Bài giảng Microeconomics - Chapter 4 Supply and Demand: An Introduction

Supply and Demand: An Introduction0What is Chapter 4 about?1I. What, How and For Whom? Central Planning vs. the Market2Universal QuestionsAll economic systems must answer the following questions:What should be produced?How should it be produced?For whom will it be produced?There is more than one way to get answers to these questions.3Planning:Central agency decides:Production targets (What/how much)Planning of how to achieve the targets (How)Distribution of the goods and services produced (For whom)ExamplesFormer Soviet UnionCuba, North Korea, ChinaIn practice, always some market & some planning – issue is % of eachCentral Planning is not prevalent todayBut planning common within organizations4The Market:Private markets are the dominant form of economic organization nowadaysIndividuals & firms interact, within a framework of laws, regulations & customsDecentralized decisions on Which careers to pursueWhich products to produce or buyWhen / where to start businessesWho gets what is decided by purchasing power and individual preferences.5Market CoordinationMost goods and services are allocated by markets, which often work quite well in matching what consumers want with what firms produce Why ?But not always Why ?6Is there a ‘Pure’ Market System?No. Allocation of goods and services is mostly done with a combination of markets, regulations, and some central ‘management’ (e.g., government policies)Why not a pure system?Markets need a framework of laws & customsProperty rights need to be defined & enforcedMacro – may not be enough demandSometimes - nonmarket methods of allocation can have both unintended and undesirable effects on a market that might otherwise function well.7II. Markets and Prices8MarketsA market for any good consists of all buyers and sellers of that goodIncludes individuals who either do sell or might sell.Includes individuals who either do buy or might buy.In this chapter, and in Part II, we concentrate upon markets in which each participant is “small” as % buyers / sellersI.e. market is not controlled in any way by any single participant or group.9PricesWhy are some goods cheap and others expensive?Cost of production ?But how would this explain the price of a Picasso painting?Value received from consumption? But how would this explain the low price of water?Both cost and consumer value are important – but key issue is SCARCITY10Supply CurveShows the total quantity of a good or service that sellers wish to sell at each priceOn a graphIn a schedulePositive relationshipRising marginal costs of producing additional units.As price rises, worthwhile to produce & sell more because any higher opportunity costs can be covered by the higher price.Slope of supply curve depends on what it takes to get suppliers to produce one more unitMarginal cost of production11Fig. 4.1Daily Supply Curve of Hamburgers in downtown Toronto12Demand CurveShows the total quantity of a good or service that buyers wish to buy at each priceOn a graph Holds “All Else Constant”Negative relationshipAs price rises, consumers usually want to buy fewer unitsPeople cannot afford as muchPeople switch to substitutes13Fig. 4.2Daily Demand Curve for Hamburgers in downtown Toronto14Market Equilibrium“State of Rest” for economyDoes any individual buyer / seller want to change their behavior ?When all buyers and sellers are satisfied with their respective quantities at the market price, market is balancedNo pressure for change in price or quantityThe supply and demand curve intersection Demand = Supply at that (price-quantity) pointThe equilibrium priceThe price the good sells and is bought forThe equilibrium quantityThe quantity that will be bought and sold15Fig. 4.3The Equilibrium Price and Quantity of Hamburgers in downtown Toronto16DisequilibriaCase I:Excess supplySurplusPrice is higher than equilibrium price – so more units are supplied than buyers want to purchaseSome sellers are dissatisfied, and they will do something about it!Case II:Excess demandShortagePrice is lower than equilibrium price – fewer units supplied than buyers want to purchase Some buyers are dissatisfied, and they will do something about it!17Fig. 4.4 Excess Supply18Fig. 4.5Excess Demand19Markets and EquilibriumDecentralized markets have a tendency to eliminate excess supply & excess demandSurplus (unsold goods) leads frustrated producers to decrease the price Shortage (not finding goods to buy) leads frustrated consumers to bid more – increases the price20Markets and Competition (a)Decentralized markets have a tendency to eliminate excess supply & excess demand, but: Only if Competition among many small buyers (to buy)Competition among many small sellers (to sell)Result of competition: None can control the price!Not always Electricity deregulation & competitive markets – a sobering experience21III. Markets and Social Welfare22Legislation and MarketsMarket equilibrium may or may not be consistent with other values (e.g. moral values)E.g. famines & market for foodE.g. organ transplantsIssue – when / how /why intervene ?23Legislation and MarketsLegislators sometimes enact price ceilings A maximum allowable price specified by lawe.g. rent controls, limits on the price of gasoline, electricityIf price signal is too low, do consumers want “too much”?Legislators sometimes enact price floors A minimum allowable price specified by lawFor example, agricultural price supports, minimum wageIf price signal is too high, do buyers want “too little” ?24Fig. 4.6Price Controls in the Hamburger Market25Markets and Social WelfareEconomic surplus is maximized when the economy produces the socially optimal quantities of goods and services.To get to this maximum, the market must achieveequilibrium (balance of supplies and demands) efficiency (right proportions of good and services, given their respective social costs and benefits)In sum: Equilibrium is not enough for social welfare. Efficiency is also needed.26Equilibrium and Social WelfareWould change in production result in net benefit for some individual ?If excess demand exists, producer marginal cost is lower than value placed on the good or service by consumers.Equilibrium Principle:A market in equilibrium leaves no unexploited opportunities for individual action. HOWEVER, market equilibrium is not sufficient for social welfare. There may still be opportunities that can be had through collective action. Example – if everyone stands up at a rock concert, nobody sees any better27Why Is Efficiency Necessary for Maximum Social Welfare?Economic efficiencyOccurs when all goods and services are produced and consumed in socially optimal amounts If so - then there is no more economic surplus to be had28Summary: Efficiency & MarketsFour necessary conditions:Equilibrium (balance of supply & demand)Competition (none controls the market)Market-demand curve must capture ALL the marginal benefits of the goodMarket-supply curve must capture ALL the marginal costs of the good.29Suppose: not enough competition?If suppliers can collude to restrict supplyEquilibrium can occur – but at a price that is higher than the cost of producing an additional unit. Without effective competition, no individual incentive to increase productionSuppliers make higher profits, but at the expense of customers – including the potential customers who are prevented from consuming anything30Suppose: the market price does not capture all marginal benefits of a good??The equilibrium market price will not reflect all the benefits to society.Not everyone pays for all the benefits they receive.If producers do not collect a price reflecting all benefits, they have no incentive to produce as much as they should, from the social point of view.Example: A bee-keeper and a nearby apple orchard31Suppose: the market price does not capture all marginal costs of a good??If supply price does not reflect all the costs to society.In equilibrium, people will buy more of the good, than they would if all its costs were reflected in the market price.Producers do not pay all the costs they cause, and they have incentive to produce more than they should.Example: Pollution not paid for by producersLittering of beer cans if no deposit system exists32IV. Predicting and Explaining Changes in Prices and Quantities33TerminologyBoth demand and supply curve show relationship of price and quantity – holding all other factors constantA “change in quantity demanded”A movement along the demand curve Or, a “change in quantity supplied”A movement along the supply curve If something else affecting demand or supply changes, you haveA “change in demand”A shift of the entire demand curveOr, a “change in supply”A shift of the entire supply curve34Fig. 4.7An Increase in the Quantity Demanded Versus an Increase in DemandIncrease in quantity demandedIncrease in demandD′35Shifts in SupplyRightward Shift = firms willing to supply more at a given priceLower Cost of materials and/or labourImprovements in Technology, resulting in lower cost of productionGovernment subsidiesIncrease in the number of firms supplying the good in the market(Reverse for leftward shift in supply curve)36Shifts in Supply and Equilibrium Price and QuantityIf the supply curve shifts rightward, this results in:lower equilibrium pricehigher equilibrium quantityIf leftward, the result is:higher equilibrium pricelower equilibrium quantity37Fig. 4.8The Effect on the Skateboard Market of an Increase in the Price of FiberglassSS′D8001000806038Fig. 4.9The Effect on the Market for New Houses of a Decline in Carpenters’ Wage RatesSS′D405016015039Fig. 4.10The Effect of Technical Change on the Market for Manuscript RevisionsSS′D1203602803540Shifts in Demand CurveRightward Shift = More Demand shifts at any given priceMore people buying the good.Stronger preference for the goodWhy ? Change in tastes, change in contextWorks in reverse tooDemands also shifts withChange in the price of related goodsChange in Income41Shifts in Demand and changes in the equilibrium price and quantityIf the demand curve shifts rightwardThe equilibrium price ends up higherThe equilibrium quantity is also higherIf the demand curve shifts leftward, the result islower equilibrium pricelower equilibrium quantity42Related Goods: ComplementsComplements: Goods that are used in combination--e.g. tennis balls and tennis courtsTwo goods are complements in consumption if a decrease in the price of one (increases the quantity demanded of it) causes a rightward shift in the demand curve for the other.43Fig. 4.11The Effect on the Market for Tennis Balls of a Decline in Court Rental FeesSD′D40581.401.0044Related Goods: SubstitutesGoods that replace each other--e.g. email messages and overnight lettersTwo goods are substitutes in consumption if a decrease in the price of one (increases its quantity demanded) causes a leftward shift in the demand curve for the other.45Fig. 4.12Effect on the Market for Overnight Letter Delivery of a Decline in the Price of Internet AccessSD′DQ′QP′P46Income effects on DemandWhen income goes up, do we consume more or less of a particular good ?Normal goodOne whose demand curve shifts right when the incomes of buyers increaseE.g. restaurant mealsInferior goodOne whose demand curve shifts left when the incomes of buyers increaseE.g. rotgut wine47Fig. 4.13The Effect of an Increase in the Price of Oil on the Price of Houses in CalgarySDD′Q′QPP′048Fig. 4.14Four Rules Governing the Effects of Supply and Demand ShiftsAn increase in demand will lead to an increase in both the equilibrium price and quantity. A decrease in demand will lead to a decrease in both equilibrium price and quantity.An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity. A decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity.49Simultaneous ShiftsIn the real world, several things can happen at the same time,Suppose: Demand decreases and Supply increasesDemand shifts leftLower price, lower quantitySupply shifts rightLower price, higher quantityWe can predict that price will fallBut what happens to quantity?We must know the magnitude of the shifts50Fig. 4.15 The Effects of Simultaneous Shifts in Supply and DemandSS′DD′SS′DD′Q′QQQ′P′PP′P51Fig. 4.16Seasonal Variation in the Air Travel and Corn MarketsSDSDWSWSSDQSQWQSQWPSPWPWPS52End of Chapter SlidesConcept Maps meant for student printouts follow.Concept Map slides are also available in pdf format.Slide 1 - 5353What is Chapter 4 about?54I. What, How and For Whom? Central Planning vs. the Market55II. Markets and Prices56III. Markets and Social Welfare57IV. Predicting and Explaining Changes in Prices and Quantities58Summary of Chapter 459