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Chp 4 Supply and Demand Basic Concepts Those who got it and those who want it In a world constrained by scarcity driven by utility seekers, there comes into being the interaction between those who want and those who have to offer The ensuing behavior creates the phenomenon known as a “market” Those who want and are allocate their own scarce resources to attain, demand This observed behavior has precise meaning in economics and refers to the following 3 points
- Willingness and ability of the buyers to want/demand different quantities of goods
- Different prices
- Within a specific time Demand Those who want but are unwilling or unable to part with resources are not considered demanders If given good is known to provide utility and is known to be object of demanders who seek utility offered than it stands to reason: Quantity demanded will be higher when price is lower Law of Demand Price of a good/quantity demand are inversely related, all things equal this may be expressed in 4 ways
- Words: definition
- Symbols
- Demand Schedule
- Demand Curve Price: Absolute vs. Relative Absolute price are reflected in monetary terms Pants = $30 Shirt = $
Relative prices are given Shirts/Pants = $10/$30 = 1/ Consider each and their implications on behavior 2 factors at work within law of demand and inverse relationship between price and demand
- Lower priced goods are substituted for goods whose prices rise
- Consumers may excise choice and are free to select other goods offering greater perceived value Law of Diminishing Marginal utility With each unit of a good consumed the marginal (or additional) utility gained declines within a given time Explained in a different way every unit consumed the benefit derived from each subsequent unit is less than the unit consumed before it Therefore if the first unit consumed is the most valuable the last is least than same good in small quantity will fetch a higher price than available in large quantity Consumers implicitly understand that something offering higher utility is worth more than something of less. There is no need to pay high prices for goods available in large quantities Aside from packaging costs, shelf space, bulk is cheaper because marginal utility of the ninth unit is less Consumers will only demand if the price is less Fluctuating demand may be caused by
- Change in quantity demanded
- Change in demand If quantity demanded = number of units individuals are willing and able to buy at a particular time then…. Change in quantity demanded = the change in units demanded given a change in price It represents the movement from one part to another on the same demand curve, caused by change in price
Reason for distinguishing between substitute goods is often a matter of tastes and preferences Maybe normal, inferior, neutral Generally speaking if the price of one differs greatly than the other demand will shift towards the good featuring a lower price As an aside, substitute goods are frequently marketed in ways to prevent them from being considered either as a substitute or commodity Complement: goods generally consumed jointly, a change in demand for one will likely precipitate a similar change in demand for the other May be normal, inferior, or neutral Generally speaking, are good if not both are not used without the other sometimes, flow goes both ways, other times not Given different types of goods Income Individuals/consumers within the market Increase will generally push the demand curve out for normal goods but reduce demand for inferior goods; neutral goods will remain the same Taste and preferences The choice determine allowing for the unique difference each consumer exhibits, it’s this effect also captures the phenomenon of how conumers differentiate between goods that ostensibly serve the same or close to the same purpose Whether consumers are motivated by seemingly trite fashion or more something like health concerns, a change in t and p will shift demand All goods maybe effected Prices of related goods: effect upon demand will likely be in the same direction Substitute: shift will be in opposing direction when “price changes”, we are referring to those changes making a pronounced effect on market dynamics That effect demand across all price ranges not quantity demanded Price of related good: effect upon demand is most relevant to complement and substitute goods
For complements, the shift in demand will likely be in the same direction For substitutes the shift will be in the opposing directions When we speak of price changes we are referring to those changes making a pronounced effect on market dynamics – effect all across Number of buyers: size of any market is related to the number of buyers, when more are around demand will be greater across all price levels, the reverse is also true. This can affect all goods. Expectations of future price: consumers react to a belief the future price will change after their behavior in the present. Overall demand will shift as people await the new price structure Supply Supply, in economic terms, is a specific term relating to those who utilize resources in such manner they produce goods, like demand. 3 key points
- Willingness and ability of sellers to produce and offer goods in different quantities
- Different prices
- During specific time period Does this mean a seller who makes only one good must offer it at a different price? No, rather, they react to different price set by the market Law of supply: quantity of a good produced is directly related to the price, all things equal thus, if the market demand for houses shifts outward builders will construct more new houses in response Just as demand was subject to the way of diminishing marginal utility supply is subject to increasing opportunity costs Recall the outward shaped PPF where by production was more costly, in terms of opportunity, at higher levels of output The supply curve is upward sloping, in reaction to price but acknowledging that higher levels of production entail more cost A producer will make more only if price merits the extra work and ultimately cost required
Advances in technology may bring about lower production costs. If such changes allow more efficient production (more production, same input) than producers will increase supply. Production is more profitable across the supply curve Number of sellers on a market More producers yields more supply, less suppliers yields less supply Expectation of future price Producers will alter what they deliver to the market if there is an expectation of change in future price If producers think a higher price will be attained in the future, why send now Likewise, if the price is expected to drop, a producer may try and capture more of the higher price now Again markets react today to those events thought to occur in the future there is no waiting Taxes and subsidies Taxes have an adverse effect on supply The more government taxes supply less will come to market Subsidies encourage production for better, for worse, the subsidies incentivizes producers to allocate resources beyond what market conditions might demand simply put, less produced of that which is taxed, more of that which is subsidized Government restriction Regulation has a negative effect upon supply The supply curve will shift inward with increasing governmental restrictions The more arduous the regulation, the more producers began to curtail production or drop out entirely of the market Supply and Demand
- Surplus vs. shortage
- Equilibrium vs. disequilibrium
- Equilibrium price vs. disequilibrium price
- Equilibrium quantity Surplus: a condition existing when quantity supplied as greater than quantity demanded Shortage: quantity supplied is less than quantity demanded Equilibrium A market is said to have reached equilibrium when demonstrating a price/quantity combination from which there is no tendency for either buyers or sellers to move away no shortage or surplus exists those that want to buy can do so, those who sell can do alike as well Disequilibrium: a market experiencing either a shortage or surplus condition Equilibrium price: the price at which the quantity demanded will equal the quantity supplied Disequilibrium price: any price which results in quantity demanded differing from quantity supplied Equilibrium quantity: the quantity corresponding with equilibrium price. At this level there exist an equal number of units demanded by willing and able buyers as there are units supplied by willing and able producers The amount produced is the amount sold – no leftover units and left out buyers Search for equilibrium Markets do not necessarily have readily apparent supply and demand graphs for all concerned to readily see the equilibrium point Rather the natural equilibrium is found through transaction experience This process maybe on going, as a single market is not insulated from other markets or worldly events Search for equilibrium in action Recall, demand and supply curves stem from schedule Therefore, we know quantities both demanded and supplied at play given varying prices levels
