Microeconomics Week 3 Reading Chapter 4 Announcements Quiz 2: Due 21 March 2022 – Economic Systems and Flows (Chapter 2 and 3) https://forms.gle/MhExcdXhyAVubJUC6 Anonymous Module Feedback form: https://forms.office.com/r/qp2MSYkqLU This Week: Chapter 4 – Supply, Demand and Prices (Read!) Learning Objectives • Construct and interpret simple graphs • Explain the concepts ‘ceteris paribus’ and ‘equilibrium’ • Explain how households and firms represent demand and supply • Identify the most important determinants of individual demand and market demand • Define the law of demand • Explain the difference between demand and quantity demanded • Differentiate between a movement along a demand curve and a shift of a demand curve; • Define the law of supply. • Explain the difference between supply and quantity supplied; • Differentiate between a movement along the supply curve and a shift of a supply curve; • Identify the most important determinants of individual supply and market supply; • Explain how the equilibrium price and quantity are determined in the goods market; • Explain the functions of prices in a market economy; • Distinguish between consumer surplus and producer surplus. Definitions Ceteris paribus - Latin for “other things being equal” - Remember economics is a social science? So we try to simplify observations by holding certain variables constant Equilibrium – A state where economic forces are balanced, in other words economic variables (e.g., price and quantity) remain unchanged. - For example, supply equals demand. DEMAND AND SUPPLY: AN INTRODUCTORY OVERVIEW We can express Demand and Supply as: Economic concepts can be expressed as: Words Schedules - The demand & Supply schedule Curves - The demand curve& Supply schedule Equations - The demand & supply equation DEMAND The quantities of a good or service that the potential buyers are willing and able to buy. Has to be backed by purchasing power. Differs from wants. Demand is a flow concept. - In microeconomics we focus on demand for particular goods and services. Law of Demand: Other things being equal (i.e., ceteris paribus), the higher the price of a good, the lower is the quantity demanded, and vice versa. A negative (inverse) relationship. Demand vs Quantity demand, Market demand Demand (the curve): - Refers to the willingness of consumers to buy different amounts of products or services at different prices - The relationship between quantities demanded and prices Quantity demanded (specific): Refers to the willingness of consumers to buy a specific quantity of a product/services at a specific price. Market demand (total): The sum of all individual demands for a good in a particular market. Graphically depicted by a market demand curve which is obtained by adding the individual demand curves horizontally (i.e., at each price. Table 4-1 A demand schedule for tomatoes (p. 77) Market demand – Determinants of Demand Qd = quantity demanded in a particular period Px = price Pg = prices of related goods Y = households' income during the period T = taste of the consumers concerned N = number of consumers in the market concerned Qd = f(Px, Pg, Y, T, N, …) (4-1) Determinants – shifters and movers If we have that Pg, Y, T and N do not change, then equation is written assumes: เดค ๐, เดค ๐, เดฅ …) Qd = f(Px, ๐เดค g, ๐, (4-2) Bars above Pg, Y, T and N indicate variables or determinants are held constant. This is then usually abbreviated to: Qd = f(Px) ceteris paribus (4-3) Determinants of Demand The quantity of a good demanded in a particular period depends on (or is a function of) the price of the good, the prices of related goods, the income of the households, consumers’ taste, the number of consumers and any other possible influence. Demand is not determined by the availability or supply of the good. Movements along the demand curve and shifts of the curve Movement along the demand curve (due to a change in price, ๐๐ฅ ) ≠ Shift of the demand curve (Everything else: Pg, Y, T, N) A movement along a demand curve (a change in the quantity demanded) Price of product (๐๐ฅ ) causes a movement along the demand curve A movement along a demand curve (a change in the quantity demanded) A change in price (increase or decrease), will cause a movement along the demand curve, between the points a, b, c, d, and e. For example, a price increase from R2 to R3 will cause a movement along the demand D from point b to c. Thus, quantity demanded decreases from 12 to 9. A shift of the demand curve (a change in demand) Prices of related goods - Substitutes A substitute is a good that can be used in place of another good to satisfy a certain want. E.g., butter and margarine, tea and coffee, bus trips and train trips. An increase in the price of a substitute will cause an increase in the demand for the product in question, ceteris paribus Prices of related goods - Complements Complements are goods that tend to be used jointly to satisfy a want. E.g., fish and chips, motorcars and petrol, tea and sugar, spaghetti and meatballs. If the price of CD players falls as a result of an increase in supply, more CD players will be bought and the demand for CDs will rise. Other Determinants of Demand A change in the income of consumer: • Normal goods: When consumer income increases and demand for a good increases as a result, that good is a normal good. Demand curve will shift right. E.g., luxury goods • Inferior goods: When consumer income increases and demand for a good decreases as a result, that good is an inferior good. Demand curve will shift. E.g., no-name products A change in consumers’ tastes or preferences A change in population Other influences on demand – A change in expected future prices – The distribution of income Summary: Move and Shift Movement along the curve (between points a, b and c): Due to a change in Price of the good Shift of the curve (between D1, D2 and D3): - Price of related goods - Income (for normal goods) - Tastes or Preferences - Population - Other (Expectations, income distribution) Supply The quantities of a good or service that producers plan to sell at each possible price during a certain period. Refers to planned quantities, and is measured over a period of time. Producers must be willing and able to supply the quantities concerned. • Supply is a flow concept. Law of Supply: A higher price will induce producers to supply a higher quantity to the market, ceteris paribus. Market Supply The quantity of a good supplied by an individual producer (seller, firm) in a particular period is a function of the price of the good, the prices of alternative outputs, the prices of the factors of production, the expected future prices of the good and the state of technology. Supply Determinants Qs = quantity of good supplied Px = price of good Pg = prices of alternative outputs Pf = prices of factors of production and other inputs Pe = expected future prices of tomatoes Ty = technology Qs = f(Px, Pg, Pf, Pe, Ty, ...) (4-5) Supply Determinants As in the case of demand, we focus primarily on the relationship between the quantity supplied and the price of the good. We therefore state that: เดค ๐f, เดค ๐e, เดค ๐y, เดค ...) Qs = f(Px, ๐g, (4-6) The bars indicate that the relevant variables are held constant. • Or Qs = f(Px) ceteris paribus (4-7) Supply: Derivation Supply: Derivation Other possible determinants Movement and shift along the supply curve Movement along the supply curve ≠ Shift of the supply curve Movements along the supply curve (a change in the quantity supplied) Change in quantity supplied: A change in sellers’ plans occurs when the price of a good changes but all other influences on sellers’ plans remain unchanged. Depicted graphically by movement along the supply curve. Not to be confused with a change in supply. A movement along a supply curve: a change in the quantity supplied (p. 85) Shifts of the supply curve (a change in supply) 4.4 MARKET EQUILIBRIUM Market equilibrium: When the quantity demanded for a good is equal to the quantity supplied, at a particular price, and all other things being equal. • The price at which this occurs is the equilibrium price. • At any other price there will be disequilibrium, in the form of excess demand or excess supply. • When there is disequilibrium, forces are set in motion to move the market towards equilibrium. Excess demand (market shortage): When the quantity demanded of a good or service is greater than the quantity supplied at that particular price. Excess supply (market surplus): When the quantity of a good supplied is greater than the quantity demanded. 4.4 MARKET EQUILIBRIUM Demand, Supply and Market Equilibrium What is happening here? Adjustments ? 4.5 CONSUMER SURPLUS AND PRODUCER SURPLUS Consumer surplus: The difference between what consumers pay for a good and the value that they receive from that good (indicated by the maximum amount they are willing to pay). • The market price for a good is usually lower than the highest price a consumer is willing and able to pay for that good. • A gain to consumers. Producer surplus Producer surplus: The difference between the total revenue received by sellers and their total cost. • Where producers are willing to supply units of the product at less than the market price. • A gain to producers. Consumer surplus and producer surplus at market equilibrium Concepts to know: • Demand • Market demand • Complements • Substitutes • Law of demand • Demand schedule • Demand curve • Change in quantity demanded • Movement along demand curve • Change in demand • Shift of demand curve • Normal and inferior goods • Supply • • • • • • • • • • • • Market supply Supply schedule Supply curve Change in quantity supplied Movement along supply curve Change in supply Shift of supply curve Equilibrium Excess demand (shortage) Excess supply (surplus) Consumer surplus Producer surplus Quiz 3: https://forms.office.com/r/uCr86Vi1Uf
