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Understanding Supply and Demand Dynamics | Microeconomics | Trường Đại học Quốc tế, Đại học Quốc gia Thành phố Hồ Chí Minh

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Buyers and Sellers in the Market • The market for any good consists of all the buyers and sellers of the good • Buyers and sellers have different motivations – Buyers want to benefit from the good – Sellers want to make a profit • Market price balances two forces – Value buyers derive from the good – Cost to produce the good. Tài liệu được sưu tầm và soạn thảo dưới dạng file PDF để gửi tới các bạn cùng tham khảo, ôn tập đầy đủ kiến thức, chuẩn bị cho các buổi học thật tốt. Mời bạn đọc đón xem!

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Supply and Demand
© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw-Hill.
Chapter 3
Learning Objectives
1. Describe how the demand and supply curves summarize the behavior
of buyers and sellers in the marketplace.
2. Discuss how the supply and demand curves interact to determine
equilibrium price and quantity.
quantities to change
4. Explain and apply the and the Efficiency Principle Equilibrium
Principle (also called the ÒNo-Cash-on-the-Table PrincipleÓ).
© 2022 McGraw Hill.
2
What, How, and for Whom?
• Every society answers three basic questions
© 2022 McGraw Hill.
3
WHAT
§
Which goods will be produced?
§
How much of each?
HOW
§
Which technology?
§
Which resources are used?
FOR
WHOM
§
How are outputs distributed?
§ Need?
§ Income?
Central Planning vs The Market
Central Planning
• Decisions by individuals or small
groups
• Agrarian societies
• Government programs
– Sets prices and goals for the group
• Individual influence is limited
The Market
– Buyers and sellers signal wants and
costs
• Resources and goods are allocated
accordingly
– Interaction of supply and demand answer
the three basic questions
© 2022 McGraw Hill.
4
Mixed economies use both the market and central planning
Buyers and Sellers in the Market
• The for any good consists of all the buyers market
and sellers of the good
• Buyers and sellers have different motivations
– Buyers want to benefit from the good
– Sellers want to make a profit
• Market price balances two forces
– Value buyers derive from the good
– Cost to produce the good
© 2022 McGraw Hill.
5
Demand
• A demand curve
illustrates the quantity
buyers would purchase at
each possible price
• Demand curves have a
negative slope
• Consumers buy less at
higher prices
• Consumers buy more at
lower prices
© 2022 McGraw Hill.
6
$4
$2
8 16
Q
P
D
Demand for Pizzas
(1,000s of slices/day)
Demand Slopes Downward
• Buyers value goods differently
– The buyerÕs reservation price is the highest price an individual is
willing to pay for a good
• Demand reflects the entire market, not one consumer
– Lower prices bring more buyers into the market
– Lower prices cause existing buyers to buy more
© 2022 McGraw Hill.
7
Income and Substitution Effects
• Buyers buy more at lower prices and buy less at higher prices
• What happens when price goes up?
– The Buyers switch to substitutes when price substitution effect:
goes up
– The Buyers' overall purchasing power goes downincome effect:
© 2022 McGraw Hill.
8
Interpreting the Demand Curve
• Horizontal interpretation
of demand:
• Given price, how much will
buyers buy?
• At a price of $4, the quantity
demanded is 8,000
slices/day.
© 2022 McGraw Hill.
9
$4
$2
8
16
Q
P
D
Demand for Pizzas
(1,000s of slices/day)
Interpreting the Demand Curve
– Vertical interpretation of
demand:
• Given the quantity to be sold,
what price is the marginal
consumer willing to pay?
• The marginal consumer is
willing to pay $4 per slice for
the 8,000
th
slice sold in the
market.
© 2022 McGraw Hill.
10
$4
$2
8
16
Q
P
D
Demand for Pizzas
(1,000s of slices/day)
The Supply Curve
• The illustrates the quantity of a good that sellers are supply curve
willing to offer at each price
• Opportunity cost differs among sellers due to:
§ Technology
■
Different costs such as rent
§ Skills
■
Expectations
• The Low-Hanging Fruit Principle explains the upward sloping supply
curve
• The sellerÕs reservation price is the lowest price the seller would be
willing to sell for
– Equal to marginal cost
© 2022 McGraw Hill.
11
Interpreting the Supply Curve
• Horizontal
interpretation of
supply:
• Given price, how much
will suppliers offer?
• At a price of $2, suppliers
are willing to sell 8,000
slices/day.
© 2022 McGraw Hill.
12
Q
P
S
Supply of Pizzas
(1,000s of slices/day)
$4
$2
8 16
Interpreting the Supply Curve
– Vertical interpretation of
supply:
• Given the quantity to be sold,
what is the opportunity cost of
the marginal seller?
• The marginal cost of
producing the 8,000
th
slice is
$2.
© 2022 McGraw Hill.
13
$4
$2
8
16
Q
P
S
Supply of Pizzas
(1,000s of slices/day)
Market Equilibrium
• A system is in when there is no tendency for it to changeequilibrium
• The equilibrium price is the price at which the supply and demand
curves intersect
• The equilibrium quantity is the quantity at which the supply and
demand curves intersect
• The occurs when all buyers and sellers are satisfied market equilibrium
with their respective quantities at the market price
– At the equilibrium price, quantity supplied equals quantity demanded
© 2022 McGraw Hill.
14
Market Equilibrium
• Quantity supplied
equals quantity
demanded AND
• Price is on supply and
demand curves
• No tendency to change
P or Q
• Buyers are on their demand
curve
• Sellers are on their supply
curve
© 2022 McGraw Hill.
15
12
Q
P
S
Market for Pizzas
(1,000s of slices/day)
D
$3
Excess Supply and Excess Demand
Excess Supply
– At $4, 16,000 slices supplied
and 8,000 slices demanded
© 2022 McGraw Hill.
16
Excess Demand
– At $2, 8,000 slices supplied
and 16,000 slices demanded
$4
8 16
Q
P
S
Market for Pizzas
(1,000s of slices/day)
D
$2
8 16
Q
P
S
Market for Pizzas
(1,000s of slices/day)
D
Surplus
Shortage
Incentive Principle:
Excess Supply at $4
– Each supplier has an
incentive to decrease the
price in order to sell more
– Lower prices decrease the
surplus
– As price decreases:
• the quantity offered for sale
decreases along the supply
curve
• the quantity demanded
increases along the
demand curve
© 2022 McGraw Hill.
17
$4
8 16
Q
P
S
Market for Pizzas
(1,000s of slices/day)
D
$3.50
$3
12
Equilibrium
Incentive Principle:
Excess Demand at $2
– Each supplier has an
incentive to increase the
price in order to sell more
– Higher prices decrease the
shortage
– As price increases
• the quantity offered for
sale increases along the
supply curve
• As price increases, the
quantity demanded
decreases along the
demand curve.
© 2022 McGraw Hill.
18
$2.50
$2
8 16
Q
P
S
Market for Pizzas
(1,000s of slices/day)
D
$3
12
Equilibrium
Rent Controls Are Price Ceilings
– A price ceiling is a
maximum allowable price,
set by law
– Rent controls set a
maximum price that can be
charged for a given
apartment
– If the controlled price is
below equilibrium, then:
• Quantity demanded
increases
• Quantity supplied
decreases
• A shortage results
© 2022 McGraw Hill.
19
2
Q
P
S
Market for NYC Apartments
(millions of apartments/day)
D
$1,600
$800
31
Movement along the Demand Curve
• When price goes up,
quantity demanded goes
down
• When price goes down,
buyers move to a new,
higher quantity demanded
• A change in quantity
demanded results from a
change in the price of a
good.
© 2022 McGraw Hill.
20
$2
$1
8 10
Q
P
D
Demand for Canned Tuna
(1,000s of cans/day)

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Chapter 3 Supply and Demand
© 2022 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom. No reproduction or distribution without the prior written consent of McGraw-Hill. Learning Objectives
1. Describe how the demand and supply curves summarize the behavior
of buyers and sellers in the marketplace.
2. Discuss how the supply and demand curves interact to determine
equilibrium price and quantity.
3. Illustrate how shifts in supply and demand curves cause prices and quantities to change
4. Explain and apply the Efficiency Principle and the Equilibrium
Principle (also called the ÒNo-Cash-on-the-Table PrincipleÓ). 2 © 2022 McGraw Hill. What, How, and for Whom?
• Every society answers three basic questions WHAT
§ Which goods will be produced? § How much of each? HOW § Which technology? § Which resources are used? FOR
§ How are outputs distributed? WHOM § Need? § Income? 3 © 2022 McGraw Hill. Central Planning vs The Market Central Planning The Market
• Decisions by individuals or small
– Buyers and sellers signal wants and groups costs • Agrarian societies
• Resources and goods are allocated accordingly • Government programs
– Interaction of supply and demand answer
– Sets prices and goals for the group the three basic questions
• Individual influence is limited
Mixed economies use both the market and central planning © 2022 McGraw Hill. 4
Buyers and Sellers in the Market
• The market for any good consists of all the buyers and sellers of the good
• Buyers and sellers have different motivations
– Buyers want to benefit from the good
– Sellers want to make a profit
• Market price balances two forces
– Value buyers derive from the good – Cost to produce the good 5 © 2022 McGraw Hill. Demand • A demand curve illustrates the quantity Demand for Pizzas buyers would purchase at P each possible price • Demand curves have a $4 negative slope • Consumers buy less at higher prices $2 D • Consumers buy more at Q lower prices 8 16 (1,000s of slices/day) 6 © 2022 McGraw Hill. Demand Slopes Downward
• Buyers value goods differently
– The buyerÕs reservation price is the highest price an individual is willing to pay for a good
• Demand reflects the entire market, not one consumer
– Lower prices bring more buyers into the market
– Lower prices cause existing buyers to buy more 7 © 2022 McGraw Hill.
Income and Substitution Effects
• Buyers buy more at lower prices and buy less at higher prices
• What happens when price goes up?
– The substitution effect: Buyers switch to substitutes when price goes up
– The income effect: Buyers' overall purchasing power goes down 8 © 2022 McGraw Hill. Interpreting the Demand Curve • Horizontal interpretation Demand for Pizzas of demand: P
• Given price, how much will buyers buy?
• At a price of $4, the quantity $4 demanded is 8,000 slices/day. $2 D Q 8 16 (1,000s of slices/day) 9 © 2022 McGraw Hill. Interpreting the Demand Curve
– Vertical interpretation of Demand for Pizzas demand: P
• Given the quantity to be sold, what price is the marginal consumer willing to pay? $4 • The marginal consumer is
willing to pay $4 per slice for the 8,000thslice sold in the $2 D market. Q 8 16 (1,000s of slices/day) 10 © 2022 McGraw Hill. The Supply Curve
• The supply curve illustrates the quantity of a good that sellers are willing to offer at each price
• Opportunity cost differs among sellers due to: § Technology
■ Different costs such as rent § Skills ■ Expectations
• The Low-Hanging Fruit Principle explains the upward sloping supply curve
• The sellerÕs reservation price is the lowest price the seller would be willing to sell for – Equal to marginal cost 11 © 2022 McGraw Hill. Interpreting the Supply Curve • Horizontal Supply of Pizzas interpretation of P supply: S • Given price, how much $4 will suppliers offer?
• At a price of $2, suppliers $2 are willing to sell 8,000 Q slices/day. 8 16 (1,000s of slices/day) 12 © 2022 McGraw Hill. Interpreting the Supply Curve
– Vertical interpretation of Supply of Pizzas supply: P
• Given the quantity to be sold, S
what is the opportunity cost of the marginal seller? $4 • The marginal cost of producing the 8,000thslice is $2 $2. Q 8 16 (1,000s of slices/day) 13 © 2022 McGraw Hill. Market Equilibrium
• A system is in equilibrium when there is no tendency for it to change
• The equilibrium price is the price at which the supply and demand curves intersect
• The equilibrium quantity is the quantity at which the supply and demand curves intersect
• The market equilibrium occurs when all buyers and sellers are satisfied
with their respective quantities at the market price
– At the equilibrium price, quantity supplied equals quantity demanded 14 © 2022 McGraw Hill. Market Equilibrium • Quantity supplied equals quantity Market for Pizzas P demanded AND S • Price is on supply and demand curves $3 • No tendency to change P or Q D
• Buyers are on their demand Q 12 curve (1,000s of slices/day)
• Sellers are on their supply curve 15 © 2022 McGraw Hill.
Excess Supply and Excess Demand Excess Supply Excess Demand
– At $4, 16,000 slices supplied
– At $2, 8,000 slices supplied and 8,000 slices demanded and 16,000 slices demanded Market for Pizzas Market for Pizzas P P Surplus S S $4 Shortage $2 D D Q Q 8 16 8 16 (1,000s of slices/day) (1,000s of slices/day) 16 © 2022 McGraw Hill. Incentive Principle: Excess Supply at $4 – Each supplier has an incentive to decrease the Market for Pizzas price in order to sell more P – Lower prices decrease the S surplus $4 – As price decreases: $3.50
• the quantity offered for sale $3 Equilibrium decreases along the supply curve D Q • the quantity demanded 8 12 16 (1,000s of slices/day) increases along the demand curve 17 © 2022 McGraw Hill. Incentive Principle: Excess Demand at $2 – Each supplier has an incentive to increase the Market for Pizzas price in order to sell more P
– Higher prices decrease the S shortage – As price increases $3 Equilibrium • the quantity offered for $2.50 sale increases along the $2 D supply curve Q 8 12 16 • As price increases, the (1,000s of slices/day) quantity demanded decreases along the demand curve. 18 © 2022 McGraw Hill.
Rent Controls Are Price Ceilings – A price ceiling is a maximum allowable price, set by law Market for NYC Apartments – Rent controls set a P maximum price that can be S charged for a given apartment
– If the controlled price is $1,600 below equilibrium, then: $800 • Quantity demanded D increases Q 1 2 3 • Quantity supplied decreases (millions of apartments/day) • A shortage results 19 © 2022 McGraw Hill.
Movement along the Demand Curve • When price goes up, quantity demanded goes Demand for Canned Tuna down P • When price goes down, buyers move to a new, higher quantity demanded $2 • A change in quantity demanded results from a $1 D change in the price of a Q good. 8 10 (1,000s of cans/day) 20 © 2022 McGraw Hill.

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