Deamnd and Supply Analysis

Transcription

1 Deamnd and Supply Analysis Chiu Yu Ko November 1, 2009 Abstract This discussion note intended to use rice-uantity diagram to illustrate the concepts of demand and supply basic analysis. In particular, we define the following concepts: (1) quantity demanded, (2) demand, (3) quantity supplied and (4) supply. We further investigate the graphical implications when they change. Finally, we define the concept of equilibrium in demand and supply framework. 1 Demand uantity demanded (given price) is the amount of good consumer(s) willing to pay (to have that quantity of good). It is a point in the price-quantity diagram. D Figure 1: uantity Demanded is a point on rice-uantity diagram. kocb@bc.edu 1

2 Demand is quantity demanded at every price. Hence, demand is the amount of good consumer(s) willing to pay (to have that quantity of good) at every price. It is represented by a curve in price-quantity diagram: called demand curve. In most of the cases, quantity demanded and price is inversely related (so-called Law of Demand): this is embodied by downward slopping demand curve. D Figure 2: Demand is a curve in rice-uantity Diagram Change in uantity Demanded is the change of the amount of good consumer(s) willing to pay (due to change in price or other factors). Holding other factors constant, change in quantity demanded must be due to change in price. 1 Hence, in rice-uantity diagram, it is represented by movement along demand curve. 1 2 D 1 D 2 D 1 Figure 3: When price drops, quantity demanded goes up. 1 Usually comes from change in supply. 2

3 Change in Demand is change in quantity demanded at every price. Hence, it is in fact a shift in demand curve in rice-uantity diagram. May be due to change in preference, income, price of substitutes and price of complement. D 1 D 2 Figure 4: Increase in demand will shift demand curve to right. 2 Supply uantity supplied (given price) is the amount of good producer(s) willing to sell (to have that quantity of good). It is a point in the price-quantity diagram. S Figure 5: uantity supplied is a point on rice-uantity diagram. 3

4 Supply is quantity supplied at every price. In the other words, it is collection of quantity supplied at various prices. Hence, supply is the amount of good consumer(s) willing to pay (to have that quantity of good) at every price. It is represented by a curve in price-quantity diagram: called supply curve. In most of the cases, quantity supplied and price is positively related (so-called Law of Supply): this is embodied by upward slopping supply curve. S Figure 6: Supply is a curve in rice-uantity Diagram Change in uantity Supplied is the change of the amount of good producer(s) willing to sell (due to change in price or other factors). Holding other factors constant, change in quantity supplied must be due to change in price. 2 Hence, in rice-uantity diagram, it is represented by movement along supply curve. 2 S 1 S 1 S 2 Figure 7: When rice goes up, quantity supplied increases. 2 Usually comes from change in demand. 4

5 Change in Supply is change in quantity supplied at every price. Hence, it is in fact a shift in supply curve in rice-uantity diagram. May be due to change in cost of production, production technology and weather condition. S 1 S 2 Figure 8: Increase in supply will shift demand curve to left. 3 Equilibrium Equilibrium is a state where there would be no further changes. In demand and supply framework, this means the quantity demanded is equal to quantity supplied. Why? It is because when quantity demanded is greater than quantity supplied, there is excess demand so that consumers would bid the market price up for limited quantity of good. Similarly, when quantity demanded is less than quantity supplied, there is excess supply so that producers would try to sell by cutting price. Therefore, only when forces from consumers and producers equalize, there would be an equilibrium. S 1 E E D 1 Figure 9: Equilibrium is achieved when quantity demanded equals to quantity supplied. Hence, equilibrium is the intersection between supply and demand curves. 5