isambigu!us(


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3-.;

urricane DamageIncrease in demand

6 Decrease in supply( igher price igher$uantity

Increase in demand

8 Decrease in supply( igher price L!wer$uantity

'rice 'rice

+uantity !% b!ttled water +uantity !% b!ttled water

Demandbe%!re Demand

be%!re

Demanda%ter

Demanda%ter

Supplya%ter

Supplya%ter

Supplybe%!re

Supplybe%!re


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3-.7


'rice g!uging0

Increase in price as a result !% mar9etreacti!n t! increase in demand !rdecrease in supply(

It pr!vides incentive t! %irms t! sell m!re(

It pr!vides incentive t! c!nsumers t!c!nserve the g!!d sh!rt in supply(


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3-2

+uantity

Diam!nds vs( #ater

#hy d! mar9etsplace higher value !ndiam!nds than !n

preci!us water"

#ater is in muchgreater supply thandiam!nds(

'rice

#aterSupply

#aterdemand

Diam!ndsupply

Diam!nddemand

Diam!nd$uilibrium

#ater

$uilibrium


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Diam!nds vs( #ater

, g!!dEs price is in%luenced by its marginal valuet! c!nsumers(

?arginal value additi!nal bene%it received %r!m

the last unit !% the g!!d c!nsumed( C!nsumers receive less marginal value %r!m a

g!!d the m!re they have !% it(

,t the e$uilibrium in mar9et %!r water/ s! muchwater is c!nsumed that marginal value is veryl!w(


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3-23

+uantity !% newly built h!mes s!ld

Demand

Increase in price !%devel!pable landincreases c!st !%

pr!ducti!n( Decrease in supply !%

newly built h!mes(

igher price andl!wer $uantity s!ld !%newly built h!mes(

AewSupply

'rice

OldSupply

Aew$uilibriuma%ter higherland prices

Old$uilibrium

be%!re higherland prices

?ar9et %!r Aewly Guilt !mes


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3-2)

+uantity s!ld !% previ!usly built h!mes

Old Demand

Aewly built andprevi!usly !ccupiedh!mes are substitutes(

igher price !% newly builth!mes0

Increase in demand %!rprevi!usly !ccupiedh!mes

igher price and higher$uantity s!ld !% previ!usly!ccupied h!mes

'rice

Supply

Aew$uilibrium

be%!re higherprices !% new

h!mes

Old$uilibrium

be%!re higherprices !% new

h!mes

?ar9et %!r 'revi!usly Occupied !mes

Aew

Demand


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D!

#hat are s!me e>amples !% %!rces that disturbmar9et e$uilibrium"

,ny changes that e%%ect demand !r supplydisturb mar9et e$uilibrium/ e(g(/ change in inputprices/ %uture e>pectati!ns/ change in price !%substitutes/ inn!vati!ns(


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D!

?ar9et%!rces guidesel%-interested pe!ple as i%by an invisible handt! act %!r the g!!d !%

s!ciety(

!w d!es marginal value relate t! the price !%water"

, g!!dEs price is in%luenced by its marginal valuet! c!nsumers( @he marginal value !% water isvery l!w since l!ts !% water is c!nsumed(


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Summary

$uilibrium #hen $uantity demandedmeets $uantity supplied(

Surplus #hen $uantity suppliede>ceeds $uantity demanded(

Sh!rtage #hen $uantity demandede>ceeds $uantity supplied(

, mar9et n!t at e$uilibrium m!ves t!wardse$uilibrium with change in price(


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3-2;

Summary

, g!!dEs price is determined byintersecti!n !% demand and supply(

, change in demand !r supply shi%ts themar9et t! a new e$uilibrium(

?ar9et %!rces !%%er the best s!luti!n t! anychanges in the s!ciety(


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C!ming Hp

Gy h!w much d!es $uantitychange when there is a change in

price"

Chap003 Miller Meiners

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