Demand and Supply Analysis

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Demand and Supply Analysis
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Plan of the Lecture

• The concept of a market
• Demand
• Supply
• Determination of the price and quantity in
  equilibrium

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Demand Supply

• Market a set of arrangements through which
  buyers and sellers exchange goods and services
• The interaction between buyers and sellers
  determines
• the quantity of the goods or services produced
• the price at which these are bought and sold

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Demand Supply

• The behaviour of buyers (consumers) is captured
  by the concept of demand
• The behaviour of sellers (producers) is captured
  by the concept of supply

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Demand

• Demand describes the the quantity of a good
  buyers wish to purchase at every possible price,
  at a particular moment of time
• Distinction between demand and quantity demanded
• The quantity demanded is only meaningful in the
  context of a particular price.
• The market demand is an aggregated representation
  of all buying agents in the market

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Demand Curve as a Marginal Valuation Curve

• A demand curve shows the maximum amount an
  individual is willing to pay for an additional
  unit of a good.

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4.1. Demand for hamburgers
Price per unit of hamburger
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4
3
2
1
D
2
6
10
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Quantity (millions) per day
Law of demand There is an inverse relationship
between price and the quantity buyers are willing
to purchase in a defined time period, ceteris
paribus.
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The Demand Curve

• A change in the price of a good leads to a
  movement up or down the demand curve - ceteris
  paribus
• The other factors held constant are called
  non-price determinants.
• Changes in these factors shift the demand curve.

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Other factors affecting demand

• a buyers disposable income
• consumer tastes
• prices of related goods and services
• the number of buyers in the market
• expectations about changes in prices, income and
  the availability of goods

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Tastes, BSE and the Market Response

• In 1996 there was a crisis of BSE
• Agents started to be reluctant to consume beef
• What happened to the price of beef?
• and to the price of substitutes of beef?
• and to the production of beef?

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Supply

• Supply describes the quantity of a good sellers
  wish to provide at every possible price
• Distinction between supply and quantity supplied
• The market supply is an aggregated representation
  of all selling agents in the market

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4.3. Market supply for hamburgers
Price per unit of hamburger
S
1
Quantity (millions) per day
Law of supply There is a direct relationship
between the price of a good and the quantity of
that good offered for sale in a defined time
period, ceteris paribus.
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Supply

• Why is there a positive relation between price
  and quantity supplied?
• As the price rises, firms will be willing to
  incur higher costs per unit to produce more
• firms will stop producing other goods and will
  switch to the good that had a price increase
• given time, new producers will enter the market

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Supply

• A change in the price of a good leads to a
  movement up or down the supply curve - ceteris
  paribus
• Other factors held constant are called non-price
  determinants
• Changes in these factors shift the supply curve

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Other factors affecting supply

• technology
• resource or input prices
• taxes and subsidies
• the number of sellers
• expectations of producers
• government regulation

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Market supply for hamburgers
4.4. Shifts in the market supply for hamburgers
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The Effects of Regulation

• Metsa-Botnia and Ence, Finnish and Spanish paper
  companies respectively plan to build a paper
  factory in Uruguay
• Argentina complains that the factories will
  pollute the river
• They suggest the firms should use the cleanest
  available technology which is more costly than
  the one the firms had planned to use
• Whats the implication in terms of the Supply
  Curve?