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Title: Supply and demand note
Description: These are notes that I have put together from information on the internet and lecture and seminar slides. I have made them simple to understand and memorise.
Description: These are notes that I have put together from information on the internet and lecture and seminar slides. I have made them simple to understand and memorise.
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WEEK2: SUPPY AND DEMAND
1
...
Supply
The relationship between quantity supplied and price (law of supply)
The supply curve
Other determinants of supply
Movements along and shifts in the supply curve
3
...
The control of prices
Setting a minimum price: price floor
Setting a maximum price: price ceiling
1
...
Relationship: when P rises then Qd falls
2 reasons: a) people feel poorer; not able to afford; purchasing power falls
(income effect);
b) the good will now cost more than alternative (substitute) goods and people
will switch to these (substitution effect)
...
Quantity demanded is the amount of a good that a consumer is willing and able to buy
at a given price over a given period of time
...
The demand curve
Consider the data in the table: The demand for potatoes (monthly)
(1)
Price
(3)
Simon's
demand
(4)
Total market
demand
(kg)
(pence per kg)
(2)
Kate's
demand
(kg)
(tonnes: 000s)
A
20
28
16
700
B
40
15
11
500
C
60
5
9
350
D
80
1
7
200
E
100
0
6
100
Note: individual demand schedule versus market demand schedule
We are talking about demand over a period of time (not a point in time)
Market demand for potatoes (monthly)
Point
Price
Market demand
(pence per kg) (tonnes 000s)
E
100
A
D
Price (pence per kg)
80
C
60
20
700
B
C
D
E
40
60
80
100
500
350
200
100
B
40
A
20
Demand
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
600
700
800
Graph: P on vertical axis and Qd on horizontal axis
Downward sloping: negative slope (the lower P, the more a person is likely to buy)
Other determinants of demand:
Tastes
Price of subsitute goods
Price of complementary goods
Income
Expectations
An increase in demand
Possible causes of a rise in demand
• Tastes shift towards this product
• Rise in price of substitute goods
• Fall in price of complementary goods
• Rise in income
• Expectations of a rise in price
Price
P
D0
O
Q0
D1
Q1
Quantity
Movements along and shifts in the demand curve
A demand curve is constructed on the assumption that “other things remain equal”
(ceteris paribus)
If P changes: movement along the demand curve
...
)
Change in quantity demanded = movement along the curve (caused by
...
Supply
Law of supply
Example: you are farmer: what to do with your land? Your land includes:
a fertile valley (grow vegetables) and a hillside (keep sheep)
Decision depends to a large extent on :
P of vegetables and P you can get for meat and wool
...
3 reasons:
a) as firms supply more, they find that beyond a certain level of output, costs rise more
and more rapidly
...
The supply curve
Consider the following supply schedule:
Graph: P on vertical axis and Qs on horizontal axis
Upward sloping: positive slope (the higher P, the more a producer is likely to supply)
Market supply of potatoes (monthly)
e
100
Supply
d
Price (pence per kg)
80
P
a 20
b 40
c 60
d 80
e 100
c
60
b
40
a
20
0
0
100
200
300
400
500
Quantity (tonnes: 000s)
Other determinants of supply:
Cost of production
Profitability of alternative products
Profitability of goods in joint supply
Shocks
Expectations
600
700
800
Q
100
200
350
530
700
Shifts in the supply curve
P
Possible causes of a rise in supply
• Fall in costs of production
S0
S1
• Reduced profitability of alternative
products that could be supplied
• Increased profitability of goods in
joint supply
• Benign shocks
• Expectations of a fall in price
Increase
O
Movements along and shifts in the supply curve
A movement along a supply curve = change in quantity supplied
A shift in the supply curve = change in supply
Q
3
...
The determination of market equilibrium
(potatoes: monthly)
E
e
100
Price (pence per kg)
Supply
d
D
80
Cc
60
b
40
SHORTAGE
B
(300 000)
a
A
20
Demand
0
0
100
200
300
400
500
600
700
800
Quantity (tonnes: 000s)
If P started at 20p, quantity demanded demand would exceed quantity suplied by
600 tonnes (shortage)
...
Producers, unable or unwilling to supply enough to meet demand, will be only
too happy to accept a higher price
...
Same at a P=40p still a shortage
...
But as P rises, the quantity demanded falls and the quantity supplied rises
...
Market clearing = when Qd atches Qs (no shortage, no surplus)
...
Pe and Qe where the two curves intersect
...
A change in demand
Example: if consumer income rises then a shift in demand curve and movement
along the supply curve
...
Equilibrium quantity would rise from Qe1 to Qe2
...
A change in supply
Example: if costs of production rise then a shift in supply (to the left) and a
movement along demand
...
So new equilibrium from g to k
...
The control of prices
Pe may not be the most desirable price
...
Minimum price creates surplus
...
Setting a minimum price: price floor
To prevent prices from falling below a certain level
...
If industry is subject to supply fluctuations
(weather), prices are likely to fluctuate severely; b) to create a surplus (e
...
of
grains) – particurarly in times of plenty – which can be stored for possible future
shortages; c) minimum wage legislation (poverty, inequality)
Problems: 1) firms with surpluses may try to evade the price control and cut their
prices; 2) high prices may cushion inefficiency
...
Reasons: fairness (in wartime, famine, poor people can afford)
...
To minimise the probles, the government can reduce the shortage by
encouraging supply (subsidies, tax relief) or reduce demand (controlling peoples’
incomes)
...
Maximum price: price ceiling
P
S
Pe
maximum
price
shortage
D
O
Qs
Qd
Q
Title: Supply and demand note
Description: These are notes that I have put together from information on the internet and lecture and seminar slides. I have made them simple to understand and memorise.
Description: These are notes that I have put together from information on the internet and lecture and seminar slides. I have made them simple to understand and memorise.