Basic terms and concepts. e
A. Volume of demand
B. Scope of supply
B. Demand curve
D. Supply curve
D. Market demand
E. Market supply
G. The Law of Demand
Z. Law of supply and. income effect
K. Substitution effect
K. Interchangeable goods
M. Complementary goods
H. Principle of diminishing marginal utility
O. Change in demand
D. Change in the volume of demand
P. Modification of the proposal
C. Change in supply
T. Market Equilibrium
Demand curve- A graphical expression of the relationship between the price of a good and the quantity demanded for that good.
Principle of diminishing marginal utility- The principle according to which each successive unit of a product produced has less utility for the consumer, in connection with which he agrees to buy additional units of the product only if the price decreases.
Market equilibrium- The ability of the competitive forces of supply and demand to set a price at which their volumes are balanced.
income effect- By reducing the prices for this product, the consumer has the opportunity to increase the volume of its purchases without denying himself the purchase of other goods.
Volume of demand- The quantity of a product that consumers are able and willing to buy at a given price at a given time.
Complementary Products- Pairs of goods for which an increase in the price of one leads to a decrease in demand for the other.
Supply volume- The quantity of a particular product that a producer is able and willing to produce and sell at a given time at a given price.
Supply curve- A graphic expression of the relationship between the price of a product and the quantity that sellers can and want to offer on the market.
market demand- The sum of the individual demand values presented by each consumer for a specific product at different prices from the total range of prices offered.
Change in supply volume - The change in the amount of a good that producers are able and willing to sell, which is caused by a change in the price of that good.
The law of supply and income effect- A principle that expresses a direct relationship between the price of a product and the amount of its supply (ceteris paribus).
substitution effect- The desire of the buyer to purchase more cheap goods, instead of similar ones, the prices of which have increased.
Change in demand - A change in the quantity of a product that consumers are willing and able to buy, associated with the action of a non-price factor.
Law of demand- The principle that expresses the inverse relationship between the price of a product and the amount of consumer demand for it (ceteris paribus).
Change of offer- Change in the amount of goods that producers are willing and able to sell, associated with the action of a non-price factor.
Interchangeable goods- Such pairs of goods for which an increase in the price of one leads to an increase in demand for the other.
Change in the volume of demand - The change in the quantity of a good that consumers are willing and able to buy due to a change in its price (ceteris paribus).
market supply- Different quantities of a product that producers are willing and able to produce and offer for sale on the market at each specific price from a number of possible during a given time.
EXERCISES
1. Table 4.1 presents data characterizing various situations in the canned beans market.
a) Draw the demand curve and the supply curve according to table 4.1.
b) If the market price for a can of beans is 8d, is there a surplus or a shortage in the market? What is their volume?
c) If the equilibrium price for a can of beans is 32 pence, is there a surplus or a shortage in this market? What is their volume?
d) What is the equilibrium price in this market?
e) Rising consumer spending increased the consumption of canned beans by 15 million cans at each price level. What will be the equilibrium price and equilibrium output?
2. How do the changes listed in Table 4.2 affect supply and demand?
Describe their impact using supply and demand curves (check the boxes in the columns whose title characterizes the effect
changes).
Table 4.2
3. In fig. 4.1 curve, the demand for pencils has shifted from Do to D). What events could have caused this movement?
a) A fall in the price of a substitute product for pencils.
b) A fall in the price of the complementary good (relative to the pencil).
c) Falling prices for the raw materials used to make pencils.
d) Decrease in consumer income, provided that pencils are defective goods.
e) Decreased value added tax.
f) Decrease in consumer income, given that pencils are a small commodity.
TESTS
1. The law of demand assumes that:
a) An excess of supply over demand will cause the price to fall.
b) When consumers' incomes rise, they tend to buy more goods
c) The demand curve usually has a positive slope.
d) When the price of a good falls, the quantity of planned purchases rises.
2, What can explain the shift in the demand curve for good X?
a) The supply of good X has decreased for some reason.
b) The price of good X has risen, and as a consequence, consumers have decided to buy less of this good,
c) The tastes of consumers have aroused interest in product X, and therefore they want to buy it at any given price more than before,
d) The price of good X has fallen, so consumers decide to buy more of it than before.
3, An increase in the price of materials needed to produce good X will cause:
a) a shift in the demand curve up (or to the right)
b) Shift the supply curve up (or to the left).
c) An upward shift in the demand curve and the supply curve.
d) Shift the supply curve down (or to the right).
4. Which term reflects the ability and willingness of people to pay for something?
a) need.
c) Necessity.
d) Desire.
5. Market demand is not affected by:
a) consumer income.
b) Prices for related goods.
c) Resource prices.
d) The number of buyers.
6. If demand falls, the demand curve shifts:
a) Down and to the left.
b) Clockwise rotation.
c) Up and to the right.
d) Anti-clockwise rotation.
7. A change in which factor does not cause a shift in the demand curve?
a) Consumer tastes and preferences.
b) The size or distribution of the national income,
c) Prices of goods.
d) The number or age of consumers.
8. Improvement of technology shifts:
a) the demand curve is up and to the right.
b) Demand curve down and to the right.
c) the supply curve down and to the right.
d) supply curve up and to the left
9. The willingness to buy additional units of a product only at a lower price is best explained by:
a) Substitution effect.
b) The principle of diminishing marginal utility.
c) Income effect.
d) the law of supply.
10. The market for goods and services is in equilibrium if:
a) Demand equals supply.
b) Price equals cost plus profit.
c) The level of technology changes gradually,
d) The volume of supply is equal to the volume of demand.
11. If the market price is below the equilibrium price, then:
a) There is a surplus of goods.
b) There is a shortage of goods.
c) A buyer's market is emerging.
d) The price of resources falls.
12. If the supply and demand for a product increase, then: a) The price will rise.
d 6) The total quantity of goods will increase. >
c) The price will remain stable.
d) The well-being of society will increase.
13. If the yen of a commodity is below the point of intersection of the demand curve and the supply curve, then there will be:
a) Excess.
b) Deficiencies.
c) Unemployment is on the rise.
d) All options are wrong.
14. Buying goods at a low price in one market and selling them at a high price in another is not:
a) An operation for the purpose of making a profit. , b) A means of increasing supply in a market with a high price level.
c) The reason for price differences in specific markets.
d) A means of increasing demand in a high-price market.
15. Activities of speculators:
a) Increases the risk to legitimate businesses; /b) Increases the trend towards price volatility.
c) Causes economic booms and recessions.
d) Always profitable.
16. The law of supply, if prices rise and other conditions remain unchanged, manifests itself:
a) An increase in supply.
b) Reduced supply.
c) An increase in supply.
d) In a fall in the volume of supply.
17. Supply and demand can be used to explain the coordinating role of price:
a) in the commodity market.
b) In the resource market.
c) in the foreign exchange market.
d) Any market.
18. It is likely that the reason for the fall in the price of a product is:
a) Increasing taxes on private enterprise.
b) Growth in consumer income.
c) Falling prices for inputs.
d) A fall in the price of a complementary good.
19. What can cause a drop in demand for good X?
a) Decrease in consumer income.
b) An increase in prices for goods that are substitutes for goods X.
c) The expectation of a rise in the price of good X.
d) A drop in the supply of good X.
20. If two goods are interchangeable, then an increase in the price of the first will cause:
a) Decreased demand for the second good.
b) An increase in demand for the second good.
c) An increase in the quantity demanded for the second good.
d) A decrease in the quantity demanded for the second good.
TRUE FALSE
1. The demand curve shows that when the price decreases, the quantity demanded increases.
2. An increase in demand means a movement along the demand curve in a direction that shows an increase in the total amount of the good purchased.
3. The law of diminishing productivity of factors of production means that a decrease in the price of a good leads to an increase in the volume of demand for this good.
4. A shift in the supply curve to the right means that producers offer more of the product at each price level.
5. If the government sets an upper limit for price increases, then the volumes of supply and demand for a given product are always equal.
6. Change in consumer preferences leads to the movement of demand along its curve, and income growth - to its shift.
7. The market mechanism uses prices as a tool to regulate distribution.
8. If the price of a product is stable, then it has settled at the level of the intersection of the supply and demand curve.
9. An increase in demand accompanied by an expansion in supply leads to an increase in the equilibrium output, but not to an increase in the equilibrium price.
10. The law of diminishing productivity of factors of production makes it possible to understand why demand curves for a finished product have a negative slope.
11. Any change in resource prices will shift the equilibrium point of supply and demand up or down the demand curve.
12. Growth in consumer income will cause an expansion in demand for all goods.
13. Ceteris paribus, a poor potato harvest will drive up the price of chips.
14. A product that is poorly made belongs to the goods of the lowest category (to defective).
15. If (ceteris paribus) the demand for a good increases as a result of an increase in consumer income, then this good belongs to the category of "normal goods".
16. In the usual sense, two goods X and Y are said to be complementary if an increase in the price of good Y leads (ceteris paribus) to a fall in the demand for good X.
17. A fall in the price of a product will lead to an increase in demand for its substitute product.
18. The distribution function of price is expressed in the elimination of commodity surpluses and deficits.
19. If the market price is below the equilibrium price, then it will decrease, because in such conditions demand will fall, and supply will increase.
20. If the supply of a good and consumer income rise at the same time, it is possible that the price of the good will not change.
PROBLEMS
1. Based on the data given in Table 4.3, complete the following tasks:
a) Draw consumer demand curves X, Y, Z, respectively, using Figure 4.2, 4.3, 4.4.
Rice. 4.4. Consumer demand Z
b) Draw a market demand curve using p^c. 4.5,. Explain how you built the market demand curve.
c) Assume that the demand for this product by consumers X and Y doubles, but is halved by Z. Change the demand curves X, Y, Z and the market demand curve accordingly.
2. In fig. 4.6 demand curves Do, Dj, D2 are presented.
Answer the questions:
a) What caused the movement from point (a) (curve Do) to point (b) (curve Di)? ______________________ Why? ___________________________________________________________
Quantity
Rice. 4.6. Demand Curves
b) What caused the movement from point (a) (curve Do) to point (c) (curve D2)?
Why?____________________________
What could be the reason for this shift?_______________________________________________
c) What caused the movement from point (a) (Do curve) to point (d) (Do curve)?
Why? ___________________________________________
____________________
d) What caused the movement from point (a) (Do curve) to point (e) (Do curve)?
Why? ___________________________________________
What could have caused this shift?__________________________________________________
_____________________
3. In fig. 4.7 shows the supply curves S 0 , S 1 , S 2 .
Quantity Fig. 4.7. Supply curves
Answer the following questions:
a) What caused the movement from point (a) to point (b)?
_____________________
b) What caused the movement from point (a) to point (c)?
_____________________
Why? ___________________ What could have caused this movement?
_____________________
c) What caused the movement from point (c) to point (d)?
Why? __________________ What could have caused this movement?
_____________________
d) What caused the movement from point (b) to point (c)?
Why? ___________________ What could have caused this movement?
_____________________
What could have caused this shift?__________________________________________________
4. a) Depict the supply and demand curves in the market for electric drills, using fig. 4.8 and the data of table 4.4.
Answer the questions:
b) What is the equilibrium price in the market for electric drills?
c) What is the equilibrium volume of purchase/sale of electric drills?
d) If the price of an electric drill is $30, what is the size of the shortage in this market?
e) If the price of an electric drill rises to $60, what is the surplus in this market?
5.. In fig. 4.9 curves of demand for the goods X, Y (substitute of the goods X) and Z (complementary to the goods X) are represented.
Suppose the price of good X has increased. Show the effect of a change in the price of good X using fig. 4.9.
Rice. 4.9. Demand curves for goods X, Y, Z .
ANSWERS AND COMMENTS
Basic terms and concepts
1. in; 2. n; 3. t; 4. and; 5. a; 6. m; 7. b; 8. g; 9. d; 10. with; 11. h; 12. to; 13, o; 14. f; 15. p; 16. l; 17. p; 18. e.
Exercises
1. a) See fig. 4.10.
b) Shortage equal to 60 million cans of beans/year.
c) A surplus equal to 30 million cans of beans/year.
d) The equilibrium price is 24 pence.
e) The equilibrium quantity is 60 million cans per year, the equilibrium price is 28 pence per can.
2. See table 4.5.
3. Movement can be caused by events b), d) or g). Factors a) and
e) can shift the demand curve in the opposite direction; factors c) and e) can shift the supply curve.
Tests
1. g; 2. in; 3. b; 4. b; 5. a; 6. a; 7. in; 8. in; 9. b; 10. g; 11. b; 12. b; 13. b; 14. g; 15. b; 16. in; 17. g; 18. in; 19. a; 20 b.
True False
1. B; 2. H; 3. H; 4. B; 5. H; 6. H; 7. B; 8. B; 9. H; 10. H; 11. V; 12. H; 13. B; 14. H; 15. V; 16. B; 17. H; 18. B; 19. H; 20. V.
Problems
1. a) See fig. 4.11, 4.12, 4.13 (curves with dots).
b) Summation of individual demand over horizons (see Figure 4.14).
c) See fig. 4.11, 4.12, 4.13, 4.14 - curves without points.
2. a) Growth in demand; the demand curve has shifted to the right; income growth, consumer preference, or other changes in non-price factors that affect demand.
b) Reducing demand; the demand curve has shifted to the left; a fall in income, an increase in the price of a complementary good, or other changes in non-price factors affecting demand.
c) Falling volume of demand; movement along the demand curve; an increase in the price of this product.
d) Growth in demand; movement along the demand curve; a fall in the price of the commodity.
3. a) Supply growth; the curve has shifted to the right; reduction in resource prices, use of more efficient technology, or other changes in non-price factors affecting supply.
b) Supply reduction; the curve has shifted to the left; an increase in resource prices, a decrease in the number of buyers, or other changes in non-price factors.
c) Growth in supply; movement along the supply curve; an increase in the price of this product.
d) Reducing the volume of supply; movement along the supply curve; price drop.
4a) see. rice, 4.15.
d) Shortage equal to 14 thousand pieces.
e) Surplus equal to 7 thousand pieces.
5, see fig. 4.16, 4.17.
The demand for the substitute product Y will increase; the demand for the complementary good Z will decrease; the demand for good X will not change.
Theme 5
the price of the goods will not change, but the quantity will decrease
46. Which phenomenon does not lead the economy to demand inflation:
there are no correct answers
47. Provided that an increase in the amount of loans provided does not lead to an increase in cash, a deposit of $ 1,000 at a reserve requirement of 20% can lead to an increase in the loan amount by a maximum of:
48. If the government expects to increase purchases of goods and services by $10 billion and at the same time wants to increase taxes, but maintain the same level of GNP, then taxes should be increased:
more than 10 billion dollars
49. Which of the listed properties of the market are inherent perfect competition:
50. The demand curve is descending. It means that:
If the price rises, then the demand for the good will decrease.
51. The growth of aggregate demand on the classical segment of the aggregate supply curve will lead to:
rise in the price level, while real NNP remains unchanged
52. If savings are determined by the formula S = 0.2Yd - 100, and planned investments are 80, then the equilibrium income is equal to:
53. Let's say that in the past year state procurements goods and services amounted to $4 billion, personal consumption spending $20 billion, gross private domestic investment $4 billion, exports $45 billion, imports $40 billion. of the year:
$33 billion
Which of the following costs can be considered fixed costs in the short run?
all answers are correct.
55. An increase in demand for good X can be caused by:
an increase in prices for goods that are substitutes for goods X
56. Monopolistic competition is characterized by the following features:
production of a differentiated product, many buyers and sellers of the product
57. Non-price demand factors include:
income of buyers, prices of substitute and complementary goods
The table shows the total benefits (billion dollars) from four environmental programs, each costing more than the previous ones. Which of these programs should be implemented?
| Program | General costs | General Benefits |
| A | ||
| B | ||
| V | ||
| G |
program B
59. An individual intends to purchase a house, rent it out and receive an annual income of 6 thousand rubles. If the current interest rate is 10%, what is the maximum settlement price of the house?
60 thousand rubles
60. Marginal product of a factor of production, in monetary terms:
equals the change in total revenue when using an additional unit of a factor of production
61. If depreciation deductions are subtracted from the gross national product, then the resulting value will show the value:
net national product
62. At the end of the financial year, your accountant reports that your company's profit is 20 thousand rubles. By running your own firm, you are missing out wages 4 thousand rubles, which could be received by working elsewhere. You have invested 30,000 rubles in your business, putting it in the bank, you would receive 10% per annum. Determine your economic profit.
"13 thousand rubles."
63. If a 2% reduction in the price of a product leads to a 2% increase in the volume of demand for it, then this demand:
unit elasticity
64. Assume that goods X and Y are fungible goods. If the price of good X has risen, then:
demand for good Y will rise
If the equilibrium GNP is greater than its potential level, then
there will be an inflationary gap
66. A change in demand for good X means that:
the demand curve has shifted to the left or right
67. Which types of income are not taken into account when calculating GNP:
68. The bank has a deposit of $5,000. The required reserve ratio is set at 10%. This deposit is able to increase the amount of loans provided to the maximum extent to:
69. Having determined the change in total utility when buying an additional unit of product X, you can determine:
marginal utility of a unit of good X
70. Suppose a steel mill sold steel to an automobile firm for $6,000 and that steel was used to make a car that was sold to a dealer for $14,000. The dealer sold the car to a family for $16,000. In this case, GNP grew to:
16 thousand dollars
71. If the nominal interest rate is 15% and the inflation rate is 20%, then the real interest rate is:
72. The indifference curve and the budget line are tools:
consumer behavior analysis
73. Side effects are considered market failures because:
in a pure market economy, there are often no incentives for an economic agent to take into account the impact of his decisions on the economic situation of other economic agents
74. If in the economy "injections" are equal to "withdrawals", then:
NNP produced is equal to NNP realized
75. All of the following shift the aggregate demand curve to the left except:
inflation expectations
76. If the process of manufacturing goods X does not require the diversion of resources that can be used in the production of other goods, then we can conclude that:
there are no alternative ways to manufacture goods X
77. If the volume of real GNP decreased by 6%, and the population decreased by 3% in the same year, then
real GNP per capita fell
78. For a firm whose production function exhibits positive (increasing) returns to scale, price discrimination allows:
increase profits through lower unit costs and different prices for different customers
79. The land supply curve is perfectly inelastic. It means that:
no matter how the price of land changes, its supply will not change in this regard
80. In long term production with an increase in the firm's output:
The answer depends on the nature of returns to scale.
81. If the economy is in equilibrium, then:
all answers are wrong
82. According to Keynesian economic theory with a significant decrease in aggregate demand on the classical segment of the aggregate supply curve:
the price level will not change, and real GDP will decrease
83. If the nominal interest rate is 20%, the inflation rate is set at 10% per year, then the real interest rate will be:
84. To get the maximum profit in short term An oligopolistic firm must choose a volume of output at which:
marginal revenue equals marginal cost
85. A profit maximizing monopolist will increase output:
if marginal revenue is higher marginal cost
86. Which of the provisions corresponds to the classical economic model:
aggregate demand is determined by the volume of production
87. During the period of economic recovery, there is:
growth in tax revenues
88. An increase in taxes in the Keynesian model will lead to a shift in the aggregate demand curve:
to the left by more than the increase in taxes
89. Due to a change in the interest rate:
asset demand for money changes
90. Factors affecting the price elasticity of demand for resources include:
all of the above answers are correct
Fixed costs associated with the organization of business for the release of a new type of product amounted to 10 million rubles. variable costs for the manufacture of a unit of production will presumably be equal to 0.4 thousand rubles. Estimated price per unit of goods - 1.6 thousand rubles. How many items must be manufactured to make a profit of 2 million rubles?
92. Nominal GNP in the reporting year amounted to 5 billion rubles. The natural rate of unemployment in the same year is 7%. The actual unemployment rate for this year is 14%. What is the potential GNP of this year? (Oakan's ratio is 2.5)
93. A Russian citizen temporarily works in the United States in an American private firm. His income is included in:
Russia's GNP and US GDP
94. The idea that prices and wages are downward elastic refers to:
to classical economic theory
95. If the monopolist chooses the volume of sales and price such that the absolute value of the price elasticity of demand is greater than one, then the following conclusion can be drawn:
all of the above answers are correct
96. According to the results of the financial year net profit entrepreneur amounted to 50 thousand rubles. In order to open his own company, the entrepreneur had to withdraw 50 thousand rubles from an account with Sberbank, where he was charged 10% per annum for this amount. If the entrepreneur did not run his own business, but would work for hire, then his salary would be 30 thousand rubles. What is equal to economic profit entrepreneur?
15 thousand rubles
97. If the government increases its purchases by $2 billion, and the marginal propensity to consume is 0.75, then GNP:
will increase by 8 billion dollars.
98. The number of able-bodied population in a certain year amounted to 150 million people, the number of unemployed - 30 million people. Determine the unemployment rate:
99. According to Keynesian theory, the equilibrium level of production is possible:
in both full and part-time employment
100. The supply curve is ascending. It means that:
When the price rises, the quantity supplied increases, and when the price falls, the quantity supplied falls.
101. An increase in the price level, accompanied by a decrease in real output, is called:
stagflation
102. Price elasticity of demand tends to decrease:
all of the above answers are correct
103. Goods X and Y are perfect substitutes for the buyer in a ratio of 1:1. The price of product X is 1 rub., the price of product Y is 1.5 rub. The customer has achieved maximum utility if:
the consumer spends all his income on good X
104. Public goods are referred to as market failures because:
all of the above answers are correct
105. The instruments of monetary (credit and monetary) policy do not include:
change in tax rates
106. If the real market price is higher than the equilibrium price, then in the market:
Task 1
Exercise:
There are three investment projects:
A: Costs are $150. Future profits = $1 per year.
B: Cost is $150. Future profit = $15 per year.
Q: Costs are $1,000. Future profits = $75 per year.
a. Calculate the rate of return for each project (A, B, C).
b. If the interest rate for the capital received on credit is 5%, 7% and 11%, then at what level of these interest rates the implementation of projects A, B, C will be profitable (C) or not profitable (H) for the entrepreneur.
Solution:
a.) The rate of return is calculated as the ratio of profit to costs:
A: 
B: 
V: 
b.) Let's make a table, where B is profitable, and H is not profitable:
|
Rate of return |
Interest rate: |
||||
Task 2
Exercise:
Table 1 presents data characterizing various situations in the canned bean market.
Table 1
|
Price (pence) |
Demand volume (million cans per year) |
Supply volume (million cans per year) |
a. Draw the demand curve and the supply curve according to table 1.
b. If the market price for a can of beans is 8d, is there a surplus or a shortage in the market? What is their volume?
v. If the equilibrium price for a can of beans is 32 pence, is there a surplus or a shortage in this market? What is their volume?
d. What is the equilibrium price in this market?
e. Rising consumer spending increased the consumption of canned beans by 15 million cans at each price level. What will be the equilibrium price and equilibrium output?
Solution:
a.) Draw a demand curve and a supply curve:
b.) At a market price of 8 pence, there will be a supply deficit of 60=70-10 cans, according to the schedule, because demand exceeds supply.
c.) At an equilibrium price of 32 pence, there will be a supply surplus of 30=70-40 cans, according to the schedule, because supply exceeds demand.
d.) The equilibrium price of the market is determined at the point of intersection of the demand curve and the supply curve in the market. The graph shows that the equilibrium price is 24 pence.
e.) Let's build a graph:
, then
Answer: with the supply unchanged and the demand increased at each price level by 15 million cans, the point of intersection of the curves shifts towards an increase in the equilibrium price, from 24 to 28 pence. And the equilibrium volume will be 60.
Task 3
Based on the data in Table 3, complete the following tasks:
Table 3
|
Consumer X |
Consumer Y |
Consumer Z |
|||
|
Volume of demand (unit) |
Volume of demand (unit) |
Volume of demand (unit) |
|||
a) Draw consumer demand curves X, Y, Z.
b) Draw a market demand curve. Explain how you
draw a market demand curve.
c) Assume that the demand for this product by consumers X and Y doubles, but is halved by Z. Change the demand curves X, Y, Z and the market demand curve accordingly.
a) Let's build graphs:
b) Let's build a schedule of market demand:
The market volume is determined by the sum Q p =Q X +Q Y +Q Z
Task4
Exercise:
Firm bears fixed costs in the amount of $ 45 Data on average variable costs in the short run (SAVC) are given in Table. 3
Table 3
|
Production volume (pcs/week) |
|
So far, we have been talking mainly about the demand curve of the individual consumer. How is formed market demand curve? In this section, we will show that market demand curves can be obtained by summing the individual demand curves of all consumers in a particular market.
From individual to market demand
To simplify the problem, suppose there are only three consumers (A, B, and C) in the food market. In table. 4.1 shows several sets for each of the three demand curves for these consumers. The total quantity demanded by consumers at each price, i.e. the market demand column data (5), is obtained by adding the data from columns 2, 3, and 4. For example, when the price of a good is $3, the quantity demanded in the market is: 2 + 6 + 10, or 18.
On fig. 4.8 the same consumer curves of demand for food are represented. The market demand curve is the curve resulting from summation of abscissa values demand of each of the consumers (marked as D A , D B , O C). We add up the abscissas to answer the question of the total quantity of goods that three consumers will need at a given price. This amount can be determined by "horizontal summation" of the charts at each price level. For example, when the price of a good is $4, the quantity demanded in the market (11 units) is the sum of the quantity requested by A (0 units), B (4 units), and C (7 units). Since all individual demand curves slope downward, the market demand curve also slopes downward. However, the market demand curve need not be a straight line, although each individual curve is. In our example, the market demand curve is bend because some consumers are unwilling to shop at prices that other consumers find acceptable (above $4).
Two points should be noted. First, the market demand curve shifts to the right as more and more consumers enter the market. Secondly, the factors affecting the demand of many consumers will also affect the market demand. Suppose, for example, that the majority of consumers in a particular market increase their income and, as a result, their demand for food increases. Since each consumer's demand curve shifts to the right, so will the market demand curve.
Aggregating individual demand into market demand is not just a theoretical exercise. It becomes important in practice when market demand is shaped by the demand of different demographic groups or by the demand of consumers living in different areas. For example, we can obtain information about the demand for personal computers by summing up information obtained independently from each other: 1) about families with children; 2) about families without children; 3) about lonely people. Or we can determine US demand for natural gas by summing natural gas demand across major regions (East, South, Mid East, West, for example).
Price elasticity of demand
We saw in ch. 2, that price elasticity of demand measures the sensitivity of demand to a change in the price of a product. In fact, price elasticity can be used to describe both individual and market demand curves. Denoting the quantity of a good as Q and its price as P, we define price elasticity as
When the price elasticity of demand is greater than 1, we say that demand is elastic, so this percentage reduction in quantity required is greater than the percentage increase in price. If price elasticity is less than one, then demand is inelastic.
In general, the elasticity of demand for a certain good depends on the availability of other goods that can replace it. When there are homogeneous goods or substitutes, an increase in the price of a certain good will force the consumer to buy less and more substitute goods. Then demand is more elastic with price. When there are no substitutes, demand will tend to be price inelastic.
The elasticity of demand is related to total money that the consumer spends on a particular product. When demand is inelastic, the quantity demanded is relatively insensitive to price changes. As a result, the total cost of a product rises when the price increases. Suppose, for example, that a family currently consumes 1,000 gallons of gasoline per year at a price of $1 per gallon. Let us further assume that the household price elasticity of demand is -0.5. Then, if the price of gasoline increases to $1.10 (a 10% increase), gasoline consumption falls to 950 gallons (a 5% decrease). The total cost of gasoline, however, will increase from $1,000 (1,000 gallons x $1/gallon) to $1,045 (950 gallons x $1.10/gallon).
But when demand is elastic, the total cost of a product decreases as prices rise. Suppose a family buys 100 pounds of chickens a year at a price of $2.00 per pound and the price elasticity of demand for chickens is -1.5. Then if the price of chickens increases to $2.20 (10% increase), the family's consumption of chickens drops to 85 pounds per year (15% decrease). The total cost of purchasing chickens will also drop from $200 (£100 - $2.00/lb) to $187 (£85 X $2.20/lb).
In the intermediate case, in which total costs remain unchanged when the price changes, the elasticity of demand for a good is called single. In this case, an increase in price leads to a decrease in the quantity to be demanded, and this is enough to keep total consumer spending unchanged.
In table. 4.2 all three cases of interrelations between elasticity of demand from the price and expenses of the consumer are resulted. It is useful to look at the table from the point of view of the seller of the goods, and not just the buyer. When demand is inelastic, an increase in price leads to only a slight decrease in the quantity required, and thus the seller's total revenue increases. But when demand is inelastic, an increase in price leads to a large decrease in the size of demand and total revenue falls.
Point and arc elasticity of demand
Calculations of price elasticity of demand for a straight line of demand, which we performed in Chap. 2 were straightforward since, firstly, we counted point elasticity, which is the elasticity measured at one point on the demand curve, and secondly, ΔQ/ΔP is constant throughout the demand line. When the demand curve is not a straight line, however, the calculation of demand elasticity may be inaccurate. Suppose, for example, that we are dealing with a segment of the demand curve in which the price of a good rises from $10 to $11 while demand falls from 100 to 95 units. How should price elasticity of demand be calculated? We can define that ΔQ = - 5 and ΔP = 1, but what values should be taken for P and Q in the formula E P = (ΔQ/ΔP) (P/Q)?
If we take the lowest price of $10, we find that E P = (- 5) (10/100) = - 0.50. However, if we take the highest price ($11), the price elasticity E P = (- 5) (11/95) = - 0.58. The difference between these two elasticity coefficients is small, but it makes it difficult to choose one of the two values. To solve this problem, when we are dealing with relatively large price changes, we use the arc elasticity of demand:
Е Р = (ΔQ/ΔP) (P′/Q′),
where Р′ - arithmetic mean two prices; Q'- arithmetic mean two quantities.
In our example, the average price is $10.5, the average quantity is $97.5, so the elasticity of demand, calculated using the arc elasticity formula, will be: EP = (- 5) (10.5 / 97.5) = - 0, 54. The arc elasticity index always lies somewhere (but not always in the middle) between the two point elasticity indexes for low and high prices.
Example 4.2. Aggregate demand for wheat
In ch. 2 (example 2.2), we considered two components of demand for wheat - domestic demand (US consumers) and export demand (foreign consumers). Let's see how we can determine the world demand for wheat in 1981 based on domestic and foreign demand. Domestic demand for wheat is given by Q DD = 1000 - 46P, where Q DD is the number of bushels (in millions) in domestic demand and P is the dollar price per bushel. External demand is equal to: Q DE = 2550 - 220R, where Q DE is the number of bushels (in millions) demanded abroad. As shown in fig. 4.9, domestic demand for wheat, expressed by direct AB, is relatively inelastic with price. Statistical studies have shown that the coefficient of elasticity of domestic demand from the price is about - 0.2. However, external demand - direct CD - has a large price elasticity. Elasticity is from - 0.4 to - 0.5. External demand is more elastic than domestic demand because many poor nations that import US wheat start consuming other crops when wheat prices rise.
To determine the world demand for wheat, we simply - simply sum up the magnitude of both demand term by term. To do this, we transfer to the left side of each demand equation the amount of wheat (the variable on the horizontal axis). Then add the right and left sides of the equations. Therefore, Q D \u003d Q DD + Q DE \u003d (1000 - 46R) + (2550 - 220R) \u003d 3550 - 266R. At any prices above point C, there is simply no external demand, and therefore world demand coincides with domestic demand. Below C, however, there is both domestic and foreign demand. As a result, the demand is obtained by adding the required amount of wheat domestically and the amount of wheat exported for each price level. As the figure shows, global demand for wheat has a twist and a kink. A break occurs at a price above which there is no external demand.
Example 4.3. Demand for housing
Demand for housing can vary significantly depending on the age of family members and the position of the family making the purchasing decision. One approach to housing demand is to relate the number of rooms in a family's home (required number) to the calculation of the price for an extra room, as well as the family's income. (Prices for rooms vary in the US due to differences in construction costs.)
In table. 4.3 provides data on the elasticity of demand from price and income for different demographic groups.
In general, elasticity of demand shows that the size of houses in demand by consumers (measured by the number of rooms) is relatively independent of changes in both income and price. But differences between subgroups of the population are significant. For example, if the head of the family is young, the price elasticity of demand is -0.221, which is much higher than if the head of the family is elderly. Presumably, families are more price sensitive when buying houses when the parents and their children are young and the parents are planning to have more children. The income elasticity of demand also increases with the age of the head of household, because, apparently, more "older" families have a higher income and additional rooms for them are more a luxury than a necessity.
The elasticity of demand with price and income when buying a home can also differ depending on the place of residence. Demand in central cities is much more price elastic than in suburbs. The income elasticity of demand, however, increases with distance from the center. Consequently, poor (or middle-income) residents central city(who live where the price of land is relatively high) are more price sensitive when choosing housing than their more affluent "competitors" on the outskirts. Not surprisingly, fringe residents have a higher income elasticity of demand, due to their wealth, and also to the fact that more and more diverse housing can be built in their areas.
Teach a parrot to pronounce the words "supply and demand" - and you have an economist in front of you! There is a lot of truth in this caustic joke, since, in essence, the simplest economic levers - supply and demand - can give us a deep idea not only about individual economic problems, but also about work. economic system generally.
In this chapter we will study the nature of the market and the process by which prices and outputs are formed. The circuit model presented in chapter 2 introduced us to the participants in both markets - both resources and goods. But there we assumed that the prices of resources and products are "given"; we will now explain how prices are set, or determined, by expanding on the concept of the market in more detail.
Market Definition
Market is an institution or mechanism that brings buyers (demanders) and sellers (supplyers) together individual goods and services. At the same time, markets take the most different forms. The nearest gas station, diner, music store, roadside farmer's stall are all regular markets. The New York Stock Exchange and the Chicago Grain Exchange are already highly developed markets where buyers and sellers, respectively, of stocks, bonds and agricultural products from around the world interact with each other. Similarly, auction organizers bring together potential buyers and sellers of art, livestock, used farm equipment, and sometimes real estate. An American-famous soccer player and his agent are negotiating a contract with the owner of a National Football League team. A finance graduate talks to Citicorp or Chase Manhattan bankers at a university office helping graduates get jobs.
All these situations that connect potential buyers with potential sellers form markets. As the examples show, some markets are local, while others are national or international. Some are characterized by personal contact between the demander and the supplier, while others are impersonal - in them the buyer and seller never see or do not know each other at all.
This chapter focuses on purely competitive markets. Such markets involve a large number of independent sellers and buyers exchanging a standardized commodity. These markets are not like a music store or a nearby gas station, where all goods are provided with price tags, but competitive markets such as the central grain exchange, the stock exchange, or the foreign exchange market, where the equilibrium price is "discovered" as a result of the interaction of decisions of sellers and buyers.
Demand
Demand can be represented as a scale showing the amount of a product that consumers are willing and able to buy at any given price from a range of possible prices over a given period of time. Demand reflects a range of alternative opportunities that can be presented in tabular form. It shows the quantity of the product for which demand will be presented at different prices, all other things being equal.
Usually we look at demand in terms of price; in other words, we consider that demand indicates the amount of a product that consumers will buy at different possible prices. It is equally correct, and sometimes more useful, to consider demand from a quantitative point of view. Instead of asking how much can be sold at different prices, one can ask at what prices consumers are willing to buy different quantities of a good. In table. Figure 3-1 shows a hypothetical demand scale for a single consumer who buys a certain number of bushels of corn.
This table chart of demand reflects the relationship between the price of corn and the quantity our mythical consumer is willing and able to buy at each of those prices. We say "willing" and "able" because willingness alone is not enough in the marketplace. I may wish to buy a Porsche, but if this desire is not supported by the ability to buy, that is, the necessary amount of money, it will be invalid and, accordingly, will not be realized on the market. As can be seen from Table. 3-1, if the market price per bushel is $5, our consumer will be willing and able to buy 10 bushels a week; if the price is $4, the consumer will be ready and able to buy 20 bushels a week, and so on.
The demand scale alone does not answer the question of which of the five possible prices actually exists in the corn market. As already mentioned, it depends on supply and demand. Therefore, demand is simply the plans or intentions of the buyer regarding the purchase of a product, expressed in tabular form.
In order for demand quantities to have any meaning, they must refer to a certain period of time - a day, a week, a month, etc. The statement that “a consumer can buy 10 bushels of corn for $5. per bushel" is vague and meaningless. And here is the statement that “the consumer will buy 10 bushels of corn weekly at $5. per bushel" is clear and full of meaning. Without knowing what specific period of time we are talking about, we will not be able to say whether the demand for a product is great or small.
Law of demand
The fundamental property of demand is as follows: with all other parameters unchanged, a decrease in price leads to a corresponding increase in the quantity demanded. Conversely, ceteris paribus, an increase in price leads to a corresponding decrease in the quantity demanded. In short, there is a negative or inverse relationship between price and quantity demanded. Economists have called this inverse relationship the law of demand.
The “ceteris paribus” assumption is of fundamental importance here. In addition to the price of the product in question, many other factors influence the quantity purchased. The number of Nike sneakers purchased will depend not only on their price, but also on the price of such substitutes for this product as Reebok, Adidas, L.A. Gear sneakers. The law of demand in this case states that fewer Nike sneakers will be purchased if their price rises, while the price of Reebok, Adidas, L.A. Gear remains constant. In short, if the relative price of Nike sneakers goes up, fewer will be bought. However, if the price of Nike shoes, as well as all other competing shoes, increases by some amount, say $5, consumers can buy more, less, or the same number of Nike shoes.
What is the basis of the law of demand? This question can be answered with varying degrees of deepening into scientific analysis.
1. Common sense and elementary observation real life are consistent with what a descending demand curve shows us. Usually people actually buy a given product more at a low price than at a high one. For consumers, price is a barrier that prevents them from making a purchase. The higher the barrier, the less product they will buy, and the lower the price barrier, the more they will buy. In other words, a high price discourages consumers from buying and low price increases their desire to make a purchase. The very fact that firms have "sales" is clear evidence of their belief in the law of demand. "Discount Days" are based on the law of demand. Firms are reducing their inventory not by raising prices, but by lowering them.
2. In any given period of time, each purchaser of a product receives less satisfaction, or benefit, or utility, from each successive unit of the product. For example, the second Big Mac gives the consumer less satisfaction than the first; the third brings even less pleasure or utility than the second, and so on. It follows that, since consumption is subject to the principle of diminishing marginal utility—that is, the principle that successive units of a given product bring less and less satisfaction—consumers buy additional units of a product only if its price falls.
3. The law of demand can also be explained by income and substitution effects. income effect indicates that. that at a lower price a person can afford to buy more of a given product without denying himself the purchase of any alternative goods. In other words, a decrease in the price of a product increases the purchasing power of the consumer's money income, and therefore he is able to buy more of the product than before. A higher price leads to the opposite result.
substitution effect expressed in the fact that at a lower price, a person has an incentive to buy a cheap product instead of similar products that are now relatively more expensive. Consumers tend to replace expensive products with cheaper ones.
To illustrate this, a decrease in the price of beef increases the purchasing power of the consumer's income and allows him to buy more beef (income effect). With a lower price of beef, it becomes relatively more attractive to buy, and it is bought instead of pork, lamb, chicken and fish (substitution effect). The income and substitution effects combine to make consumers able and willing to buy more of a product at a lower price than at a higher price.
Demand curve
The inverse relationship between the price of a product and the quantity demanded can be represented as simple graphics, showing the amount of demand on the horizontal axis, and the price - on the vertical axis. Let's place on the chart those five options "price - quantity", which are shown in Table. 3-1 by drawing perpendiculars to the corresponding points on the two axes. So, for plotting the option on the chart: “at a price of 5 dollars. the quantity demanded is 10 bushels" - we draw a perpendicular to point 10 on the horizontal axis (quantity), which must meet the perpendicular drawn to point 5 dollars. on the vertical axis (price). If this operation is done for each of the five possible options, we will end up with a series of points, which are shown in Fig. 3-1. Each dot represents a specific price and the corresponding quantity of a product that a consumer is willing to buy at that price.
Assuming that the same inverse relationship between price and quantity demanded exists at any other point on the graph, one can deduce a general conclusion about feedback between price and quantity demanded and construct a curve representing all possible options for the relationship between price and quantity demanded within the limits shown in the graph. The curve thus obtained is called the demand curve (denoted by the letters DD in Figure 3-1). It is directed down and to the right, since the relationship between the price and the quantity demanded, which it reflects, is negative, or inverse. The law of demand - people buy more of a product at a low price than at a high one - is reflected in the downward direction of the demand curve.
Why is it better to depict the demand scale in graphical form? Generally speaking, Tab. 3-1 and fig. 3-1 contain the same data and reflect the same relationship between price and quantity demanded. The advantage of graphic representation is that it allows us to clearly represent this relationship - in this case the law of demand - more in a simple way than if we had to use a verbal or tabular description of it. With the help of a single curve, having understood its meaning, it is easier to determine such a relationship and manipulate its various combinations than with the help of tables and verbose texts. Charts are invaluable tools for economic analysis. They allow you to clearly depict and combine often very complex relationships.
Individual and market demand
Until now, we have considered the problem from the perspective of a single consumer. The recognition of competition obliges us to consider a situation in which there are many buyers in the market. One can go from the scale of individual demand to the scale of market demand by summing up the quantities demanded by each consumer at different possible prices. If only three buyers acted on the market, as shown in Table. 3-2, it would be easy to determine the total quantities demanded at each price. On fig. 3-2 this summation process is shown graphically, and only one price is used for this - 3 dollars. Note that we simply combine the three individual demand curves horizontally to derive the overall demand curve.
Of course, competition involves a much larger number of buyers of the product in the market. Therefore, to avoid a lengthy summation process, suppose there are 200 buyers of corn in the market, and each of them decides to purchase the same amount of corn at each of the different prices, as did our original consumer. Thus, we can determine the total market demand by multiplying the quantities of demand given in Table. 3-1, at 200. Curve D in fig. Figure 3-3 shows this market demand curve for 200 buyers.
Demand determinants
When an economist draws a demand curve - say, one like D 1 in Fig. 3-3, he starts from the assumption that price is the most important determinant of the quantity of any product purchased. However, the economist knows that there are other factors that can and do affect the volume of purchases. Thus, when constructing the demand curve D, one must also assume that "other conditions are equal", that is, that the determinants of the quantity demanded are unchanged. When any of these determinants of demand actually change, the demand curve shifts to some new position to the right or left of D 1 . Therefore, these determinants are called demand change factors.
The main determinants of market demand are as follows: 1) tastes, or preferences, of consumers; 2) the number of consumers in the market; 3) money income of consumers; 4) prices for related goods; 5) consumer expectations regarding future prices and incomes.
Change in demand
A change in one or more determinants of demand changes the scale of demand presented in Table. 3-3, and hence the position of the demand curve in fig. 3-3. Such a change in the scale of demand or - graphically - a shift in the position of the demand curve is called a change in demand.
If consumers find the desire and ability to buy more of a given product at each of the possible prices than shown in column (4) of Table. 3-3, it is clear that there has been an increase in demand. On fig. 3-3 this increase in demand finds expression in a shift of the demand curve to the right, for example from D to D 2 . Conversely, a decrease in demand occurs when, due to a change in one of its determinants (or several), consumers buy a smaller amount of the product at each of the possible prices than indicated in column (4) of Table. 3-3. Graphically, the drop in demand is expressed as a shift in the demand curve to the left, for example from D 1 to D 3 in Fig. 3-3.
Now consider the impact that each of the above determinants has on demand.
1. Consumer tastes. A favorable change in consumer tastes or preferences for a given product, caused by advertising or fashion changes, will mean that demand will increase at any price. Unfavorable changes in consumer preferences will cause a decrease in demand and a shift in the demand curve to the left. Consumer tastes can be influenced technological change embodied in the new product. For example, the advent of the CD greatly reduced the demand for long-playing records. Consumers who are concerned about the health risks caused by cholesterol and excess obesity have increased demand for broccoli, low-calorie sweeteners and fresh fruits, reducing demand for beef, veal, eggs and whole milk. Medical studies showing that beta-carotene prevents cardiovascular disease and certain types of cancer have greatly increased the demand for carrots.
2. Number of buyers. It is obvious that an increase in the number of consumers in the market contributes to an increase in demand. A decrease in the number of consumers is reflected in a reduction in demand. Let's give examples. Improvement in the means of communication has expanded the boundaries of international financial markets and led to an increase in demand for stocks, bonds and other financial assets. The surge in the birth rate after the Second World War led to an increase in demand for diapers, baby lotions and obstetric services. As the children born during this boom in the 1970s reached their twenties, the demand for housing increased. And the growing up of this generation, on the contrary, caused a decline in housing demand in the 80s and 90s. Increasing life expectancy has increased the need for medical care, nursing care and nursing homes. Recent international trade agreements, such as the North American Free Trade Agreement (NAFTA) and the General Agreement on Tariffs and Trade (GATT), have lowered foreign trade barriers to US agricultural products, increasing demand for those products.
In table. 3-8 columns (I) and (2) reproduce the scale of the market supply of corn (from Tables 3-6), and columns (2) and (3) - the scale of the market demand for corn (from Tables 3-3). Note that in column (2) we use the usual price range. At the same time, we assume the presence of competition, that is, the presence of a large number of buyers and sellers on the market.
Excess
Which of the five possible prices at which corn can be sold on the market would actually be recognized as the market price for corn? Let's try to get the answer by an elementary enumeration method. Without any special reason, let's start with a price of $ 5. Could this price be the main market price for corn? We answer "no" for the simple reason that producers are willing to produce and offer for sale on the market at this price of about 12,000 bushels, while buyers, for their part, are only willing to purchase 2,000 bushels at this price. Price $5 encourages farmers to grow large quantities of corn, but discourages consumers from buying that corn. With the price of corn so high , buying other products seems like a better deal . The result is a 10,000 bushel surplus of corn, or an oversupply of corn, in the market. This excess, shown in column (4) of Table. 3-8 represents the excess of supply over demand at a price of $5. Farmers - producers of corn have an unnecessary stock of products on their hands.
The price of $5, even if it existed temporarily in the corn market, would not be able to stay there for any period of time. A very large surplus of corn would force competing sellers to lower the price in order to induce buyers to rid them of this surplus.
Let's say the price goes down to $4. The lower price encouraged buyers to purchase more corn from the market, but also encouraged producers to use fewer inputs to grow corn. As a result, the surplus was reduced to 6 thousand bushels. However, the surplus, or oversupply, still persists, and competition between sellers drives the price down again. We can therefore conclude that the prices of 5 and 4 dollars. will be unstable because they are too high. The market price for corn should be slightly below $4. Table 3-8. Market supply and demand for corn (thousand bushels)
a lack of
Let's now "jump" to the end of column (4) and consider $1 as a possible market price. It can be seen that at this price, the quantity demanded exceeds the quantity supplied by 15,000 units. This price discourages farmers from devoting their resources to growing corn, but at the same time encourages consumers to buy more corn than is available on the market. As a result, there is a shortage (deficit) of corn in the amount of 15 thousand bushels, or an excess demand for it. Price 1 USD is also not able to stay on the market as a market price. Competition between buyers will push the price above $1. Many consumers who wanted and could afford to buy corn for $1 will be left out in this situation. And many other consumers will be willing to pay more than $1 for corn. in order to still be able to buy it.
Suppose such competition between the buyer will raise the price to 2 dollars. This higher price reduces but does not eliminate the corn shortage. At a price of 2 dollars. farmers are willing to devote more resources to the production of corn, and part of the buyers who wanted to pay $ 1 per bushel would prefer not to buy corn at $ 2 per bushel. However, there will still be a 7,000 bushel shortage, or shortage, of corn in the market. Therefore, we can conclude that competition between buyers will raise the market price to a level above $2.
Equilibrium
Using the enumeration method, we excluded all prices, except for the price of $3. At a price of $3, and at that price only, the amount of corn that farmers are willing to grow and offer for sale on the market is equal to the amount that consumers are willing and able to buy. As a result, there is neither a surplus nor a shortage of corn in the market at this price. An excess of a product pushes the price down, and a shortage causes the price to rise.
When at a price of 3 dollars. there is neither shortage nor surplus, there is no reason for the real price of corn to change. The economist calls this price the purely market or equilibrium price, and equilibrium here means "harmony" or "peace." At a price of 3 dollars. the amount of supply and the amount of demand are balanced, that is, the equilibrium quantity is 7 thousand bushels. Therefore, the price is $3. acts as the only stable price for corn in terms of supply and demand, shown in Table. 3-8. In other words, the price of corn is set at a level at which producers' selling decisions and consumers' buying decisions are mutually consistent. Such solutions correspond to each other only at a price of $3. At any higher price, suppliers tend to sell more of the product than consumers are willing to buy, resulting in a surplus; at any lower price, consumers want to buy more than producers are willing to sell, as evidenced by the resulting shortage. Differences between the supply of sellers and the demand of buyers lead to a change in price, which ultimately ends in the reconciliation of these two opposite desires.
| The point of intersection of the descending demand curve D and the ascending supply curve S shows the equilibrium price and the equilibrium quantity of the product - in this case, 3 dollars. and 7 thousand bushes of corn. A shortage of corn that would occur at a price below the equilibrium price, say $2, would be 7,000 bushels and push the price up, causing supply to increase and demand to decrease until equilibrium was reached. An excess of corn at a price above the equilibrium price, say $4, would be 6,000 bushels and would move the price down, thereby increasing demand and reducing supply until equilibrium is reached. |
Graphical analysis of supply and demand leads us to the same conclusions. On fig. The market supply curve and the market demand curve are aligned in Figure 3-5, with the horizontal axis now showing both supply and demand.
At any price that exceeds the equilibrium price of $3, the quantity supplied will be greater than the quantity demanded. This surplus will cause competitive price-cutting by sellers seeking to get rid of their surplus. Lowering the price will reduce the supply of corn and at the same time encourage consumers to buy more of it.
Any price below the equilibrium price leads to a shortage of the product, i.e., the quantity demanded exceeds the quantity supplied. Price premiums offered by competing buyers will push it towards the equilibrium level. And such a price increase simultaneously forces producers to increase supply and “pushes” unnecessary buyers out of the market; as a result, the deficit disappears. Graphically: the point of intersection of the supply curve with the demand curve for the product is the equilibrium point. Here the equilibrium price is $3 and the supply and demand are 7,000 bushels.
The balancing function of prices
The ability of the competitive forces of supply and demand to set a price at a level at which buying and selling decisions are consistent, or synchronized, is called the balancing function of prices. In the above case, the equilibrium price is $3. unloads the market without leaving a burdensome surplus for sellers and without creating tangible product shortages for potential buyers. Essentially, the market mechanism of supply and demand "asserts" the following: any buyer who is willing and able to pay $3. for a bushel of corn, can buy it; those who are unwilling and unable will not be able to. In the same way, any seller who is willing and able to grow corn and offer it for sale at the price of $3 can do so with success; those who are unwilling and unable will not grow corn. (Key question 7.)
Changes in supply and demand
We already know that demand can change due to fluctuations in consumer tastes or incomes, changes in consumer expectations or prices of related goods. On the other hand, supply may change as a result of changes in technology, resource prices, or taxes. Now we will consider how changes in supply and demand affect the equilibrium price.
Change in demand. Let us first analyze the effects of changes in demand, assuming that supply remains constant. Assume that demand increases as shown in Fig. 3-ba. How will this affect the price? Noting that the new point of intersection of the supply and demand curves has higher values on both the price and quantity axes, we can conclude that an increase in demand, other things being equal (supply), generates a price increase effect and an increase in the quantity of the product. (The importance of graphical analysis becomes especially obvious; there is no need to fiddle with columns of numbers to determine the impact of the indicator we need on the price and quantity of the product, it is enough to compare the position of the new point with the position of the old intersection point on the graph.)
As shown in fig. 3-6b, a decrease in demand reveals both the effect of lowering the price and the effect of reducing the quantity of the product. The price goes down, and so does the quantity of the product. In short, we find a direct relationship between a change in demand and the resulting changes in both the equilibrium price and the quantity of the product.
Change of offer. Let us now carry out the opposite procedure and analyze the effect of a change in supply on price, assuming that demand is constant. When supply increases, as shown in Fig. 3bc, the new point of intersection of the supply and demand curves is located below the equilibrium price. However, the equilibrium amount of the product increases. On the other hand, when the supply is reduced, this leads to an increase in the price of the product, but a decrease in its quantity. Rice. 3bg illustrates a similar situation.
An increase in supply generates the effect of lowering the price and the effect of increasing the quantity of the product. Reduction in supply generates the effects of price increase and reduction in the quantity of the product. Thus, there is an inverse relationship between a change in supply and the resulting change in the equilibrium price, but the relationship between a change in supply and a change in the quantity of a product remains direct.
Difficult cases. The situation becomes much more complicated when supply and demand change simultaneously.
1. Supply is growing, demand is declining. Let us first assume that supply is increasing and demand is decreasing. What effect will this have on the equilibrium price? This example combines two price-cutting effects, with the end result being that the price will drop more than either of these events taken separately.
What about the equilibrium quantity of the product? Here, the effects of changes in supply and demand are multidirectional: an increase in supply leads to an increase in the equilibrium quantity of the product, while a decrease in demand leads to a decrease in the equilibrium quantity of the product. The direction of change in the quantity of a product depends on the relative parameters of changes in supply and demand. If the increase in supply exceeds the decrease in demand, then the equilibrium quantity of the product will be greater than the original. However, if the relative increase in supply is less than the reduction in demand, then the equilibrium quantity of the product will decrease. In order to verify the truth of these conclusions, you can use the graphs.
2. Supply falls, demand rises. The second possible case is when supply decreases and demand increases. There is a double effect of price increase here. It can be foreseen that the increase in the equilibrium price will be greater than if it were caused by any of these factors separately. The effects on the equilibrium quantity of the product in this case are again multidirectional and the final result depends on the relative parameters of changes in supply and demand. If the decrease in supply is relatively greater than the increase in demand, the equilibrium quantity of the product will be less than the original quantity. However, if the supply decreases by a relatively smaller scale than the increase in demand, the equilibrium quantity of the product will increase as a result of these changes. You can plot these two cases graphically to support our conclusions.
3. Supply is growing, demand is growing. What happens when both supply and demand increase? How will this affect the equilibrium price? This question cannot be answered unambiguously. Here, two opposing influences on price should be compared - the effect of lowering the price as a result of an increase in supply and the effect of raising the price as a result of an increase in demand. If the scale of increase in supply is greater than the scale of increase in demand, eventually the equilibrium price will fall. Otherwise, the equilibrium price will rise.
The impact on the equilibrium quantity of the product is unambiguous: an increase in both supply and demand leads to an increase in the quantity of the product. This means that the equilibrium amount of the product will increase in this case by a greater amount than under the influence of each of the factors taken separately.
4. Supply falls, demand falls. The simultaneous decrease in supply and demand can be subjected to the same analysis. When the reduction in supply exceeds the reduction in demand, the equilibrium price rises.
In the opposite situation, the equilibrium price decreases. Since both a decrease in supply and a decrease in demand have a downward effect on the quantity of product, it is safe to expect that the equilibrium quantity of the product will be less than the original.
In table. 3-9 these four cases are brought together. You should plot supply and demand schedules for each of these cases to make sure that the corresponding changes in the equilibrium price and equilibrium quantity of the product are indicated in Table. 3-9 is correct.
Special cases may arise when a decrease in supply and demand, on the one hand, and an increase in supply and demand, on the other, completely neutralize each other. In both these cases, the final impact on the equilibrium price is zero, the price does not change. (Key question 8.)
resource market
As in the market for products, resource supply curves are usually ascending, while resource demand curves are descending.
Resource supply curves reflect a direct relationship between the price of a resource and the amount of its supply, since it is in the interests of the resource owners themselves to supply more of a particular resource at a high price, and not at a low price. High incomes of workers in certain professions or industries encourage households to supply there as many people and material resources. Low incomes work in the opposite direction: they induce resource owners not to supply them to these specific areas employment or industry, but in fact encourage resources to be directed to other purposes.
In terms of demand for resources, firms tend to buy less of the resource that is rising in price and replace it with other, relatively cheap resources. Entrepreneurs seeking to reduce production costs find it profitable to replace expensive resources with cheap ones. Demand for a particular resource is higher when its price is lower. And what is the result? Descending demand curve for different resources.
Just as supply-side decisions of entrepreneurial firms and demand-side decisions of consumers determine the price in the product market, so price in the resource market is determined by the supply decisions made by households and the demand decisions made by households. firms.
Ticket Speculation: Is Resale Evil?
Some market transactions have an undeservedly bad reputation.
Tickets for sports and concerts are sometimes resold at prices higher than the original ones; such market transactions are referred to as "speculation". For example, a ticket to a high school baseball game bought for $40 can be resold for $200 or $250, sometimes more. The press often accuses speculators of "ripping off" buyers by charging "exorbitant prices." In the minds of some people, speculation and extortion are synonymous.
But is speculation really an unacceptable evil? First, we must note that the resale is a voluntary transaction, not a forced one. It follows that both the seller and the buyer benefit from the exchange, otherwise it would not have happened. The seller can appreciate 200 dollars. higher than the opportunity to watch the game, and the buyer, on the contrary, may appreciate the opportunity to watch the game above 200 dollars. There are no losers or victims here: both the seller and the buyer both benefit from the deal. The "speculative" market simply redistributes assets (tickets to the game) between those who value them lower and those who value them higher.
Does speculation harm other parties - in particular the sponsors of a competition or concert? If the sponsors suffered a loss, it was because they had originally priced the tickets below the equilibrium price. As a result, they suffered economic losses in the form of lost profits, that is, they received less profit than they otherwise could have received. But they caused this damage to themselves by setting the wrong price. This mistake of theirs has nothing to do with the fact that some of the tickets were later resold at a higher price.
What about viewers? Does the speculation cause a decrease in the quality of the audience? Not! The people who most wanted to see the game - mostly those who are most interested in and understand the game - will pay a high speculative price. Athletes and artists also benefit from ticket speculation: they will perform in front of a more understanding and interested audience.
So, is ticket speculation undesirable? From an economic point of view, no. Both the seller and the buyer of the "speculative" ticket benefit from the deal, and the result is a more understanding and interested audience. Sponsors of a game or concert may make less profit, but this is their own fault - due to their incorrect estimate of the equilibrium price.
Again on the “ceteris paribus” assumption
In Chapter 1, The Subject and Method of Economics, it was already noted that economists make up for their failure to conduct control experiments by using the “ceteris paribus” assumption in their research. In this chapter, we have seen that supply and demand are influenced by a number of factors. Therefore, when constructing specific supply and demand curves, such as D 1 D 1 and SS in Fig. 3-ba, economists isolate the influence of what they consider the most important determinant of supply and demand, namely the price of the particular product under consideration. Representing, thus, the laws of supply and demand in the form of descending and ascending curves, respectively, the economist assumes that all other determinants of demand (income, consumer tastes, etc.) and supply (resource prices, technology, etc.) remain constant or unchanged. In other words, price and quantity demanded, other things being equal, are inversely related. In turn, the price and the amount of supply are ceteris paribus in direct proportion.
By ignoring the “ceteris paribus” assumption, you can end up with confusing situations that seem to conflict with the laws of supply and demand. Suppose, for example, that Ford sold 200,000 escorts in 1993 at a price of $10,000; in 1994, 300,000 cars at a price of $11,000. and in 1995 - 400 thousand cars at a price of 12 thousand dollars. The price and the number of cars sold change in direct proportion, that is, in the same direction, and these data of the real market, it would seem, contradict the law of demand. But in fact there is no contradiction here. These data do not refute the law of demand at all. The catch here is that during the three years covered by our example, the "ceteris paribus" assumption was not met. Specifically: just because, for example, income growth, population growth and relatively high fuel prices increased the attractiveness of compact models to consumers, the demand curve for "escorts" crept upward from year to year, shifting to the right, as in Fig. 3-ba from D 1 to D 2, which caused an increase in prices and at the same time an increase in sales.
The opposite trend is shown in Fig. 3-bg. Comparing the initial equilibrium
Analysis of individual markets: demand and supply state S 1 D with a new S 2 D, we note that at a higher price a smaller amount of product is sold or offered, that is, the price and supply are characterized by an inverse relationship, and not a direct relationship, as the law dictates suggestions. And in this case, the catch is also that the “ceteris paribus” assumption underlying the construction of the ascending curve is not met. Perhaps the cost of production has increased or the product has been subject to a specific tax, which has shifted the supply curve from S 1 to S 2 .
These examples also underscore the significance of the distinction noted above between "changes in demand (or supply)" and "changes in demand (supply)". On fig. 3-bg "change in supply" entailed "change in the magnitude of demand."
Brief repetition 3-3
- In competitive markets, the price comes to an equilibrium level at which demand equals supply.
- A change in demand changes the equilibrium price and equilibrium quantity of a product in the same direction as the demand itself changes.
- A change in supply leads to a change in the equilibrium price in the opposite direction, and the equilibrium quantity in the same direction as the supply itself changes.
- Over time, the equilibrium price and the equilibrium quantity of a product may change in a direction that seems to be contrary to the law of supply and demand, since the “ceteris paribus” assumption is violated.
SUMMARY
- Market An institution or mechanism that brings together buyers and sellers of a product or service.
- Demand is described by a scale that reflects the willingness of consumers to buy a given product for a certain period of time at each of the different prices at which it can be sold. According to the law of demand, consumers generally buy more of a product at a low price than at a high price. Therefore, ceteris paribus, the relationship between price and quantity demanded is negative, or inverse, and demand is graphically depicted as a descending curve.
- Changes in one or more of the main determinants of demand - consumer tastes, the number of buyers in the market, consumers' money income, prices of related goods and consumer expectations - cause a shift in the market demand curve. Its shift to the right means an increase in demand, and its shift to the left means a decrease in demand. A change in demand must be distinguished from a change in the magnitude of demand; the latter entails a movement from one point to another on a fixed demand curve as a result of a change in the price of the product in question.
- The supply is described by a scale showing the volumes of a product that producers are willing to offer for sale on the market during a certain period of time at each of the possible prices at which this product can be bought. The Law of Demand states that, other things being equal, producers offer more of a product for sale at a high price than at a low one. As a result, the relationship between price and supply is direct, and the supply curve is ascending.
- Changes in resource prices, production technologies, taxes or subsidies, prices of other goods, expectations of changes in prices, or the number of buyers in a market cause a shift in the demand curve for a product. Its shift to the right means an increase in supply, and its shift to the left means a decrease in supply. In contrast, a change in the price of a given product leads to a change in the quantity supplied, that is, to a movement from one point to another on a constant supply curve.
- Under competitive conditions, the interaction of market demand and market supply adjusts the price until the moment when the quantity demanded and the quantity supplied coincide. This is the equilibrium price. The corresponding amount of product is the equilibrium amount.
- The ability of market forces to synchronize buying and selling decisions in such a way that potential surpluses and shortages of a product are eliminated is called the balancing function of prices.
- A change in either demand or supply entails a change in the equilibrium price and equilibrium quantity of the product. There is a positive, or direct, relationship between a change in demand and a concomitant change in the equilibrium price and quantity of a product. The relationship between a change in supply and a concomitant change in the equilibrium price is inverse, but the relationship between a change in supply and the equilibrium quantity of a product is direct.
- The concepts of supply and demand also apply to the resource market.
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