Supply & Demand True Pillars of Economics Václav Šebek 2015 Václav Šebek (FSS MU) Introduction to Economics 1/23 Q Supply and Demand 0 The Market Q Elasticity Václav Šebek (FSS MU) Introduction to Economics 2/23 Outline Supply and Demand Q Supply and Demand Q The Market Q Elasticity Václav Sebek (FSS MU) Introduction to Economics 3/23 Supply and Demand Basic Terms Good(s) - a thing satisfying a need. A thing scarce in its availability (remember previous lecture). Market - Group of buyers and sellers of particular good. Competition - • Process, clash of buyers to buy or sellers to sell (offering lowest price to catch a customer) • More importantly: Particular structure of a market (ei competitive market, monopoly etc.) Quantity (Q) - the amount of good we are talking about. Price (P) - relative scarcity of a good (usually compared with money or other good). Václav Šebek (FSS MU) Introduction to Economics 4/23 Supply and Demand Quantity demanded • Demanded Q of a good is an amount of good one buys at certain price. • Q demanded thus cannot be found without relation to price! • Set of all possible amounts demanded at all possible prices is the demand. • Or equally by function:QD = f(P) Price 1 2 3 4 5 6 7 8 9 Q 17 15 13 11 9 7 5 3 1 Introduction to Economics 5/23 Supply and Demand Demand Supply and Demand Quantity supplied Supplied Q of a good is an amount of good one offers (sells) at certain price. Q supplied thus cannot be found without relation to price! Set of all possible amounts sold at all possible prices is the supply. Or equally by function:*?5 = f(P) Price 1 2 3 4 5 6 7 8 9 Q 1 3 5 7 9 11 13 15 17 Václav Šebek (FSS MU) Introduction to Economics 7/23 Supply and Demand Supply p Václav Šebek (FSS MU) Introduction to Economics 8/23 Supply and Demand Some Remarks • Market supply is simply the sum of all personal supplies. Market demand is analogy. • There are several factors determining Qsand QD besides price such as income, preferences, technology, expectations etc. However the basic relation depicted in previous figures reflects changes of Q caused by changes of P ceteris paribus, eg all other conditions unchanged. • Figures are turned upside down, P being independent variable but occupying vertical axis and vice versa. Don't ask me why's that :-) Václav Šebek (FSS MU) Introduction to Economics 9/23 Supply and Demand Changes in S and D • Changing the price ceteris paribus (see previous slide) causes so called "moves on the line" (left hand figure). • Changing other factors such as income, preferences, technology, expectations etc. causes so called "move of the line" (right hand figure) p P 17 1 17 Introduction to Economics 10 / 23 The Market Outline Q Supply and Demand Q The Market Q Elasticity Václav Sebek (FSS MU) <□► < [f? ► < ► < -Ž ► -Š 'O Q, O Introduction to Economics 11 / 23 The Market Supply and Demand Supply and Demand meet at the market Set of interesting questions • What price will prevail? • What quantity of good will be offered and demanded? • What quantity will be actually traded? • What if the price is somehow disturbed? Václav Šebek (FSS MU) <□► < [f? ► < -E ► < -Ž ► -Š 'O Q, O Introduction to Economics 12 / 23 The Market Reaching Equilibrium • Market equilibrium is defined by price when both supply and demand are balanced • In other words: P*when Qs = Q P Introduction to Economics 13 / 23 The Market Markets Not in Equilibrium • What happens, when the price on the market is not that of equilibrium • The price does not clear the market, P*when Qs ^ QD. Qty Qty q Qty Qty demanded supplied demanded supplied Václav Sebek (FSS MU) Introduction to Economics 14 / 23 The Market Examples • Increase in demand =4>Pricetand Quantity t • Decrease in supply =4>Pricetand Quantity I a1 a2 q a2 o1 q Václav Šebek (FSS MU) Introduction to Economics 15 / 23 The Market Examples (cont.) Simple international trade example Perloff [2012]. Ban (left hand figure) or quota (right hand figure) on wheat imports. Both decreases wheat supply - S|, Pt, Q I When the quota is effective? Q2 Q1 <^(w/imports) S(quota) g(no quota] Q Václav Šebek (FSS MU) Introduction to Economics 16 / 23 The Market Competitive Markets • Conducted analysis apply only on competitive markets! • Many buyers and sellers with insignificant market share =^>price-takers • No market-entry-barriers • Perfect information, no technology-barriers • Homogeneous product Václav Sebek (FSS MU) <□► < [f? ► < ► < -Ž ► -Š 'O Q, O Introduction to Economics 17 / 23 Outline Elasticity Q Supply and Demand Q The Market Q Elasticity Václav Sebek (FSS MU) <□► < [f? ► < ► < -Ž ► -Š 'O Q, O Introduction to Economics 18 / 23 Elasticity Motivation • Supply and Demand usually not linear • How to assess the quantity fall associated with price rise? • On of the crucial managerial questions • Substitute good gets cheaper Václav Sebek (FSS MU) Introduction to Economics 19 / 23 Elasticity Elasticity • Mathematical phenomenon, attribute of a function _ percentual change of f(x) ^ percentual change of x • Not the same as difference (slope of a function)! • Elasticity is independent of used units so you can easily compare apples with oranges • Intuition: • High elasticity = huge shift of f(x) (Q) in response to little shift of x • Low elasticity = little shift of f(x) (Q) in response to huge shift of x Václav Sebek (FSS MU) Introduction to Economics 20 / 23 Elasticity Elasticities • Which independent variables changes • Demand elasticities: • Price e • Income e • Cross e (other good) • Supply elasticity: • Price e • Including special cases (0, <1, 1, >1, oo) Václav Sebek (FSS MU) <□► < [f? ► < ► < -Ž ► -Š 'O Q, O Introduction to Economics 21 / 23 Elasticity determinants Elasticity • Necessary x luxury goods • Availability of substitutes • Market definition (apples x fruits x food) • Time scale • Share of income Václav Sebek (FSS MU) <□► < [f? ► < ► < -Ž ► -Š 'O Q, O Introduction to Economics 22 / 23 References Elasticity Jeffrey M. Perloff. Microeconomics. Addison-Wesley, 2012 Václav Šebek (FSS MU) Introduction to Economics 23 / 23