Understanding Supply and Demand: Key Concepts and Examples
School
UCLA Community School-Los Angeles**We aren't endorsed by this school
Course
ECONOMICS N.A
Subject
Economics
Date
Dec 9, 2024
Pages
37
Uploaded by PrivateTank14197
Applications of the Supply and DemandModel1
2The Supply and Demand Model
Supply Curve•A supply curve shows the number of units of output that would be supplied to the market at any given price. –The firm’s supply curve shows the units supplied by an individual firm, –The market (or industry) supply curve shows the total number of units supplied by all sellers in the market (or firms in the industry). •The market supply curve represents the marginal cost of the firm supplying the marginal unit3
The Short Run Market Supply Curve4•Assume: 1,000 identical firms•At each P, market Qs= 1,000 x (one firm’s Qs)MCP2MarketQP(market)One firmQP(firm)SP3AVCP2P330P12010P130,00010,00020,000Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
The market for bread5Assume: firms have different costs and production capacities
The market for bread6Assume: firms have different costs and production capacities
Demand Curve•A demand curve shows the number of units of a good that buyers would wish to buy at any given price.•It represents the willingness to pay of the customer buying the marginal unit7
Market demand curve for muffins8Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.PQPQd(Market)$0.00241.00212.00183.00154.00125.0096.006DMarket
PQSupply and demand together 9DSMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Market for MuffinsEquilibrium
10More examples of S + D
One hot summer, sweltering heat, what is the effect on the market for ice cream? EXAMPLE
One hot summer, sweltering heat, what is the effect on the market for ice cream? A. hot weather shifts the demand curve (tastes)B. Demand curve shifts to the rightC. higher equilibrium price and quantityEXAMPLE
EXAMPLE
EXAMPLEOne summer, a hurricane destroys part of the sugar cane crop, leading to a higher price of sugar. What happens to the market for ice cream?
EXAMPLEOne summer, a hurricane destroys part of the sugar cane crop, leading to a higher price of sugar. What happens to the market for ice cream? A.Change in price across the board of sugar: supply curveB.Supply curve shifts to the leftC.Higher equilibrium price and lower equilibrium quantity
EXAMPLE
PRICES•Signals that guide the allocation of resources•Mechanism for rationing scarce resources•Determine who produces each good and how much is produced“two dollars”“and 75 cents”
•Why did eggs become so expensive recently?https://www.npr.org/2024/09/27/nx-s1-5126581/egg-prices-bird-flu18Eggs
19Price Controls
EXAMPLE 1: The market for apartments20Equilibrium without price controls PQDSRental price of apartments$800300Quantity of apartmentsMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EXAMPLE 1A: Not binding price ceiling21Price ceiling = Max Price (can’t go above it)A price ceiling above the equilibrium price is not binding— has no effect on the market outcome.P= $800Q= 300 PQDS$800300Price ceiling$1,000The Market for ApartmentsMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EXAMPLE 1B: Binding price ceiling22Price ceiling = Max Price (can’t go above it)The equilibrium price ($800) is above the ceiling and therefore illegal.The price ceiling is binding, causes a shortage. P= $500Qd= 400Qs= 250 PQDS$800Price ceiling$500250400shortageThe Market for ApartmentsMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EXAMPLE 1C: Binding price ceiling in long run23In the long run, supply and demand of rental apartments are more price-elastic. So, the shortage is larger. PQDS$800150Price ceiling$500450shortageThe Market for ApartmentsMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Price Ceilings Affect Market Outcomes•Effects of a binding price ceiling on a competitive market:–A shortage arises–Sellers must ration scarce goods among potential buyers•Long lines (inefficient, wasting buyers’ time)•Bias of sellers (inefficient and unfair) 24Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PQActive Learning 1: Price ceilings for muffins25DSMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Market for MuffinsThe Muffin Buyers’ Association lobbies the government to impose a price ceiling. Which of the following is binding and what’s the effect on the market? A.The price ceiling is set at $5.B.The price ceiling is set at $2.
PQActive Learning 1: Answers26A.The price ceiling is set at $5.•Not binding•P= $3, Q= 15B.The price ceiling is set at $2.•Binding•P= $2•Qd= 18•Qs= 10 •Shortage = 8 muffinsMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.DSMarket for Muffins
Price Floors•Price floors–Are an attempt by the government to maintain prices at other than equilibrium levels–Places a legal minimum on prices –Not binding: Price floor set below equilibrium–Binding: Price floor set above equilibrium27Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EXAMPLE 2: A free labor market28Labor DemandLabor SupplyWLWage paidQuantity of laborMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.Equilibrium$9.00500Equilibrium wage
EXAMPLE 2A: Not binding price floor 29Price floor = Min price (can’t go below it)A price floor below the equilibrium price is not binding – has no effect on the market outcome. W= $10.00Q= 500WLDS$10.00500Price floor$7.00The Market for LaborMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
EXAMPLE 2B: Binding price floor 30Price floor = Min price (can’t go below it)The equilibrium wage ($7) is below the floor and therefore illegal.The price floor is binding, causes a surplus(i.e., unemployment). W= $9.25Qd= 400 and Qs= 550 WLDS$7.00Price floor$9.25400550labor surplusThe Market for Teenage LaborMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
How Price Floors Affect MarketOutcomes•Effects of a binding price floor on a competitive market –Causes a surplus–Undesirable rationing mechanisms•The sellers who appeal to the buyers’ personal biases may be better able to sell their goods than those who do not 31Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Active Learning 2: Price floors for muffins32Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.The Muffin Sellers’ Association lobbies the government to impose a price floor. Which of the following is binding and what’s the effect on the market? A.The price floor is set at $1.B.The price floor is set at $4.PQDSMarket for Muffins
Active Learning 2: Answers33Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.A.The price floor is set at $1.•Not binding•P= $3, Q= 15B.The price floor is set at $4.•Binding•P= $4•Qd= 12•Qs= 20 •Surplus = 8 muffinsPQDSMarket for Muffins
QPS0The market for bicyclesDActive Learning 3: Price controls: binding or not?The market for bicycles is in equilibrium as in the graph. Determine the effects of:A.$90 price ceilingB.$90 price floorC.$120 price floor34Mankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
QPS0The market for bicyclesDActive Learning 3A: $90 price ceiling35The price falls to $90. (binding price ceiling below the equilibrium)Consumers demand 120 bicycles; sellers supply 90, leaving a shortageof 120-90 = 30 bicycles. shortage = 30Price ceilingMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
QPS0The market for bicyclesDActive Learning 3B: $90 price floor36Equilibrium price is above the $90 price floor, so the price floor is not binding. P= $100, Q= 100 bicycles. Price floorMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
QPS0The market for bicyclesDActive Learning 3C: $120 price floor37The price rises to $120. (binding price floor above the equilibrium)Consumers demand 60 bicycles; sellers supply 120, causing a surplus of 120-60 = 60 bicycles. surplus= 60Price floorMankiw, Principles of Economics, 10th Edition. © 2024 Cengage. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.