Econ 201
Winter 2010
Demand and Suppy
Ceteris Paribus
1-12-2010
Overview
• Individual and Market Demand Curves
• Factors that Shift Demand Curves
• More useful websites
From the Demand Side
• First Law of Demand
– What Does Law Of Demand
Mean?
– all other factors being equal, as
the price of a good or service
increases, consumer demand for
the good will decrease and vice
versa.
– http://www.investopedia.com/term
s/l/lawofdemand.asp
Changes in Demand (cont’d)
Factors That Can Shift Demand
• Individual and Market Demand Curves
– Income
– Price of Substitutes
– Price of Compliments
– Product Quality
– Future Prices
– Taste and Preferences
• Market Demand Curves
– Population (market)
Table 4.1
Factors That Shift
the Demand Curve
Individual
& Market
Market
Only
Market Demand:
Maybe a little bit different
• Market Demand may be kinked as new
buyers enter at different price points
When it’s only Tom – Tom’s D is the market
Harry joins the Market
Dick joins
What We’ve Learned
• Sell rule for firms (Qs: P=MC)
– Firms will supply y units up to the point where the MC
of producing the next/last unit (yth) is just equal to the
price it receives for the good
– First law of supply: supply curves will be upward
sloping
• Buy rule for consumers (Qd: P=MV)
– Consumers will buy x units up to the point that price
equals MV for the last (xth) unit
• First law of demand: demand curves are downward sloping
• Negative slope  diminishing marginal value of consuming
next unit
Homework Assignment #1
Problem # 1
Due Friday 1/15
Seattle Times Oct 3, 2007
Olympic National Park officials are suggesting raising the price of an entrance pass
for motorists — good for seven days — from $15 to $25 starting in 2009, with the
fee for individuals such as cyclists climbing from $5 to $12. Season passes would
increase from $30 to $50
But public response, particularly from tourist-dependent local businesses has been
generally negative said a spokeswoman for Olympic National Park.
1.
Illustrate the effect of the increase of the price for park passes on
the demand for trips to the park
2.
Illustrate how the park fee increase would affect the demand for
other tourist-related businesses, e.g., hotels, restaurants.
Homework #1
Problem #2
Due 1/15
Price
Indiv 1
$10
$9
$8
$7
$6
$5
$4
$3
$2
$1
Indiv 2
1
2
3
4
5
6
7
8
9
10
Indiv 3
0
0
1
1
2
2
3
3
4
4
Indiv 4
0
1
2
3
4
5
6
6
6
6
Total Rev Total WTP Cons Surp
0
1
1
2
2
3
3
4
4
5
Changes in Supply (cont’d)
Changes in Supply
• Factors that affect the supply of a good:
– Prices of inputs (such as wages)
– Technology
– Natural disruptions (such as bad weather)
– The number of firms in the market
– Expectations
– Government policies
Table 4.2
Factors That Shift the Supply Curve
Equilibrium
• The combined forces of supply and demand in a market
determine:
– The quantity of a product bought and sold, and
– The price per unit of the product.
• The equilibrium price is the price at which:
– The quantity demanded equals the quantity supplied and the
market “clears.”
Equilibrium (cont’d)
• When a market is in equilibrium, there will
be no tendency for price or quantity to
change.
Equilibrium (cont’d)
Price
(£)
The Cobweb Theorem
S
11
The
Assume
Farmers
the
respond
falls
initial
£5
by
equilibrium
and
planning
farmers
This
In price
acreates
‘divergent
atomassive
cobweb’
- to
price
increase
react
is
by
£7
cutting
supply,
and
the
plans
ten
quantity
months
for
turkey
9.
shortage
also termed
of 9 an
million
unstable
turkeys If
demand
later,
production.
the rises,
supply
the
months
of
shortage
turkeys
later,
is
and
cobweb
the
price
- Ten
theis
price
forced
tends
up
–to15
pushes
million.
supply
At
the
the
this
price
market
level,
upequilibrium.
to
there
will
£11be
will
per
8
and
move
soon
away
the
process
from
continues!
turkey.
be
million.
a surplus of turkeys and the
A divergent
price
drops. cobweb leads to
price instability over time.
7
5
D
8
9
15
17
D1
Quantity Bought and Sold
(millions)
Cobweb Theorem
• http://www.bized.co.uk/current/mind/2004_5/251004.ppt
• Hungarian-born economist Nicholas Kaldor (1908-1986)
• Simple dynamic model of cyclical demand with time lags
between the response of production and a change in
price (most often seen in agricultural sectors).
• Cobweb theory is the process of adjustment in markets
• Traces the path of prices and outputs in different
equilibrium situations. Path resembles a cobweb with the
equilibrium point at the center of the cobweb.
• Sometimes referred to as the hog-cycle (after the
phenomenon observed in American pig prices during the
1930s).
Useful Websites
– Basics of demand and supply
• http://www.investopedia.com/university/economics/
economics3.asp
Understanding differences between factors that
cause shifts in demand or supply
• http://hspm.sph.sc.edu/COURSES/ECON/SD/SD.h
tml
– Cobweb theorem
• http://www.bized.co.uk/current/mind/2004_5/25100
4.ppt