# Eco1001 Chapter 5 2023

```Faculty of Business &amp; Economic Sciences
ECO1001 Chapter 5 – Demand and supply applied
Clifford Johnson
Chapter Outcomes
Once you have studied this chapter you should be able to
•
explain how equilibrium price and quantity in the market is affected by:
•
Changes in demand
•
Changes in supply.
•
predict the effects of simultaneous changes in demand and supply.
•
analyse the interaction between related markets.
•
Show the effects of government intervention markets, for example by
setting minimum or maximum prices.
Demand
Determinants of Demand
•
•
•
The quantity of goods demanded by an individual (household) in a particular
period of time depends on (function of), a) the price of the good, b) prices of
related goods, c) income of the individual, d) taste and e) the number of
individuals in the household.
Symbolically we can denote demand as:
• QD = quantity demanded (dependent variable)
• Px
• Pg
• Y
Independent variables
• T
• N
QD = f (Px , Pg , Y , T , N, …)
Changes in demand
• Increase
in demand
QD :
•
Px - quantities demanded
•
Pr
•
Y
Change in
•
T
DEMAND
•
N
QD = f (Px , Pg , Y , T , N, …)
•
•
•
Initial E, P0 ,Q0
•
DD
P1
• NEW E1
▪
.
Q1
Figure: Changes in demand
Changes in demand
• Decrease
in demand
QD :
•
Px – quantities demanded
•
Pg
•
Y
Change in
•
T
DEMAND
•
N
QD = f (Px , Pg , Y , T , N, …)
•
•
•
Initial E, P0 ,Q0
•
DD
P2
• New E2
▪
.
Q2
Figure: Changes in demand
Changes in demand
Figure: Examples of changes in demand
Changes in demand
Figure: Examples of changes in demand continued
Changes in demand
Figure: Examples of changes in demand continued
Supply
Determinants of Supply
•
•
The quantity of goods supplied by an individual producer
(seller/firm) in a particular period of time depends upon (function
of), a) the price of the good, b) prices of alternative output, c) the
price of the FOP, d) expected future prices of the good and e) the
state of technology.
Symbolically we can denote supply as:
• QS = quantity supplied (dependent variable)
• Px
• Pg
• Pf
Independent variables
• Pe
• Ty
• QS = f (Px , Pg , Pf , Pe , Ty , N …)
Changes in supply
• Increase
in supply
QS :
•
Px - quantities supplied
•
Pg
•
Pf
CHANGE IN
•
Pe
SUPPLY
•
Ty
•
N
QS = f (Px , Pg , Pf , Pe , Ty , N …)
•
•
•
Initial E, P0 ,Q0
•
SS
P1
•
NEW E1
Q1
Figure: Changes in supply
Changes in supply
• Decrease
in supply
QS :
•
Px - quantities supplied
•
Pg
•
Pf
CHANGE IN
•
Pe
SUPPLY
•
Ty
•
N
QS = f (Px , Pg , Pf , Pe , Ty , N …)
•
•
•
Initial E, P0 ,Q0
•
SS
P2
•
NEW E2
▪
.
Q2
Figure: Changes in supply
Changes in supply
Figure: Examples of changes in supply
Changes in supply
Figure: Examples of changes in supply continued
Simultaneous changes in demand and supply
Table: Simultaneous changes in demand and supply
Simultaneous changes in demand and supply
Figure: A simultaneous change in demand and supply
Simultaneous changes in demand and supply
Figure: A simultaneous increase in demand and decrease in supply continued
Interaction between related markets
• Fish and meat:
Figure - Interaction between the markets for fish and meat
Interaction between related markets
•
Motorcars and tyres
Figure: Interaction between markets for motorcars and tyres
Government intervention
Government intervention
•
•
•
Changes in previous section occur in a “competitive market”
But sometimes parties are unsatisfied with PRICES and QUANTITIES of goods
and services.
Government intervenes:
• Set maximum prices (price ceilings)
• Set minimum prices (price floors)
• Subsidise certain goods and services
• Taxing certain goods and services
Government intervention
Government intervention
•
•
•
Government sets maximum prices in order to:
• Keep prices of basic food prices low, assisting the poor
• Avoid exploitation of consumers
• Combat inflation
• Limit production of certain goods and services
If the maximum price above E – no effect on the market
If below E, the market is affected (excess demand)
Government intervention
•
Price ceiling (max price)
•
Point c – above E
•
No effect
•
Point a – below E
•
Excess demand (shortage)
•
Problem arises with excess DD
•
“first come first serve”
•
Rationing system may be
- established by producers
- (eg. 3 max per customer)
•
Rationing system may be
- established by government
- (coupons/tickets)
Figure Maximum prices
Government intervention
•
Price ceiling (max price)
•
Rationing systems cause
•
-
Other consequences include:
•
Black markets (unlawful)
•
Creates shortages
•
Prevents markets allocating
resources efficiently
Figure Maximum prices
Government intervention
Maximum prices (price ceilings, price control)
-The welfare costs of maximum
price fixing
Figure: The welfare costs of maximum price fixing
Government intervention
Government intervention
•
•
•
•
Government sets minimum prices in order to:
• Prevent large fluctuations in agricultural product markets
• Unstable and uncertain income to farmers
If the minimum price below E – no effect on the market
If below E, a surplus occurs (excess supply)
Government may intervene further by:
• Purchasing surplus and exporting it
• Storing the surplus (non-perishable goods)
• Destroying the surplus
• Requesting producers to destroy surplus
• Quotas imposed to limit quantities
Government intervention
•
Price floor (min price)
•
Consequences include:
•
Artificially higher prices
•
Benefit accrues to larger
companies
•
Inefficient producers are
protected and survive
•
Disposal causes an
Figure: A minimum price (Textbook page 94)
Government intervention
Minimum prices (price supports, price floors)
– The welfare costs of
minimum price fixing
- Government revenue?
Government intervention
Government intervention
•
Alternative Government intervention include:
• Subsidies
• Taxes
• Quotas (limit quantities supplied)
• Import tariffs (import tax)
Government intervention
• Subsidies
Taxes
Figures: A subsidy paid to suppliers. A tax on cigarettes
Government intervention
– The welfare implications of a specific excise tax
Figure: The welfare costs of a specific excise tax
Government intervention
• Quotas
Figure: The impact of a production quota
Government intervention
• Import tariffs
Figure: The impact of a specific import tariff
Government intervention
Import tariffs
- The welfare effects of an
Import tariff.
- Transfer of surplus:
- Consumers
- Producers
- Government?
Figure: the welfare costs of a tariff
Agricultural prices
Figure: An increase in supply as a result of an expected high price of potatoes
Speculative behaviour: self-fulfilling expectations
Figure: Self-fulfilling expectations
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