![MODEL OF DEMAND ,[object Object],Demand slide DEMAND DEFINED The amount of a good or service a consumer wants to buy, and is able to buy per unit time.](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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Demand
- 1. Junhel Dalanon, DDM, MAT
- 9. The demand curve means: Demand slide You pick a price, such a p 0 , and the demand curve shows how much is demanded. own price quantity demanded demand Market for tacos p 0 Q 0
- 10. What if the price of tacos were less than p 0 ? How do you show the effect on demand? Demand slide Go to hidden slide
- 11. Demand slide At a lower price, consumers want to buy more. own price quantity demanded demand p 0 Q 0 Market for tacos p lower Q 1
- 15. This is a change in demand. It shows up as a shift to the right of the original demand curve. Demand slide own price quantity demand @ I = $1000 Market for beer $1/can demand @ I = $2000
- 17. Pizza is a normal good. Demand slide own price quantity demand @ I = $1000 Market for pizza What’s the effect on the demand curve for pizza if income rises to $2,000? Go to hidden slide
- 18. An increase in income increases demand when pizza is normal. Demand slide own price quantity demand @ I = $1000 Market for pizza demand @ I = $2000
- 19. Suppose instead that pizza was an inferior good. Demand slide own price quantity demand @ I = $1000 Market for pizza What’s the effect on the demand curve for pizza if income rises to $2,000? Go to hidden slide
- 22. The graph shows the demand curve for spaghetti when pizzas cost $10 each. Demand slide own price quantity demand @ pizza price of $10 Market for spaghetti What’s the effect of an increase in the price of pizza to $15? Go to hidden slide
- 23. An increase in the price of pizza, a substitute for spaghetti, causes an increase in demand for spaghetti. Demand slide own price quantity demand @ pizza price of $10 Market for spaghetti demand @ pizza price of $15.
- 25. The graph shows the demand curve for beer when pizzas cost $10 each. Demand slide price of beer quantity demand @ pizza price of $10 Market for beer What is the effect on the market for beer of an increase in the price of pizza to $15? Go to hidden slide
- 26. When beer and pizza are complements, an increase in the price of pizza decreases the demand for beer. Demand slide price of beer quantity demand @ pizza price of $10 Market for beer demand @ pizza price of $15.
- 27. The graph shows the demand curve for umbrellas on sunny days. Demand slide price of umbrellas quantity demand on sunny days Market for umbrellas What’s the effect on demand of it being a rainy day? Go to hidden slide
- 28. This is an example of a change in tastes. Demand increases. Demand slide price of umbrellas quantity demand on sunny days Market for umbrellas demand on rainy days
- 30. The Law of Demand An increase in price will cause a decrease in the quantity demanded (inverse relationship) EXPLAINERS: Income effect Substitution effect
- 31. The Law of Demand EXPLAINERS: Income effect Substitution effect Diminishing Marginal Utility
- 32. The Law of Demand CHANGE IN PRICE= change in quantity demanded CHANGE IN OTHER= change in demand P 1 P 2 Q 1 Q 2 P Q A B P Q D 1 D 2
- 33. The Law of Demand CHANGE IN OTHER= change in demand P Q D 1 D 2
- 34. Determinants of Demand Things other than price that cause the whole curve to shift Increase: shift to the right Decrease: shift to the left
- 35. Determinants of Demand Change in consumer tastes Change in people’s income normal goods inferior goods
- 36. Determinants of Demand Change in prices of related goods complementary goods (inverse effect) substitute goods (direct effect) Change in expectations Change in size of market
- 37. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (a) people change their preference from hamburgers to hot dogs?
- 38. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (b) U.S. negotiates a deal w/ China to trade hot dogs for egg rolls?
- 39. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (c) the price of ground beef plummets?
- 40. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (d) the minimum wage rises?
- 41. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (e) the MWU threatens a strike if owners fail to meet their demands?
- 42. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (f) unemployment hits an all-time high?
- 43. What Happens to Demand if…? SITUATION: You’re the owner of a hot dog making company: (g) the price of buns increases due to a wheat shortage?
- 44. Supply, Demand and Market Equilibrium
- 45. Demand: Raw data
- 46. Demand Schedule
- 47. Demand Curve D
- 49. Demand Curve D
- 50. Demand Curve I D
- 51. Change in quantity demanded due to change in price I II D
- 53. Demand curve shifts to the right D
- 54. Demand curve shifts to the left D
- 58. Graph of Bradley demand data
- 59. The effect of NBA party on demand for Bradley contracts
- 60. Supply: Raw data
- 61. Supply Schedule
- 62. Supply Curve S
- 64. Supply Curve I S
- 65. Change in quantity supplied due to a change in price I II S
- 67. Supply curve shifts to the right S
- 68. Supply curve shifts to the left S
- 71. Graph of Bradley supply data
- 72. Effect of internet taxes on supply of Bradley contracts
- 73. A Market S D
- 74. Surplus S D Surplus Qd Qs
- 75. Market adjustment to surplus S D Surplus Qd Qs
- 76. Shortage S D Shortage Qd Qs
- 77. Market adjustment to shortage S D Shortage Qd Qs
- 78. Equilibrium S D Eq.Q Eq.P
- 80. Equilibrium in the Bradley market
- 81. Supply and demand information available in a real market Price Quantity S D Exchanges that already have occurred Offers to sell (ask price) Offers to buy (bid price) Market price (observed)
- 82. Supply and demand information available in a real market Price Quantity S D Eq.Q Eq.Q +1 Best Ask Best Bid Last Trade Note: Eq.Q. is equilibrium quantity
Notas do Editor
- Data provided is atomistic data: for each person, the quantity given is the quantity demanded by that person, and the price given is the maximum that person is willing to pay. Students should be made aware that different people have different levels of “want”, and therefore are willing to pay different prices.
- Points to emphasize to the student: 1. Total quantity demanded at each price consists of the sum of the quantity demanded of all individuals who are willing to pay that price or more. 2. The demand schedule considers the total quantity demanded at each price from highest price to lowest. This will aid the student when graphing the demand schedule, since demand curves are usually read from highest price to lowest price.
- When drawing a demand curve, the instructor should plot the points determined in the demand schedule before drawing the curve connecting the points (seen here). Again, the instructor should emphasize that the total quantity demanded at each price consists of the quantity demanded of different people summed
- It is important here to note that demand (and therefore, the demand curve) is a relationship between two variables. This will provide a context for later when variables are introduced which also affect quantity demanded, and will be used to shift the demand curve. If the math level of students makes it possible, the instructor could at this point describe demand as a function , and provide a more mathematically rigorous description of demand.
- This slide is used to cement the demand concept in the mind of the student.
- It is vital that the student recognizes the difference between quantity demanded and demand. The instructor should then use the demand curve to show that the demand relationship “tells” the student that at a specific price ($4, for example), a specific amount (2 units) will be the quantity demanded.
- At this point, the instructor should emphasize again the nature of demand as a relationship, noting that demand describes not only the specific quantity demanded at a specific price, but also the effect of a change in price on the quantity demanded. This is shown above as the increase in quantity demanded from 2 to 4 units because of a decline in price from $4 to $2 (point I to point II). To explain this, the instructor could either use the raw data from previously and explain it as an increase in the number of people who are willing to buy the good, or introduce the concepts of income and substitution effects: a. income effect: a change in price causes a change in real income (or purchasing power), and therefore a change in the quantity demanded (more can be afforded), b. substitution effect: a change in price causes a change in a good’s relative price (the price of a good expressed in terms of an amount of another good), which affects the relative amounts of the two goods that will be demanded. For example, a decrease in the price of butter so that it is twice as expensive as margarine instead of three times as expensive will tend to make people substitute butter for margarine.
- At this point, the instructor should introduce the other variables which affect quantity demanded, and therefore will cause shifts in the demand curve. The instructor should emphasize that these variables affect quantity demanded just as price does. In addition, the instructor should describe the appropriate subcategories of each variable: 1. Income: normal goods (a direct relationship between quantity demanded and income) and inferior goods (an inverse relationship between quantity demanded and income) 2. Related goods: substitutes (a direct relationship between the price of A and the quantity demanded of B) and complements (an inverse relationship between the price of A and the quantity demanded of B) The instructor should provide the students (and have the students determine some of their own) with examples of each of the above subcategories.
- An increase in demand is described as “an increase in quantity demanded at each possible price”, thus the graphical representation of an increase in demand as a rightward shift. Some examples of this shift that can be used in class are: 1. An increase in the demand for computers over time due to an increase in consumer preferences for computers. 2. An increase in the demand for new cars as incomes increase and people can afford more cars (new cars are a normal good). 3. An increase in the demand for software due to less expensive computers increasing the quantity demanded of computers (computers and software are complementary goods). 4. An increase in the demand for beef due to more expensive chicken decreasing the quantity demanded of chicken (beef and chicken are substitute goods). 5. An increase in the demand for gasoline due to people’s expectations that the price of gasoline will be higher in the future than previously thought.
- A decrease in demand is described as “a decrease in quantity demanded at each possible price”, thus the graphical representation of an decrease in demand as a leftward shift. Some examples of this shift that can be used in class are: 1. A decrease in the demand for fatty foods over time due to an decrease in consumer preferences for a more healthy lifestyle. 2. A decrease in the demand for used cars as incomes increase and people can afford more new cars (used cars are an inferior good). 3. A decrease in the demand for milk due to more expensive cereal decreasing the quantity demanded of cereal (milk and cereal are complementary goods). 4. A decrease in the demand for chicken due to less expensive beef increasing the quantity demanded of beef (beef and chicken are substitute goods). 5. A decrease in the demand for computers due to people’s expectations that the price of computers will be lower in the future than previously thought.
- The instructor should not as yet introduce the specific contracts of the IEM, but rather use other, more commonly known, examples of the demand for an intangible good. This way, the instructor can discuss the concepts necessary using examples of which the students are already aware. Insurance is a particularly good example. The idea that people will pay someone a periodic amount(the ‘premium’) for the promise that if some future event occurs(car accident, illness, death) the insurance company will pay some amount is a good way to introduce the concept of the futures contract. Perhaps the instructor could have the class design their own intangible good. For example, students could issue ‘get out of an assignment free’ cards. A student could then ‘get out of an assignment’ by holding a card or reaching a certain score on an previous assignment. Students could then trade cards based on their expectation of whether they will need one or not.
- At this point, the instructor should introduce some real world examples of events that a futures contract could be based upon. Once an event is introduced, the class should discuss how the contract would be set up and some of the variables which might affect the attractiveness (and therefore the bid price) of the contract. Note the example given of the stock price of Microsoft on the 3rd Friday of June, which mirrors the Microsoft Price Level market on the IEM. The instructor could at this point introduce some of the other types of events that could be the basis for a futures contract, especially political and financial markets.
- The data for this exercise is available in an Excel spreadsheet. Alternatively, the instructor can simply describe the example and show the actual demand curve on the next slide.
- As in the smaller examples, we see that more contracts are demanded at the lower prices. Depending on the course structure, the instructor may wish to use this example later to illustrate changes in price elasticity of demand over the range of prices.
- In this example, the instructor should discuss the nba party thrown by Bill Bradley as a way to gain political popularity. Then the probable effect of the party, an increase in Bradley’s popularity and therefore probability of gaining the nomination, should be connected to the demand for the Bradley contract. The shift in the demand for the contract can be explained not only in terms of an increase in the preferences for the Bradley contract, but also in terms of buyers’ change in their expectation of the probability of the Bradley contract paying off.
- Data given is atomistic: for each company to provide a single unit of the good, the minimum acceptable price is given. The instructor should introduce at this point the concept of cost and profitability: that the minimum acceptable price is based upon the marginal cost of the unit produced. For example, for company ADC, the marginal cost of producing a unit of the good is $3, therefore the company must receive a minimum of $3 to make that unit profitable.
- The supply schedule shows at each price, the additional number of units that would be offered (quantity, second column) and the total number of units that would be offered (total quantity supplied, third column). The instructor should point out to the student that the supply schedule then shows, at each price, the total number of units that would be profitable to be offered.
- The above graph shows the supply schedule from the previous slide. The instructor should note the following: 1. Price is listed on the independent axis, quantity supplied on the dependent axis. This could be explained by noting that a given price determines the quantity that is profitable, and therefore offered. 2. The instructor should use this to discuss the law of increasing costs: that as production increases, the additional (marginal) cost of production increases. 3. The instructor should connect the law of increasing costs to the slope of the supply curve.
- The instructor should note that supply , a relationship between price and quantity supplied, only describes the effect of price changes on the quantity of a good offered. It should also noted here that there are other variables which would affect the profitability of production, and therefore other variables which affect quantity supplied. This will prepare the student for when shifts in supply are introduced later. A more rigorous mathematical treatment can be introduced here, with supply being described mathematically as an upward-sloping function.
- The above is a graphical representation of the supply schedule data presented in slide 18. Point I above should be noted as a single point on the supply curve, showing that at a price of $2, 2 units of production are profitable and therefore will be offered.
- A second point is added to the supply curve of the previous slide, showing the supply curve telling us that a change in price will affect the quantity that is profitable, and therefore will be offered. As price rises, more units are profitable (units 3 and 4 cost too much to be profitable at $2, but are profitable at $4), and the greater quantity will be supplied. The instructor should note the difference between supply, the relationship, and quantity supplied, the amount offered at a given price shown by the supply relationship.
- At this point, the instructor can introduce the other variables which affect profitability (or expected profitability, in the case of expectations of future prices) and therefore also affect the quantity supplied of a good. The variables listed above should be discussed with the effect on profitability of each: 1. A change in costs from a change in resource prices will change the profitability of each unit of production. 2. Changes in technology (the available methods of production) will affect the amount of each resource used, and therefore the cost of producing a unit of output. 3. Changes in taxes, especially the sales tax, will affect the profitability of a unit at any given price. 4. Changes in the number of suppliers will change the amount available at various prices, especially in the short-run. 5. Changes in the expected future price will affect the business’ decision to offer or inventory production in the current period.
- An increase in supply is described as “an increase in quantity supplied at each possible price”, thus the graphical representation of an increase in supply as a rightward shift. This can typically be attributed to an increase in profitability, making more units profitable at a given price. Some examples of this shift that can be used in class are: 1. A decline in labor costs reduces the cost of producing each unit of the good, so a greater quantity of units is profitable at each price. 2. An improvement in technology reduces the number of resources necessary for each unit, reducing the cost of producing each unit, increasing the number of units profitable at each price. 3. The sales tax is lowered on a good (for example, the sales tax on groceries in Iowa was removed many years ago), reducing the cost to the seller, increasing the profitability each each unit and therefore the quantity offered at each price. 4. If sellers believe the future price is now lower than previously, they may choose to offer units which were going to be put into inventory for the higher relative profitability now.
- A decrease in supply is described as “a decrease in quantity supplied at each possible price”, thus the graphical representation of a decrease in supply as a leftward shift. This can typically be attributed to a decrease in profitability, making fewer units profitable at a given price. Some examples of this shift that can be used in class are: 1. An increase in labor costs increases the cost of producing each unit of the good, so a lesser quantity of units is profitable at each price. 2. A decline in technology increases the number of resources necessary for each unit, increasing the cost of producing each unit, decreasing the number of units profitable at each price. 3. The sales tax is raised on a good (for example,a local option sales tax is approved for a region), increasing the cost to the seller, decreasing the profitability each each unit and therefore the quantity offered at each price. 4. If sellers believe the future price is now higher than previously, they may choose to inventory some units rather than offering them now (a decrease in quantity supplied at each price), to gain the relatively higher future profit.
- The instructor should discuss with the class the concept of differing expectations and views of the probability of certain events: this time, however, from the supplier point of view. The premiums for car insurance provide an excellent example for class discussions. Why insurance rates are higher for younger drivers, lower for married people, all cement the idea that sellers of insurance and other intangible goods have their own expectations of the amount paid out for claims (their “costs”) and therefore what price (premium) they are willing to accept for their “product” (promise to pay).
- Using the example futures contract introduced in slide 14, it was discussed then how buyers might view such a contract. Now it is time to discuss the seller side. The specifics of the contract should be reviewed: holders of the contract receive $1 if Bradley is the nominee, $0 otherwise. If holders are not sure if Bradley will be the nominee, they may be willing to sell their contract. Holders would take into account the probability that Bradley will receive the nomination, and therefore the expected payout of the contract. The minimum price holders are willing to accept, their “cost”, could either be the expected payout or the price that was paid for the contract.
- This is the actual supply curve for Bradley contracts from the IEM data. As before, the instructor may wish to have the students construct this graph from the raw data or merely use this as a real-life example.
- In this example, suppose that a tax was placed on transactions occurring over the internet. Therefore, if a Bradley contract is sold, the seller would have to pay the tax to the government. This would have the effect of raising the “cost” to the seller, and would raise the price the seller would have to receive to make selling the contract “profitable”. Therefore, for each possible quantity of the Bradley contract, a higher price would be needed to make that quantity profitable of offered (a decrease in supply).
- A market, then, would be described as the getting together of buyers and sellers to make exchanges seen as beneficial. This is shown graphically as the supply and demand curves “together” on the same graph. The instructor should note that 1. A market requires both buyers and sellers. 2. A unit will be exchanged if the exchange benefits both buyer and seller.
- In the above example, we can see what would occur in a market at a price above equilibrium. At a price of $4, the quantity demanded is 2 units. In other words, at that price, only “two” people are willing to buy the good or only two units are seen as providing enough benefit for people to be willing to pay $4 for them. At $4, the quantity supplied is 4 units. In other words, that price is high enough for 4 units of the good to be profitable (the “cost” of each is less than or equal to $4). Only 2 units would be purchased in this case, as units 3 and 4 are not “worth” spending $4 on. Units 3 and 4 therefore become “excess quantity supplied”, or a surplus . They are units the seller(s) wish to sell, but will not.
- In the case of a typical good, a surplus results in an undesired and unplanned increase in inventory levels. The seller, faced with a need to decrease both the amount offered and increase the quantity demanded, reacts by lowering the price until a surplus no longer occurs: at the price where quantity supplied equals quantity demanded. In the case of an IEM contract, since the buyer is willing to pay more ($4 for the second unit) than the seller is willing to accept ($2 for the second unit), that unit will be traded, and the trade price for the next unit (3rd) will be lower.
- At a price of $2 (below equilibrium), the quantity supplied is 2 units (only the first 2 units have a “cost” low enough to be profitable at $2) and the quantity demanded is 4 units (at that price, 4 units provide the buyer with enough benefit to make them worthwhile). This results in units 3 and 4 being “excess quantity demanded”, or a shortage.
- In today’s businesses, the need to satisfy customers is a primary issue. In this case, there is an excess quantity demanded. Rather than not provide customers with the product, sellers will typically pull units out of inventory to satisfy the customers. This will result in an undesired and unplanned decrease in inventory levels. Faced with the need to increase the amount they offer, and decrease the quantity demanded, sellers will react by raising price until the shortage no longer occurs (at the price where quantity demanded equals the quantity supplied).
- At this price ($3), the quantity supplied (3 units) equals the quantity demanded (3 units). At this price, all 3 units will be exchanged. Since no surpluses or shortages occur, there is no pressure on price to change or the market to adjust. Since this situation has both of the following characteristics: 1. once a market reaches this point, there is a tendency to stay at this point, 2. when a market is not at this point, the resulting surplus or shortage will move the price toward this point, it is an equilibrium point . For a futures contract such as those on the IEM, the equilibrium can be described as the amount where the bid price equals the ask price.
- Price ceilings : a government mandated maximum legal price for a product, effective only if placed at a price below the market equilibrium price; otherwise, the market will simply move to equilibrium. An effective price ceiling will therefore result in a perpetual excess quantity demanded. Since inventories cannot cover this indefinitely, the quantity exchanged will revert to the quantity supplied. The quantity sold being less than the quantity demanded will then require a new method of rationing the good. (Examples of other rationing methods include a lottery, queuing, and others.) Minimum wage is an example of a price floor: a government mandated minimum legal price for a product, effective only if placed at a price above the market equilibrium price; otherwise, the market will simply move to equilibrium. An effective minimum wage will result in the quantity purchased by buyers (employers) will be less than the quantity offered by workers. This excess quantity supplied in the labor market translates into underemployment or unemployment. The instructor could explore the effect on the shape of the labor supply curve by introducing the “backward L” shaped supply curve for labor.
- In the Bradley market, by putting the supply and demand curves together, we can now explore the effect of supply and demand shifts on the price of the “good”. Assuming the market is initially in equilibrium (the last traded price on the IEM), the demand shift predicted as a result of the nba party would result in a “surplus” of the contract. This would be interpreted as for each contract, people are now willing to pay more since they see the probability that the Bradley contract will pay off $1 is higher. This will result in the next trade price to be higher (an increase in the equilibrium price). The effect of a tax shifting supply can also be analyzed. The higher “cost” of each contract will result in holders of that contract requiring a higher price (a decrease in the supply of the contract) for the contract to be profitable. This will result in the next trade price to be higher (an increase in the equilibrium price).
- When a market is in equilibrium, then, the last price traded is the equilibrium price. Since only those units which benefits both buyers and sellers will be traded, all of the units to the “left” of the equilibrium point have already been exchanged. Therefore, in a futures market especially (which reach equilibrium very quickly), the bid prices of the buyers and the ask prices of the sellers that are “seen” (shouted out in a pit, listed on the IEM market screens)are those for trades that have not occurred; those to the “right” of the equilibrium point.
- In this slide, we see a close-up of the “right” side of a market in the context of the IEM markets. The last trade price is shown as the equilibrium price; the next prices in the queues are for the next contract in the respective queues. The next lowest ask price in the supply queue is now the “best ask”, while the next highest bid price is now the “best bid”. Since the seller requires more than the buyer is willing to pay, this unit will not currently be traded.