 Supply and Demand Curves
 Equilibrium Quantity and Price
 Adjustment to Equilibrium
 Some Welfare Properties of Equilibrium
 Free Markets and The Poor
 Price Supports
 The Rationing and Allocative Function of Prices
 Determinants of Supply and Demand
 Predicting and Explaining Changes in Price and Quantity
 The Algebra of Supply and Demand
2-2


A Market: consists of the buyers and sellers of a good or service.
 Law of Demand: the empirical observation that when the price of a product falls, people demand larger quantities of it.

Law of Supply: the empirical observation that when the price of a product rises , firms offer more of it for sale .
The Demand and Supply Curves for Lobsters in Hyannis, MA., July 20, 2011
2-3

Equilibrium Quantity and Price
 Equilibrium quantity and price: it is the price-quantity pair at which both buyers and sellers are satisfied.
2-4

 Excess supply: the amount by which quantity supplied exceeds quantity demanded.

Excess demand: the amount by which quantity demanded exceeds quantity supplied.
2-5

If price and quantity take anything other than their equilibrium values, however,
An Opportunity for Improvement in the Lobster Market
2-6

Rent Controls
 A price ceiling for rents is a level beyond which rents are not permitted to rise.

The price ceiling creates an excess demand of 40,000 units
=(80,000 – 40,000) units.
2-7

Price Supports
 A price support (or price floor) keep prices above their equilibrium levels.

Require the government to become an active buyer in the market.

Purpose of farm price supports is to ensure prices high enough to provide adequate incomes for “family farmers.”
2-8

Factors that Shift Demand Curves Factors the Shift the Demand Curve
( SHIFT FACTORS )

Incomes

Normal goods - the quantity demanded at any price rises with income.

Inferior goods - the quantity demanded at any price falls with income.

Tastes

Price of Substitutes and Complements

Complements - an increase in the price of one good decreases demand for the other good.
 Substitutes - an increase in the price of one will tend to increase the demand for the other.

Expectations

Populations
NON_SHIFT FACTOR

Price
2-9

Factors the Shift the Supply Curve ( SHIFT FACTORS )
 Technology

Factor Prices
 The Number of Suppliers

Expectations

Weather
Factors that Shift Supply Schedules
NON_SHIFT FACTOR

Price
2-10

S= Summer, W =winter
Case 1: An increase in supply
→ a decrease in the equilibrium price and an increase in the equilibrium quantity.
Case 2:An increase in demand
→ an increase in both the equilibrium price and quantity.
2-11

Case III: A decrease in supply → an increase in the equilibrium price and a decrease in the equilibrium quantity.
Case IV: A decrease in demand → a decrease in both the equilibrium price and quantity [ not shown ]
2-12

2.1
: Supply function: P = 2+ 3Q s
2.2: Demand function: P =10 – Q d
Let Q* = Q d = Q s
Then
2 + 3Q* = 10 – Q*
4Q* =10-2=8
Q* =8/2 = 2
Plug Q* into either demand or supply function.
We choose the supply function, so P* =
2+ 3*2 = 8
2-13

Note: A Tax ( T ) is a shift factor on the S curve.
2-14

2-15

Note: A Tax ( T ) is a shift factor on the D curve.
2-16

2-17

Assume T =$2 is on the seller
Given: p=Q s ; P=10-Q d
Set Q =10-Q and assume that at equilibrium, Q s =Q d .
Thus, 2Q s =10 or Q s =Q d =Q*= 5
Assume T =$2 is on the buyer
Given: p=Q s ; P=10-Q d
Set Q =10-Q and assume that at equilibrium, Q s =Q d .
Thus, 2Q s =10 or Q s =Q d =Q*= 5
So P=10-5= $5
P buyer
=$5+$1= $6 ; P seller
=$5-$1= $4
So P=10-5=
P buyer
$5
=$5+$1= $6 ; P seller
=$5-$1= $4
Summary: It doesn’t matter whether the tax is on buyers or sellers, the result is the same on P buyers
P sellers
.
and
2-18

Problem: Consider a market whose supply and demand curves are given by P= 4Q s and
P= 12 - 2Q d respectively. How will the equilibrium price and quantity in this market be affected if a tax of 6 per unit of output is imposed on sellers? If the same is imposed on buyers?
Answer: The original price and quantity are given by P*= 8 and Q* = 2 respectively.
The supply curve with the tax is given by P = 6+4Q s . Letting P’ and Q’ denote the new equilibrium values of price and quantity, we now have 6 +4Q’ =12 - 2Q’ which yields
Q’=1 , P’ =10 , where P’ is the price paid by buyers and P’-6=4 is the price received by sellers.
Alternatively, the demand curve with a tax of 6 levied on buyers is given by P=12 - 6 -
2Q d = 6 - 2Q d , and we have 4Q ’ =6’ – 2Q’ which yields Q’=1 and P”=4 where P” is the price received by sellers . That is, P”+T = P” + 6 = 10 is the price paid by buyers .

Question: Suppose demand for seats at football games is P = 1900 – (1/50)Q and supply is fixed at Q =90,000 seats.
(a) Find the equilibrium price and quantity of seats for a football game (using algebra and a graph).
(b) Suppose the government prohibits ticket scalping (selling tickets above their face value), and the face value of tickets is $50
(this policy places a pricing ceiling at $50). How many consumers will be dissatisfied (how large is excess demand)?
(c) Suppose the next game is a major rivalry, so demand jumps to P = 2100 – (1/50)Q. How many consumers will be dissatisfied with this game?
(d) How do distortions of this price ceiling differ from the more typical case of upward-sloping supply?
Answer: a) The equilibrium quantity is Q = 90,000 seats and the equilibrium price is P = 1900 – (1/50)(90,000) = 1900 – 1800 =
$100.
b) At a price ceiling of P = $50, quantity demanded is found by solving 50 = 1900 – (1/50)Q for Q = 92,500 seats. Since the stadium only holds Q = 90,000 seats, there will be 92,500 – 90,000 = 2,500 dissatisfied fans who want to buy a ticket at P =
$50 but cannot find one available. c) Quantity demanded for the higher demand is found by solving 50 = 2100 – (1/50)Q for Q = 102,500 seats. Now there will be 102,500 – 90,000 = 12,500 dissatisfied fans who want to buy a ticket at P = $50 but cannot find one available. The excess demand is12,500 – 2,500 = 10,000 seats more than for the not so big game.
d) Normally a price ceiling both raises quantity demanded and lowers quantity supplied. Here, only the first effect is present because the stadium capacity is fixed.
S
$300
$100
$50
0
D
D’
90 92.5
102.5
105