Supply and Demand (Also, include private goods vs. public goods, marginal analysis, producer and consumer surplus and how it applies to perfect competition)- Thaddeus Bogardus
Supply and Demand Overview Law of Demand-Price and quantity demanded are inversely related. Market Demand Curve-A curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the prices of related goods, income, advertising, and other variables constant. Market Supply Curve-a curve indicating the total quantity of a good that all producers in a competitive market would produce at each price, holding input prices, technology, and other variables affecting supply constant. Consumer Surplus-The value consumers get from a good but do not have to pay for. It is the difference between each price on the demand curve and the price paid. It is the area below the demand curve but above the market price of the good. Producer Surplus-The amount producers receive in excess of the amount necessary to induce them to produce the good. It is the area above the supply curve but below the market price of the good.
In perfect competition, consumer and producer surplus are maximized. No one can be made better off without making someone else worse off.
Equilibrium Price-Determined by the interactions of all the buyers and sellers in the market. It is where the demand curve and the supply curve intersect, where Quantity demanded=Quantity supplied Private Good-A product that must be purchased in order to be consumed, and who consumption by one individual prevents another individual from consuming it. Public Good-A product that one individual can consume without reducing its availability to another individual and from which no one is excluded. Marginal Benefit-The change in total benefits arising from a change in the managerial control variable Q. Marginal Cost-The change in total costs arising from a change in the managerial control variable Q. Price Floor-The minimum legal price that can be charged in a market. Price Ceiling-The maximum legal price that can be charged in a market.
Demand Shifters- Any variable other than the price of a good that influences demand is known as a demand shifter. A rightward shift of the demand curve is called an increase in demand, while a leftward shift in the demand curve is called a decrease in demand. There are five demand shifters--consumer income, prices of related goods, advertising and consumer tastes, population, and consumer expectation.
Consumer Income-changes in income affect how much a consumer will buy at any price. A change in income will shift the entire demand curve. Depending on the type of good (Normal or Inferior) will depend on how the demand curve changes based on a change in consumer income.
Normal Good-A good for which an increase (decrease) in income leads to an increase (decrease) in the demand for that good. Inferior Good-A good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.
Prices of related goods-changes in the prices of related goods generally shift the demand curve ofr a good. The shift in the demand curve will depend on the type of good (substitutes or complements).
Substitutes-Goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good.
Complements-Goods for which an increase (decrease) in the price of one good leads to a decrease (increase) in the demand for the other good.
Advertising and consumer Tastes-An increase in advertising will shift the demand curve to the right, therefore increasing demand.
Population-Changes in size and composition of the population will affect the demand curve. Generally as the population rises more individuals will buy the product, increasing demand and shifting the demand curve to the right.
Consumer Expectation-If future prices of a good are expected to be substantially higher in the future are more likely to buy the good now, therefore increasing demand and shifting the demand curve to the right.
Supply Shifters- Variables that affect the position of the supply curve. There are five supply shifters--prices of inputs, the level of technology ,the number of firms in the market, taxes, and producer expectations.
Input Prices-As the price of an input rises (falls), producers are willing to produce less (more) output at each given price. A decline in supply results in a leftward shift in the supply curve, while an increase in supply results in a rightward shift in the supply curve.
Technology-Changes that make it possible to produce a given output at a lower cost have the effect of increasing supply (a rightward shift).
Number of Firms-As additional firms enter an industry, more output is available at each given price, and results in a rightward shift. As firms leave an industry supply decreases and results in a leftward shift.
Taxes-As taxes increase producers are less willing to sell a product at the given price than before tax (shown by a leftward shift)
Producer Expectations-If a firm expects prices to be higher in the future producers can hold back output today and sell it later at a higher price. This would be reflected with a leftward shift of the supply curve.
Real World Application of Supply and Demand 1-Tablet Computers With the passing of Steve Jobs earlier this week, I couldn't help but think of the technologies he helped invent affect our world. One of these technologies is the tablet computer/iPad. Apple was the first to bring this product to the market and controls a majority share of the market. Other companies such as RIM and HP have developed products to compete with the iPad with little success. The lack of demand for the competitors products have caused some changes in the market which I will look at here.
The tablet computer that HP produces is the TouchPad. Originally the TouchPad was priced at $499 and there was very little demand for the product at this price point. When HP announced that it was going to get out of the tablet market and slashed the price to $99, the TouchPad flew off the shelves. This price change actually resulted in a shortage in supply for the TouchPad. This example shows how demand is strongly affected by price.
RIM is another company that has a product, the PlayBook, in the tablet market that is failing to attract demand. But, as of the publishing date of the article I read, RIM has not slashed its prices in the same way that HP did with its tablet computer. Thus sales have remained low and resulted in a surplus of product, estimated at 800,000 units. And there will remain a surplus of the PlayBook's if prices remain the same; in the last quarter only 200,000 units were shipped.
These two examples show how changes in price can vastly affect demand. It also shows an example of why certain products will have a shortage/surplus based on the price they are offered at. And finally, it shows how much people value the products that Apple produces. The iPad, PlayBook, and TouchPad are all very similar products, but only one is produced by Apple and thus controls a majority of the market.
Real World Application of Supply and Demand 2-Wine Many people tend to enjoy some sort of alcohol with their dinner, with wine tending to be a favorite. Based on a story in October by Rudy Ruitenberg, of Bloomberg, expect to see prices changes due to a tightening supply of domestic grapes. This article was able to touch on a handful of different scenarios that occur due to changes in supply and demand.
The tightening supply of domestic grapes has led to an increase in the price of grapes in the U.S., as would be expected. But, the demand for wine has not changed, and has continued to rise. The increase in the price of grapes has led many wine companies to look for different supply strategies to help profits. While some companies have been able to pass the rising inputs (shifting the supply curve to the left) on to consumers, many companies have been unable to do this. The companies that have been able to pass along the increased price are those that have their own supply of grapes and are not exposed to the spot market. This is also an example of vertical integration where a firm produces the inputs required to make its final product.
Another example in this article of supply and demand principles is the idea of substitutes. Because of the weakening U.S. dollar against the currencies of major wine importers, imported wines have become more expensive. As the price of these imported wines has gone up, the demand for domestic wines has risen. This is a great example of a substitutes, which are defined as goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good.
The article also shows how during the 2008 recession, when consumer income was in obvious decline, that the demand for high price wine decreased. This would be depicted by a shift of the entire demand curve to the left. Also starting in 2008, the demand for lower-priced wines has been increasing. And lastly, the article talks about how the supply of wine was going to be at least 10% lower, and would lead to high prices. This is the most basic application of supply and demand and the relation to price.
This was a great article to see how one market can be affected in so many ways by supply and demand. A simple decrease in the supply of an input product changed supply and price, as well as consumer preferences. Also, the change in consumer income was able to change demand for two different products in the market. Overall, this was a great article to see all types of changes in a market because of supply and demand.
Real World Application of Supply and Demand 3-Gasoline Gasoline is a product with one of the highest demands in the world. As our country, the United State seems to have an insatiable demand for this good, even while we attempt to move into more energy efficient goods. Still, the United States consume about 25% of the world's oil. The article I read talked about the different factors that go into the prices of gasoline.
The first, and biggest, variable in the price of gasoline is the price of crude oil. Since crude oil accounts for 55% of the price of gasoline, changes in this input change price and supply of the good greatly. Crude oil prices are set by futures contracts. If commodity traders drive up the future price of crude oil, an input of gasoline, the price of gasoline will rise as the supply curve shifts to the left. And, if oil contracts are falling, the price of gasoline will decline while the supply curve will shift to the right. You can see that these shifts are because of the input prices rising as well as producer expectations of prices. When gasoline producers expect the prices to be higher in the future, they will want to hold back on the supply and sell later when the price is higher.
The article also discusses how demand can affect the price of gasoline. During the summer when there is more travel for vacation, gas prices usually increase. This is because the demand for oil increases during vacation season as more and more people are traveling (using gasoline). And, then during the winter months when there is less travel occurring, the prices of gasoline usually go down.
The last thing the article discusses is how we can change the price for gasoline by lowering our demand for oil. But, it has to be a significant change in demand over a long period of time to impact the prices. Also, because the only 20% of crude oil is used for gasoline, a complete boycott of gasoline may only result in a 20% decline in the price of oil.
Real World Application of Supply and Demand 4-Water and Energy Energy and water are two of the most essential products for human life in this generation. As humans, we obviously need water to live, and we rely on energy for just about everything in our daily life. But, what many of us do not realize is that water is essential to creating the energy we use.
As populations across the globe continue to grow, and more countries continue to modernize themselves, the demand for energy and water grows, shown by shifts in the demand curves to the right. In fact, energy consumption is expected to rise by as much as 50% by 2030. With this, there will also be an increase in demand for the water to produce this energy. The use of water is expected to grow by 30-100% in the energy sector over this same time frame. But, all of this is occurring while the supply for surface water is declining by as much as 25% in some areas.
Taking all of this into consideration, there is going to be considerable competition for sources of water, driven by the populations need for water as well as companies needing water to produce products. Economically, with the increased demand for water and a decreased supply for water, prices will be expected to rise quite a bit. This will also cause an increase in the energy prices as demand for this increases and the input price of water increases. It will be interesting to see how the supply and demand curves for these two change in the coming years, and how this will affect the market prices for these goods.
Multiple Choice Quiz #1-An increase in income leads to consumers buying more personal computers. A PC is an example of a
a) Public Good
b) Normal Good
c) Inferior Good
d) Complement
#2-Producers of cars expect the price of steel to go up in the future. How would this impact the supply curve of cars?
a) Increase
b) Double
c) Decrease
d) Remain the same
#3-Which of the following variables would not impact the demand curve?
a) An increase in consumer income
b) A decrease in the prices of related goods
c) A decrease in input prices
d) An increase in the population
#4-The demand curve for pizza is Qd=50-3P and the supply curve is 5+2P. Determine the equilibrium price and quantity.
a) P=9, Q=23
b) P=5, Q=15
c) P=7, Q=19
d) P=10, Q=25
#5-The government set a price ceiling on pizza of 8 dollars. Assume the market demand is still Qd=50-3P and market supply is 5+2P. Will there be a shortage or a surplus in the market, and how how much?
a) Surplus of 5 units
b) Shortage of 8 units
c) Surplus of 8 units
d) Shortage of 5 units
Summaries of other wiki's
Antony Christofaro-Government Policies
His wikispace talks about the effects of prohibition, marijuana legalization and sin taxes. He discusses the effects these policies have on consumption of goods and the effects that the entire country deals with, such as the costs of excessive alcohol use. It is interesting to read about the different costs that the economy deals with because of different government policies.
Amy Kitzman-Monopoly
Amy talks about what a monopoly is and how a monopoly can come about. She talks about the four sources that can create a monopoly and how these differ from one another. Her examples of monopolies include the Furukawa Electric Company and the AT&T attempt to acquire T-Mobile.
Rachel Kay-Perfect Competition
Rachel discusses perfect competition. She starts by giving the definition of perfect competition and then gives examples of markets that have perfect competition—such as agriculture and gasoline. I found the gasoline example interesting as I was also able to discuss the gasoline market in my wiki.
Kreg Hunter-Input Markets
Kreg focuses on supply and demand for labor in the market. He gives extensive definitions of both the demand and supply of labor in a market, including the market equilibrium. He also discusses the spot exchange markets, contracts and input procurement. The example he gives is about the retail industry.
Joshua Jackson-Concentration Indexes
Joshua looks at the different concentration models that describe markets. He looks at how the different indexes are used, such as how the DOJ uses the HHI for evaluating mergers, such as the AT&T and T-Mobile merger. He finishes up by discussing the limitations of concentration indexes and how they can overstate the true level of concentration because they exclude foreign producers, or they are a local industry.
Supply and Demand Overview
Law of Demand-Price and quantity demanded are inversely related.
Market Demand Curve-A curve indicating the total quantity of a good all consumers are willing and able to purchase at each possible price, holding the prices of related goods, income, advertising, and other variables constant.
Market Supply Curve-a curve indicating the total quantity of a good that all producers in a competitive market would produce at each price, holding input prices, technology, and other variables affecting supply constant.
Consumer Surplus-The value consumers get from a good but do not have to pay for. It is the difference between each price on the demand curve and the price paid. It is the area below the demand curve but above the market price of the good.
Producer Surplus-The amount producers receive in excess of the amount necessary to induce them to produce the good. It is the area above the supply curve but below the market price of the good.
- In perfect competition, consumer and producer surplus are maximized. No one can be made better off without making someone else worse off.
Equilibrium Price-Determined by the interactions of all the buyers and sellers in the market. It is where the demand curve and the supply curve intersect, where Quantity demanded=Quantity suppliedPrivate Good-A product that must be purchased in order to be consumed, and who consumption by one individual prevents another individual from consuming it.
Public Good-A product that one individual can consume without reducing its availability to another individual and from which no one is excluded.
Marginal Benefit-The change in total benefits arising from a change in the managerial control variable Q.
Marginal Cost-The change in total costs arising from a change in the managerial control variable Q.
Price Floor-The minimum legal price that can be charged in a market.
Price Ceiling-The maximum legal price that can be charged in a market.
Demand Shifters-
Any variable other than the price of a good that influences demand is known as a demand shifter. A rightward shift of the demand curve is called an increase in demand, while a leftward shift in the demand curve is called a decrease in demand.
There are five demand shifters--consumer income, prices of related goods, advertising and consumer tastes, population, and consumer expectation.
Inferior Good-A good for which an increase (decrease) in income leads to a decrease (increase) in the demand for that good.
Supply Shifters-
Variables that affect the position of the supply curve.
There are five supply shifters--prices of inputs, the level of technology ,the number of firms in the market, taxes, and producer expectations.
Real World Application of Supply and Demand 1-Tablet Computers
With the passing of Steve Jobs earlier this week, I couldn't help but think of the technologies he helped invent affect our world. One of these technologies is the tablet computer/iPad. Apple was the first to bring this product to the market and controls a majority share of the market. Other companies such as RIM and HP have developed products to compete with the iPad with little success. The lack of demand for the competitors products have caused some changes in the market which I will look at here.
The tablet computer that HP produces is the TouchPad. Originally the TouchPad was priced at $499 and there was very little demand for the product at this price point. When HP announced that it was going to get out of the tablet market and slashed the price to $99, the TouchPad flew off the shelves. This price change actually resulted in a shortage in supply for the TouchPad. This example shows how demand is strongly affected by price.
RIM is another company that has a product, the PlayBook, in the tablet market that is failing to attract demand. But, as of the publishing date of the article I read, RIM has not slashed its prices in the same way that HP did with its tablet computer. Thus sales have remained low and resulted in a surplus of product, estimated at 800,000 units. And there will remain a surplus of the PlayBook's if prices remain the same; in the last quarter only 200,000 units were shipped.
These two examples show how changes in price can vastly affect demand. It also shows an example of why certain products will have a shortage/surplus based on the price they are offered at. And finally, it shows how much people value the products that Apple produces. The iPad, PlayBook, and TouchPad are all very similar products, but only one is produced by Apple and thus controls a majority of the market.
Real World Application of Supply and Demand 2-Wine
Many people tend to enjoy some sort of alcohol with their dinner, with wine tending to be a favorite. Based on a story in October by Rudy Ruitenberg, of Bloomberg, expect to see prices changes due to a tightening supply of domestic grapes. This article was able to touch on a handful of different scenarios that occur due to changes in supply and demand.
The tightening supply of domestic grapes has led to an increase in the price of grapes in the U.S., as would be expected. But, the demand for wine has not changed, and has continued to rise. The increase in the price of grapes has led many wine companies to look for different supply strategies to help profits. While some companies have been able to pass the rising inputs (shifting the supply curve to the left) on to consumers, many companies have been unable to do this. The companies that have been able to pass along the increased price are those that have their own supply of grapes and are not exposed to the spot market. This is also an example of vertical integration where a firm produces the inputs required to make its final product.
Another example in this article of supply and demand principles is the idea of substitutes. Because of the weakening U.S. dollar against the currencies of major wine importers, imported wines have become more expensive. As the price of these imported wines has gone up, the demand for domestic wines has risen. This is a great example of a substitutes, which are defined as goods for which an increase (decrease) in the price of one good leads to an increase (decrease) in the demand for the other good.
The article also shows how during the 2008 recession, when consumer income was in obvious decline, that the demand for high price wine decreased. This would be depicted by a shift of the entire demand curve to the left. Also starting in 2008, the demand for lower-priced wines has been increasing. And lastly, the article talks about how the supply of wine was going to be at least 10% lower, and would lead to high prices. This is the most basic application of supply and demand and the relation to price.
This was a great article to see how one market can be affected in so many ways by supply and demand. A simple decrease in the supply of an input product changed supply and price, as well as consumer preferences. Also, the change in consumer income was able to change demand for two different products in the market. Overall, this was a great article to see all types of changes in a market because of supply and demand.
Real World Application of Supply and Demand 3-Gasoline
Gasoline is a product with one of the highest demands in the world. As our country, the United State seems to have an insatiable demand for this good, even while we attempt to move into more energy efficient goods. Still, the United States consume about 25% of the world's oil. The article I read talked about the different factors that go into the prices of gasoline.
The first, and biggest, variable in the price of gasoline is the price of crude oil. Since crude oil accounts for 55% of the price of gasoline, changes in this input change price and supply of the good greatly. Crude oil prices are set by futures contracts. If commodity traders drive up the future price of crude oil, an input of gasoline, the price of gasoline will rise as the supply curve shifts to the left. And, if oil contracts are falling, the price of gasoline will decline while the supply curve will shift to the right. You can see that these shifts are because of the input prices rising as well as producer expectations of prices. When gasoline producers expect the prices to be higher in the future, they will want to hold back on the supply and sell later when the price is higher.
The article also discusses how demand can affect the price of gasoline. During the summer when there is more travel for vacation, gas prices usually increase. This is because the demand for oil increases during vacation season as more and more people are traveling (using gasoline). And, then during the winter months when there is less travel occurring, the prices of gasoline usually go down.
The last thing the article discusses is how we can change the price for gasoline by lowering our demand for oil. But, it has to be a significant change in demand over a long period of time to impact the prices. Also, because the only 20% of crude oil is used for gasoline, a complete boycott of gasoline may only result in a 20% decline in the price of oil.
Real World Application of Supply and Demand 4-Water and Energy
Energy and water are two of the most essential products for human life in this generation. As humans, we obviously need water to live, and we rely on energy for just about everything in our daily life. But, what many of us do not realize is that water is essential to creating the energy we use.
As populations across the globe continue to grow, and more countries continue to modernize themselves, the demand for energy and water grows, shown by shifts in the demand curves to the right. In fact, energy consumption is expected to rise by as much as 50% by 2030. With this, there will also be an increase in demand for the water to produce this energy. The use of water is expected to grow by 30-100% in the energy sector over this same time frame. But, all of this is occurring while the supply for surface water is declining by as much as 25% in some areas.
Taking all of this into consideration, there is going to be considerable competition for sources of water, driven by the populations need for water as well as companies needing water to produce products. Economically, with the increased demand for water and a decreased supply for water, prices will be expected to rise quite a bit. This will also cause an increase in the energy prices as demand for this increases and the input price of water increases. It will be interesting to see how the supply and demand curves for these two change in the coming years, and how this will affect the market prices for these goods.
Multiple Choice Quiz
#1-An increase in income leads to consumers buying more personal computers. A PC is an example of a
a) Public Good
b) Normal Good
c) Inferior Good
d) Complement
#2-Producers of cars expect the price of steel to go up in the future. How would this impact the supply curve of cars?
a) Increase
b) Double
c) Decrease
d) Remain the same
#3-Which of the following variables would not impact the demand curve?
a) An increase in consumer income
b) A decrease in the prices of related goods
c) A decrease in input prices
d) An increase in the population
#4-The demand curve for pizza is Qd=50-3P and the supply curve is 5+2P. Determine the equilibrium price and quantity.
a) P=9, Q=23
b) P=5, Q=15
c) P=7, Q=19
d) P=10, Q=25
#5-The government set a price ceiling on pizza of 8 dollars. Assume the market demand is still Qd=50-3P and market supply is 5+2P. Will there be a shortage or a surplus in the market, and how how much?
a) Surplus of 5 units
b) Shortage of 8 units
c) Surplus of 8 units
d) Shortage of 5 units
Quiz Answers:
Sources:
Baye, Michael R. Managerial Economics and Business Strategy. New York: McGraw-Hill/Irwin, 2010. Print.
http://www.tgdaily.com/mobility-features/58607-rims-playbooks-are-gathering-dust
http://www.reuters.com/article/2011/09/15/us-hp-tablet-idUSTRE78E1SJ20110915
http://global.christianpost.com/news/99-hp-touchpad-sale-will-tablet-giveaway-be-resurrected-by-new-ceo-56787/
http://global.christianpost.com/news/99-hp-touchpad-sale-will-tablet-giveaway-be-resurrected-by-new-ceo-56787/
http://tutor2u.net/economics/revision-notes/a2-micro-perfect-competition.html
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2011/10/05/BUMJ1LDMVT.DTL
http://useconomy.about.com/od/commoditiesmarketfaq/p/high_gas_prices.htm2
http://web.ebscohost.com/ehost/pdfviewer/pdfviewer?sid=ff158ae7-0cb9-4cfd-93f1-2d2bfa083e85%40sessionmgr12&vid=2&hid=11
Summaries of other wiki's
Antony Christofaro-Government Policies
His wikispace talks about the effects of prohibition, marijuana legalization and sin taxes. He discusses the effects these policies have on consumption of goods and the effects that the entire country deals with, such as the costs of excessive alcohol use. It is interesting to read about the different costs that the economy deals with because of different government policies.
Amy Kitzman-Monopoly
Amy talks about what a monopoly is and how a monopoly can come about. She talks about the four sources that can create a monopoly and how these differ from one another. Her examples of monopolies include the Furukawa Electric Company and the AT&T attempt to acquire T-Mobile.
Rachel Kay-Perfect Competition
Rachel discusses perfect competition. She starts by giving the definition of perfect competition and then gives examples of markets that have perfect competition—such as agriculture and gasoline. I found the gasoline example interesting as I was also able to discuss the gasoline market in my wiki.
Kreg Hunter-Input Markets
Kreg focuses on supply and demand for labor in the market. He gives extensive definitions of both the demand and supply of labor in a market, including the market equilibrium. He also discusses the spot exchange markets, contracts and input procurement. The example he gives is about the retail industry.
Joshua Jackson-Concentration Indexes
Joshua looks at the different concentration models that describe markets. He looks at how the different indexes are used, such as how the DOJ uses the HHI for evaluating mergers, such as the AT&T and T-Mobile merger. He finishes up by discussing the limitations of concentration indexes and how they can overstate the true level of concentration because they exclude foreign producers, or they are a local industry.