Chapter 3 Market Demand and Supply

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Chapter 3 Market Demandand Supply
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KEY CONCEPTS

• demand
• direct demand
• utility
• derived demand
• demand function
• demand curve
• change in the quantity demanded
• shift in demand
• Supply

• supply function
• supply curve
• change in the quantity supplied
• shift in supply
• equilibrium
• market equilibrium price
• surplus
• shortage
• comparative statics analysis

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OVERVIEW

• Basis for Demand
• Market Demand Function
• Demand Curve
• Basis For Supply
• Market Supply Function
• Supply Curve
• Market Equilibrium

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?. Basis for Demand

• 1.Direct Demand versus derived demand
• Demand is the quantity customers are willing to
  buy under current market conditions.
• Direct demand is demand for consumption.

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• Derived Demand
• Derived demand is input demand.
• Firms demand inputs that can be profitably
  employed.

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2. Market Demand Function

• 1.Determinants of Demand
• Demand is determined by price, prices of other
  goods, income, and so on.
• 2.Industry Demand Versus Firm Demand
• Industry demand is subject to general economic
  conditions.
• Firm demand is determined by economic conditions
  and competition.

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3.Demand Curve

• Demand Curve Determination
• The price-quantity demanded relation.
• All non-price variables are held constant.

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4.Relation Between the Demand Curve and Demand
Function

• Move along demand curve when price changes.
• Shift to another demand curve when non-price
  variables change.

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A summary of what can cause an increase in demand

• a. Favorable change in consumer tastes.
• b. Increase in the number of buyers.
• c. Rising income if product is a normal good.
• d. Falling incomes if product is an inferior
  good.
• e. Increase in the price of a substitute good.
• f. Decrease in the price of a complementary good.
• g. Consumers expect higher prices in the future.

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?.Basis For Supply

• 1.How Output Prices Affect Supply
• Firms offer supply to make profits.
• Higher prices boost the quantity supplied.
• Lower prices cut the quantity supplied.
• 2.Other Factors That Influence Supply
• Everything that affects marginal production costs
  affects supply.
• If MC falls, supply rises.
• If MC rises, supply falls.

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2.Market Supply Function

• Determinants of Supply
• Supply is determined by price, prices of other
  goods, technology, and so on.

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• The determinates of supply supply shifters
• 1.Resource prices
• 2.Price of related goods
• 3. Technology
• 4.Number of sellers
• 5.Taxes and subsidies
• 6.Expected future prices
• 7.Nature, random shocks and other unpredictable
  events

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• Industry Supply Versus Firm Supply
• Firm supply is determined by economic conditions
  and competition.
• Industry supply is the horizontal sum of firm
  supply.

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3.Supply Curve

• Supply Curve Determination
• The price-quantity supplied relation.
• All non-price variables are held constant.

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4.Relation Between Supply Curve and Supply
Function

• Move along supply curve when price changes.
• Shift to another curve when non-price variables
  change.

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What effect will each of the following have on
the supply of product B?

• a. A technological advance in the methods of
  producing B.
• b. A decline in the number of firms in industry
  B.
• c. An increase in the price of resources required
  in the production of B.
• d. The expectation that the equilibrium price of
  B will be lower in the future than it is
  currently.
• e. A decline in the price of product A, a good
  whose production requires substantially the same
  techniques as does the production of B.
• f. The levying of a specific sales tax upon B.
• g. The granting of a 50-cent per unit subsidy for
  each unit of B produced.

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?.Market Equilibrium

• 1. Surplus and Shortage
• Surplus is excess supply.
• Shortage is excess demand.

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2.Comparative Statics Changing Demand

• Equilibrium changes with demand shifts.
• Comparative Statics Changing Supply
• Equilibrium changes with supply shifts.
• Comparative Statics Changing Demand and
  Supply

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Effects of changes in demand and supply
Change in D Change in S Effect on Pe Effect on Qe
Increase Fixed
Decrease Fixed
Fixed Increase
Fixed Decrease
Decrease Increase Uncertain
Increase Decrease Uncertain
Increase Increase Uncertain
Decrease Decrease Uncertain
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Three steps for analyzing changes in equilibrium

• 1. To decide whether the event shifts supply or
  demand curve (or perhaps both).
• 2. To decide in which direction the curve shifts.
• 3. To use the supply- demand diagram to see how
  the shift changes the equilibrium price and
  quantity.

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• The effects of the following changes have on Pe
  and Qe
• A. Supply decreases and demand is constant.
• B. Demand decreases and supply is constant.
• C. Demand increases and supply increases.
• D. Supply increases and demand decreases.
• E. Demand decreases and supply decreases.
• F. Supply decreases and demand increases

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• Prices are the automatic regulator that tends to
  keep production and consumption in line with each
  other. Explain.

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• Advanced analysis Assume that the demand for a
  commodity is represented by the equation P 10 -
  .2Qd and supply by the equation P 2 .2Qs,
  where Qd and Qs are quantity demanded and
  quantity supplied, respectively, and P is price.
  Using the equilibrium condition Qs Qd, solve
  the equations to determine equilibrium price.
  Now determine equilibrium quantity. Graph the
  two equations to substantiate your answers.

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• Discuss the economic aspects of ticket scalping,
  specifying the gainers and losers