Kinh tế học - Chapter 3: Supply and demand intertwined

Chapter 3Supply and DemandIntertwined McGraw-Hill/IrwinCopyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.1Learning ObjectivesHow do supply and demand determine prices?What is equilibrium?What is surplus?What is shortage?What is the effect of a change in demand?What is the effect of a change in supply?2 $P.45Quantity of Apples DemandWhen Supply and Demand IntersectSupplyQuantity supplied at 0.45Quantity demanded at 0.4512,000 At $0.45:Consumers want 12,000 apples.Firms want to produce 12,000 apples.Quantity demanded = Quantity supplied.Supply and demand intersect. = Equilibrium 3 $P.70Quantity of Apples DemandSurplusSupplyQuantity supplied at 0.70Quantity demanded at 0.7010,000 14,600 At $0.70:Consumers want 10,000 apples.Firms want to produce 14,600 apples.Quantity supplied > quantity demanded = Surplus. Price will fall.4 $P.25Quantity of Apples DemandShortageSupplyQuantity supplied at 0.25Quantity demanded at 0.259,000 15,000 At $0.25:Firms want to produce 9,000 apples.Consumers want 15,000 apples.Quantity supplied Decrease in supply.Higher priceHigher quantity Increase in demand < Decrease in supply.Higher priceLower quantityPricePriceQuantity of bottled waterQuantity of bottled waterDemand beforeDemand beforeDemand afterDemand afterSupplyafterSupplyafterSupplybeforeSupplybefore18Markets in Times of Crisis Price gouging: Increase in price as a result of market reaction to increase in demand or decrease in supply.It provides incentive to firms to sell more.It provides incentive to consumers to conserve the good short in supply.19Quantity Diamonds vs. Water Why do markets place higher value on diamonds than on precious water?Water is in much greater supply than diamonds.PriceWater SupplyWater demandDiamond supplyDiamond demandDiamond EquilibriumWater Equilibrium20 Diamonds vs. WaterA good’s price is influenced by its marginal value to consumers.Marginal value = additional benefit received from the last unit of the good consumed.Consumers receive less marginal value from a good the more they have of it.At the equilibrium in market for water, so much water is consumed that marginal value is very low.21Quantity of developable landDemand Government passes anti-development law:Decrease in supply of developable land.Higher price and lower quantity of traded developable land.SupplyafterPriceSupplybeforeNew EquilibriumOld EquilibriumMarket for Developable Land22Quantity of newly built homes sold Demand Increase in price of developable land increases cost of production.Decrease in supply of newly built homes.Higher price and lower quantity sold of newly built homes.New SupplyPriceOld SupplyNew Equilibrium after higher land pricesOld Equilibrium before higher land pricesMarket for Newly Built Homes23Quantity sold of previously built homesOld DemandNewly built and previously occupied homes are substitutes. Higher price of newly built homes:Increase in demand for previously occupied homesHigher price and higher quantity sold of previously occupied homesPriceSupplyNew Equilibrium before higher prices of new homesOld Equilibrium before higher prices of new homesMarket for Previously Occupied HomesNew Demand24Do You Know?Do markets move to new equilibrium instantaneously? No. It takes time. How long depends on the type of market. It can be from a few seconds to a few months. What are some examples of forces that disturb market equilibrium? Any changes that effect demand or supply disturb market equilibrium, e.g., change in input prices, future expectations, change in price of substitutes, innovations.25Do You Know?What is Adam Smith’s Invisible Hand? Market forces guide self-interested people as if by an invisible hand to act for the good of society.How does marginal value relate to the price of water? A good’s price is influenced by its marginal value to consumers. The marginal value of water is very low since lots of water is consumed.26Summary Equilibrium = When quantity demanded meets quantity supplied.Surplus = When quantity supplied exceeds quantity demanded.Shortage = When quantity demanded exceeds quantity supplied.A market not at equilibrium moves towards equilibrium with change in price.27Summary A good’s price is determined by intersection of demand and supply. A change in demand or supply shifts the market to a new equilibrium.Market forces offer the best solution to any changes in the society.28Coming Up By how much does quantity change when there is a change in price?29