Topic 2 - Demand and Suply ECO

FUNDAMENTALS OF ECONOMICS PPE
Topic 2.
Demand, Supply, Equilibrium
1
CONTENT
I. GRAPHING
II. THE MARKET
III. DEMAND
IV. SUPPLY
V. EQUILIBRIUM
(Appendix Ch 2; Ch 3)
2
CONTENT
I. GRAPHING
3
CONTENT
I. GRAPHING
Graphs are a code and a language
4
1. Functions
y=f(x) = a + bx
A type of function called linear equation
5
2. Graphing functions
y=f(x) = a + bx = 5 +2x
First task
ALWAYS!
6
3. Types of graphs
7
3. Types of graphs
8
3. Types of graphs
9
4. Graphs of two variables
10
Relationship
IS NOT
causality
11
Correlation
IS NOT
causality
12
Post hoc,
propter hoc
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
RCT. Randomized Controlled Trial
29
5. Graphs of two variables. Dynamics
Ceteris paribus
(remember, models in Economics)
30
31
32
33
34

Slope
Slope =Δy/Δx
35

Slope
Slope =Δy/Δx
36
6. Graphs of two variables. Causality

Omitted variables
Remember, correlation IS NOT causality

37
6. Graphs of two variables. Causality

Reverse causality
38
CONTENT
I. GRAPHING
II. THE MARKET
39
From Topic 1
• Scarcity: managing resouces is relevant as
they are scarce (limited)
• Economy: understanding how the society
manages its scarce resources
• QUESTION: ¿How do we assign resources?
40
Prices:
 Provide information
 Give incentives
 Allow measuring relative scarcity
Market: interaction between Demand and
Supply
 Demand: reflects the behaviour of
consumers/buyers
 Supply: reflects the behavior of producers/sellers
41
Competitive market: is a market in which there are

many buyers and many sellers so that each has a
negligible impact on the market price.
Each seller has limited control over the price

because other sellers are offering similar products.
No single buyer can influence the price because

each buyer purchases only a small amount relative
to the size of the market.
42
CONTENT
I. GRAPHING
II. THE MARKET
III. DEMAND
43
DEMAND
 Quantity demanded: the quantity that buyers
are willing and able to buy, at different price
levels.
 Curve of demand: the relationship between
the price of a good and the quantity
demanded
44
DEMAND
 Law of demand: as a general rule, the higher
the price of the good, the lower the quantity
wanted to buy
 Negative relationship: if/when the price of
the good increases, the quantity demanded
will decrease.
45
FUNCTION OF DEMAND
Price
P1
P2
1.A decrease Demand
of the
price…
Q1 Q2 Quantity
2… increases the quantity demanded of this good 46

¿WHY THE SLOPE IS NEGATIVE?

 Income effect: the decrease of price of the
good increases the income power of those
buying the good.
 Substitution effect: if the price of the good
decreases, while the prices of the other goods
remain unchanged, this good has become less
expensive in relative terms against the other
goods. It becomes more attractive.
47
¿WHY THE SLOPE IS NEGATIVE?

 Income effect: the decrease of price of the
good increases the income power of those
buying the good.
 Substitution effect: if the price of the good
decreases, while the prices of the other goods
remain unchanged, this good has become less
expensive in relative terms against the other
goods. It becomes more attractive.
inflation
48
 Complement goods: two goods are

complement when the increase of the price of
one of them provokes a decrease of the
demand of the other good
 gasoline --- cars

 coffee --- sugar
 printers --- toner
49
Substitute goods: two goods are substitute

when the increase of price of one of them
provokes an increase of demand of the other
one.
 butter --- margarine
 wine --- beer
50
DEMAND
Quantity demanded may be affected by
 The price of the good (-)
 Income (+)
 The price of the sustitute goods (+)
 Price of complement goods (-)
 Population (+), Demographics
 Preferences
 Expectations
51
SHITFS
 OF the demand curve (one of the
determinants change, except the price)
 ALONG the demand curve (change of
prices: income and substitution effect)
52
FUNDAMENTOS DE ECONOMIA PPE
SHIFT OF THE DEMAND CURVE

Price
A B
P1
D2
D1
Q1 Q2 Quantity
53
MOVEMENT ALONG THE DEMAND CURVE

Price
A
P1
P2 B
D1
Q1 Q2 Quantity
54
a/ Anti smoking campaign

Price An economic measure against
smoking shifts the demand curve to
the left
P1 A
B
D1
D2
Q2 Q1 Quantity
55
56
b/ Increase of prices
Precio
P2 B
P1 A
1.An increase Demanda

of prices
Q2 Q1 Cantidad
2… reduces the quantity demanded 57

CONTENT
I. GRAPHING
II. THE MARKET
III. DEMAND
IV. SUPPLY
58
SUPPLY
 Quantity supplied of any good or service is
the amount that sellers are willing and able to
sell at different prices.
 Supply curve: he relationship between the
price of a good and the quantity supplied
59
SUPPLY
 Quantity supplied of any good or service is
the amount that sellers are willing and able to
sell at different prices.
 Supply curve: he relationship between the
price of a good and the quantity supplied
 Law of supply: the claim that, ceteris paribus,
the quantity supplied of a good rises when the
price of a good rises
60
SUPPLY FUNCTION
Price
Supply
A
P1
B
P2
1. A
decrease of
the price …
Q2 Q1 Quantity
2… reduces the quantity supplied of this good 61

SUPPLY
Quantity supplied depends of
Price of the good sold (+) --- supply function
 The prices of factors of production (-)
 Technology of production
 Expectations of producers
 Number of sellers
62
SHIFTS
 OF the supply curve (a change in any of the
determinants, except the price)
 ALONG the curve (change in prices)
63
SHIFTS OF SUPPLY S2
Price
S1
B
P1
A
1.A decrease
of the supply
of a good…
Q2 Q1 Quantity
2… reduces the quantity of this good supplied at the initial price 64

SHIFT ALONG THE CURVE

Price
S1
P1
A
B
P2
Q2 Q1 Quantity
65
CONTENT
I. GRAPHING
II. THE MARKET
III. DEMAND
IV. SUPPLY
V. EQUILIBRIUM
66
EQUILIBRIUM
 Market: group of buyers and sellers of a given
good or service
 Market price (equilibrium): the price where
the quantity demanded is the same as the
quantity supplied
 Equilibrium quantity: the quantity bought
and sold at the equilibrium price
67
Price S
PE
QE Quantity
68
SURPLUS OR EXCESS SUPPLY

Price S
PE Situation in which the quantity

supplied is greater than the
quantity demanded at the
going market price
D
Quantity
QD QE QS
69
SHORTAGE OR EXCESS DEMAND

Price S
Situation in which quantity
demanded is greater than
quantity supplied at the
PE going market price
QS QE QD Quantity
70
EQUILIBRIUM – ALGEBRA I
 Demand equation (function): 𝑄𝑄𝑄𝑄 = 30 – 5𝑃𝑃
 Supply equation: 𝑄𝑄𝑄𝑄 = 12 + 4𝑃𝑃
 Equilibrium: 𝑄𝑄𝑄𝑄 = 𝑄𝑄𝑄𝑄
Sol.:?
71
EQUILIBRIUM – ALGEBRA I
𝑄𝑄𝑄𝑄 = 30 – 5𝑃𝑃
𝑄𝑄𝑄𝑄 = 12 + 4𝑃𝑃
𝑄𝑄𝑄𝑄 = 𝑄𝑄𝑄𝑄
30 – 5𝑃𝑃 = 12 + 4𝑃𝑃; 18 = 9𝑃𝑃;
𝑃𝑃 = 𝑷𝑷𝑷𝑷 = 𝟐𝟐
• 𝑄𝑄𝑄𝑄 = 𝑄𝑄𝑄𝑄 = 30 − 5 2 = 20
• 𝑄𝑄𝑄𝑄 = 𝑄𝑄𝑄𝑄 = 12 + 4 2 = 20
72
EQUILIBRIUM – ALGEBRA II
 Demand equation: 𝑄𝑄𝑄𝑄 = 30 – 5𝑃𝑃
 What happens if 𝑃𝑃 = 3
𝑄𝑄𝑄𝑄 = 30 – 5𝑃𝑃 = 30 − 5 3 = 15
𝑄𝑄𝑄𝑄 = 12 + 4𝑃𝑃 = 12 + 4 3 = 24
Excess supply: 24 – 15 = 9
73
SURPLUS OR EXCESS SUPPLY

Price S
PE Situation in which the quantity

supplied is greater than the
quantity demanded at the
going market price
D
Quantity
QD QE QS
74
EQUILIBRIUM – ALGEBRA II
 Demand equation: 𝑄𝑄𝑄𝑄 = 30 – 5𝑃𝑃
 What happens if 𝑃𝑃 = 1
𝑄𝑄𝑄𝑄 = 30 – 5𝑃𝑃 = 30 − 5 1 = 25
𝑄𝑄𝑄𝑄 = 12 + 4𝑃𝑃 = 12 + 4 1 = 16
Excess demand: 25 – 16 = 9
75
SHORTAGE OR EXCESS DEMAND

Price S
Situation in which quantity
demanded is greater than
quantity supplied at the
PE going market price
QS QE QD Quantity
76
A CHANGE IN DEMAND
Price S
B
P2
P1
A
D2
D1
Q1 Q2 Quantity
77
STUDY CASE.
Assess the impact in the icecream market
 an increase of temperature
 an increase of sugar price
78
EQULIBRIUM
Price S
PE
QE Quantity
79
An increase of temperature
Price S
B
P2
P1 1. An increase of temperatures
increases the demand of
A
icecream
2… this leads D2
to an increase
of the Price of D1
icecreas
Q1 Q2 Cantidad
3…and to an increase of the quantity of 80

icecream sold
An increase in sugar price

S2
Price S1
P2
P1 A
1. An increase in sugar prices

2…. It reduces the supply of
D
increases icecreams
the Price os
Q2 Q1 Quantity
icecream
3…reducing the quantity of icecream sold 81

Topic 2 - Demand and Suply ECO

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FUNDAMENTALS OF ECONOMICS PPE

Graphs are a code and a language

A type of function called linear equation

4. Graphs of two variables

4. Graphs of two variables

4. Graphs of two variables

4. Graphs of two variables

RCT. Randomized Controlled Trial

5. Graphs of two variables. Dynamics

5. Graphs of two variables. Dynamics

5. Graphs of two variables. Dynamics

5. Graphs of two variables. Dynamics

5. Graphs of two variables. Dynamics

5. Graphs of two variables. Dynamics

5. Graphs of two variables. Dynamics

6. Graphs of two variables. Causality

Remember, correlation IS NOT causality

6. Graphs of two variables. Causality

Competitive market: is a market in which there are

Each seller has limited control over the price

No single buyer can influence the price because

2… increases the quantity demanded of this good 46

¿WHY THE SLOPE IS NEGATIVE?

¿WHY THE SLOPE IS NEGATIVE?

 Complement goods: two goods are

 gasoline --- cars

Substitute goods: two goods are substitute

SHIFT OF THE DEMAND CURVE

MOVEMENT ALONG THE DEMAND CURVE

a/ Anti smoking campaign

1.An increase Demanda

2… reduces the quantity demanded 57

2… reduces the quantity supplied of this good 61

2… reduces the quantity of this good supplied at the initial price 64

SHIFT ALONG THE CURVE

SURPLUS OR EXCESS SUPPLY

PE Situation in which the quantity

SHORTAGE OR EXCESS DEMAND

SURPLUS OR EXCESS SUPPLY

PE Situation in which the quantity

SHORTAGE OR EXCESS DEMAND

3…and to an increase of the quantity of 80

An increase in sugar price

1. An increase in sugar prices

3…reducing the quantity of icecream sold 81

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