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Mankiew Chapter 4
Mankiew Chapter 4
2
Markets and Competition
Demand and supply are studied in the context of
market.
A market is a group of buyers and sellers of a
particular product.
There are three types of markets:
A perfectly competitive market is characterized
by:
• Homogeneous goods
• Buyers & sellers so numerous that no one can
affect market price – each is a “price taker”
3
Markets and Competition
• The other extreme is monopoly market : where there is a single
seller (for instance, indian railways- irctc)
4
Demand
Demand examines the behavior of buyers.
The 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 ,other things
equal, the quantity demanded of a good falls
when the price of the good rises
5
The Demand Schedule
Quantity
Demand schedule: Price
of lattes
The demand schedule is a table that of
shows the quantity demanded at each demande
lattes
price. The demand curve, which graphs d
the demand schedule, illustrates how $0.00 16
the quantity demanded of the good
changes as its price varies. Because a 1.00 14
lower price increases the quantity 2.00 12
demanded, the demand curve slopes
downward. 3.00 10
4.00 8
Example: Catherine’s Demand 5.00 6
Schedule and Demand Curve 6.00 4
6
Demand Schedule & Curve
Price Quantity
Price
of lattes
of
$6.00 demande
lattes
d
$5.00 $0.00 16
$4.00 1.00 14
$3.00 2.00 12
3.00 10
$2.00
4.00 8
$1.00 5.00 6
$0.00 6.00 4
Quantity
0 5 10 15
By convention, the price of ice cream is on the vertical axis, and the quantity of ice cream
demanded is on the horizontal axis. The downward-sloping line relating price and quantity
demanded is called the demand curve. 7
Market Demand versus Individual Demand
The quantity demanded in the market is the sum of the quantities
demanded by all buyers at each price. Thus, the market demand curve
is found by adding horizontally the individual demand curves.
Suppose Helen and Ken are the only two buyers in the market.
(Qd = quantity demanded)
Qd
P P
(Market)
$6.00
$0.00 24
$5.00 1.00 21
$4.00 2.00 18
$3.00 3.00 15
4.00 12
$2.00
5.00 9
$1.00 6.00 6
$0.00 Q
0 5 10 15 20 25
9
Demand Curve Shifters
The demand curve shows how price affects
quantity demanded, other things being equal.
These “other things” are non-price determinants
of demand (i.e., things that determine buyers’
demand for a good, other than the good’s price).
10
Demand Curve Shifters: no. of buyers
An increase in the number of buyers causes
an increase in quantity demanded at each price,
which shifts the market demand curve to the
right.
11
Demand Curve Shifters: no. of buyers
13
Demand Curve Shifters: prices of
related goods
Substitutes are often pairs of goods that are used in
place of each other. For instance, tea and coffee,
hamburgers and hot dogs etc. An increase in the
price of one causes an increase in demand for the
other.
Example: tea and coffee
An increase in the price of tea increases demand for
coffee, shifting coffee demand curve to the right.
14
Demand Curve Shifters: prices of
related goods
Complements are often pairs of goods that are
used together, such as fuel and automobiles,
computers and software, and pen and ink. 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 curve shifts left.
15
Demand Curve Shifters: tastes
16
Demand Curve Shifters: expectations
Expectations affect consumers’ buying
decisions.
Example: an upcoming sale on flipkart will
induce buyers to buy in the future and reduce
the demand at present, shifting the demand
curve towards left.
17
Summary: Variables That Affect Demand
18
Supply
Supply examines the behavior of sellers.
The quantity supplied of any good is the
amount that sellers are willing and able to sell.
Law of supply: the claim that, other things
equal, the quantity supplied of a good rises
when the price of the good rises
19
The Supply Schedule
Supply schedule: Price Quantity
The supply schedule is a table that of of lattes
shows the quantity supplied at each lattes supplied
price. This supply curve, which graphs
the supply schedule, illustrates how the $0.00 0
quantity supplied of the good changes 1.00 3
as its price varies. Because a higher
price increases the quantity supplied, 2.00 6
the supply curve slopes upward. 3.00 9
4.00 12
5.00 15
Example: Ben’s Supply
6.00 18
Schedule and Supply
Curve
20
Ben’s Supply Schedule & Curve
Price Quantity
P of of lattes
$6.00 lattes supplied
$5.00 $0.00 0
1.00 3
$4.00
2.00 6
$3.00 3.00 9
$2.00 4.00 12
$1.00
5.00 15
6.00 18
$0.00 Q
0 5 10 15
21
Market Supply versus Individual Supply
The 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)
Price Starbucks Jitters Market Qs
$0.00 0 + 0 = 0
1.00 3 + 2 = 5
2.00 6 + 4 = 10
3.00 9 + 6 = 15
4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30 22
The Market Supply Curve
QS
P
(Market)
P
$6.00 $0.00 0
1.00 5
$5.00
2.00 10
$4.00 3.00 15
$3.00 4.00 20
$2.00 5.00 25
6.00 30
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
23
Supply Curve Shifters
The supply curve shows how price affects
quantity supplied, other things being equal.
These “other things” are non-price determinants
of supply.
Changes in them shift the S curve.
24
Supply Curve Shifters: input prices
Examples of input prices:
wages, prices of raw materials.
A fall in input prices makes production
more profitable at each output price,
so firms supply a larger quantity at each price,
and the S curve shifts to the right.
25
Supply Curve Shifters: input prices
P Suppose the
$6.00 price of sugar
falls.
$5.00
At each price,
$4.00 the quantity of
$3.00 ice cream
supplied
$2.00 will increase.
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
26
Supply Curve Shifters:
Technology : A technological advancement
reducing the cost of production will raise the
supply, shifting the supply curve to the right.
27
Supply Curve Shifters: expectations
28
Summary: Variables That Affect Supply
29
Supply and Demand Together
P
$6.00 D S The Equilibrium of Supply
and Demand: The
$5.00 equilibrium is found where
the supply and demand
$4.00 curves intersect. At the
equilibrium price, the
$3.00 quantity supplied equals
the quantity demanded.
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
30
Equilibrium price:
The price that equates quantity supplied
with quantity demanded
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
31
Equilibrium quantity:
The quantity supplied and quantity demanded
at the equilibrium price
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
32
Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Example:
If P = $5,
$5.00
then
$4.00 QD = 9
$3.00 and
$2.00 QS = 25
$1.00 resulting in a surplus
of 16
$0.00 Q
0 5 10 15 20 25 30 35
33
Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting the price.
$4.00 This causes Q D
to rise
and QS to fall.
$3.00
37
Three Steps to Analyzing Changes in
Equilibrium
38
EXAMPLE: A Change in Market
Equilibrium Due to a Shift in
Demand
Suppose that one summer the weather is very hot. How does this event affect the
market for ice cream?
1. The hot weather affects the demand curve by changing people’s taste for ice
cream. That is, the weather changes the amount of ice cream that people want to
buy at any given price. The supply curve is unchanged because the weather does
not directly affect the firms that sell ice cream.
2. Because hot weather makes people want to eat more ice cream, the demand
curve shifts to the right. This shift indicates that the quantity of ice cream
demanded is higher at every price.
3. At the old price, there is now an excess demand for ice cream, and this
shortage induces firms to raise the price. The increase in demand raises the
equilibrium price and the equilibrium quantity. In other words, the hot weather
increases the price of ice cream and the quantity of ice cream sold.
39
EXAMPLE 1: A Change in Demand
EVENT TO BE
ANALYZED: P
S1
STEP 1: P2
D curve shifts
because
STEP 2:
price of gas P1
affects demand for
D shifts right
hybrids.
because
STEP 3: high gas
S curve
price doeshybrids
makes not D1 D2
The shift
shift, causes
because an
price
more attractive Q
increase
of gas in price
does not cars. Q1 Q 2
relative to other
and quantity
affect cost of of ice-
creams. hybrids.
producing
40
EXAMPLE 1: A Change in Demand
Notice: P
When P rises,
S1
producers supply
a larger quantity P2
of ice-creams, even
though the S curve P1
has not shifted.
Always be careful
D1 D2
to distinguish b/w
a shift in a curve Q
Q1 Q 2
and a movement
along the curve.
41
Terms for Shift vs. Movement Along Curve
Change in supply: a shift in the S curve
• occurs when a non-price 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 curve
• occurs when a non-price determinant of
demand changes (like income or no. of buyers)
Change in the quantity demanded:
a movement along a fixed D curve
• occurs when P changes
42
EXAMPLE: A Change in Market
Equilibrium Due to a Shift in
Supply
Suppose that during another summer, a hurricane destroys part of the sugarcane
crop and drives up the price of sugar. How does this event affect the market for ice
cream?
1. The change in the price of sugar, an input for making ice cream, affects the
supply curve. By raising the costs of production, it reduces the amount of ice
cream that firms produce and sell at any given price. The demand curve does not
change because the higher cost of inputs does not directly affect the amount of ice
cream households wish to buy.
2. The supply curve shifts to the left because, at every price, the total amount that
firms are willing and able to sell is reduced.
3. At the old price, there is now an excess demand for ice cream, and this
shortage induces firms to raise the price. The decrease in supply raises the
equilibrium price and lowers the equilibrium quantity.
43
EXAMPLE 2: A Change in Supply
P
S2
S1
STEP 1:
S curve shifts
because
STEP 2:
event affects P1
cost of production.
S shifts left P2
D curve does
because eventnot
STEPbecause
shift, 3:
reduces cost, D1
The shift causes
production technology
makes production Q
price
is not to
onerise
of theat Q1 Q 2
more profitable
and quantity
factors that to fall.
affect
any given price.
demand.
44
EXAMPLE 3: A Change in Both Supply
and Demand
Now suppose that a heat wave and a P
hurricane occur during the same S2
summer. S1
STEP 1: P2
Both curves shift.
STEP 2:
Demand shifts to the P1
right. Supply shifts to
the left. D1 D2
STEP 3: Q
P rises, but effect QQ
1
2
on Q is ambiguous:
If demand curve shifts in a greater
proportion than supply, Q rises. 45
EXAMPLE 3: A Change in Both Supply
and Demand
P
S2
S1
STEP 3:
If demand curve shifts in P2
a lesser proportion than
supply, Q falls. P1
D1 D2
Q
Q2 Q1
46
EXAMPLE 3: A Change in Both Supply
and Demand
P
S2
S1
STEP 3: P2
If demand curve shifts in a
equal proportion P1
to supply, Q does not
change.
D1
D2 Q
Q1
=Q2
47