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    Lecture 3

    Uploaded by

    Charity Kwok

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    © All Rights Reserved
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    Lecture 3

    Uploaded by

    Charity Kwok
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    4 views41 pages

    Lecture 3

    Uploaded by

    Charity Kwok

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    © All Rights Reserved
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    Demand and Supply

    Last Time…

    We learned the concepts of “efficiency.”


    • The PPF represents production efficiency and tells the marginal cost of production
    • The preference tells us the marginal benefit of consumption
    • Allocative efficiency: marginal cost = marginal benefit (Why?)
    We also learned that, in order to achieve production/allocative efficiency,
    we need specialization and trade.
    • One should specialize and trade according to her comparative advantage.
    The remaining question is: How exactly do we trade?
    Markets and Prices

    Market
    A market is any arrangement that enables buyers and sellers to get
    information and do business with each other.
    A competitive market is a market that has many buyers and many sellers so
    no single buyer or seller can influence the price.

    Price
    The money price of a good is the amount of money needed to buy it.
    The relative price of a good—the ratio of its money price to the money price
    of the next best alternative good—is its opportunity cost.
    Markets and Prices

    What are typical examples of a market?


    • Supermarkets
    • Restaurants
    • Movie theatres
    • Auction market
    • Financial market
    Demand

    If you demand something, then you


    1. Want it,
    2. Can afford it, and
    3. Have made a definite plan to buy it.
    Wants are the unlimited desires or wishes people have for goods and
    services. Demand reflects a decision about which wants to satisfy.
    The quantity demanded of a good or service is the amount that consumers
    plan to buy during a particular time period, and at a particular price.
    Demand

    The law of demand states:


    Other things remaining the same, the higher the price of a good, the smaller
    is the quantity demanded; and …
    the lower the price of a good, the larger is the quantity demanded.

    Why does a change in the price change the quantity demanded?


    • Substitution effect
    • Income effect
    Demand

    Substitution Effect
    When the relative price (opportunity cost) of a good or service rises, people
    seek substitutes for it, so the quantity demanded of the good or service
    decreases.
    Income Effect
    When the price of a good or service rises relative to income, people cannot
    afford all the things they previously bought, so the quantity demanded of the
    good or service decreases.
    Demand

    Demand Curve and Demand Schedule


    The term demand refers to the entire relationship between the price of the
    good and quantity demanded of the good.
    A demand curve shows the relationship between the quantity demanded of
    a good and its price when all other influences on consumers’ planned
    purchases remain the same.
    Demand

    The figure shows a demand curve for energy bars.


    Demand

    A rise in the price, other things


    remaining the same, brings a decrease
    in the quantity demanded and a
    movement up along the demand
    curve.

    A fall in the price, other things


    remaining the same, brings an
    increase in the quantity demanded
    and a movement down along the
    demand curve.
    Demand

    Willingness and Ability to Pay


    A demand curve is also a
    willingness-and-ability-to-pay curve.

    The smaller the quantity available, the


    higher is the price that someone is
    willing to pay for another unit.
    Willingness to pay measures marginal
    benefit.
    Demand

    A Change in Demand
    When some influence on buying plans other than the price of the good
    changes, there is a change in demand for that good.
    The quantity of the good that people plan to buy changes at each and every
    price, so there is a new demand curve.
    • When demand increases, the demand curve shifts rightward.
    • When demand decreases, the demand curve shifts leftward.
    Demand

    Six main factors that change demand are:


    1. The prices of related goods
    2. Expected future prices
    3. Income
    4. Expected future income and credit
    5. Population
    6. Preferences
    Demand

    Prices of Related Goods


    A substitute is a good that can be used in place of another good.
    A complement is a good that is used in conjunction with another good.
    When the price of a substitute for an energy bar rises or when the price of a
    complement of an energy bar falls, the demand for energy bars increases.
    Demand

    What happened to the demand for energy bars when


    the price of hardtack rises?
    • Energy bars and hardtack are substitutes
    • Energy bars and hardtack can be used alternatively to fulfill the
    same purpose
    • When the price of hardtack rises and the price of energy
    bars remains the same, it is now relatively cheaper to
    purchase energy bars instead of hardtack
    • At each given price of energy bars, the consumer is willing
    to consume more energy bars
    ➢ Demand for energy bars increases
    Demand

    What happened to the demand for energy bars


    when purified water become cheaper?
    • Energy bars and purified are complements
    • They are consumed at the same time during activities such
    as hiking or long-distance cycling
    • When the price of purified water drops and the price of
    energy bars remains the same, it is now relatively
    cheaper to go out for hiking compared to stay at home
    • At each given price of energy bars, the consumer is
    willing to consume more energy bars
    ➢ Demand for energy bars increases
    Demand

    Expected Future Prices


    If the price of a good is expected to rise in the future, current demand for the
    good increases and the demand curve shifts rightward.

    Income
    When income increases, consumers buy more of most goods and the demand
    curve shifts rightward.
    • A normal good is one for which demand increases as income increases.
    • An inferior good is a good for which demand decreases as income increases.
    Demand

    Expected Future Income and Credit


    When income is expected to increase in the future or when credit is easy to
    obtain, the demand might increase now.

    Population
    The larger the population, the greater is the demand for all goods.

    Preferences
    People with the same income have different demands if they have different
    preferences.
    Demand

    The figure shows an increase in demand.


    An increase in income increases the demand for energy bars and shifts the
    demand curve rightward.
    Demand

    A Change in the Quantity Demanded


    Versus a Change in Demand
    The figure illustrates the distinction
    between a change in demand and a
    change in the quantity demanded.
    Demand

    Movement Along the Demand Curve


    When the price of the good changes
    and other things remain the same, the
    quantity demanded changes and there
    is a movement along the demand
    curve.
    Demand

    A Shift of the Demand Curve


    If the price remains the same but one
    of the other influences on buyers’
    plans changes, demand changes and
    the demand curve shifts.
    Demand

    Is there a change in demand for MTR?


    • The MTR ticket fare is increased by 20%.
    • The taxi fare is increased by 20%.
    • The MTR station is flooded due to the rainstorm.
    • The government releases consumption vouchers to
    Hong Kong residents.
    Supply

    If a firm supplies a good or service, then the firm


    1. Has the resources and the technology to produce it,
    2. Can profit from producing it, and
    3. Has made a definite plan to produce and sell it.
    Resources and technology determine what it is possible to produce. Supply
    reflects a decision about which technologically feasible items to produce.
    The quantity supplied of a good or service is the amount that producers
    plan to sell during a given time period at a particular price.
    Supply

    The law of supply states:


    Other things remaining the same, the higher the price of a good, the greater
    is the quantity supplied; and the lower the price of a good, the smaller is the
    quantity supplied.

    The law of supply results from the general tendency for the marginal cost of
    producing a good or service to increase as the quantity produced increases.
    Producers are willing to supply a good only if they can at least cover their
    marginal cost of production.
    Supply

    Supply Curve and Supply Schedule


    The term supply refers to the entire relationship between the quantity
    supplied and the price of a good.
    The supply curve shows the relationship between the quantity supplied of a
    good and its price when all other influences on producers’ planned sales
    remain the same.
    Supply

    The figure shows a supply curve of energy bars.


    Supply

    Minimum Supply Price


    A supply curve is also a minimum-
    supply-price curve.
    As the quantity produced increases,
    marginal cost increases.
    The lowest price at which someone is
    willing to sell an additional unit rises.
    This lowest price is marginal cost.
    Supply

    A Change in Supply
    When some influence on selling plans other than the price of the good
    changes, there is a change in supply of that good.
    The quantity of the good that producers plan to sell changes at each and
    every price, so there is a new supply curve.
    • When supply increases, the supply curve shifts rightward.
    • When supply decreases, the supply curve shifts leftward.
    Supply

    The six main factors that change supply of a good are


    1. The prices of factors of production
    2. The prices of related goods produced
    3. Expected future prices
    4. The number of suppliers
    5. Technology
    6. State of nature
    Supply

    Prices of Factors of Production


    If the price of a factor of production used to produce a good rises, the
    minimum price that a supplier is willing to accept for producing each
    quantity of that good rises.
    So a rise in the price of a factor of production decreases supply and shifts the
    supply curve leftward.
    Supply

    What happened to the supply of energy bars


    when the price of nuts rises?
    • Nuts are a factor of production (raw materials) for
    energy bars.
    • When the price of nuts rises, the opportunity cost of
    producing energy bars increases.
    • Minimum supply price (marginal cost) for energy
    bars increases at every quantity of energy bars
    produced
    ➢ Supply for energy bars decreases
    Supply

    Prices of Related Goods Produced


    A substitute in production for a good is another good that can be produced
    using the same resources.
    The supply of a good increases if the price of a substitute in production falls.

    Goods are complements in production in production if they must be


    produced together.
    The supply of a good increases if the price of a complement in production rises.
    Supply

    What happened to the supply of energy bars


    when the price of nut drinks rises?
    • Nut drinks are a substitute in production for
    energy bars
    • Both energy bars and nut drinks use nuts as a factor
    of production
    • When the price of nut drinks rises, the opportunity
    cost of producing energy bars increases.
    • Minimum supply price (marginal cost) for energy
    bars increases at every quantity of energy bars
    produced.
    ➢ Supply for energy bars decreases
    Supply

    Expected Future Prices


    If the price of a good is expected to rise in the future, supply of the good
    today decreases and the supply curve shifts leftward.

    The Number of Suppliers


    The larger the number of suppliers of a good, the greater is the supply of the
    good. An increase in the number of suppliers shifts the supply curve
    rightward.
    Supply

    Technology
    Advances in technology create new products and lower the cost of producing
    existing products.
    So advances in technology increase supply and shift the supply curve rightward.

    The State of Nature


    The state of nature includes all the natural forces that influence production—
    e.g., the weather.
    A natural disaster decreases supply and shifts the supply curve leftward.
    Supply

    The figure shows an increase in supply.


    An advance in the technology increases the supply of energy bars and shifts
    the supply curve rightward.
    Supply

    A Change in the Quantity Supplied


    Versus a Change in Supply
    The figure illustrates the distinction
    between a change in supply and a
    change in the quantity supplied.
    Supply

    Movement Along the Supply Curve


    When the price of the good changes
    and other influences on sellers’ plans
    remain the same, the quantity
    supplied changes and there is a
    movement along the supply curve.
    Supply

    A Shift of the Supply Curve


    If the price remains the same but
    some other influence on sellers’ plans
    changes, supply changes and the
    supply curve shifts.
    Supply

    Is there a change in supply for iPhone?

    • The price of chips increases due to a global chip shortage.

    • A rainstorm hits Zhengzhou, where the bulk of iPhone


    production line is located.

    • Google announces a price cut for its Pixel models.

    • The pandemic increases the demand for iPad.

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