KINH TẾ VI MÔ Chapter II quan nguyen

DEMAND & SUPPLY CONTENT Demand  Supply  Market equilibrium Copyright © 2014 by Quan Hong NGUYEN DEMAND & SUPPLY I Demand Definition The law of demand Demonstrating demand Determinants in demand function Movement and shift of demand curve Copyright © 2014 by Quan Hong NGUYEN DEMAND Definition - Demand (D): An economic principle describes the quantity of goods/services that consumer is willing to buy and afford to buy at various price level in a certain time, ceteris paribus - Quantity demanded (QD): The quantity of goods and services that consumer is willing to buy and afford to buy at a price level in a certain time, ceteris paribus - Individual demand is the demand of one individual or firm - Market demand is the sum of the individual demand for a product from buyers in the market Copyright © 2014 by Quan Hong NGUYEN Market demand as the sum of individual demands (demand schedule) Price of ice-cream cone Catherine $0.00 0.50 1.00 1.50 2.00 2.50 3.00 12 10 Nicholas + Market = 19 16 13 10 The quantity demanded in a market is the sum of the quantities demanded by all the buyers at each price Thus, the market demand curve is found by adding horizontally the individual demand curves At a price of $2.00, Catherine demands ice-cream cones, and Nicholas demands ice-cream cones The quantity demanded in the market at this price is cones Market demand as the sum of individual demands Catherine’s Nicholas’s Market + = demand demand demand Price of Ice Cream Cones $3.00 DCatherine Price of Ice Cream Cones $3.00 Price of Ice Cream Cones $3.00 DNicholas 2.50 2.50 2.00 2.00 2.00 1.50 1.50 1.50 1.00 1.00 1.00 0.50 0.50 0.50 10 11 12 Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones 2.50 DMarket 10 12 14 16 18 Quantity of Ice-Cream Cones DEMAND The law of demand In a certain time, ceteris paribus, when the price of a good/service rises, the quantity demanded of the good falls, and when the price falls, the quantity demanded rises P QD P QD Copyright © 2014 by Quan Hong NGUYEN DEMAND Demonstrating demand - Demand schedule (Ex: Lavie) - Demand curve - Demand function QD = aP + b (a < 0) P = cQD + d (c < 0) General form: QD = f (Px, Py, I, T, E, N) P A P1 P2 B Q1 Copyright © 2014 by Quan Hong NGUYEN Q2 Q DEMAND Determinants in demand function 4.1 Price of related goods (PY) - Substitutes goods: A and B are substitutes if the usage of A can be replaced by the usage of B, provided that the initial consumption target is unchanged (Price of substitutes goods) PS ↑ → QDs ↓ → QDx ↑ (Price of substitutes goods) PS ↓ → QDs ↑ → QDx ↓ → covariates Copyright © 2014 by Quan Hong NGUYEN DEMAND 4.1 Price of related goods (PY) - Complement goods: A and B are complements if the usage of A must go together with the usage of B to ensure the initial utility of both goods PC ↑ → QDc ↓ → QDx ↓ PC↓ → QDc ↑ → QDx ↑ → inverse Copyright © 2014 by Quan Hong NGUYEN DEMAND 4.2 Income of consumer (I) (afford to buy) 10 I QD I QD I QD I QD Normal goods Inferior goods Copyright © 2014 by Quan Hong NGUYEN DEMAND & SUPPLY III Market equilibrium Equilibrium status Surplus and shortage Price controlling 23 Copyright © 2012 by Quan Hong NGUYEN Market equilibrium Equilibrium status 1.1 Definition  Equilibrium - a situation  Market price has reached the level :  Quantity supplied = quantity demanded  Equilibrium price - the price:  Balances quantity supplied and quantity demanded  Equilibrium quantity  Quantity supplied and the quantity demanded at the equilibrium price 24 Copyright © 2014 by Quan Hong NGUYEN Market equilibrium Equilibrium status 1.2 Method of determining - Merger demand schedule and supply schedule - Intersection of (S) and (D) - Solve the system of equations { QD = aP + b QS = cP + d => E(PE, QE) P S PE E D QE 25 Copyright © 2014 by Quan Hong NGUYEN Q Market equilibrium The equilibrium of supply and demand Price of Ice-Cream Cones Supply $3.00 2.50 Equilibrium price Equilibrium 2.00 1.50 1.00 Demand Equilibrium quantity 0.50 10 11 12 Quantity of Ice-Cream Cones 26 Copyright © 2012 by Quan Hong NGUYEN Supply and Demand Together  Surplus  Quantity supplied > quantity demanded + P1 > PE + QS > QE > QD   Excess supply Downward pressure on price Surplus P1 PE QD QE QS Surplus 27 Supply and Demand Together  Shortage  Quantity demanded > quantity supplied + P2 < PE + QS < QE < QD   Excess demand Upward pressure on price PE P2 Shortage QS QE QD Shortage 28 Markets not in equilibrium (a) Excess Supply Price of Ice Cream Cones Surplus (b) Excess demand Supply Price of Ice Cream Cones Supply $2.50 2.00 $2.00 Demand Quantity demanded 1.50 Demand Quantity supplied 10 Quantity of Ice-Cream Cones Quantity supplied Shortage Quantity demanded 10 Quantity of Ice-Cream Cones In panel (a), there is a surplus Because the market price of $2.50 is above the equilibrium price, the quantity supplied (10 cones) exceeds the quantity demanded (4 cones) Suppliers try to increase sales by cutting the price of a cone, and this moves the price toward its equilibrium level In panel (b), there is a shortage Because the market price of $1.50 is below the equilibrium price, the quantity demanded (10 cones) exceeds the quantity supplied (4 cones) With too many buyers chasing too few goods, suppliers can take advantage of the shortage by raising the price Hence, in both cases, the price adjustment moves the market toward the equilibrium of supply and 29 demand Supply and Demand Together  Law of supply and demand  The price of any good adjusts   Bring the quantity supplied and the quantity demanded into balance In most markets  Surpluses and shortages are temporary 30 Supply and Demand Together  Three steps to analyzing changes in equilibrium Decide: the event shifts the supply curve, the demand curve, or both curves Decide: curve shifts to right or to left Use supply-and-demand diagram   Compare initial and new equilibrium How the shift affects equilibrium price and quantity 31 How an increase in demand affects the equilibrium Price of Ice-Cream Cones Supply …resulting in a higher price Hot weather increases the demand for ice cream $2.50 New equilibrium 2.00 Initial equilibrium D1 D2 …and a higher quantity sold 10 Quantity of Ice-Cream Cones An event that raises quantity demanded at any given price shifts the demand curve to the right The equilibrium price and the equilibrium quantity both rise Here an abnormally hot summer causes buyers to demand more ice cream The demand curve shifts from D1 to D2, which causes the equilibrium price to rise from $2.00 to $2.50 and the equilibrium quantity to rise from to 10 cones 32 How a decrease in supply affects the equilibrium Price of Ice-Cream Cones An increase in the price of sugar reduces the supply of ice cream S2 …resulting in a higher price S1 $2.50 New equilibrium 2.00 Initial equilibrium Demand …and a smaller quantity sold Quantity of Ice-Cream Cones An event that reduces quantity supplied at any given price shifts the supply curve to the left The equilibrium price rises, and the equilibrium quantity falls Here an increase in the price of sugar (an input) causes sellers to supply less ice cream The supply curve shifts from S1 to S2, which causes the equilibrium price of ice cream to rise from $2.00 to $2.50 and the equilibrium quantity to fall from to 33 cones A shift in both supply and demand (a) Price Rises, Quantity Rises Price of Ice Cream New equilibrium Cones Large S2 Price of (b) Price Rises, Quantity Falls Ice Cream Small Cones increase S1 in demand increase in demand P2 Small decrease in supply D2 Large decrease in supply P1 D2 Initial equilibrium Initial equilibrium D1 Q1 Q2 Quantity of Ice-Cream Cones S1 New equilibrium P2 P1 S2 Q2 D1 Q1 Quantity of Ice-Cream Cones Here we observe a simultaneous increase in demand and decrease in supply Two outcomes are possible In panel (a), the equilibrium price rises from P to P2, and the equilibrium quantity rises from Q1 to Q2 In panel (b), the equilibrium price again rises from P1 to P2, but the equilibrium quantity falls from Q1 to Q2 34 Market equilibrium What happens to price and quantity when supply or demand shifts? No change In Supply An increase In Supply A decrease In supply No change In demand P same Q same P down Q up P up Q down An increase In demand P up Q up P ambiguous Q up P up Q ambiguous A decrease In demand P down Q down P Down Q ambiguous P ambiguous Q down 35 Market equilibrium Price controlling - Controlled by the Government - PC - Ceiling price + The highest price allowed in the market + For the sake of buyer + Appear shortage + Government’s responsibility PE E PC (G) QS 36 Copyright © 2012 by Quan Hong NGUYEN QE QD Market equilibrium Price controlling -PF – Floor price -The lowest price allowed in the market - For the sake of supplier - Appear surplus - Government’s responsibility (G) PF PE QD 37 Copyright © 2012 by Quan Hong NGUYEN QE QS ... level :  Quantity supplied = quantity demanded  Equilibrium price - the price:  Balances quantity supplied and quantity demanded  Equilibrium quantity  Quantity supplied and the quantity... Copyright © 2014 by Quan Hong NGUYEN Q2 Q DEMAND & SUPPLY III Market equilibrium Equilibrium status Surplus and shortage Price controlling 23 Copyright © 2012 by Quan Hong NGUYEN Market equilibrium... Cones Supply $2.50 2.00 $2.00 Demand Quantity demanded 1.50 Demand Quantity supplied 10 Quantity of Ice-Cream Cones Quantity supplied Shortage Quantity demanded 10 Quantity of Ice-Cream Cones In panel