chapter 3 market demand and supply. key concepts demand direct demand utility derived demand demand...
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Chapter 3 Market Chapter 3 Market DemandDemand
and Supply and Supply
Chapter 3 Market Chapter 3 Market DemandDemand
and Supply and 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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一 . 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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二 .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 prices2.Price of related goods3. Technology4.Number of sellers5.Taxes and subsidies6.Expected future prices7.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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三 .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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206510510
or
206550550
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510550
condition mequilibriu into and Substitute
510 and 105 Therefore
22 isSupply
550505 Therefore
210 is Demand
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• Discuss the economic aspects of ticket scalping, specifying the gainers and losers