Demand, Supply & MarketEquilibrium                P                          S                          D                 ...
Demand   A relation between the price of a good and the    quantity that consumers are willing and able    to buy during ...
Demand Schedule and Curve   Demand curve:                Price of Quantity       a curve showing the       Good    Deman...
Law of Demand   States that a quantity of a good demanded    during a given period relates inversely to its    price, oth...
Why?   Substitution Effect       Unlimited wants/scarce resources       When the price of a good falls, consumers      ...
Why?   Income Effect       Money income: is simply the number of dollars        received per period       Real income: ...
Demand Curve                                 A curve showing the relation between  Price                          the pric...
Movement Along the Demand Curve   Caused by a change in price       Only a change in price   Move from one point to ano...
Movement along the Demand Curve     Price                   B     $6    $5                  A                             ...
Demand   Individual demand       The demand of an individual consumer   Market demand       Sum of individual demands ...
Shifts in the Demand Curve   A demand curve isolates the relation between    prices of a good and quantities demanded    ...
Determinants of Demand   Changes in consumer income   Changes in prices of related goods   Changes in consumer expectat...
Changes in determinants   Results in changes to the RELATIONSHIP    BETWEEN PRICE AND QUANTITY    DEMANDED.   At each an...
Changes in Demand   Increase in demand       At each and every price        MORE of the good is                         ...
Causes of Increase in Demand   Increase in consumer    income       Causes consumers to        buy more of the        pr...
Change in consumer income   Normal goods       A good for which demand        increases as consumer        income rise ...
Changes in Price of Related Goods   Substitutes       Goods that are not        consumed jointly       Goods that are r...
Changes in Price of Related Goods   Substitutes       Suppose that the price of Coke rises from $1 to        $1.50, then...
Changes in the price of related goods   Complements       Goods that are        related in a such a        way that an i...
Changes in Price of Related Goods   Complements       An decrease in the        price of DVD        players, increases t...
Changes in Consumer Expectations   Such as expectations in       Prices and income       Affect how consumers        sp...
Changes in consumer tastes   Consumer preferences    likes and dislikes in    consumption assumed to    be constant along...
Changes in taste   Consumers    prefer platform    shoes.                      $50   At $50, demand    increases from   ...
Change in the number and compositionof consumers   The market demand curve is the sum of the    individual demand curves....
Changes in Demand   Decrease in demand       At each and every price        Less of the good is                         ...
Causes of Decrease in Demand   Decrease in consumer    income       Causes consumers to        buy less of the product  ...
Changes in Price of Related Goods   Complements       An decrease in the        price of DVD        players, increases t...
Change in the number and compositionof consumers   The market demand curve is the sum of the    individual demand curves....
Review of Demand   A change in quantity demanded is not a change in    demand   Change in quantity demanded is caused by...
Supply   Producer’s side   A relation between the price of a good and the    quantity that the producers are willing and...
Law of Supply   The quantity of a good supplied during a    given period is usually directly related to the    price of t...
Supply Curve                       PricePrice of    Quantity Good      Demanded                       6       Supply  $3  ...
Movement along the supply curve   A change in price and only in price   Causes a movement along the supply curve   Call...
Supply   Individual supply       The supply of an individual producer   Market supply       The sum of individual supp...
Determinants for the Supply Curve   Changes in technology   Changes in prices of relevant resources   Changes in the pr...
Changes in Supply   Caused by changes in the determinants to    the supply curve   Results in changes to the relationshi...
Increase in Supply   At each and every price more of the good    is supplied                                      S1     ...
Causes of increase in Supply   Improvements in Technology   Changes in relevant resources       Decrease in the price o...
Changes in technology   Technology is the economy’s stock of    knowledge about how to combine resources    efficiently
Changes in Technology   Improvements in technology       Causes an increase in supply       More of the product is avai...
Changes in Relevant Resources   Decrease in    resource prices                                            S1       Incre...
Changes in prices of Alternative Goods   Alternative goods       Other goods that use        Price        some or all of...
Changes in Producers Expectations   Expectation of future prices of resources or    their own product can cause producers...
Changes in the Number of Producers   As the number of    producers change so    does the supply of the    product   A de...
Decrease in Supply   At each and every price LESS of the good is    supplied             5                             S1...
Causes of Decrease in Supply   Backward movement in Technology   Changes in relevant resources       Increase in the pr...
Changes in Relevant Resources                        Are those employed in                         the production of the ...
Changes in prices of Alternative Goods   Alternative goods       Other goods that use        Price        some or all of...
Producer’s Expectation   Nationalization   Expropriation
Supply Review   Change in Quantity Supplied       Caused by a change in the price of the product       Movement along t...
Market Equilibrium   Market       Includes all the        arrangements used to        buy and sell       Reduce transac...
Equilibrium   At specific price where:     Quantity demanded = Quantity supplied   Equilibrium price –       market cle...
Equilibrium                   P   At specific    price where:                S      Quantity       demanded    $5        ...
Reaching Equilibrium  P       Surplus                If market price is                      S           ABOVE equilibriu...
Reaching Equilibrium   If the market             P    price is BELOW                              S    the equilibrium   ...
Shifts in Demand   Demand                        P    increases                                       S       Equilibriu...
Shifts in Demand     P                            S                                        Decrease in demand            ...
Shifts in Supply                                  Increase in supplyPrice                                      Decrease ...
Shifts in Supply   Decrease in supply       Price increases       Quantity decreases
Simultaneous Shifts in Supply andDemand   The change in equilibrium price and quantity    depends on which curve shifts t...
Simultaneous Changes Change in   Change in    Effect on       Effect on  Supply      Demand     Equilibrium     Equilibriu...
Government Intervention   Government enters    the economy   Price Setting   Subsidies       Government payments      ...
Price Floors     A minimum      legal price              Surplus      below which a                                      ...
Price Ceilings P                            A maximum legal                   S           price above which              ...
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Demand & Supply

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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

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