be lecture 2 demand & supply

8/2/2019 BE Lecture 2 Demand & Supply

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BusinessEnvironment

Lecture 2

Demand & Supply


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Learning Objectives

Understand the meaning of demand Be able to distinguish between movements and shifts

of the demand curve, and the factors that cause shifts Understand the meaning of supply Be able to distinguish between movements along, and

shifts of the supply curve, and the factors that causeshifts

Understand the concept of equilibrium Know the meaning of excess demand and excess

supply Be able to apply demand and supply analysis to a

number of economic or market situations. Consider cases of intervention in a free market:

the housing market


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DEMAND


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Demand (D)

Effective demand is what is being considered

Factors affecting demand Price (P)

Income (Y) Relative prices of other goods

Taste, preference, & fashion Population

All these factors change over time, to identify theeffects of each individually we have to assume thatonly one factor is changing. Ceteris paribus: all otherthings being held constant.


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Demand (D) Price (P): For a normal good, a price increase = a

reduction in quantity demanded. For two reasons: Substitution effect: Price of this good rises and the

price of other goods unchanged, consumers will buy lessof this good and more of other goods, which havebecome relatively cheaper.

Income effect: Price of this good rises but consumersbuy the same amount, it will take a larger proportion oftheir income, they will have to buy less of other goods.So demand may decrease as price rises because

consumers cannot afford to buy as much. The Demand Curve shows the relationship

between the price of the good and the quantityconsumers want to purchase, ceteris paribus, other

factors remaining unchanged.


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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Quantity (tonnes: 000s)

Price

(pence

perkg)

Price(pence per kg)

20

Market demand

(tonnes 000s)

700A

Point

A

Market demand forpotatoes (monthly)

Demand


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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Price

(pence

perkg)

Price(pence per kg)

2040

Market demand

(tonnes 000s)

700

500

AB

Point

A

B

Demand



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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Price

(pence

perkg)

Price(pence per kg)

2040

60

Market demand

(tonnes 000s)

700

500

350

AB

C

Point

A

B

C

Demand

Market demand for

potatoes (monthly)


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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Price

(pence

perkg)

Price(pence per kg)

2040

60

80

Market demand

(tonnes 000s)

700500

350

200

AB

C

D

Point

A

B

C

D

Demand



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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


Price

(pence

perkg)

Price(pence per kg)

2040

60

80

100

Market demand

(tonnes 000s)

700500

350

200

100

AB

C

D

E

Point

A

B

C

D

E

Demand

Market demand for

potatoes (monthly)


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Shifts in demand curves

If a factor other than the price of the goodchanges, then the demand curve will shift.Factors causing the demand curve to shift:

Income (Y) As income increases = usually demand increases

Relative prices of other goods Substitutes: alternatives: bus or tube, if tube fares went up

and bus fares did not the demand for bus travel increases. Complements: goods used together: cars and petrol, if the

price of petrol goes up the demand for cars decreases

Taste, preference, & fashion Population: demand usually increases as pop increases.


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fig 2.2

D1

Price

P

O Q0 Q1Quantity

An increase in demand

D0


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fig 2.2

D0

Price

P

O Q0 Q1Quantity

A decrease in demand

D1


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SUPPLY


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Supply (S)Factors affecting supply Price of the good Costs of production Price of other goods Nature: random shocks Producers objectives Regulation Taxes and subsidies

Expectations of future price changesAll these factors change over time, to identify theeffects of each individually we have to assumethat only one factor is changing. Ceterisparibus: all other things being held constant.


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The Supply Curve

It is normally assumed that as the price risesthe quantity supplied will increase. Thesupply curve slopes upward. Assuming price

is the only factor that is rising.

An upward sloping supply curve is likelybecause firms assumed to be maximising

profits. If the price risies it is likely to becomeprofitable to increase output, because theincrease in price more than offsets theincreases in costs.


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0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

P20

Q100a

Market supply of potatoes (monthly)


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0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

b

P20

40

Q100

200

a

b


M k l f


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0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

b

c

P20

4060

Q100

200350

a

bc


M k l f


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0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

b

c

dP20

406080

Q100

200350530

a

bcd


M k t l f t t


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0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

Price

(pence

perkg)


Supply

a

b

c

d

e

P

20

406080

100

Q

100

200350530

700

a

bcd

e



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Shifts in the supply curve

If any factor other than the price of theproduct changes then the supply curve isassumed to shift. For example:

Higher fertilizer prices would decrease inwheat supply, farmers would require higherprices to offset the cost increase.

A improvement in technology, higher yieldingwheat varieties, would lead to an increase insupply, improved productivity would offset

lower prices.

Shift i th l


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fig

P

QO

S0




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fig

P

QO

S0

Increase

S1




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fig

P

QO

S2 S0 S1

IncreaseDecrease



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Market equilbrium

Equilibrium a point of balance, from whichthere is no inherent tendency to move.

Markets are in equilibrium when at thecurrent price the amount consumers want tobuy is equal to the amount producers want tosell. So there are no unsatisfied buyers and

no unplanned change in stocks. If any significant factor affecting supply or

demand changes the equilibrium will change.

E ilib i i d t t


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Equilibrium price and output:The Market Demand and Supply of Potatoes

(Monthly)

Price of Potatoes(pence per kilo)

Total Market Demand(Tonnes: 000s)

Total Market Supply(Tonnes: 000s)

20 700 (A) 100 (a)

40 500 (B) 200 (b)

60 350 (C) 350 (c)

80 200 (D) 530 (d)

100 100 (E) 700 (e)


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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

The determination of market equilibrium(potatoes: monthly)


E

D

C

B

Aa

b

c

d

e

Supply

Demand

Price

(penc

e

perkg)


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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

C

B

Aa

b

c

e

Supply

Demand

Price

(penc

e

perkg)

D dSURPLUS

(330 000)



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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800


E

D

C

B

Aa

b

c

d

e

Supply

Demand

Price

(penc

e

perkg)

SHORTAGE

(300 000)



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fig

0

20

40

60

80

100

0 100 200 300 400 500 600 700 800

D d

Qe


E

B

Aa

b

e

Supply

Demand

Price

(penc

e

perkg)



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fig

P

QO

Pe1

Qe1

S

D1

g

Effect of a shift in the demand curve

An increasein demand


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fig

P

QO

Pe1

Qe1

S

D1

g



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fig

P

QO

Pe1

Qe1

S

D1

D2

g



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fig

P

QO

Pe1

Qe1

S

g h

D1

D2

Pe2

Qe2

i



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fig

P

QO

Pe1

Qe1

S

D1D2

g

A decreasein demand



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fig

P

QO

Pe1

Qe1

S

D1D2

g

Pe2

Qe2

n

m


Eff f hif i h l


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fig

P

QO

Pe1

Qe1

D

S1

g

Effect of a shift in the supply curve

A decrease

in supply


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fig

P

QO

Pe1

Qe1

D

S1

g



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fig

P

QO

Pe1

Qe1

D

S1

S2

g



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fig

P

QO

Pe1

Pe3

Qe3Qe1

D

S1

S2

j g

k



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fig

P

QO

Pe1

Qe1

D

S1

g

An increase

in supply

S2



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fig

P

QO

Pe1

Qe1

D

S1

g

S2

p

Pe2

Qe2

q



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Markets that are not Free

Normally governments work with, and favourfree markets

In some cases, governments may not wish tohave a free market

Rented Housing

Rented Housing: an example of a maximum priceili


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ceiling

P(H)rent

QO

P (rentin a freemarket)

S

D

Qs Qd

controlledrent

price excess demand= shortage of rented housing


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Summary

Q demanded decreases as P increases

Other factor affecting D changes D curve shifts

Quantity S increases as P increases Other factor affecting S changes S curve shifts

Market equilibrium where S = D

Changing S or D factors will shift equilibrium Intervening in markets can cause problems

Competition is needed for markets to operate

be lecture 2 demand & supply

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