1. Aggregate Supply and Demand
2. Supply and Demand for Labor
3. Supply and Demand for Money and Bonds
4. Supply and Demand for Imports and Exports
5. Supply and Demand for Foreign Currencies
1. Understanding how demand schedules and demand curves are constructed
2. Understanding how demand schedules and demand curves are constructed
3. Explaining how market prices are determined
4. Explaining how quantities bought and sold are determined
5. Explaining why prices rise and fall.
6. Using the tools of supply and demand to predict price and quantity changes.
1. Demand
2. Supply
3. The determination of prices
4. Elasticity
5. Time frames for supply
(B 3-2, 3-3, 3-4)
A. The difference between the "quantity demanded" of a good and the "demand" for a good.
1. The "quantity demanded" of a good (QD) is the amount of that good that consumers plan to buy during a given period of time at a particular price.
a. QD is not how much people want (or need),
b. QD is how much they will buy
i. at a particular price.
c. QD is measured per unit of time (e.g. per week, month or year)
2. the "demand"is the whole relationship between the quantity demanded and the price
QD = f (P)
B. The "Law of Demand" states:
"All other things being equal, the higher the price (P) of a good, the lower is the quantity demanded. (QD)"
or
"During a given time period, the quantity demanded (QD) is inversely related to the price (P)"
1. The Law of Demand is based upon two effects of a price change:
a. the substitution effect and
b. the income effect
2. The substitution effect states that:
a. Consumers tend to substitute a lower price good for one that goes up in price.
3. The income effect states that:
a. As the price (P) of a good is increased, the amount of the good that can be bought with a given income declines.
C. "Demand" refers to the entire relationship between price (P) and the quantity demanded (QD).
QD = f (P)
or
Demand is the set of quantities of a good that buyers wish to purchase at each conceivable price (P).
1. Demand can be illustrated as:
a. An equation,
b. a schedule or
c. a line on a graph
2. In a demand equation,
a. The quantity demanded (QD) is usually the dependent variable and
b. price (P) is the independent variable.
QD = f (P)
(e.g. QD = 60/price)
3. A demand schedule lists the quantities people demand at various possible prices (P).
(e.g. price QD
1 60
2 30
3 20
4 15
5 12
6 10
4. A demand curve illustrates a demand schedule (or equation) by graphing the relationship between the quantity demanded (QD) of a good and its price (P).
or
A demand curve shows the relation between price (P) and quantity demanded (QD), holding all other things constant.
a. By historical accident (Alfred Marshall) the demand curve is normally drawn with:
i. price (P), (the independent variable) on the ordinate (the y axis) and
ii. the quantity demanded (QD), (the dependent variable) on the abscissa, (the x axis).
b. The demand curve shows how much people are willing to pay for the last unit purchased.
C. A movement along the demand curve is called "a change in the quantity demanded (QD)".
1. A change in the quantity demanded (QD) is caused by only one thing
a. - a change in the price (P) of the good.
b. Everything else causes "a change in demand".
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(B 3-5)
A. "A change in demand" refers to a change in the entire relationship between price (P) and the quantity demanded (QD).
1. A change in demand can be illustrated by:
a. A change in the parameters of the equation
b. New entries in the demand schedule
c. A new demand curve (a shift in the demand curve)
B. A change in demand can be caused by anything except a change in the price (P) of the good.
C. Some factors that can cause a change in demand are:
1. A change in the price of other goods
2. A change in consumer's incomes
3. A change in expected future prices (and incomes)
4. A change in the number of consumers
5. A change in consumer's preferences (tastes)
D. A change in the prices of related goods will change demand.
1. There are two possible relationships
a. substitutes and
b. complements
2. A substitute is a good that can be used in place of the good being studied.
a. An increase in the price of substitutes will increase the demand for the product.
i. e.g. motor bikes and bicycles
b. A decrease in the price of a substitute will
i. lower demand for the good being studied.
ii. e.g. taxi fares and demand for cyclo rides
3. A complement is a product used in conjunction with the good under study.
a. An increase in the price of a complement will reduce the demand for the product being studied.
i. e.g. computers and diskettes.
b. A decrease in the price of a complement will
i. increase the demand for the product.
ii. (e.g. gas prices and the demand for gas cookers)
E. Consumer's incomes
1. There are two possible relationships between demand and consumer's incomes
a. normal goods and
b. inferior goods.
2. A normal good is one for which an increase in consumer's incomes will cause an increase in demand.
a. (e.g. motor scooters), (taxi rides)
3. An inferior good is one for which an increase in consumer's incomes will cause an decrease in demand.
a. (e.g. bicycles), (cyclo rides)
F. Expected prices or expected incomes
1. If future prices are expected to:
a. fall, it will cause current demand to fall. (postpone purchase-buy later)
b. rise, it will cause present demand to rise. (buy now - stock up)
3. If incomes are expected to:
a. rise - you may be willing to buy more now. Demand will rise
b. fall - you may buy less today (save for a rainy day). Demand will fall
G. Number of consumers
1. Market demand curve is sum of individual demand curves
2. Market demand is the result of horizontal addition of individual demand curves.
a. Example of two consumer demand curves
Price Ba A Ba B Mkt. D
11,000 10 8 18
22,000 4 2 6
33,000 2 0 2
3. An increase in consumers causes demand to increase for all goods.
a. Example of adding third consumer
Price Ba A Ba B Ba C Mkt. D
11,000 10 8 6 24
22,000 4 2 3 9
33,000 2 0 1 3
H. A change in preferences will cause a change in demand.
1. Can be an increase
a. e.g. in US wine, jogging suits, rap music
b. e.g. in VN BaBaBa Beer vs. Tiger Beer
c. e.g. video rentals in Ha Noi
2. Can be decrease
a. In US cigarettes, bell bottom trousers, disco music
b. e.g. the "Piano" restaurant and bar on Hang Vai
M. A reminder: The distinction between a movement along a demand curve and a shift in a demand curve is equivalent to the distinction between:
1. a change in the quantity demanded (QD) and
2. a change in demand.
(B 3-3, 3-3, 3-6, 3-7)
A. The quantity supplied (QS) of a good is the quantity that producers plan to sell:
1. in a given period of time,
2. at a particular price.
B. The "Law of Supply" is as follows:
"Other things being equal, the higher the expected price (P) of a good, the greater is the quantity supplied (QS).
or
During a given time period, the quantity supplied (QS) is directly related to the price (P) of the good."
1. If producers receive higher prices,
a. they can bid resources away from producers of other products.
2. Higher prices will cause other producers to start producing that product.
C. Supply refers to the entire relationship between price (P) and the quantity supplied (QS).
QS = f (P)
or
Supply is the set of quantities of a good that sellers wish to sell at each conceivable price (P).
1. Supply can be illustrated as
a. An equation,
b. a schedule or
c. a line on a graph
2. In a supply equation,:
a. The quantity supplied (QS) is usually the dependent variable and
b. The price (P) is the independent variable.
i. QS = f (P)
ii. (e.g. QS = 15 * P)
3. A supply schedule lists the quantities firms supply at various possible prices (P).
(e.g. price QS
1 15
2 30
3 45
4 60
5 75
6 90
4. A supply curve illustrates a supply schedule or equation by graphing the relationship between the quantity supplied (QS) of a good and its price (P).
or
A supply curve shows the relation between price (P) and the quantity supplied (QS), holding all other things constant.
a. By historical accident (Marshall) the supply curve is normally drawn:
i. with price (P) (the independent variable) on the ordinate (the y axis) and
ii. the quantity supplied (QS) (the dependent variable) on the abscissa, (the x axis).
b. The supply curve shows the minimum price firms must receive in order to supply the last unit produced.
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(B 3-5)
A. A movement along the supply curve is called a change in the quantity supplied (QS).
1. A change in the quantity supplied (QS) is caused by only one thing
a. - a change in the price (P) of the good.
2. Anything else causes:
a. a change in supply.
B. A change in supply refers to a change in the entire relationship between price (P) and the quantity supplied (QS).
1. A change in supply can be illustrated by:
a. A change in the parameters of the equation
b. New entries in the supply schedule
c. A new supply curve (a shift in the supply curve)
2. A change in supply can be caused by anything except :
a. a change in the price (P) of the good.
C. Some factors that can cause a change in supply are:
1. A change in the price of factors of production
2. A change in the prices of related goods
3. a change in expected future prices
4. A change in the number of suppliers
5. A change in the technology of production
6. A change in government subsidies or taxes
D. A change in the prices of factors of production
1. It will alter the producer's costs and so change supply.
e.g. If foam prices go up, cushion makers will have to charge more
2. An increase in the prices of factors of production will reduce supply.
e.g. If wages to construction workers goes up, the cost of building mini-hotels in Ha Noi will rise.
3. A decrease in factor prices will increase supply.
e.g. if oil prices fall, electricity can be produced more cheaply
E. A change in the prices of related goods.
1. There are two possible relationships
a. Substitutes in production and
b. Complements in production.
2. A substitute in production is a good that can be used in place of the good being studied.
a. An increase in the price of substitutes in production will reduce the supply of the product
i. A farmer can grow cattle for beef or for milk
ii. a rise in price of beef will cause fewer cows to be grown for milk and
iii. reduce the supply of milk.
b. A decrease in the price of a substitute in production will increase the supply of the good being studied.
3. A complement in production is a product used in conjunction with the good under study.
a. An increase in the price of a complement in production will increase the supply of the product being studied.
i. When sheep are grown, they produce wool and mutton
ii. a rise in the price of wool will cause more sheep to be grown and
ii. increase the supply of mutton.
b. A decrease in the price of a complement in production will decrease the supply of the product.
F. Expected future prices
1. If prices are expected to fall, it will cause supply to increase now (before prices fall).
(sell now - draw down inventories)
2.If future prices are expected to rise, it will cause present supply to fall.
(sell later - build up inventories)
a. I note large inventories in electronics shops relative to sales - in Ha Noi.
b. (Do they expect prices to rise?)
G. Number of suppliers
1. Market supply curve is sum of individual supply curves
a. e.g. tomato vendors
i. in market (Cho) at corner of Ngo Tram, Hang Da and Duong Thanh Streets
Price Ba A Ba B Mkt. S
11,000 10 8 18
22,000 30 20 50
33,000 35 25 60
2. The market supply is found by horizontal addition of the individual supply curves.
3. If the number of suppliers increases, the supply increases for all goods.
a. Example of adding third seller of tomatoes
Price Ba A Ba B Ba C Mkt. S
11,000 10 8 6 24
22,000 30 20 30 80
33,000 35 25 40 100
H. An improvement in technology will cause an increase in supply.
1. Adoption of a more costly technology could reduce supply.
2. Firms could be forced to adopt more costly technologies by governments.
a. environmental protection
b. Worker safety protection
I. Government taxes and subsidies
1. A tax placed on the production of a good will reduce the supply of the good.
a. e.g. tax on banking transactions in VN
2. A subsidy paid for the production of a good will increase the supply of the good.
a. Tariff placed on importing foreign cars is similar to a subsidy for domestic auto assembly plants in VN
M. The distinction between a movement along a supply curve and a shift in a supply curve is equivalent to the distinction between:
1. a change in the quantity supplied (QS) and
2. a change in supply.
III. Price Determination
(B 3-3)
A. There are two issue in the determination of market prices:
1. Finding the equilibrium price
2. Determining whether the equilibrium is a stable one:
a. Will system return to equilibrium after a shock causes disequilibrium?
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A. Equilibrium is defined as a situation in which opposing forces balance. It is a state of rest.
1. There are three types of equilibrium
a. Stable,
b. unstable and
c. neutral
2. A stable equilibrium is one which, if the equilibrium is disturbed,
a. forces will be set in motion to move the system back to that equilibrium.
3. An unstable equilibrium is one which, if the equilibrium is disturbed,
a. forces will be set in motion to move the system away from that equilibrium.
4. A neutral equilibrium is one which, if the equilibrium is disturbed,
a. forces will not be set in motion to move the system back to that equilibrium or
b. to move it farther away from that equilibrium.
B. Market equilibrium is a situation where,:
1. given available resources and the actions of others,
2. no one can make a choice that will make himself or herself better off. (an optimum)
C. The equilibrium price is the price (P) at which the quantity supplied (QS) is equal to the quantity demanded (QD).
QS = QD
D. The equilibrium quantity (Q0) is the amount traded at the equilibrium price (P0).
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A. If the price (P1) is not at the equilibrium price (P0), we have disequilibrium.
1. excess supply or
QS > QD
2. excess demand
QD > QS
B. Dynamic Laws of Supply and Demand
1. The First Law
a. If the quantity demanded (QD) is greater than the quantity supplied (QS),
i. prices (P) will rise.
b. If the quantity demanded (QD) is less than the quantity supplied (QD),
i. prices (P) will fall.
2. Second Law
a. The larger the difference between the quantity supplied (QS) and the quantity demanded (QD),
b. the greater the pressure on prices (P) to change.
3. Third Law
a. When quantity supplied (QS) equals quantity demanded (QD),
b. prices (P) have no tendency to change.
C. The effects of a disequilibrium price:
1. If price (P) is below equilibrium,
P1 < P0
a. There will be a an excess quantity demanded (QD) (excess demand) or (shortage).
QD > QS
b. Since some people are willing to pay more than the current price,
i. prices will be bid up to equilibrium.
2. If price is above equilibrium,
P1 > P0
a. There will be a an excess quantity supplied (excess supply) or (surplus).
QD < QS
b. Since some firms are willing to sell at a lower price,
i. They will try to attract customers by lowering prices to equilibrium.
3. At the equilibrium price,
P1 = P0
a. There will be no surplus or shortage and
QD = QS
b. There will be no pressure for price to change.
C. The equilibrium is stable if:
a. The Law of demand is obeyed and
b. the Law of supply is obeyed
IV. Predicting Changes in Prices and Quantities
A. Three types of analysis (Statics, Comparative Statics, Dynamics)
1. Statics studies the equilibrium values of the variables.
2. Comparative statics examines how the equilibrium has changed when one or more of the relationships has changed.
3. Dynamics examines the time paths of the variables as they move from one equilibrium to the next.
B. If there is a change in demand, and no change in supply
1. The equilibrium point moves along the supply curve (a positive relationship).
a. Thus any change in demand will move the equilibrium price (P) and quantity (Q)
i. in the same direction as the change in demand.
2. An increase in demand shifts the demand curve to the right. This results in:
a. An increase in the equilibrium price (P) and
b. An increase in the equilibrium quantity (Q).
3. A decrease in demand shifts the demand curve to the left. This results in:
a. A decrease in the equilibrium price (P) and
b. A decrease in the equilibrium quantity (Q).
B. If there is a change in supply, and no change in demand
1. The equilibrium point moves along the demand curve (a negative relationship).
a. Thus any change in supply will move the equilibrium quantity (Q) in the same direction as the change in supply and
b. it will move the equilibrium price (P) in the opposite direction as the change in supply.
2. An increase in supply shifts the supply curve to the right. This results in:
a. An increase in the equilibrium quantity (Q) and
b. A decrease in the equilibrium price (P).
3. A decrease in supply shifts the supply curve to the left. This results in:
a. A decrease in the equilibrium quantity (Q) and
b. An increase in the equilibrium price (P).
C. If there is a shift in both demand and supply, you cannot predict both price and quantity.
1. If supply and demand both increase, both curves shift to the right. This results in:
a. An increase in the equilibrium quantity (Q).
b. An increase in price (P)
i. if the shift in the demand curve is larger than the shift in the supply curve.
c. A decrease in price (P)
i. if the shift in the demand curve is smaller than the shift in the supply curve.
2. If supply and demand both decrease, both curves shift to the left. This results in:
a. An decrease in the equilibrium quantity (Q).
b. An increase in price (P)
i. if the shift in the demand curve is smaller than the shift in the supply curve.
c. A decrease in price (P)
i. if the shift in the demand curve is greater than the shift in the supply curve.
3. If supply increases and demand decreases,
a. the supply curve shifts to the right and the demand curve shifts to the left.
b. The result is:
i. A decrease in the equilibrium price (P).
ii. An increase in quantity (Q)
iii. if the shift in the demand curve is smaller than the shift in the supply curve.
c. The result is a decrease in quantity (Q)
i. if the shift in the demand curve is greater than the shift in the supply curve.
4. If supply decreases and demand increases,
a. the supply curve shifts to the left and the demand curve shifts to the right.
b. The result is:
i. An increase in the equilibrium price (P).
ii. An increase in quantity (Q)
iii. if the shift in the demand curve is greater than the shift in the supply curve.
c. The result will be a decrease in quantity (Q)
i. if the shift in the demand curve is smaller than the shift in the supply curve.
V. Disequilibrium Prices
(B 3-9)
A. In most markets, the determinants of supply and demand are constantly changing.
1. Hence demand and supply curves are constantly shifting.
B. It takes time for producers and consumers to adjust their behavior.
1. Hence, most markets are in a state of disequilibrium most of the time.
2. As long as the Law of Supply and the Law of Demand hold,
a. the equilibria are stable and
b. the markets are moving toward the new equilibria.
3. Shortages and surpluses are being reduced.
a. They are temporary phenomena if
b. Prices are free to rise and fall.
C. Governments may prevent markets from reaching equilibria by controlling prices.
1. They may impose price floors or price ceilings.
2. Price ceilings (maximum legal prices) (B Fig. 3-7)
e.g. maximum interest rates banks can charge borrowers
a. Generally imposed when supplies are limited.
b. Result is a shortage (QD is increased and QS is decreased).
i. e.g. rental housing
ii. Bank loans to businessmen
c. Requires some other form of rationing
i. Other forms of rationing are often unfair and inefficient
(e.g. waiting lines, favoritism)
(e.g. credit rationing to preferred borrowers)
ii. Often difficult to administer (e.g. ration books)
d. In long run price ceilings may reduce the supply (shift supply curve)
i. e.g. rental housing in Portugal, Berkeley and New York
ii. e.g. rice production in Viet Nam (effect of price liberalization)
C. Price floors (minimum legal prices)
1. Generally imposed to protect producers.
2. Examples are:
a. minimum wage (B Fig. 3-9) and
b. farm price supports (B Fig. 3-10)
c. Minimum interest rates paid to depositors of banks.
3. Result in surplus (QS raised, QD reduced)
4. Requires government scheme to buy up surplus
i. Expensive
(e.g. U.S. grain, European butter)
ii. Inefficient
encourages overproduction
iii. Causes international trade disputes
(US sugar quotas, US grain dumping)
(European Canola Oil)
D. Sometimes individual sellers refuse to respond to shortages by raising their prices because of customs and traditions.
1. (e.g. ice and building materials after Hurricane Andrew)
a. Called "price gouging"
2. e.g. World Cup tickets
a. Called "scalping"
3. result is the same as government imposed price ceilings.
a. Delayed delivery of ice and building materials.
b. Illegal purchase and resale by individual scalpers.
V. Elasticity
A. Many disputes in macroeconomics have to do with the disagreements about the sensitivity of the key variables with respect to other variables.
1. e.g. Sensitivity of investment demand (II) to interest rates (r).
2. e.g. Sensitivity of real interest rates (r) to changes in the money supply (M)
3. e.g. Sensitivity of exports (X) and imports (Z) to changes in the exchange rate (ER).
4. e.g. Sensitivity of the exchange rate (ER) to changes in the domestic interest rate (r).
B. Elasticity is a measure of the sensitivity of the dependent variable (Y) to changes in the independent variable (X).
1. Elasticity is measured as the value of the percentage change in the dependent variable (Y) divided by the value of the percentage change in the dependent variable (X).
a. % DELTA Y / % DELTA X
2. Since percentage changes are independent of the units in which the variables are measured,
a. elasticity,
i. which is a ratio of percentage changes
ii. is independent of the units in which the variables are measured.
b. elasticity is a pure number
i. e.g. e = 1/2 or e = 3.2
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( B 5-1)
A. Since in the case of demand, price (P) and quantity demanded (QD) are negatively related, demand elasticities have negative signs.
1. However, by convention, economists often speak of demand elasticities as if they were positive.
a. If they are treated as positive,
i. Remember that they are really negative
2. Begg treats demand elasticities as negative (e < 0)
3. So it is important to make sure which convention is being followed.
B. For all elasticities except elasticity of demand:
1. The sign of the elasticity will be the same as the sign of the slope of the curve.
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A. The term elastic demand refers to
1. the case where the percentage change in the quantity demanded (QD) is greater than the percentage change in the Price (P).
El. of D = (% change in QD / % change in P) > 1
B. The term inelastic demand refers to
1. the case where the percentage change in the quantity demanded (QD) is less than the percentage change in the Price (P).
El of D = (% change in QD / % change in P) < 1
B. The term unitary elasticity of demand refers to
1. the case where the percentage change in the quantity demanded (QD) is equal to the percentage change in the Price (P).
El of D = (% change in QD / % change in P) = 1
VIII. Time Frames for Supply
(B 5-4)
A. The analytic time frames for supply are defined differently for:
1. microeconomics and
2. macroeconomics
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A. The market period refers to:
1. a period of time where suppliers can make no adjustments to quantity in response to a change in prices.
a. e.g. a movie theater on any given night
b. An airline with a given number of planes
c. A market woman who brought a certain amount of tomatoes into the city that day
2. The supply curve is vertical
a. or perfectly inelastic
A. The short run refers to:
1. a period where suppliers can only make partial adjustments to changes in prices.
a. Garment factory can hire more workers and run two shifts but
b. Number of sewing machines is fixed.
2. The short run supply curve is positively sloped.
a. Elasticity is a finite positive number
B. The long run refers to
1. a period where suppliers can make complete adjustments to changes in prices.
a. Hire more workers, expand the factory and add more sewing machines.
2. The long run supply curve is positively sloped, but not as steeply sloped as the short-run supply curve.
a. Supply is more elastic in the long run
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A. The short run refers to the period where producers can respond to an increase in demand by increasing their prices and output.
i. But the prices of inputs (e.g. wages) are fixed
B. The long run refers to the period when producers and the sellers of inputs can respond to an increase in demand by raising their prices.
i. No prices are fixed
C. The short run aggregate supply curve is positively sloped
i. Because profits rise as prices rise
D. The long run aggregate supply curve is vertical
i. Because profits do not rise as prices rise.
ii. In nominal terms, Wages, prices and profits rise in proportion.
iii. There are no changes in relative prices
IX. Summary of the Lecture
Demand
The quantity demanded of a good or service is the amount that consumers will buy in a given period of time at a particular price. Demands are different from wants or needs. Wants are unlimited, whereas demands reflect decisions to satisfy specific wants. The quantity that consumers will buy of any good depends on:
1. The price of the good
2. The prices of related goods-substitutes and compliments
3. Income
4. Expected future prices and incomes
5. Population
6. Preferences
Other things being equal, the higher the price of a good, the smaller the quantity of that good demanded. The relationship between the quantity demanded and price, holding constant all other influences on consumers' planned purchases is illustrated by the demand schedule or the demand curve. A change in the price of a good produces a movement along a demand curve for that good. Such a movement is called a change in the quantity demanded.
Supply
The quantity supplied of a good or service is the amount that producers will sell in a given period of time at a particular price. The quantity that producers will sell of any good depends on:
1. The price of the good
2. The prices of factors of production
3. The prices of related goods
4. Expected future prices
5. The number of suppliers
6. Technology
Other things being equal, the higher the price of a good, the larger the quantity of that good supplied. The relationship between the quantity supplied and price, holding constant all other influences on sellers' planned sales is illustrated by the supply schedule or the supply curve. A change in the price of a good produces a movement along a supply curve for that good. Such a movement is called a change in the quantity supplied.
Changes in all other influences on selling plans are said to change supply. When supply changes, there is a new supply schedule and the supply curve shifts. Where there is an increase in supply, the supply curve shifts to the right; when there is a decrease in supply, the supply curve shifts to the left.
Price Determination
In competitive markets, price regulates the quantities supplied and demanded. The higher the price, the greater is the quantity supplied and the smaller is the quantity demanded. At high prices, there is a surplus-an excess of the quantity supplied over the quantity demanded. At low prices, there is a shortage-an excess of the quantity demanded over the quantity supplied. There is one price, and only one price, at which the quantity demanded equals the quantity supplied. That price is the equilibrium price. At that price, buyers have no incentive to offer a higher price and sellers have no incentive to sell at a lower price.
Predicting changes in price and quantity
Changes in demand and supply lead to changes in price and in the quantity bought and sold. An increase in demand leads to a rise in price and to an increase in quantity. A decrease in demand leads to a fall in price and to a decrease in quantity. An increase in supply leads to an increase in quantity and a decrease in price. A decrease in supply leads to an decrease in quantity and a increase in price. A simultaneous decrease in demand and supply increases the quantity bought and sold but can raise or lower the price. If the increase in demand is larger than the increase in supply, then the price will rise. if the increase in supply is larger than the increase in demand, then the price will fall.
Elasticity
Elasticity of demand is a measure of the responsiveness of the quantity demanded of a good to a change in its price. The larger the elasticity, the greater is the responsiveness of the quantity demanded to a give change in price. When the percentage change in the quantity demanded is smaller than the percentage change in price, elasticity is between zero and one and demand is inelastic. When the percentage change in quantity demanded equals the percentage change in price, the elasticity is one and demand is unit elastic. When the percentage change in the quantity demanded is greater than the change in price, the elasticity is greater than one and demand is elastic.
Time frames of supply
We classify supply according to three different time frames: market, short-run and long run. the market period refers to the response to a price change when the quantity supplied is fixed. Short run supply refers to the response of sellers when they have had time to make some adjustments in production. Long run supply refers to the response of suppliers when they have had time to make all technically feasible adjustments.
Key terms
1. Change in demand
2. Change in supply
3. Change in quantity demanded
4. Change in quantity supplied
5. Complement (Hang bo tro)
6. Demand (Cau)
7. Demand curve
8. Demand schedule
9. Elastic Demand (Nhu cau co gian)
10. Elasticity of demand (Do co gian theo)
11. Elasticity of Supply
12. Equilibrium price (Gia)
13. Equilibrium quantity (Luong canh bang)
14. Excess demand (Du cau)
15. Excess supply (Du cung)
16. Inelastic Demand (Nhu cau kong co gian)
17. Inferior good (hang thu cap)
18. Normal good (Hang binh thuong [chin pham])
19. Perfectly elastic demand
20. Perfectly inelastic Demand
21. Price ceiling (Tran gia)
22. Price floor (San gia)
23. Quantity demanded (QD) (Luong cau)
24. Quantity supplied (QS) (Luong cung)
25. Shortage (thieu hut hang)
26. Substitute (Hang thay the)
27. Supply (cung)
28. Supply curve
29. Supply schedule
30. Surplus (du thua hang)
31. Unit elastic Demand (co gian mot don vi)
32. Wants
Questions based on lecture 3
1. Why is the price at which the quantity demanded (QD) equal to the quantity supplied (QS) called the "equilibrium price"? Is this a better price than a "disequilibrium" price?
2. Would a doubling of per capita incomes in Hanoi cause an large increase in the demand for bicycles?
3. There has been a disastrous drought in Brazil, could that cause a decrease in the supply of coffee in Brazil?
4. As a result of the drought in Brazil, world coffee prices are increasing rapidly. Would a doubling of the world price of coffee prices be likely to increase the supply of coffee in Viet Nam?
5. Are Vietnamese cotton farmers as responsive to increases in the price of cotton as Vietnamese rice farmers are responsive to increases in the price of rice? How would you go about answering that question?
6. What would happen to the price of beer in Viet Nam if the wages of brewery workers in HMC were doubled?
7. What would happen in Viet Nam if the government set the maximum price for a can of beer at 1,000 dong?
8. What would happen in Viet Nam if the government set a minimum price for a can of beer at 100,000 dong?
9. If the number of automobiles in Viet Nam increases by 500% in the next five years, which prices would be likely to rise and which prices are likely to fall (compared to the average price level)?
10. During the recent World Cup football matches held in the United States, tickets were sold for $100 each. That was far below the equilibrium price. Did the American football fans get more than they really paid for?
Problem based on lecture 3
1. Use the fictional data in the table below to graph the supply and demand curves using the conventions of economics. (Be sure to label the axes of the graph.)
Price (dong) QD (per month) QS (per month)
0 400 0
30,000 340 60
50,000 300 100
80,000 240 160
100,000 200 200
130,000 140 260
160,000 80 320
190,000 20 380
2. What is the equilibrium price? ____________
3. What is the equilibrium quantity? ____________
4. At what price will there be a shortage of 280? _____________
5. How large will the surplus be if the price is 190,000 dong? ____________
6. What will happen to the equilibrium quantity if both the supply and the demand increases? _________________________
7. What will happen to the equilibrium price if the supply decreases and the demand increases? _________________________