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Chapter 3

Basic Elements of Supply


and Demand
RMPanti, UPSE
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A. The Demand Schedule
Definitions
Demand Schedule or Demand Curve P

Relationship between the market price


and quantity bought

Law of Downward-Sloping Demand Curve

When the price of a commodity is raised D


(and other things are held constant),
buyers tend to buy less of the commodity. Q
The Demand Curve
Mechanisms

Substitution Effect
Occurs because a good becomes relatively more expensive
when price rises

Income Effect
When price goes up, less expendable income
Forces behind the Demand Curve

Average Income
Size of the Market
Prices and availability of related goods
Tastes or preferences
Special influences
Shifts in Demand

Why does the demand curve shift?

Because influences other than the goods price change.


B. The Supply Schedule
Definition
P
S
Supply Schedule or Supply Curve

Relationship between the market price


and the amount of commodity producers
are willing to produce and sell, usually
upward sloping

Q
Forces behind the Supply Curve

Cost of production / Prices of Inputs


Technology
Input prices
Prices of related goods
Government policy
Special influences
Shifts in Supply

Why does the supply curve shift?

Because influences other than the goods price change.


C. Equilibrium of Supply and Demand
Definitions
P
Market Equilibrium S

Price and quantity where the forces of


supply and demand are in balance
Comes at the price at which quantity
demand equals quantity supplied
Also called market clearing
D

Q
Market Equilibrium
P
S

surplus
P

QD QS Q
Market Equilibrium
P
S

P
shortage
D

QS QD Q
Market Equilibrium
P
S

P* E

Q* Q
Market Equilibrium
P
S

P** E

P* E

Q* Q** Q
Market Equilibrium
P
S

P* E

P** E

D
D
Q** Q* Q
Market Equilibrium
P
S S

P* E

P** E

Q* Q** Q
Market Equilibrium
P
S S

P** E

P* E

Q** Q* Q

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