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1、Chapter 4Supply and DemandFall 2017,1,Chapter 41,Questions,If you are making real estate investment decisions,how would you predict the effect of the policy changes?What are the real factor driving the residential housing price in China?What are the long-run perspectives of Chinese real estate marke
2、ts?,2,QuestionsIf you are making rea,The Market Mechanism,A Market is a mechanism through which buyers and sellers interact to determine prices and exchange goods,services,and assetsGeographical area;Time period;Good/service being tradedThe“indivisible hand”No single individual or organization or go
3、vernment is responsible for solving the economic problems in a market economyOur society,despite of its fragility(surprise!),functions well for most of the time in a spontaneous mannerTo know how market help to solve the important questions and to be familiar with the following economic concepts,we
4、need to study the demand and supply model(D-S model)Price;market equilibrium;efficiency,3,The Market MechanismA Market i,Markets and Competition,Supply and demand Words economists use most oftenThe forces that make market economies workRefer to the behavior of people as they interact with one anothe
5、r in competitive markets,4,Markets and CompetitionSupply,Markets and Competition,MarketA group of buyers and sellers of a particular good or serviceBuyers as a groupDetermine the demand for the productSellers as a group Determine the supply of the product,5,Markets and CompetitionMarket5,Markets and
6、 Competition,Markets take many formsHighly organizedMarkets for many agricultural commoditiesLess organizedMarket for ice cream in a particular town,6,Markets and CompetitionMarkets,Markets and Competition,Competitive marketMarket in which there are many buyers and many sellersEach has a negligible
7、impact on market pricePrice and quantity are determined by all buyers and sellersAs they interact in the marketplace,7,Markets and CompetitionCompeti,Markets and Competition,Perfectly competitive marketGoods offered for sale are all exactly the sameBuyers and sellers are so numerous No single buyer
8、or seller has any influence over the market pricePrice takersAt the market priceBuyers can buy all they wantSellers can sell all they want,8,Markets and CompetitionPerfect,Markets and Competition,MonopolyThe only seller in the marketSets the priceOther marketsBetween perfect competition and monopoly
9、,9,Markets and CompetitionMonopol,Demand,Quantity demandedAmount of a good that buyers are willing and able to purchase Law of demandOther things equalWhen the price of a good rises,the quantity demanded of the good fallsWhen the price falls,the quantity demanded rises,10,Demand Quantity demanded10,
10、Demand,DemandRelationship between the price of a good and quantity demandedDemand schedule:a tableDemand curve:a graphPrice on the vertical axisQuantity on the horizontal axisIndividual demandAn individuals demand for a product,11,Demand Demand11,Figure 1,Catherines Demand Schedule and Demand Curve,
11、Demand curve,The demand schedule is a table that shows the quantity demanded at each price.The demand curve,which graphs the demand schedule,illustrates how the quantity demanded of the good changes as its price varies.Because a lower price increases the quantity demanded,the demand curve slopes dow
12、nward.,1.A decreasein price.,2.increases quantityof cones demanded.,12,Figure 1Catherines Demand Sch,Demand,Market demandSum of all individual demands for a good or serviceMarket demand curveSum the individual demand curves horizontallyTotal quantity demanded of a good variesAs the price of the good
13、 variesOther things constant,13,Demand Market demand13,Figure 2,Market Demand as the Sum of Individual Demands,The quantity demanded in a market is the sum of the quantities demanded by all the buyers at each price.Thus,the market demand curve is found by adding horizontally the individual demand cu
14、rves.At a price of$2.00,Catherine demands 4 ice-cream cones,and Nicholas demands 3 ice-cream cones.The quantity demanded in the market at this price is 7 cones.,14,Figure 2Market Demand as the S,Figure 2,Market Demand as the Sum of Individual Demands,DCatherine,Catherines demand,DNicholas,Nicholass
15、demand,+,=,DMarket,Market demand,15,Figure 2Market Demand as the S,Demand,Shifts in the demand curveIncrease in demandAny change that increases the quantity demanded at every priceDemand curve shifts rightDecrease in demandAny change that decreases the quantity demanded at every priceDemand curve sh
16、ifts left,16,Demand Shifts in the demand cu,Figure 3,Shifts in the Demand Curve,Price of Ice-Cream Cones,Demand curve,D1,Demand curve,D3,Demand curve,D2,Increase inDemand,Decrease inDemand,Any change that raises the quantity that buyers wish to purchase at any given price shifts the demand curve to
17、the right.Any change that lowers the quantity that buyers wish to purchase at any given price shifts the demand curve to the left.,17,Figure 3Shifts in the Demand C,Demand,Variables that can shift the demand curveIncomePrices of related goodsTastesExpectationsNumber of buyers,18,Demand Variables tha
18、t can shif,Demand,IncomeNormal goodOther things constantAn increase in income leads to an increase in demandInferior goodOther things constantAn increase in income leads to a decrease in demand,19,Demand Income19,Demand,Prices of related goodsSubstitutes,two goodsAn increase in the price of oneLeads
19、 to an increase in the demand for the otherComplements,two goodsAn increase in the price of oneLeads to a decrease in the demand for the other,20,Demand Prices of related goods,Demand,TastesChange in tastes:changes the demandExpectations about the future Expect an increase in incomeIncrease in curre
20、nt demandExpect higher pricesIncrease in current demand Number of buyers,increasesMarket demand increases,21,Demand Tastes21,Table 1,Variables That Influence Buyers,This table lists the variables that affect how much consumers choose to buy of any good.Notice the special role that the price of the g
21、ood plays:A change in the goods price represents a movement along the demand curve,whereas a change in one of the other variables shifts the demand curve.,22,Table 1Variables That Influenc,Two ways to reduce the quantity of smoking demanded,Shift the demand curve for cigarettes and other tobacco pro
22、ducts Try to raise the price of cigarettes,“What is the best way tostop this?”,23,Two ways to reduce the quantit,Two ways to reduce the quantity of smoking demanded,Shift the demand curve for cigarettes and other tobacco products Public service announcementsMandatory health warnings on cigarette pac
23、kagesProhibition of cigarette advertising on televisionIf successfulShift demand curve to the left,24,Two ways to reduce the quantit,Two ways to reduce the quantity of smoking demanded,Try to raise the price of cigarettesTax the manufacturer:higher priceMovement along demand curve10%in price 4%in sm
24、okingTeenagers:10%in price 12%in smokingDemand for cigarettes vs.demand for marijuana Appear to be complements,25,Two ways to reduce the quantit,Figure 4,Shifts in the Demand Curve versus Movements along the Demand Curve,Price of Cigarettes,per Pack,D1,D2,A policy to discourage smoking shifts the de
25、mand curve to the left,10,20,$2.00,(a)A Shift in the Demand Curve,If warnings on cigarette packages convince smokers to smoke less,the demand curve for cigarettes shifts to the left.In panel(a),the demand curve shifts from D1 to D2.At a price of$2.00 per pack,the quantity demanded falls from 20 to 1
26、0 cigarettes per day,as reflected by the shift from point A to point B.By contrast,if a tax raises the price of cigarettes,the demand curve does not shift.Instead,we observe a movement to a different point on the demand curve.In panel(b),when the price rises from$2.00 to$4.00,the quantity demanded f
27、alls from 20 to 12 cigarettes per day,as reflected by the movement from point A to point C.,Price of Cigarettes,per Pack,D1,A tax that raises the price of cigarettes results in a movement along the demand curve,12,20,2.00,(b)A Movement along the Demand Curve,$4.00,26,Figure 4Shifts in the Demand C,D
28、emand Function,The Demand Function describes the relationship between the amount of a good or service that consumers are willing to purchaseQ=a-bP,a0,b0Law of Demand：-b0Inverse Demand Function：P=a/b-1/b Q,27,Demand FunctionThe Demand Func,Supply,Quantity suppliedAmount of a goodSellers are willing a
29、nd able to sellLaw of supplyOther things equalWhen the price of a good rises,the quantity supplied of the good also risesWhen the price falls,the quantity supplied falls as well,28,Supply Quantity supplied28,Supply,SupplyRelationship between the price of a good and the quantity suppliedSupply schedu
30、le:a tableSupply curve:a graphPrice on the vertical axisQuantity on the horizontal axisIndividual supplyA sellers individual supply,29,Supply Supply29,Figure 5,Bens Supply Schedule and Supply Curve,Supply curve,The supply schedule is a table that shows the quantity supplied at each price.This supply
31、 curve,which graphs the supply schedule,illustrates how the quantity supplied of the good changes as its price varies.Because a higher price increases the quantity supplied,the supply curve slopes upward.,1.An increasein price.,2.increases quantity of cones supplied.,30,Figure 5Bens Supply Schedule,
32、Supply,Market supplySum of the supplies of all sellers for a good or serviceMarket supply curveSum of individual supply curves horizontallyTotal quantity supplied of a good variesAs the price of the good variesAll other factors that affect how much suppliers want to sell are hold constant,31,Supply
33、Market supply31,Figure 6,Market Supply as the Sum of Individual Supplies,The quantity supplied in a market is the sum of the quantities supplied by all the sellers at each price.Thus,the market supply curve is found by adding horizontally the individual supply curves.At a price of$2.00,Ben supplies
34、3 ice-cream cones,and Jerry supplies 4 ice-cream cones.The quantity supplied in the market at this price is 7 cones.,32,Figure 6Market Supply as the S,Figure 6,Market Supply as the Sum of Individual Supplies,SBen,Bens supply,SJerry,Jerrys supply,+,=,SMarket,Market supply,33,Figure 6Market Supply as
35、the S,Supply,Shifts in supplyIncrease in supplyAny change that increases the quantity supplied at every priceSupply curve shifts rightDecrease in supplyAny change that decreases the quantity supplied at every priceSupply curve shifts left,34,Supply Shifts in supply34,Exhibit 7,Shifts in the Supply C
36、urve,Price of Ice-Cream Cones,Supply curve,S1,Supply curve,S3,Supply curve,S2,Increase inSupply,DecreaseIn supply,Any change that raises the quantity that sellers wish to produce at any given price shifts the supply curve to the right.Any change that lowers the quantity that sellers wish to produce
37、at any given price shifts the supply curve to the left.,35,Exhibit 7Shifts in the Supply,Supply,Variables that can shift the supply curveInput pricesTechnologyExpectations about future Number of sellers,36,Supply Variables that can shif,Supply,Input pricesSupply is negatively related to prices of in
38、putsHigher input prices:decrease in supplyTechnologyAdvance in technology:increase in supply,37,Supply Input prices37,Supply,Expectations about future Affect current supplyExpected higher pricesDecrease in current supplyNumber of sellers,increasesMarket supply increases,38,Supply Expectations about
39、futu,Table 2,Variables That Influence Sellers,This table lists the variables that affect how much producers choose to sell of any good.Notice the special role that the price of the good plays:A change in the goods price represents a movement along the supply curve,whereas a change in one of the othe
40、r variables shifts the supply curve.,39,Table 2Variables That Influenc,Supply Function,The supply function describes the relationship between the amount of a good or service that firms are willing to sell and the relevant environmental variablesQ=c+dP,c0,d0,40,Supply FunctionThe supply func,Supply a
41、nd Demand Together,Equilibrium Various forces are in balanceA situation in which market price has reached the level whereQuantity supplied=quantity demandedSupply and demand curves intersect,41,Supply and Demand TogetherEqui,Supply and Demand Together,Equilibrium priceBalances quantity supplied and
42、quantity demandedMarket-clearing priceEquilibrium quantity Quantity supplied and quantity demanded at the equilibrium price,42,Supply and Demand TogetherEqui,Figure 8,The Equilibrium of Supply and Demand,Supply,Equilibrium,Demand,Equilibriumprice,Equilibriumquantity,The equilibrium is found where th
43、e supply and demand curves intersect.At the equilibrium price,the quantity supplied equals the quantity demanded.Here the equilibrium price is$2.00:At this price,7 ice-cream cones are supplied,and 7 ice-cream cones are demanded.,43,Figure 8The Equilibrium of Sup,Supply and Demand Together,SurplusQua
44、ntity supplied quantity demandedExcess supplyDownward pressure on priceMovements along the demand and supply curvesIncrease in quantity demandedDecrease in quantity supplied,44,Supply and Demand TogetherSurp,Supply and Demand Together,ShortageQuantity demanded quantity suppliedExcess demandUpward pr
45、essure on priceMovements along the demand and supply curvesDecrease in quantity demandedIncrease in quantity supplied,45,Supply and Demand TogetherShor,Figure 9,Markets Not in Equilibrium,Price ofIce-CreamCones,Demand,7,$2.50,(a)Excess Supply,In panel(a),there is a surplus.Because the market price o
46、f$2.50 is above the equilibrium price,the quantity supplied(10 cones)exceeds the quantity demanded(4 cones).Suppliers try to increase sales by cutting the price of a cone,and this moves the price toward its equilibrium level.In panel(b),there is a shortage.Because the market price of$1.50 is below t
47、he equilibrium price,the quantity demanded(10 cones)exceeds the quantity supplied(4 cones).With too many buyers chasing too few goods,suppliers can take advantage of the shortage by raising the price.Hence,in both cases,the price adjustment moves the market toward the equilibrium of supply and deman
48、d,(b)Excess demand,2.00,Supply,Price ofIce-CreamCones,Demand,7,1.50,$2.00,Supply,46,Figure 9Markets Not in Equilib,Supply and Demand Together,Law of supply and demandThe price of any good adjusts To bring the quantity supplied and the quantity demanded for that good into balance In most marketsSurpl
49、uses and shortages are temporary,47,Supply and Demand TogetherLaw,Supply and Demand Together,Three steps to analyzing changes in equilibriumDecide whether the event shifts the supply curve,the demand curve,or,in some cases,both curvesDecide whether the curve shifts to the right or to the leftUse the
50、 supply-and-demand diagramCompare the initial and the new equilibriumEffects on equilibrium price and quantity,48,Supply and Demand TogetherThre,Table 3,Three Steps for Analyzing Changes in Equilibrium,49,Table 3Three Steps for Analyzi,Supply and Demand Together,A change in market equilibrium due to
