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Theory of Supply and Demand
Overview ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Markets ,[object Object],[object Object],[object Object],[object Object]
How Broadly Should We Define The Market ,[object Object],[object Object],[object Object],[object Object]
Defining  Macro economic Markets ,[object Object],[object Object],[object Object],[object Object]
Defining  Micro economic Markets ,[object Object],[object Object]
Buyers and Sellers ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Competition in Markets ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Using Supply and Demand ,[object Object],[object Object],[object Object],[object Object]
Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Quantity Demanded ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Law of Demand ,[object Object],[object Object],[object Object],[object Object],[object Object]
The Demand Schedule ,[object Object],[object Object],[object Object],[object Object],[object Object]
The Demand Curve ,[object Object],[object Object],[object Object]
Figure 1: The Demand Curve A B Rs4.00 2.00 D 40,000 60,000 Number of Bottles per Month Price per Bottle At Rs2.00 per bottle, 60,000 bottles are demanded (point B). When the price is Rs4.00 per bottle, 40,000 bottles are demanded (point A).
“ Shifts ”  vs.  “ Movements Along ”  The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 3(a):  Movements Along and Shifts of The Demand Curve P 2 Q 2 Q 1 Q 3 P 1 P 3 Quantity Price Price increase moves us leftward  along   demand curve Price increase moves us rightward  along   demand curve
“ Shifts ”  vs.  “ Movements Along ”  The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 2:  A Shift of The Demand Curve B C Rs2.00 60,000 80,000 D 1 D 2 An increase in income shifts the demand curve for maple syrup from  D 1  to  D 2 .  Number of Bottles per Month Price per Bottle At each price, more bottles are demanded after the shift
“ Change in Quantity Demanded ”  vs.  “ Change in Demand ” ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Income:  Factors That Shift The Demand Curve ,[object Object],[object Object],[object Object],[object Object]
Wealth:  Factors That Shift The Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object]
Prices of Related Goods:  Factors that Shift the Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Other Factors That Shift the Demand Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Small Summary -- Factors Affecting Demand ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 3(b):  Movements Along and Shifts of The Demand Curve D 2 D 1 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Quantity Price
Figure 3(c):  Movements Along and Shifts of The Demand Curve D 1 D 2 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Quantity Price
Supply ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Quantity Supplied ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
The Law of Supply ,[object Object],[object Object],[object Object],[object Object],[object Object]
The Supply Schedule and The Supply Curve ,[object Object],[object Object],[object Object]
Figure 4: The Supply Curve F G 2.00 S 40,000 60,000 Rs4.00 At Rs4.00 per bottle, quantity supplied is 60,000 bottles (point  G ). When the price is Rs2.00 per bottle, 40,000 bottles are supplied (point  F ). Number of Bottles per Month Price per Bottle
Shifts vs. Movements Along the Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 5:  A Shift of The Supply Curve S 2 G J S 1 60,000 Rs4.00 80,000 A decrease in transportation costs shifts the supply curve for maple syrup from  S 1  to  S 2 .  Number of Bottles per Month Price per Bottle At each price, more bottles are supplied after the shift
Factors That Shift the Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Factors That Shift the Supply Curve ,[object Object],[object Object],[object Object],[object Object]
Factors That Shift the Supply Curve ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 6(a):  Changes in Supply and in Quantity Supplied P 2 Q 3 Q 1 Q 2 P 1 P 3 S Quantity Price Price increase moves us rightward  along   supply curve   Price increase moves us leftward  along   supply curve
Figure 6(b): Changes in Supply and in Quantity Supplied S 2 S 1 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Quantity Price
Figure 6(c):  Changes in Supply and in Quantity Supplied S 1 S 2 ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Quantity Price
Summary:  Factors That Shift The Supply Curve ,[object Object],[object Object],[object Object],[object Object]
Equilibrium:  Putting Supply and Demand Together ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 7:  Market Equilibrium E H J 1.00 Rs3.00 D S 50,000 75,000 25,000 Excess Demand 4. until price reaches its equilibrium value of Rs3.00 . 2. causes the price to rise . . . 3. shrinking the excess demand . . . 1. At a price of Rs1.00 per bottle an excess demand of 50,000 bottles . . . Number of Bottles per Month Price per Bottle
Excess Demand ,[object Object],[object Object],[object Object]
Figure 8:  Excess Supply and Price Adjustment K L E 3.00 D S Rs5.00 50,000 35,000 65,000 Excess Supply at Rs5.00 3. shrinking the excess supply . . . 2. causes the price to drop,  4. until price reaches its equilibrium value of Rs3.00. Number of Bottles per Month Price per Bottle 1. At a price of Rs5.00 per bottle an excess supply of 30,000 bottles . . .
Excess Supply ,[object Object],[object Object],[object Object]
Solve for Equilibrium Algebraically ,[object Object],[object Object]
Income Rises:  What Happens When Things Change ,[object Object],[object Object],[object Object],[object Object]
Figure 9 E F' 3.00 D 1 D 2 S Rs4.00 50,000 60,000 1. An increase in demand . . . 3. to a new equilibrium. 5. and equilibrium quantity increases too. 2. moves us along the supply curve . . . Number of Bottles  of Maple Syrup per Period Price per Bottle 4. Equilibrium price increases
An Ice Storm Hits: What Happens When Things Change ,[object Object],[object Object],[object Object],[object Object]
Figure 10:  A Shift of Supply and A New Equilibrium E' E 3.00 D Rs5.00 50,000 35,000 S 2 S 1 Number of Bottles Price per Bottle
Using Supply and Demand:  The Invasion of Kuwait ,[object Object],[object Object],[object Object],[object Object]
Figure 12:  The Market For Oil P 2 D E' P 1 E Q 2 Q 1 S 2 S 1 Barrels  of Oil Price per  Barrel of Oil
Using Supply and Demand:  The Invasion of Kuwait ,[object Object],[object Object],[object Object],[object Object],[object Object]
Figure 13:  The Market For Natural Gas P 4 P 3 F Q 3 Q 4 S D 2 F' D 1 Cubic Feet of Natural Gas Price per Cubic Foot of Natural Gas
Figure 11:  Changes in the Market for Handheld PCs A B Rs400 D 2003 S 2002 S 2003 D 2002 Rs500 2.45 3.33 1. An increase in supply . . . 2. and a decrease in demand . . . 5. and quantity decreased as well. Millions of Handheld PCs per Quarter Price per Handheld PC 4. Price decreased . . . 3. moved the market to a new equilibrium.
Both Curves Shift ,[object Object],[object Object],[object Object]
The Three Step Process ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Example: rental apartment ,[object Object],[object Object],[object Object],[object Object],[object Object],rent(Rs) quantity demanded quantity supplied 800 30 10 1000 25 14 1200 22 17 1400 19 19 1600 17 21 1800 15 22
Demand for two bedroom rental apartment
Summaries ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

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3 Supply And Demand

  • 1. Theory of Supply and Demand
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  • 15. Figure 1: The Demand Curve A B Rs4.00 2.00 D 40,000 60,000 Number of Bottles per Month Price per Bottle At Rs2.00 per bottle, 60,000 bottles are demanded (point B). When the price is Rs4.00 per bottle, 40,000 bottles are demanded (point A).
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  • 17. Figure 3(a): Movements Along and Shifts of The Demand Curve P 2 Q 2 Q 1 Q 3 P 1 P 3 Quantity Price Price increase moves us leftward along demand curve Price increase moves us rightward along demand curve
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  • 19. Figure 2: A Shift of The Demand Curve B C Rs2.00 60,000 80,000 D 1 D 2 An increase in income shifts the demand curve for maple syrup from D 1 to D 2 . Number of Bottles per Month Price per Bottle At each price, more bottles are demanded after the shift
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  • 32. Figure 4: The Supply Curve F G 2.00 S 40,000 60,000 Rs4.00 At Rs4.00 per bottle, quantity supplied is 60,000 bottles (point G ). When the price is Rs2.00 per bottle, 40,000 bottles are supplied (point F ). Number of Bottles per Month Price per Bottle
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  • 34. Figure 5: A Shift of The Supply Curve S 2 G J S 1 60,000 Rs4.00 80,000 A decrease in transportation costs shifts the supply curve for maple syrup from S 1 to S 2 . Number of Bottles per Month Price per Bottle At each price, more bottles are supplied after the shift
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  • 38. Figure 6(a): Changes in Supply and in Quantity Supplied P 2 Q 3 Q 1 Q 2 P 1 P 3 S Quantity Price Price increase moves us rightward along supply curve Price increase moves us leftward along supply curve
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  • 43. Figure 7: Market Equilibrium E H J 1.00 Rs3.00 D S 50,000 75,000 25,000 Excess Demand 4. until price reaches its equilibrium value of Rs3.00 . 2. causes the price to rise . . . 3. shrinking the excess demand . . . 1. At a price of Rs1.00 per bottle an excess demand of 50,000 bottles . . . Number of Bottles per Month Price per Bottle
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  • 45. Figure 8: Excess Supply and Price Adjustment K L E 3.00 D S Rs5.00 50,000 35,000 65,000 Excess Supply at Rs5.00 3. shrinking the excess supply . . . 2. causes the price to drop, 4. until price reaches its equilibrium value of Rs3.00. Number of Bottles per Month Price per Bottle 1. At a price of Rs5.00 per bottle an excess supply of 30,000 bottles . . .
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  • 49. Figure 9 E F' 3.00 D 1 D 2 S Rs4.00 50,000 60,000 1. An increase in demand . . . 3. to a new equilibrium. 5. and equilibrium quantity increases too. 2. moves us along the supply curve . . . Number of Bottles of Maple Syrup per Period Price per Bottle 4. Equilibrium price increases
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  • 51. Figure 10: A Shift of Supply and A New Equilibrium E' E 3.00 D Rs5.00 50,000 35,000 S 2 S 1 Number of Bottles Price per Bottle
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  • 53. Figure 12: The Market For Oil P 2 D E' P 1 E Q 2 Q 1 S 2 S 1 Barrels of Oil Price per Barrel of Oil
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  • 55. Figure 13: The Market For Natural Gas P 4 P 3 F Q 3 Q 4 S D 2 F' D 1 Cubic Feet of Natural Gas Price per Cubic Foot of Natural Gas
  • 56. Figure 11: Changes in the Market for Handheld PCs A B Rs400 D 2003 S 2002 S 2003 D 2002 Rs500 2.45 3.33 1. An increase in supply . . . 2. and a decrease in demand . . . 5. and quantity decreased as well. Millions of Handheld PCs per Quarter Price per Handheld PC 4. Price decreased . . . 3. moved the market to a new equilibrium.
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  • 60. Demand for two bedroom rental apartment
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Notes de l'éditeur

  1. (example: laptop computers; orange juice)
  2. Consider an example from our real life: the price of laptop decreases, how is the total number of computer bought changed?
  3. Emphasize the “other things constant” Emphasize the price influence Exercise and example: - Illustrate the example of maple syrup in the textbook – how to draw the graph? what is the relations? Is it the linear relation?
  4. Maple syrup example Horizontal axis; Vertical axis Points A and B, interpretation Negative relations Move along the curve – price change