Chapter 4
TERMS:
Market
supply and demand (curves)
quantity
demanded/supplied
normal/inferior
goods
substitutes
complements
demographic effects
law of
demand/supply (p/q)
equilibrium
surplus/shortage
Individual demand schedule for beef hotdogs
|
P |
Q |
|
0.25 |
11 |
Market demand
|
P |
Q Betty |
Q Juan |
Q Frances |
Market Q |
|
0.25 |
11 |
5 |
6 |
22 |
Can be graphed by adding Qs.
The law of demand says that as price rises, the quantity demanded falls.
(When we discuss elasticity we will look at the question of HOW MUCH the quantity demanded falls as price rises.)
Demand refers to the entire line, quantity demanded refers to the quantity at
a particular price.
Determinants of demand
can read from graph: price
implicit in graph: (these are the things that are assumed to be held constant when talking about the law of demand and these cause SHIFTS in demand)
income (inferior/normal goods)
the prices of other goods
(substitutes/complements)
demography (population size and age
distribution)
tastes (advertising)
expectations
the latter two may reflect new
information
Examples:
Income - As you get more income, you generally want more of things.
If this is the case, a good is considered 'normal.'
How would we show this in the graph? The whole line will shift to the right as income increases.
Another way to think about this is, given a particular price, people will
want more of the good as their income increases.
There are some goods though, where the more money you have, the less you consume. Examples?
Bus rides, potatoes or other starchy foods, McDonalds meals, used clothing/furniture?
In this case, which is the EXCEPTION, the demand curve shifts left as income increases.
Are hotdogs an inferior or a normal good?
Substitutes:
Items which can generally be used instead of something else.
What is a good substitute for beef hotdogs?
Hamburgers
turkey dogs
tofu dogs
polish sausages
How will an increase in the price of polish sausages impact the demand curve for beef hotdogs?
People will buy more hotdogs at each price (they will substitute away from polish sausages into hotdogs.)
What are some other examples of substitutes in demand?
ice cream/frozen yoghurt
pinball/video games
cotton/wool
sweaters
Coke/Pepsi
chicken/beef
Complements:
Items which are generally consumed together.
What do you generally eat with hotdogs?
Buns
catsup
relish
mustard
If the price of buns increases, what might happen to the demand for hotdogs?
It will shift the demand curve to the left.
What are some other examples of complements in demand?
ice cream/ice cream
cones
paper/pencils
computers/printers
cars/gas
Tastes:
Can you think of examples of changes in tastes which could impact the demand for beef hotdogs?
When the 'mad cow disease' stories first hit the news, what do you think happened to the beef hotdog market (and all other beef markets, for that matter)?
On the other hand, what if an article came out saying that eating hotdogs has
been linked to increased intelligence?
Expectations:
If you hear that the dept of ag has ordered that a bunch of cattle be slaughtered in the next week or so, how might that influence your demand for hotdogs today?
Hotdogs don't seem like the best example for expectations - can you think of some goods which you might buy in expectation of a change which is about to occur?
Stocks
a house
airline tickets
Individual Supply versus Market Supply
Just as market demand is the addition of all quantities that individuals
demand at various prices, supply is the addition of all quantities supplied by
all the producers, at various prices.
2 hotdog stands by the campus
|
P |
Q |
|
0.25 |
4 |
Determinants of supply:
can read from graph: price
implicit in graph:
(these are the things that shift the Supply curve)
input prices
technology
natural environment (war)
expectations
The law of supply says that as price rises, the quantity supplied
rises.
What if the price of beef goes down?
What do you think will happen to the price of all beef hotdogs at your
neighborhood hotdog stand, if the city suddenly puts a tax on all vendors, for
parking their carts on city streets?
Technology:
Again, it is hard to imagine a big change in technology surrounding hotdogs, but what other products can you think of where supply (and thus price) is often influenced by technological change?
cellular phones
computers
Expectations:
What might a vendor do if she hears that the people are getting worried about mad cow disease?
What other examples can you think of where producers make changes in their supplies based on expectations?
SUVs and the price of gas
ice cream in summer
fashion world (sandals, shorts)
(they may anticipate changes in demand and react before these
occur)
Let's put supply and demand together, so we can find the equilibrium price and quantity.
Now think about each of the above scenarios and try to trace through what
will happen to the supply and demand curves and equilibrium in each
case.
For example:
If hotdogs are a normal good and we see a rise in consumers' income, how will that impact the hotdog market?
First there will be a temporary shortage of hotdogs, which will cause the
price to rise, which will lead to an increase in the quantity supplied and we
will reach a new equilibrium.
Let's think about the cell phone market now.
What happens if there is a new technology which makes cell phones much cheaper and better.
Can you draw that graph and show the impact on the cell phone
market?
Going back to the mad cow example, what happens if the vendors anticipate a
shift away from beef hotdogs (into tofudogs) and so reduce the supply of
hotdogs, and at the same time the consumers reduce their demand for
hotdogs?
Can you tell me how p and Q will be impacted? Q down, but p?