Chapter Supply and Demand Chapter Outline • • • • • Market demand Market supply Market equilibrium Comparative statics analysis Supply, demand, and price Copyright ©2014 Pearson Education, Inc All rights reserved 3-2 Learning Objectives • Define supply, demand, and equilibrium price • List and provide specific examples of the non-price determinants of supply and demand • Distinguish between the short-run rationing function and long-run guiding function of price • Illustrate how the concepts of supply and demand can be used in management decisions about price and allocations of resources • Use supply and demand diagrams to determine price in the short and long run Copyright ©2014 Pearson Education, Inc All rights reserved 3-3 Market Demand • The demand for a good or service is defined as: – Quantities of a good or service that people are ready, willing and able to buy at various prices within some given time period (Other factors besides price held constant.) Copyright ©2014 Pearson Education, Inc All rights reserved 3-4 Market Demand • “Ready” implies that consumers are prepared to buy a good or service both because they are: – Willing: Consumers have a preference for it – Able: Consumers have the income to support this preference Copyright ©2014 Pearson Education, Inc All rights reserved 3-5 Market Demand Market demand is the sum of all the individual demands • Individuals may have distinct demand curves, and they sum to the overall demand in the market Example: demand for pizza Copyright ©2014 Pearson Education, Inc All rights reserved 3-6 Market Demand There is an inverse relationship between price and the quantity demanded of a good or service This is called the Law of Demand Thus, the demand curve is downward sloping Copyright ©2014 Pearson Education, Inc All rights reserved 3-7 Market Demand • Graphical Representation of Demand • Algebraic Representation of Demand Qd=700-100P Copyright ©2014 Pearson Education, Inc All rights reserved 3-8 Market Demand • Changes in price result in changes in the quantity demanded – This is shown as movement along the demand curve • Changes in non-price factors result in changes in demand – This is shown as a shift in the demand curve Copyright ©2014 Pearson Education, Inc All rights reserved 3-9 Market Demand Copyright ©2014 Pearson Education, Inc All rights reserved 3-10 Comparative Static Analysis: Short-run • an increase in demand causes equilibrium price and quantity to rise Copyright ©2014 Pearson Education, Inc All rights reserved 3-28 Comparative Static Analysis: Short-run • a decrease in demand causes equilibrium price and quantity to fall Copyright ©2014 Pearson Education, Inc All rights reserved 3-29 Comparative Static Analysis: Short-run • an increase in supply causes equilibrium price to fall and equilibrium quantity to rise Copyright ©2014 Pearson Education, Inc All rights reserved 3-30 Comparative Static Analysis: Short-run • a decrease in supply causes equilibrium price to rise and equilibrium quantity to fall Copyright ©2014 Pearson Education, Inc All rights reserved 3-31 Comparative Static Analysis: Long-run • The long run is the period of time in which: – new sellers may enter a market – existing sellers may exit from a market – existing sellers may adjust fixed factors of production – buyers may react to a change in equilibrium price by changing their tastes and preferences Copyright ©2014 Pearson Education, Inc All rights reserved 3-32 Comparative Static Analysis: Long-run • Long run changes show the allocating function of price • The guiding or allocating function of price is the movement of resources into or out of markets in response to a change in the equilibrium price Copyright ©2014 Pearson Education, Inc All rights reserved 3-33 Comparative Static Analysis: Long-run • initial change: decrease in demand from D1 to D2 • result: reduction in equilibrium price and quantity (to P2, Q2) • follow-on adjustment: – movement of resources out of the market – leftward shift in the supply curve to S2 – equilibrium price and quantity (to P3, Q3) Copyright ©2014 Pearson Education, Inc All rights reserved 3-34 Long-run Analysis • initial change: increase in demand from D1 to D2 • result: increase in equilibrium price and quantity (to P2, Q2) • follow-on adjustment: – movement of resources into the market – rightward shift in the supply curve to S2 – equilibrium price and quantity (to P3, Q3) Copyright ©2014 Pearson Education, Inc All rights reserved 3-35 Summary: Short-Run and Long-Run Changes in the Market Copyright ©2014 Pearson Education, Inc All rights reserved 3-36 Supply, Demand, and Price • In the extreme case, the forces of supply and demand are the sole determinants of the market price, not any single firm – this type of market is ‘perfect competition’ • In many cases, individual firms can exert market power over price because of their: – dominant size – ability to differentiate their product through advertising, brand name, features, or services Copyright ©2014 Pearson Education, Inc All rights reserved 3-37 Supply, Demand, and Price • Discussion of changes in the computer industry – Makers of PCs, notebooks and jump drives are facing slower growth in the demand for their products as technology is changing – What impact you think cloud computing will have on the demand for stand-alone applications such as Microsoft Office or storage devices for computers? Copyright ©2014 Pearson Education, Inc All rights reserved 3-38 Global Application What are the implications of rising demand for oil among developing counties? Copyright ©2014 Pearson Education, Inc All rights reserved 3-39 Global Application Copyright ©2014 Pearson Education, Inc All rights reserved 3-40 Global Application Copyright ©2014 Pearson Education, Inc All rights reserved 3-41 Summary • The law of demand states that, other factors held constant, the quantity demanded is inversely related to price • The law of supply states that, other factors held constant, the quantity supplied is directly related to price • Non-price factors may shift the curves • Price serves a short-run rationing function and a long-run guiding function in the marketplace Copyright ©2014 Pearson Education, Inc All rights reserved 3-42 ... Market Demand Market demand is the sum of all the individual demands • Individuals may have distinct demand curves, and they sum to the overall demand in the market Example: demand for pizza... concepts of supply and demand can be used in management decisions about price and allocations of resources • Use supply and demand diagrams to determine price in the short and long run Copyright... supply, demand, and equilibrium price • List and provide specific examples of the non-price determinants of supply and demand • Distinguish between the short-run rationing function and long-run