The Demand Curve

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Introduction to Supply and Demand Markets are … Consumers and producers Exchange goods/services for payment Most basic is a COMPETITIVE MARKET 5 Elements of S&D Model Demand curve 5 Elements of S&D Model Demand curve Supply curve 5 Elements of S&D Model Demand curve Supply curve Equilibrium 5 Elements of S&D Model Demand curve Supply curve Equilibrium Demand and Supply factors Changes in equilibrium The Demand Curve Chapter 3: Supply and Demand (pages 62-71) Think for a minute… How do we calculate the amount of coffee demanded in a given year? We need a DEMAND SCHEDULE… Demand Schedule and Curve Price Quantity Law of Demand ⇑ Price=⇓ Quantity Demanded Downward-sloping curves Change in quantity demanded Caused by a ∆ in PRICE Demand schedule unchanged Movement along curve Determinants of Demand M.E.R.I.T. shifts the curve Market size (# consumers) Expectations Related prices Income Tastes and preferences Shifts in Demand Demand shifts with ∆ M.E.R.I.T. Increase = shift to right Decrease = shift to left Market Size Amount of goods demanded at a given price will change More buyers = ⇑ Demand Fewer buyers = ⇓ Demand Example: Cost of prescription drugs as the population gets older Expectations Future prices, product availability, and income can shift demand Example: What do you do if the price of gas is expected to fall next week? Example: If the iPhone 5 will be released in October what happens to demand for iPhone 4? Related prices Depends on whether the good is a SUBSTITUTE ⇑P for good 1 ⇑D for good 2 Example: Coffee and Tea COMPLEMENT ⇑P for good 1 ⇓D for good 2 Example: Peanut butter and jelly Income ⇑Income = ⇑Demand (usually…) True for NORMAL goods INFERIOR goods are different ⇑ Income = ⇓ Demand Example: Bus vs. plane tickets Tastes Favorable change = ⇑ Demand Unfavorable change = ⇓ Demand Example: Winning the Super Bowl increase demand for merchandise (Why?) .

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Demand Curve
Econ 201: Introduction to Economics Analysis September 4 Lecture: Supply and Demand Jeffrey Parker Reed College Daily dose of The Far Side Keeping with the vegetable theme from Wednesday… www.thefarside.com 2 Preview of this class session • Basic principles of market analysis using supply and demand curves are central to economics • Formal conditions for “perfectly competitive” markets are strict and rarely satisfied • We discuss what supply curves and demand curves are • We define market equilibrium and why we expect markets to move there • We consider effects of shifts in curves on equilibrium price and quantity 3 “Two-curve” analysis • Why is it useful? • Two key variables (price, quantity) • One curve slopes up and the other down • Some exogenous variables affect one curve, others the other • Few affect both • Change in any exogenous variable affects one curve in predictable way: • Intersection moves SE, NE, NW, or SE • Predictable changes in price and quantity exchanged https://www.econgraphs.org/graphs/micro/supply_and_demand/supply_and_demand?textbook=varian 4 Demand function • Relates quantity of good demanded to its relative price • Quantity demanded = amount buyers are willing and able to purchase • Relative price is price of good holding all other goods constant • Reflects decision-making by potential buyers • Demand function: QD = D (P ) • Negative relationship • Downward-sloping curve • Need not be straight line https://www.econgraphs.org/graphs/micro/supply_and_demand/supply_and_demand?textbook=varian 5 Demand curves 6 Demand
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Theory of Public Goods
Public Goods Private versus Public Goods A private good (bread) exhibits the following two properties: exclusive: A good is exclusive if once you have purchased a good, then you can exclude others from consuming it. rival: A good is rival in consumption, in the sense that once someone buys a loaf of bread and consumes it, then that precludes you from consuming that same loaf of bread. • A rival good is depletable. A technical consequence of depletability is that consumption of additional amounts of rival goods involve some marginal costs of production. A public good (air quality) may exhibit the following two properties: nonexclusive: A good is nonexclusive if no one can be excluded from benefiting from or consuming the good once it is produced. An implication of nonexclusivity is that goods can be enjoyed without direct payment. nonrivalrous: One person's consumption of a good does not diminish the amount or quality available for others. • A nonrival good is nondepletable. A technical consequence of nondepletability is that the marginal cost of providing a nonrival good to an additional consumer is zero. • All public goods exhibit the nonexcludability property but they do not necessarily exhibit the nonrivalrous property. nonrival rival • water pollution in small body of private good excludable water, indoor air pollution pure public good/bad congestible public good/bad • users neither interfere with each • users affect good's usefulness to other nor increase good's others — mutual interference usefulness to each other of users creates negative nonexcludable (free–rider problem) externality (free–access • biodiversity, greenhouse gases problem) • noise, defence, radio signal • ocean fishery, parks • bridge, highway Aggregate Demand Curves for Private and Public Goods 1.
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1 Unit 4. Consumer Choice Learning Objectives to Gain an Understanding of the Basic Postulates Underlying Consumer Choice: U
Unit 4. Consumer choice Learning objectives to gain an understanding of the basic postulates underlying consumer choice: utility, the law of diminishing marginal utility and utility- maximizing conditions, and their application in consumer decision- making and in explaining the law of demand; by examining the demand side of the product market, to learn how incomes, prices and tastes affect consumer purchases; to understand how to derive an individual’s demand curve; to understand how individual and market demand curves are related; to understand how the income and substitution effects explain the shape of the demand curve. Questions for revision: Opportunity cost; Marginal analysis; Demand schedule, own and cross-price elasticities of demand; Law of demand and Giffen good; Factors of demand: tastes and incomes; Normal and inferior goods. 4.1. Total and marginal utility. Preferences: main assumptions. Indifference curves. Marginal rate of substitution Tastes (preferences) of a consumer reveal, which of the bundles X=(x1, x2) and Y=(y1, y2) is better, or gives higher utility. Utility is a correspondence between the quantities of goods consumed and the level of satisfaction of a person: U(x1,x2). Marginal utility of a good shows an increase in total utility due to infinitesimal increase in consumption of the good, provided that consumption of other goods is kept unchanged. and are marginal utilities of the first and the second good correspondingly. Marginal utility shows the slope of a utility curve (see the figure below). The law of diminishing marginal utility (the first Gossen law) states that each extra unit of a good consumed, holding constant consumption of other goods, adds successively less to utility.
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ELASTICITY Principles of Economics in Context (Goodwin, Et Al.), 2Nd Edition
Chapter 5 ELASTICITY Principles of Economics in Context (Goodwin, et al.), 2nd Edition Chapter Overview This chapter continues dealing with the demand and supply curves we learned about in Chapter 3. You will learn about the notion of elasticity of demand and supply, the way in which demand is affected by income, and how a price change has both income and substitution effects on the quantity demanded. Objectives After reading and reviewing this chapter, you should be able to: 1. Define elasticity of demand and differentiate between elastic and inelastic demand. 2. Calculate the elasticity of demand. 3. Understand how to apply an elasticity of demand to a business seeking to maximize revenues as well as to a policy situation. 4. Define elasticity of supply and differentiate between elastic and inelastic supply. 5. Understand the income and substitution effects of a price change. 6. Discuss the differences between short-run and long-run elasticities. Key Terms elasticity price elasticity of demand price-inelastic demand price-elastic demand price-inelastic demand (technical definition) price-elastic demand (technical definition) perfectly inelastic demand perfectly elastic demand unit-elastic demand price elasticity of supply income elasticity of demand normal goods inferior goods substitution effect of a price change income effect of a price change short-run elasticity long-run elasticity Chapter 5 – Elasticity 1 Active Review Questions Fill in the blank 1. When you drop by the only coffee shop in your neighborhood, you notice that the price of a cup of coffee has increased considerably since last week. You decide it’s not a big deal, since coffee isn’t a big part of your overall budget, and you buy a cup of coffee anyway.
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Unit 2: Supply, Demand, and Consumer Choice
Unit 2: Supply, Demand, and Consumer Choice 1 DEMAND DEFINED What is Demand? Demand is the different quantities of goods that consumers are willing and able to buy at different prices. (Ex: Bill Gates is able to purchase a Ferrari, but if he isn’t willing he has NO demand for one) What is the Law of Demand? The law of demand states There is an INVERSE relationship between price and quantity demanded 2 Why does the Law of Demand occur? The law of demand is the result of three separate behavior patterns that overlap: 1.The Substitution effect 2.The Income effect 3.The Law of Diminishing Marginal Utility We will define and explain each… 3 Why does the Law of Demand occur? 1. The Substitution Effect • If the price goes up for a product, consumer but less of that product and more of another substitute product (and vice versa) 2. The Income Effect • If the price goes down for a product, the purchasing power increases for consumers - allowing them to purchase more. 4 Why does the Law of Demand occur? 3. Law of Diminishing Marginal Utility U-TIL-IT- Y • Utility = Satisfaction • We buy goods because we get utility from them • The law of diminishing marginal utility states that as you consume more units of any good, the additional satisfaction from each additional unit will eventually start to decrease • In other words, the more you buy of ANY GOOD the less satisfaction you get from each new unit. Discussion Questions: 1. What does this have to do with the Law of Demand? 2.
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Understand How Various Factors Shift Supply Or Demand and Understand the Consequences for Equilibrium Price and Quantity.”
Microeconomics Topic 3: “Understand how various factors shift supply or demand and understand the consequences for equilibrium price and quantity.” Reference: Gregory Mankiw’s Principles of Microeconomics, 2nd edition, Chapter 4. The Supply and Demand Model Supply and demand is a model for understanding the how prices and quantities are determined in a market system. The explanation works by looking at two different groups -- buyers and sellers -- and asking how they interact. The supply and demand model relies on a high degree of competition, meaning that there are enough buyers and sellers in the market for bidding to take place. Buyers bid against each other and thereby raise the price, while sellers bid against each other and thereby lower the price. The equilibrium is a point at which all the bidding has been done; nobody has an incentive to offer higher prices or accept lower prices. Perfect competition exists when there are so many buyers and sellers that no single buyer or seller can affect the price on the market. Imperfect competition exists when a single buyer or seller has the power to influence the price on the market. For more discussion of perfect and imperfect competition, see the notes on Microeconomics topic 7. The supply and demand model applies most accurately when there is perfect competition. In reality, few markets are perfectly competitive. However, the supply and demand framework still provides a good approximation for what is happening much of the time. The Consumer Side of the Market Demand is the relationship between the price of a good and the quantity of the good that consumers are willing and able to buy.
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Market Power and Monopoly Introduction 9
9 Market Power and Monopoly Introduction 9 Chapter Outline 9.1 Sources of Market Power 9.2 Market Power and Marginal Revenue 9.3 Profit Maximization for a Firm with Market Power 9.4 How a Firm with Market Power Reacts to Market Changes 9.5 The Winners and Losers from Market Power 9.6 Governments and Market Power: Regulation, Antitrust, and Innovation 9.7 Conclusion Introduction 9 In the real world, there are very few examples of perfectly competitive industries. Firms often have market power, or an ability to influence the market price of a product. The most extreme example is a monopoly, or a market served by only one firm. • A monopolist is the sole supplier (and price setter) of a good in a market. Firms with market power behave in different ways from those in perfect competition. Sources of Market Power 9.1 The key difference between perfect competition and a market structure in which firms have pricing power is the presence of barriers to entry, or factors that prevent entry into the market with large producer surplus. • Normally, positive producer surplus in the long run will induce additional firms to enter the market until it is driven to zero. • The presence of barriers to entry means that firms in the market may be able to maintain positive producer surplus indefinitely. Sources of Market Power 9.1 Extreme Scale Economies: Natural Monopoly One common barrier to entry results from a production process that exhibits economies of scale at every quantity level • Long-run average total cost curve is downward sloping; diseconomies never emerge.
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1 Chapter 15: Public Goods and Tax Policy
Chapter 15: Public Goods and Tax Policy A. Definitions of public and private goods public sector: government private sector: businesses, individuals A nonrival good is one whose consumption by one person does not diminish its consumption by others Example: clean air is a Example: a hamburger nonrival good is a rival good A nonexcludable good is one where it is Example: national defense is a difficult to prevent people from nonexcludable good consuming it once it has been produced 1 • Many goods are both nonrival and nonexcludable Example: seeing a • If a good is both nonrival and movie at the theater is nonexcludable, it is called a public good an excludable good • Examples: clean air and national defense are public goods • Many other goods are both rival and • Some goods can be excludable rival but nonexcludable • If a good is both rival and excludable, it is • Example: catching a called a private good fish in the ocean • Examples: a hamburger or seeing a movie • a good that is rival but in the theater are private goods nonexcludable is called a commons good MB MC The Classification of Private, Public, and Hybrid Goods • Yet other goods may Nonrival be nonrival but Low High excludable • Example: watching a Commons good Public good High movie on HBO is (fish in the ocean) (national defense) nonrival but Nonexcludable Private good Collective good excludable Low (wheat) (pay-per-view TV) • a good that is nonrival but excludable is called a collective good Copyright c 2004 by The McGraw-Hill Companies, Inc. All rights reserved. 2 Chapter 15: Public Goods and Tax For a private good, the total willingness to pay is horizontal summation of each individual demand curve Policy Joe’s hamburger Moe’s hamburger Total hamburger demand demand demand A.
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12 Perfect Competition
Chapter PERFECT 12 COMPETITION Answers to the Review Quizzes Page 275 1. Why is a firm in perfect competition a price taker? One firm’s output is a perfect substitute for another firm’s output and each firm is a small part of the market. These points imply that each firm cannot unilaterally influence the market price at which it can sell its good or service. It must accept, or “take” the market equilibrium price—hence the term, price taker. 2. In perfect competition, what is the relationship between the demand for the firm’s output and the market demand? The market demand curve for the goods and services in a perfectly competitive market is downward sloping. However, no single firm in this market can influence the price at which it sells its output. This point means a firm that is a price taker must take the equilibrium market price as given, and the firm faces a perfectly elastic demand. 3. In perfect competition, why is a firm’s marginal revenue curve also the demand curve for the firm’s output? A perfectly competitive firm’s demand curve is a horizontal line at the market price. This result means that the price it receives is the same for every unit sold. The marginal revenue received by the firm is the change in total revenue from selling one more unit, which is the constant market price. So a perfectly competitive firm’s demand curve is the same as its marginal revenue curve. 4. What decisions must a firm make to maximize profit? The firm has three decisions it must make.
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Monopoly Monopoly: Why?
Monopoly Monopoly: Why? Natural monopoly (increasing returns to scale), e.g . (p arts of) utility companies? Artificial monopoly – a patent; e.g. a new drug – sole ownership of a resource; e.g. a toll bridge – formation of a cartel; e.g. OPEC Monopoly: Assumptions Many buyers Only one seller i.e . not a price-taker (Homogeneous product) Perfect information Restricted entry (and possibly exit) Monopoly: Features The monopolist’s demand curve is the (downward sloping) market demand curve The monopolist can alter the market price by adjusting its output level. Monopo ly: Marke t Be hav iou r p()(y) Higher output y causes a lower market price, p(y). D y = Q Monopoly: Market Behaviour Suppose that the monopolist seeks to maximize economic profit ( y) p( y) y c( y) TR TC What output level y* maximizes profit? Monopoly: Market Behaviour At the profit-maximizing output level, the slopes of the revenue and total cost curves are equal, i.e. MR(y*) = MC(y*) Marginal Revenue: Example p = a – by (inverse demand curve) TR = py (total revenue) TR = ay - by2 Therefore, MR(y) = a - 2by < a - by = p for y > 0 Marginal Revenue: Example MR= a - 2by < a - by = p P for y > 0 P=aP = a - by a a/2b a/b y MR = a - 2by Monopoly: Market Behaviour The aim is to maximise profits MC = MR p MR p y p y < 0 MR lies inside/below the demand curve Note: Contrast with perfect competition (MR = P) Monopo l y: Equ ilib riu m P MR Demand y=Qy = Q Monopo l y: Equ ilib riu m MC P MR Demand y Monopo l y: Equ ilib riu m MC P AC MR Demand y Monopo l y: Equ ilib
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Ch2(Demand-Supply).Pdf
Microeconomics Microeconomics Lectures 02-03-04 Jan 9/12/16, 2017 Microeconomics Demand-Supply What do we study? CHAPTER 2 OUTLINE 2.1 Supply and Demand 2.2 The Market Mechanism 2.3 Changes in Market Equilibrium 2.4 Elasticities of Supply and Demand 2.5 Short-Run versus Long-Run Elasticities 2.6 Understanding and Predicting the Effects of Changing Market Conditions 2.7 Effects of Government Intervention—Price Controls Microeconomics Demand-Supply The Basics of Supply and Demand Supply-demand analysis is a fundamental and powerful tool that can be applied to a wide variety of interesting and important problems. To name a few: Understanding and predicting how changing world economic conditions affect market price and production Evaluating the impact of government price controls, minimum wages, price supports, and production incentives Determining how taxes, subsidies, tariffs, and import quotas affect consumers and producers Microeconomics Demand-Supply The2.1 Supply Curve SUPPLY AND DEMAND The Supply Curve ● supply curve Relationship between the quantity of a good that producers are willing to sell and the price of the good. Figure 2.1 The Supply Curve The supply curve, labeled S in the figure, shows how the quantity of a good offered for sale changes as the price of the good changes. The supply curve is upward sloping: The higher the price, the more firms are able and willing to produce and sell. If production costs fall, firms can produce the same quantity at a lower price or a larger quantity at the same price. The supply curve then shifts to the right (from S to S’).
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Recitation 1
Sloan School of Management 15.010/15.011 Massachusetts Institute of Technology Professors Berndt, Chapman, Doyle, and Stoker RECITATION NOTES #1 Market Definition, Elasticities and Surpluses Friday - September 10, 2004 OUTLINE OF TODAY’S RECITATION 1. Market Definition: How to determine whether two products are in the same market or not and how to use the Market Definition Test 2. Elasticities: Definition of own-price elasticity and cross-price elasticity 3. Supply and Demand: Types of supply and demand curves; how to find the elasticities from a supply/demand curve; how to derive the curves from the elasticities 4. Surplus: Definition of Consumer Surplus and Producer Surplus; how to calculate them 5. Numeric Example: An example to put all the concepts together 1. MARKET DEFINITION 1.1 Definition 1.2 Market Check 1.1. Definition: A Market is a collection of buyers and sellers that, through their actual or potential interactions, determine the price of a product or set of products. Markets can be defined in several ways, for instance: • Products - which to include, coffee and tea, or just tea • Geography – only Boston, or the whole world 1.2 Market Check: A convenient way to “test” whether a product is in the same market as another one is to ask the following question: “Are there either demand substitutes or supply substitutes to this product?” 1 Demand Substitutes If the price of good A rises substantially (holding all else constant), will a significant number of buyers of good A instead purchase good B? Supply Substitutes If the price of good A rises substantially (holding all else constant), will a significant number of producers of good B decide to produce good A instead? NOTE: In general, demand substitutability is the more important factor in determining whether two products are in the same market.
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