Upcoming SlideShare
×

# Demand & Supply

324
-1

Published on

0 Likes
Statistics
Notes
• Full Name
Comment goes here.

Are you sure you want to Yes No
• Be the first to comment

• Be the first to like this

Views
Total Views
324
On Slideshare
0
From Embeds
0
Number of Embeds
0
Actions
Shares
0
24
0
Likes
0
Embeds 0
No embeds

No notes for slide

### Demand & Supply

1. 1. Demand, Supply & MarketEquilibrium P S D Q
2. 2. Demand A relation between the price of a good and the quantity that consumers are willing and able to buy during a given period, other things constant.  Willing: you want to buy the product  Able: you can afford the buy the product
3. 3. Demand Schedule and Curve Demand curve: Price of Quantity  a curve showing the Good Demand relation between the ed price of a good and quantity demanded \$3 200 during a given period, \$4 150 other things constant. \$5 100  Suppose we are making pizza. \$6 75 \$7 50
4. 4. Law of Demand States that a quantity of a good demanded during a given period relates inversely to its price, other things constant. Price increases  Quantity Demanded decreases Price decreases  Quantity demanded increases Creates a downward sloping demand curve
5. 5. Why? Substitution Effect  Unlimited wants/scarce resources  When the price of a good falls, consumers substitute that good for other goods, which become relatively more expensive.  Reverse also holds true
6. 6. Why? Income Effect  Money income: is simply the number of dollars received per period  Real income: your income measured in terms of what it can buy.  A fall in the price of a good increases consumers’ real income making consumers more able to purchase goods; for a normal good, the quantity demanded increases.
7. 7. Demand Curve A curve showing the relation between Price the price of a good and the quantity demanded. \$6 \$5 Point on the line that matches the schedule Every point on the line matches the schedule. \$4 It is a price/quantity demanded that consumers are willing and able to buy. \$3 Demand 0 Quantity 50 75 100 150 200
8. 8. Movement Along the Demand Curve Caused by a change in price  Only a change in price Move from one point to another on the same graph Called a  Change in quantity demanded.
9. 9. Movement along the Demand Curve Price B \$6 \$5 A Demand 0 75 100 Quantity
10. 10. Demand Individual demand  The demand of an individual consumer Market demand  Sum of individual demands of all consumers in the market
11. 11. Shifts in the Demand Curve A demand curve isolates the relation between prices of a good and quantities demanded when other factors that could affect demand remain unchanged. Factors called assumptions or determinants
12. 12. Determinants of Demand Changes in consumer income Changes in prices of related goods Changes in consumer expectations Changes in the number or composition of consumers Changes in consumer tastes
13. 13. Changes in determinants Results in changes to the RELATIONSHIP BETWEEN PRICE AND QUANTITY DEMANDED. At each and every price a DIFFERENT quantity is demanded. Results in a shift in the demand curve  New curve must be drawn
14. 14. Changes in Demand Increase in demand  At each and every price MORE of the good is Price demanded  Shifts to the rightP Qd1 Qd2 \$5 A B D2\$4 150 200 D1\$5 100 150 Quantity 100 150\$6 75 100
15. 15. Causes of Increase in Demand Increase in consumer income  Causes consumers to buy more of the product at each and every price.  Normal goods  Inferior goods
16. 16. Change in consumer income Normal goods  A good for which demand increases as consumer income rise Inferior goods  A good which demand increases as consumer income falls
17. 17. Changes in Price of Related Goods Substitutes  Goods that are not consumed jointly  Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward.  Increase in price of Coke leads to increase in demand for Pepsi
18. 18. Changes in Price of Related Goods Substitutes  Suppose that the price of Coke rises from \$1 to \$1.50, then the demand for Pepsi will decrease from 75 to 100. \$1 D1 D2 75 100
19. 19. Changes in the price of related goods Complements  Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward  Two goods that are consumed jointly.  An decrease in the price of one will increase demand for the other
20. 20. Changes in Price of Related Goods Complements  An decrease in the price of DVD players, increases the demand for DVDs  Suppose that DVD players decrease in \$20 price from \$145 to \$100, now the demand for DVDs will decrease from D D2 750 at \$20 to 900. 750 900
21. 21. Changes in Consumer Expectations Such as expectations in  Prices and income  Affect how consumers spend their money and their demand  If product cheaper today than tomorrow, then increase in demand
22. 22. Changes in consumer tastes Consumer preferences likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.
23. 23. Changes in taste Consumers prefer platform shoes. \$50 At \$50, demand increases from 100 to 200. D D2 100 200
24. 24. Change in the number and compositionof consumers The market demand curve is the sum of the individual demand curves. If the number of consumers falls then the sum will be smaller thus shifting the demand curve
25. 25. Changes in Demand Decrease in demand  At each and every price Less of the good is Price demanded  Shifts to the LeftP Qd1 Qd2 \$5 B A D1\$4 150 110 D2\$5 100 90 Quantity 90 100\$6 75 60
26. 26. Causes of Decrease in Demand Decrease in consumer income  Causes consumers to buy less of the product at each and every price.
27. 27. Changes in Price of Related Goods Complements  An decrease in the price of DVD players, increases the demand for DVDs  Suppose that DVD players increase in \$20 price from \$100 to \$145, now the demand for DVDs will decrease from D2 D1 900 at \$20 to 750. 750 900
28. 28. Change in the number and compositionof consumers The market demand curve is the sum of the individual demand curves. If the number of consumers falls then the sum will be smaller thus shifting the demand curve
29. 29. Review of Demand A change in quantity demanded is not a change in demand Change in quantity demanded is caused by a change in price Change in quantity demanded is a movement along the demand curve Change is demand is caused by a change in the determinants Change in demand shifts the demand curve
30. 30. Supply Producer’s side A relation between the price of a good and the quantity that the producers are willing and able to offer for sale during a given period, other things constant.
31. 31. Law of Supply The quantity of a good supplied during a given period is usually directly related to the price of the good Increase in price leads to increase in quantity supplied Decrease in price leads to decrease in quantity supplied. Creates upward sloping supply curve
32. 32. Supply Curve PricePrice of Quantity Good Demanded 6 Supply \$3 50 \$4 75 5 \$5 100 \$6 150 Quantity \$7 200
33. 33. Movement along the supply curve A change in price and only in price Causes a movement along the supply curve Called a Change in Quantity Supplied Supply \$6 B \$4 A 100 150
34. 34. Supply Individual supply  The supply of an individual producer Market supply  The sum of individual supplies of all producers in the market
35. 35. Determinants for the Supply Curve Changes in technology Changes in prices of relevant resources Changes in the prices of alternative goods Changes in Producer Expectations Changes in the number of producers
36. 36. Changes in Supply Caused by changes in the determinants to the supply curve Results in changes to the relationship between the price and quantity supplied At each and every price a different quantity is supplied New supply curve - shift in supply
37. 37. Increase in Supply At each and every price more of the good is supplied S1 S2 \$6 300 400
38. 38. Causes of increase in Supply Improvements in Technology Changes in relevant resources  Decrease in the price of resources  Lowers costs Changes in price of alternative goods  If price of alternative good increases, supply of the good increases Changes in producers expectations
39. 39. Changes in technology Technology is the economy’s stock of knowledge about how to combine resources efficiently
40. 40. Changes in Technology Improvements in technology  Causes an increase in supply  More of the product is available at all prices S1 S2 \$6 300 400
41. 41. Changes in Relevant Resources Decrease in resource prices S1  Increases the S2 \$6 supply of the good at each and every price. 300 400
42. 42. Changes in prices of Alternative Goods Alternative goods  Other goods that use Price some or all of the same S1 resources as the good in S2 \$6 question  Beef and leather.  If the price of beef increases, producers Q Leather will supply more beef 300 400 thus increasing the supply of leather. Above is the market for the supply of leather
43. 43. Changes in Producers Expectations Expectation of future prices of resources or their own product can cause producers to change what they offer at each individual price
44. 44. Changes in the Number of Producers As the number of producers change so does the supply of the product A decrease in the number of producers will lead to a decrease in supply
45. 45. Decrease in Supply At each and every price LESS of the good is supplied 5 S1 S2 400 600
46. 46. Causes of Decrease in Supply Backward movement in Technology Changes in relevant resources  Increase in the price of resources  Raises costs Changes in price of alternative goods  If price of alternative good decreases, supply of the good decreases Changes in producers expectations
47. 47. Changes in Relevant Resources  Are those employed in the production of the good in question\$9  Increase in price of resources S1  Results in decrease in S2 supply 500 600  Less of the good is available at all prices
48. 48. Changes in prices of Alternative Goods Alternative goods  Other goods that use Price some or all of the same S1 resources as the good in \$6 question  Beef and leather.  If the price of beef decreases, producers Q Leather will supply less beef 300 400 thus decreasing the supply of leather. Above is the market for the supply of leather
49. 49. Producer’s Expectation Nationalization Expropriation
50. 50. Supply Review Change in Quantity Supplied  Caused by a change in the price of the product  Movement along the supply curve Change in Supply  Caused by change in the determinants  Results in a shift in the supply curve
51. 51. Market Equilibrium Market  Includes all the arrangements used to buy and sell  Reduce transaction costs  The place where buyers and sellers meet to determine price and quantity
52. 52. Equilibrium At specific price where: Quantity demanded = Quantity supplied Equilibrium price –  market clearing price Equilibrium quantity –  D=S
53. 53. Equilibrium P At specific price where: S Quantity demanded \$5 Equilibrium Equals Quantity D Supplied Q 150
54. 54. Reaching Equilibrium P Surplus  If market price is S ABOVE equilibrium \$6  Qs > Q D\$5  Economy is at a SURPLUS D  Market price will Q fall 100 150 200
55. 55. Reaching Equilibrium If the market P price is BELOW S the equilibrium price QD > Qs \$5 Shortage exists \$4 Market price rises D to equilibrium Shortage Q 100 150 200
56. 56. Shifts in Demand Demand P increases S  Equilibrium price \$6 increases B \$4 A  Equilibrium quantity increases D1 D Q 100 150 200
57. 57. Shifts in Demand P S  Decrease in demand  decrease in price\$6 B  decrease in equilibrium\$5 A D1 D Q 100 200
58. 58. Shifts in Supply  Increase in supplyPrice  Decrease in S1 equilibrium price S2\$6  Increase in quantity\$5 Q Leather 300 400
59. 59. Shifts in Supply Decrease in supply  Price increases  Quantity decreases
60. 60. Simultaneous Shifts in Supply andDemand The change in equilibrium price and quantity depends on which curve shifts the most. S S1 5 A B 4 D1 D 200 300
61. 61. Simultaneous Changes Change in Change in Effect on Effect on Supply Demand Equilibrium Equilibrium Price QuantityIncrease Decrease Decrease IndeterminateDecrease Increase Increase IndeterminateIncrease Increase Indeterminate IncreaseDecrease Decrease Indeterminate Decrease
62. 62. Government Intervention Government enters the economy Price Setting Subsidies  Government payments to reduce the cost of product or to limit production.
63. 63. Price Floors  A minimum legal price Surplus below which a S good or service cannot be sold \$7  If above \$6 equilibrium causes surplus D Q 100 150 200
64. 64. Price Ceilings P  A maximum legal S price above which a good or service cannot be sold\$5  Below equilibrium price D Shortage  Shortage occurs Q 100 150 200