ENGR 3360U Winter 2012

Unit 2.1.5
Microeconomics: Supply and Demand
Dr. J. Michael Bennett, P. Eng., PMP,
UOIT,
Version 2014-I-01

Unit 2.1 Introduction to Microeconomics

2.1.5 Supply and Demand

Up until 1990, the ROR of an IBM
mainframe was 80%. If it cost them 1
million dollars to build, they charged $1.8M
What would you pay for a 32G memory
stick? A new printer? A new laptop?
How does a company price its product?
Apple and their new i-phone for example?

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Musings
Supply forces that urge people to construct
something
Demand money willing to be spent by buyers
for that thing
Sellers-Buyers
Monopoly only one seller
Air infinite supply, cost zero
Consider a bumper wheat crop; price plummets
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Selling Burgers in TO
If Torontonians would pay $100/burger
Wed all be hawking burgers on Yonge St
Then the supply would exceed the demand (how many
burgers can a person eat? Cant store them)
Prices would fall
Wed come back to class
If gas prices dropped to 50 cents a litre; $5.00 a litre?
How to quantify this effect?
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

The Supply Curve (Highly Idealized)

4
Price ($/Burg)

Supply
3
2
1
0

2.1-5

4
8
12
16
20
Supplied Quantity (1000s of hamburgers/day)
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

The Demand Curve

Price ($/Burg)

4
3

Demand

2
1
D
0

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4
8
12
16
20
Demanded Quantity (1000s of hamburgers/day)
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

The Equilibrium Point

Price ($/Burg)

4
3
2

Demand

1
0

2.1-7

Supply

4
8
12
16
20
Quantity (1000s of hamburgers/day)
2014-I-01

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

The Equilibrium Point

Price ($/Burg)

4
3

Excess Demand of
8K burgs

Demand

1
0

2.1-8

Excess Supply of
8K burgs

4
8
12
16
20
Quantity (1000s of hamburgers/day)
2014-I-01

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Supply & Demand

Are the two blades of a pair of scissors
(Alfred Marshall)
Explain the action of all sorts of markets
Foreign Exchange for example
1$CND = $0.96US
1$US = $1.04CDN

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

More Likely Shape

A

PRICE

4.00

2.00

1.00
5
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11

QUANTITY

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

More Demand Shapes

DC

PRICE

B'

2.1-11

A'

5 6
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DC'

QUANTITY

15

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

PERFECTLY
INELASTIC

PRICE

PRICE

Extreme Demand Elasticity

QUANTITY

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PERFECTLY
ELASTIC

QUANTITY

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

PERFECTLY
INELASTIC

PRICE

PRICE

Extreme Demand Elasticity

QUANTITY
Life-saving drug
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PERFECTLY
ELASTIC

QUANTITY
Mustard A

Mustard B

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

PERFECTLY
INELASTIC

PRICE

PRICE

Extreme Supply Elasticity

QUANTITY

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PERFECTLY
ELASTIC

QUANTITY

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

PERFECTLY
INELASTIC

PRICE

PRICE

Extreme Supply Elasticity

QUANTITY
Hope Diamond, land, EMS
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PERFECTLY
ELASTIC

QUANTITY
CDs, pencils

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Elasticity of Demand
When the price of a good increases, demand
falls. But not all fall the same rate.
For example, if the price of peas went up
20%, the demand would plummet. If the
price of cigarettes went up 20%, demand
would hardly change.
The demand for peas is elastic; cigarettes,
inelastic.
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Definitions of Price Elasticity

Price elasticity of demand = percentage change
in quantity resulting from a 1% change in price
Example if the price of gas falls 1% and the demand
rises 2%, = 2 (we ignore the minus sign)

Elastic if >1
Inelastic if <1
Unit elastic if =1

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Observations on Elasticity
If >1, an increase in price will reduce total
revenue(& vv)
If <1, an increase in price will increase
total revenue(& vv)
If =1, an increase in price will leave total
revenue unaffected (& vv)

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Typical Examples
Green peas 2.80
Restaurant meals 1.63
Automobiles
1.35
Electricity 1.20
Beer (non-engineers)
Movies
0.87
Air travel (off-shore)
Shoes
0.70
Coffee
0.25
Theatre/opera
0.18
Beer (engineers) 0.01
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1.19
0.77

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Summary
The market for a good is the totality of all actual and
potential buyers and sellers.
For a given price, the supply curve shows the quantity
of that good that the sellers are willing to create and
sell
The demand curve is the quantity that the buyers will
buy at that price
Market equilibrium is where the two curves cross;
buyers quantity-price-pt. = sellers quantity-price-pt.
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Reaching Equilibrium
May take time; curves may shift
For example
Freeze in California
Supply tanks, demand is constant, price soars
But hard to increase supply (need to plant more
trees etc.)

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Changes in the Equilibriums

That is; shifts in the curves NOT caused by price
Caused by improved production techniques
Caused by changes in tastes, worries over transfat, bad weather, etc.
Note the terminology
Increase in quantity demanded (slide down the curve)
static prices/demand
Increase in Demand line shifts to the right
prices/demands shift
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Increase in Demand
Price ($/Burg)

Increase in
Demand

At every price,
the quantity
demanded
increases

2
1
0

2.1-23

D'

4
8
12
16
20
Quantity (1000s of hamburgers/day)
2014-I-01

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Shifts in the Supply Curve

Price ($/Burg)

S'

3
2
Demand

1
0

2.1-24

4
8
12
16
20
Quantity (1000s of hamburgers/day)
2014-I-01

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Suppose that Norman Nerdo develops a

new process to take a live cow in at one end
and spit out beef patties at the other
Becomes 50% cheaper to make hamburgers
than before
The whole supply curve shifts to the right

2.1-25

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Canonical Rules on Supply & Demand

P'
P
D
S

P
P'
D

2.1-26

Q Q'
Quantity
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P
P'

D'
Q' Q
Quantity

S'
Price

Q Q'
Quantity
Price

S
Price

Price

D'

S'

P'
P
D

Q' Q
Quantity
Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Canonical Rules on Supply & Demand

Price

Q Q'
Quantity

D
Q Q'
Quantity
2014-I-01

Burgers
cause cancer

P
P'

D'
Q' Q
Quantity

S'

Cost of cows
halves

P
P'

Price

Burgers act
like Viagra

P'
P

2.1-27

Price

Price

P'
P

D'

S'

Mad cow
doubles the
price
D

Q' Q
Quantity
Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Price /$kg

2.1.5 Supply and Demand

RCMP decides to get tough on drugs. Spends a
bunch of $ and drives the hoods off. Supply
curve shifts backwards.
S'
S But look! Total $ spent
on drugs increases!
Chances
of
your
laptop
being
800
stolen increases!
500
D
4 5
Q (1000 kgs/day)
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

PRICE

Price Ceilings
D

P*
PC

QS
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Q*

QD

QUANTITY

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Price Ceilings
Shortages, queues
Housing for example
Common in demand economies

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Price Floors
D

PC

PRICE

P*

QD
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Q*

QS

QUANTITY

Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Mohair Madness
In the 2nd WW, Americans needed mohair
wool to protect pilots at high altitude. So the
US gov put a huge subsidy in place to
encourage the production of goat wool
Now we have no need of it
Subsidy is still there
Go figure!
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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Perversity of Price Supports

American example
Pay framers NOT to grow crops!
Imagine if I am paid NOT to teach!
Give it away? Ruin the Nigerian wheat
farmer

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Morale
Let the Invisible Hand of the Market do its
work (Adam Smith)
Produce what you do best
Note the connection with international trade
FREE TRADE SI!
UNFREE TRADE NON!

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Should Eddie Greenspan do his will?

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco

Unit 2.1 Introduction to Microeconomics

Marx was WRONG

Karl not Groucho
A child of five could understand Economics.
Send someone to fetch a child of five! pace
Groucho Marx
Je suis Marxiste tendance Groucho!

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Dr. J.M. Bennett, P.Eng., PMP ENGR 3360U Eng Eco