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1、 2009 South-Western,a part of Cengage Learning,all rights reservedC H A P T E RThe Market Forces of Supply and DemandEconomicsP R I N C I P L E S O FP R I N C I P L E S O FN.Gregory Mankiw4In this chapter,look for the answers to these questions:What factors affect buyers demand for goods?What factor
2、s affect sellers supply of goods?How do supply and demand determine the price of a good and the quantity sold?How do changes in the factors that affect demand or supply affect the market price and quantity of a good?How do markets allocate resources?1THE MARKET FORCES OF SUPPLY AND DEMAND2Markets an
3、d CompetitionA market is a group of buyers and sellers of a particular product.A competitive market is one with many buyers and sellers,each has a negligible effect on price.In a perfectly competitive market:All goods exactly the sameBuyers&sellers so numerous that no one can affect market price eac
4、h is a“price taker”In this chapter,we assume markets are perfectly competitive.THE MARKET FORCES OF SUPPLY AND DEMAND3DemandThe quantity demanded of any good is the amount of the good that buyers are willing and able to purchase.Law of demand:the claim that the quantity demanded of a good falls when
5、 the price of the good rises,other things equal THE MARKET FORCES OF SUPPLY AND DEMAND4The Demand ScheduleDemand schedule:a table that shows the relationship between the price of a good and the quantity demanded Example:Helens demand for lattes.Price of lattesQuantity of lattes demanded$0.00161.0014
6、2.00123.00104.0085.0066.004Notice that Helens preferences obey the Law of Demand.THE MARKET FORCES OF SUPPLY AND DEMAND5Price of LattesQuantity of LattesHelens Demand Schedule&CurvePrice of lattesQuantity of lattes demanded$0.00161.00142.00123.00104.0085.0066.004Market Demand versus Individual Deman
7、dThe quantity demanded in the market is the sum of the quantities demanded by all buyers at each price.Suppose Helen and Ken are the only two buyers in the Latte market.(Qd=quantity demanded)46810121416Helens Qd 2345678Kens Qd+=691215+=18+=21+=24Market Qd$0.006.005.004.003.002.001.00Price 6THE MARKE
8、T FORCES OF SUPPLY AND DEMAND7PQThe Market Demand Curve for LattesPQd(Market)$0.00241.00212.00183.00154.00125.0096.006THE MARKET FORCES OF SUPPLY AND DEMAND8Demand Curve ShiftersThe demand curve shows how price affects quantity demanded,other things being equal.These“other things”are non-price deter
9、minants of demand(i.e.,things that determine buyers demand for a good,other than the goods price).Changes in them shift the D curve THE MARKET FORCES OF SUPPLY AND DEMAND9Demand Curve Shifters:#of BuyersIncrease in#of buyers increases quantity demanded at each price,shifts D curve to the right.THE M
10、ARKET FORCES OF SUPPLY AND DEMAND10PQSuppose the number of buyers increases.Then,at each P,Qd will increase(by 5 in this example).Demand Curve Shifters:#of BuyersTHE MARKET FORCES OF SUPPLY AND DEMAND11Demand for a normal good is positively related to income.Increase in income causes increase in qua
11、ntity demanded at each price,shifts D curve to the right.(Demand for an inferior good is negatively related to income.An increase in income shifts D curves for inferior goods to the left.)Demand Curve Shifters:IncomeTHE MARKET FORCES OF SUPPLY AND DEMAND12Two goods are substitutes if an increase in
12、the price of one causes an increase in demand for the other.Example:pizza and hamburgers.An increase in the price of pizza increases demand for hamburgers,shifting hamburger demand curve to the right.Other examples:Coke and Pepsi,laptops and desktop computers,CDs and music downloads Demand Curve Shi
13、fters:Prices of Related GoodsTHE MARKET FORCES OF SUPPLY AND DEMAND13Two goods are complements if an increase in the price of one causes a fall in demand for the other.Example:computers and software.If price of computers rises,people buy fewer computers,and therefore less software.Software demand cu
14、rve shifts left.Other examples:college tuition and textbooks,bagels and cream cheese,eggs and baconDemand Curve Shifters:Prices of Related GoodsTHE MARKET FORCES OF SUPPLY AND DEMAND14Anything that causes a shift in tastes toward a good will increase demand for that good and shift its D curve to the
15、 right.Example:The Atkins diet became popular in the 90s,caused an increase in demand for eggs,shifted the egg demand curve to the right.Demand Curve Shifters:TastesTHE MARKET FORCES OF SUPPLY AND DEMAND15Expectations affect consumers buying decisions.Examples:If people expect their incomes to rise,
16、their demand for meals at expensive restaurants may increase now.If the economy sours and people worry about their future job security,demand for new autos may fall now.Demand Curve Shifters:ExpectationsTHE MARKET FORCES OF SUPPLY AND DEMAND16Summary:Variables That Influence BuyersVariableA change i
17、n this variable Pricecauses a movement along the D curve#of buyersshifts the D curveIncomeshifts the D curvePrice ofrelated goodsshifts the D curveTastesshifts the D curveExpectationsshifts the D curveA.The price of iPods fallsB.The price of music downloads fallsC.The price of CDs fallsA C T I V E L
18、 E A R N I N G A C T I V E L E A R N I N G 1 1 Demand Curve17Draw a demand curve for music downloads.What happens to it in each of the following scenarios?Why?THE MARKET FORCES OF SUPPLY AND DEMAND18SupplyThe quantity supplied of any good is the amount that sellers are willing and able to sell.Law o
19、f supply:the claim that the quantity supplied of a good rises when the price of the good rises,other things equal THE MARKET FORCES OF SUPPLY AND DEMAND19The Supply ScheduleSupply schedule:A table that shows the relationship between the price of a good and the quantity supplied.Example:Starbucks sup
20、ply of lattes.Notice that Starbucks supply schedule obeys the Law of Supply.Price of lattesQuantity of lattes supplied$0.0001.0032.0063.0094.00125.00156.0018THE MARKET FORCES OF SUPPLY AND DEMAND20Starbucks Supply Schedule&CurvePrice of lattesQuantity of lattes supplied$0.0001.0032.0063.0094.00125.0
21、0156.0018PQMarket Supply versus Individual SupplyThe quantity supplied in the market is the sum of the quantities supplied by all sellers at each price.Suppose Starbucks and Jitters are the only two sellers in this market.(Qs=quantity supplied)1815129630Starbucks121086420Jitters+=30252015+=10+=5+=0M
22、arket Qs$0.006.005.004.003.002.001.00Price 21THE MARKET FORCES OF SUPPLY AND DEMAND22PQThe Market Supply CurvePQS(Market)$0.0001.0052.00103.00154.00205.00256.0030THE MARKET FORCES OF SUPPLY AND DEMAND23Supply Curve ShiftersThe supply curve shows how price affects quantity supplied,other things being
23、 equal.These“other things”are non-price determinants of supply.Changes in them shift the S curve THE MARKET FORCES OF SUPPLY AND DEMAND24Supply Curve Shifters:Input PricesExamples of input prices:wages,prices of raw materials.A fall in input prices makes production more profitable at each output pri
24、ce,so firms supply a larger quantity at each price,and the S curve shifts to the right.THE MARKET FORCES OF SUPPLY AND DEMAND25PQSuppose the price of milk falls.At each price,the quantity of Lattes supplied will increase(by 5 in this example).Supply Curve Shifters:Input PricesTHE MARKET FORCES OF SU
25、PPLY AND DEMAND26Supply Curve Shifters:TechnologyTechnology determines how much inputs are required to produce a unit of output.A cost-saving technological improvement has the same effect as a fall in input prices,shifts S curve to the right.THE MARKET FORCES OF SUPPLY AND DEMAND27Supply Curve Shift
26、ers:#of Sellers An increase in the number of sellers increases the quantity supplied at each price,shifts S curve to the right.THE MARKET FORCES OF SUPPLY AND DEMAND28Supply Curve Shifters:Expectations Example:Events in the Middle East lead to expectations of higher oil prices.In response,owners of
27、Texas oilfields reduce supply now,save some inventory to sell later at the higher price.S curve shifts left.In general,sellers may adjust supply*when their expectations of future prices change.(*If good not perishable)THE MARKET FORCES OF SUPPLY AND DEMAND29Summary:Variables that Influence SellersVa
28、riableA change in this variable Pricecauses a movement along the S curveInput Pricesshifts the S curveTechnologyshifts the S curve#of Sellersshifts the S curveExpectationsshifts the S curveA C T I V E L E A R N I N G A C T I V E L E A R N I N G 2 2 Supply Curve30Draw a supply curve for tax return pr
29、eparation software.What happens to it in each of the following scenarios?A.Retailers cut the price of the software.B.A technological advance allows the software to be produced at lower cost.C.Professional tax return preparers raise the price of the services they provide.THE MARKET FORCES OF SUPPLY A
30、ND DEMAND31PQSupply and Demand TogetherDSEquilibrium:P has reached the level where quantity supplied equals quantity demanded THE MARKET FORCES OF SUPPLY AND DEMAND32DSPQEquilibrium price:PQDQS$0240121521810315154122059256630the price that equates quantity supplied with quantity demandedTHE MARKET F
31、ORCES OF SUPPLY AND DEMAND33DSPQEquilibrium quantity:PQDQS$0240121521810315154122059256630the quantity supplied and quantity demanded at the equilibrium priceTHE MARKET FORCES OF SUPPLY AND DEMAND34PQDSSurplus(a.k.a.excess supply):when quantity supplied is greater than quantity demandedSurplusExampl
32、e:If P =$5,then QD =9 lattesand QS =25 lattesresulting in a surplus of 16 lattesTHE MARKET FORCES OF SUPPLY AND DEMAND35PQDSSurplus(a.k.a.excess supply):when quantity supplied is greater than quantity demandedFacing a surplus,sellers try to increase sales by cutting price.This causes QD to riseSurpl
33、uswhich reduces the surplus.and QS to fall THE MARKET FORCES OF SUPPLY AND DEMAND36PQDSSurplus(a.k.a.excess supply):when quantity supplied is greater than quantity demandedFacing a surplus,sellers try to increase sales by cutting price.This causes QD to rise and QS to fall.SurplusPrices continue to
34、fall until market reaches equilibrium.THE MARKET FORCES OF SUPPLY AND DEMAND37PQDSShortage(a.k.a.excess demand):when quantity demanded is greater than quantity suppliedExample:If P =$1,then QD =21 lattesand QS =5 lattesresulting in a shortage of 16 lattesShortageTHE MARKET FORCES OF SUPPLY AND DEMAN
35、D38PQDSShortage(a.k.a.excess demand):when quantity demanded is greater than quantity suppliedFacing a shortage,sellers raise the price,causing QD to fallwhich reduces the shortage.and QS to rise,ShortageTHE MARKET FORCES OF SUPPLY AND DEMAND39PQDSShortage(a.k.a.excess demand):when quantity demanded
36、is greater than quantity suppliedFacing a shortage,sellers raise the price,causing QD to falland QS to rise.ShortagePrices continue to rise until market reaches equilibrium.THE MARKET FORCES OF SUPPLY AND DEMAND40Three Steps to Analyzing Changes in EqmTo determine the effects of any event,1.Decide w
37、hether event shifts S curve,D curve,or both.2.Decide in which direction curve shifts.3.Use supply-demand diagram to see how the shift changes eqm P and Q.THE MARKET FORCES OF SUPPLY AND DEMAND41EXAMPLE:The Market for Hybrid CarsPQD1S1P1Q1price of hybrid carsquantity of hybrid carsTHE MARKET FORCES O
38、F SUPPLY AND DEMAND42STEP 1:D curve shifts because price of gas affects demand for hybrids.S curve does not shift,because price of gas does not affect cost of producing hybrids.STEP 2:D shifts rightbecause high gas price makes hybrids more attractive relative to other cars.EXAMPLE 1:A Shift in Deman
39、dEVENT TO BE ANALYZED:Increase in price of gas.PQD1S1P1Q1D2P2Q2STEP 3:The shift causes an increase in price and quantity of hybrid cars.THE MARKET FORCES OF SUPPLY AND DEMAND43EXAMPLE 1:A Shift in DemandPQD1S1P1Q1D2P2Q2Notice:When P rises,producers supply a larger quantity of hybrids,even though the
40、 S curve has not shifted.Always be careful Always be careful to distinguish b/w to distinguish b/w a shift in a curve a shift in a curve and a movement and a movement along the curve.along the curve.Terms for Shift vs.Movement Along CurveChange in supply:a shift in the S curveoccurs when a non-price
41、 determinant of supply changes(like technology or costs)Change in the quantity supplied:a movement along a fixed S curve occurs when P changes Change in demand:a shift in the D curveoccurs when a non-price determinant of demand changes(like income or#of buyers)Change in the quantity demanded:a movem
42、ent along a fixed D curveoccurs when P changes 44THE MARKET FORCES OF SUPPLY AND DEMAND45STEP 1:S curve shifts because event affects cost of production.D curve does not shift,because production technology is not one of the factors that affect demand.STEP 2:S shifts rightbecause event reduces cost,ma
43、kes production more profitable at any given price.EXAMPLE 2:A Shift in SupplyPQD1S1P1Q1S2P2Q2EVENT:New technology reduces cost of producing hybrid cars.STEP 3:The shift causes price to fall and quantity to rise.THE MARKET FORCES OF SUPPLY AND DEMAND46EXAMPLE 3:A Shift in Both Supply and DemandPQD1S1
44、P1Q1S2D2P2Q2EVENTS:price of gas rises AND new technology reduces production costsSTEP 1:Both curves shift.STEP 2:Both shift to the right.STEP 3:Q rises,but effect on P is ambiguous:If demand increases more than supply,P rises.THE MARKET FORCES OF SUPPLY AND DEMAND47EXAMPLE 3:A Shift in Both Supply a
45、nd DemandSTEP 3,cont.PQD1S1P1Q1S2D2P2Q2EVENTS:price of gas rises AND new technology reduces production costsBut if supply increases more than demand,P falls.A C T I V E L E A R N I N G A C T I V E L E A R N I N G 3 3 Shifts in supply and demand48Use the three-step method to analyze the effects of ea
46、ch event on the equilibrium price and quantity of music downloads.Event A:A fall in the price of CDsEvent B:Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell.Event C:Events A and B both occur.THE MARKET FORCES OF SUPPLY AND DEMAND49CONCLUSION:How
47、 Prices Allocate ResourcesOne of the Ten Principles from Chapter 1:Markets are usually a good way to organize economic activity.In market economies,prices adjust to balance supply and demand.These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.
48、CHAPTER SUMMARYA competitive market has many buyers and sellers,each of whom has little or no influence on the market price.Economists use the supply and demand model to analyze competitive markets.The downward-sloping demand curve reflects the Law of Demand,which states that the quantity buyers dem
49、and of a good depends negatively on the goods price.50CHAPTER SUMMARYBesides price,demand depends on buyers incomes,tastes,expectations,the prices of substitutes and complements,and number of buyers.If one of these factors changes,the D curve shifts.The upward-sloping supply curve reflects the Law o
50、f Supply,which states that the quantity sellers supply depends positively on the goods price.Other determinants of supply include input prices,technology,expectations,and the#of sellers.Changes in these factors shift the S curve.51CHAPTER SUMMARYThe intersection of S and D curves determines the mark