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Demand and Supply<br />Ms. AmanpreetKaur<br />
The Basic Decision-Making Units<br />A firm is an organization that transforms resources (inputs) into products (outputs)....
Theories and Predictions<br />We need to be able to predict the consequences of <br />alternative policies, and<br />event...
We need a theory of prices<br />The theory of demand and supply is a simple example of an economic theory<br />It can be u...
Assume perfect competition<br /><ul><li>The theory of supply and demand assumes that commodities are traded in perfectly c...
A perfectlycompetitivemarket is a market in which
there are many buyers
many sellers
and all sellers sell the exact same product
As a result, each buyer and seller has a negligible impact on the market price</li></ul>SUPPLY AND DEMAND<br />5<br />
demand<br />SUPPLY AND DEMAND<br />6<br />
Demand<br />Quantity demanded is the amount of a good that buyers are willing and able to purchase<br />Demand is a full d...
SUPPLY AND DEMAND<br />8<br />1. A decrease <br />in price<br /> ...<br />2. <br />...<br />increases quantity <br />of co...
Market Demand is the Sum of Individual Demands<br />SUPPLY AND DEMAND<br />9<br />
Law of Demand<br />The lawof demand states that <br />the quantity demanded of a good falls when the price of the good ris...
“provided all other factors … are unchanged”<br />That’s an important phrase in the wording of the Law of Demand<br />The ...
Shift of Demand Versus Movement Along a Demand Curve<br /><ul><li>A change in demand is not the same as a change in quanti...
Changes in Price, i.e., In this example, a higher price causes lower quantity demanded.
Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from...
Why Might Demand Increase?<br />How can we explain the difference in Catherine’s behavior in situations A and B?<br />Why ...
Shifts in the Market Demand Curve<br />… are caused by changes in:<br />Consumer income<br />Prices of related goods<br />...
SUPPLY AND DEMAND<br />16<br />Increase<br />in demand<br />Decrease<br />in demand<br />Demand<br />curve, <br />D<br />2...
Shifts in the Demand Curve<br /><ul><li>Consumer Income
As income increases the demand for a normal good will increase
As income increases the demand for an inferior good will decrease
Prices of Related Goods
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes
When a fall in the price of one good increases the demand for another good, the two goods are called complements</li></ul>...
The Impact of a Change in Income<br /><ul><li>Higher income decreases the demand for an inferior good
Higher income increases the demand for a normal good</li></li></ul><li>The Impact of a Change in the Price of Related Good...
Demand for substitute good (chicken) shifts right
Price of hamburger rises
Quantity of hamburger demanded falls</li></li></ul><li>The Law of Demand—Explanations <br />There are two ways to explain ...
Substitution Effect<br />SUPPLY AND DEMAND<br />21<br />Coke<br />Books<br />Movies<br />Clothes<br />Pepsi<br />When the ...
Income Effect<br />    A decrease in the price of a commodity is essentially equivalent to an increase in consumers’ incom...
Lower Prices = Higher Income<br />SUPPLY AND DEMAND<br />23<br />If income rises, Situation A becomes Situation B. <br />I...
Income Effect<br />SUPPLY AND DEMAND<br />24<br />Coke<br />Books<br />Movies<br />Clothes<br />Pepsi<br />Consumers respo...
supply<br />SUPPLY AND DEMAND<br />25<br />
SUPPLY<br />Quantity supplied is the amount of a good that sellers are willing and able to sell<br />Supply is a full desc...
Ben’s supply schedule and supply curve<br />27<br />Price of<br /> Ice-Cream<br />Cones <br />Supply curve<br />$3.00<br /...
Market supply and individual supplies<br />28<br />
Market supply and individual supplies<br />29<br />Price of<br /> Ice<br />Cream<br />Cones<br />Price of<br /> Ice<br />C...
Law of Supply<br />The law of supply states that, the quantity supplied of a good rises when the price of the good rises, ...
Law of Supply—Explanation <br />How can we make sense of the numbers in Ben’s supply schedule?<br />The best guess is that...
SUPPLY AND DEMAND<br />32<br />Supply curve, <br />S<br />3<br />Supply<br />curve, <br />S<br />1<br />Supply<br />curve,...
Shifts in the Supply Curve…<br />… are caused by changes in<br />Input prices<br />Technology<br />Number of sellers (shor...
A Change in Supply Versus a Change in Quantity Supplied<br /><ul><li>A change in supply is not the same as a change in qua...
In this example, a higher price causes higher quantity supplied, and a move alongthe supply curve.
In this example, changes in determinants of supply, other than price, cause an increase in supply, or a shift of the entir...
equilibrium<br />SUPPLY AND DEMAND<br />36<br />
Interaction of demand and supply<br />We have seen what demand and supply are<br />We have seen why demand and supply may ...
Equilibrium <br />We assume that the price will automatically reach a level at which the quantity demanded equals the quan...
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Ch 1. demand & supply

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Transcript of "Ch 1. demand & supply"

  1. 1. Demand and Supply<br />Ms. AmanpreetKaur<br />
  2. 2. The Basic Decision-Making Units<br />A firm is an organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.<br />An entrepreneur is a person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.<br />Households are the consuming units in an economy.<br />
  3. 3. Theories and Predictions<br />We need to be able to predict the consequences of <br />alternative policies, and<br />events that may be outside our control<br />The mental tool we use to make such predictions is called a theory<br />A theory is of no use if its predictions are inaccurate<br />SUPPLY AND DEMAND<br />3<br />
  4. 4. We need a theory of prices<br />The theory of demand and supply is a simple example of an economic theory<br />It can be used to make predictions about the price and quantity of some commodity<br />In a free-market economy, most economic decisions are guided by prices<br />Therefore, without a reliable theory of prices, you will get nowhere in economic analysis<br />SUPPLY AND DEMAND<br />4<br />
  5. 5. Assume perfect competition<br /><ul><li>The theory of supply and demand assumes that commodities are traded in perfectly competitive markets
  6. 6. A perfectlycompetitivemarket is a market in which
  7. 7. there are many buyers
  8. 8. many sellers
  9. 9. and all sellers sell the exact same product
  10. 10. As a result, each buyer and seller has a negligible impact on the market price</li></ul>SUPPLY AND DEMAND<br />5<br />
  11. 11. demand<br />SUPPLY AND DEMAND<br />6<br />
  12. 12. Demand<br />Quantity demanded is the amount of a good that buyers are willing and able to purchase<br />Demand is a full description of how the quantity demanded changes as the price of the good changes.<br />SUPPLY AND DEMAND<br />7<br />
  13. 13. SUPPLY AND DEMAND<br />8<br />1. A decrease <br />in price<br /> ...<br />2. <br />...<br />increases quantity <br />of cones demanded.<br />Catherine’s Demand Schedule and Demand Curve<br />Price of<br />Ice-Cream Cone<br />$3.00<br />2.50<br />2.00<br />1.50<br />1.00<br />0.50<br />Quantity of<br />0<br />1<br />2<br />3<br />4<br />5<br />6<br />7<br />8<br />9<br />10<br />11<br />12<br />Ice-Cream Cones<br />Copyright © 2004 South-Western<br />
  14. 14. Market Demand is the Sum of Individual Demands<br />SUPPLY AND DEMAND<br />9<br />
  15. 15. Law of Demand<br />The lawof demand states that <br />the quantity demanded of a good falls when the price of the good rises, and vice versa, provided all other factors that affect buyers’ decisions are unchanged<br />SUPPLY AND DEMAND<br />10<br />
  16. 16. “provided all other factors … are unchanged”<br />That’s an important phrase in the wording of the Law of Demand<br />The quantity demanded of a consumer good such as ice cream depends on<br />The price of ice cream<br />The prices of related goods<br />Consumers’ incomes<br />Consumers’ tastes<br />Consumers’ expectations about future prices and incomes<br />Number of buyers, etc<br />The Law of Demand says that the quantity demanded of a good is inversely related to its price, provided all other factors are unchanged<br />SUPPLY AND DEMAND<br />11<br />
  17. 17. Shift of Demand Versus Movement Along a Demand Curve<br /><ul><li>A change in demand is not the same as a change in quantity demanded.
  18. 18. Changes in Price, i.e., In this example, a higher price causes lower quantity demanded.
  19. 19. Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to DB.</li></li></ul><li>Change in price of a good or service<br /> leads to<br /> Change in quantity demanded(Movement along the curve).<br />Change in income, preferences, orprices of other goods or services<br /> leads to<br /> Change in demand (Shift of curve).<br />A Change in Demand Versus a Change in Quantity Demanded<br />To summarize:<br />
  20. 20. Why Might Demand Increase?<br />How can we explain the difference in Catherine’s behavior in situations A and B?<br />Why does she consume more in situation Bat every possible price?<br />SUPPLY AND DEMAND<br />14<br />Price<br />Quantity Demanded<br />
  21. 21. Shifts in the Market Demand Curve<br />… are caused by changes in:<br />Consumer income<br />Prices of related goods<br />Tastes<br />Expectations, say, about future prices and prospects<br />Number of buyers<br />SUPPLY AND DEMAND<br />15<br />
  22. 22. SUPPLY AND DEMAND<br />16<br />Increase<br />in demand<br />Decrease<br />in demand<br />Demand<br />curve, <br />D<br />2<br />Demand<br />curve, <br />D<br />1<br />Demand curve, <br />D<br />3<br />Shifts in the Demand Curve<br />Price of<br />Ice-Cream<br />Cone<br />Quantity of<br />0<br />Ice-Cream Cones<br />
  23. 23. Shifts in the Demand Curve<br /><ul><li>Consumer Income
  24. 24. As income increases the demand for a normal good will increase
  25. 25. As income increases the demand for an inferior good will decrease
  26. 26. Prices of Related Goods
  27. 27. When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes
  28. 28. When a fall in the price of one good increases the demand for another good, the two goods are called complements</li></ul>SUPPLY AND DEMAND<br />17<br />
  29. 29. The Impact of a Change in Income<br /><ul><li>Higher income decreases the demand for an inferior good
  30. 30. Higher income increases the demand for a normal good</li></li></ul><li>The Impact of a Change in the Price of Related Goods<br /><ul><li>Demand for complement good (ketchup) shifts left
  31. 31. Demand for substitute good (chicken) shifts right
  32. 32. Price of hamburger rises
  33. 33. Quantity of hamburger demanded falls</li></li></ul><li>The Law of Demand—Explanations <br />There are two ways to explain the Law of Demand<br />Substitution effect<br />Income effect<br />SUPPLY AND DEMAND<br />20<br />
  34. 34. Substitution Effect<br />SUPPLY AND DEMAND<br />21<br />Coke<br />Books<br />Movies<br />Clothes<br />Pepsi<br />When the price of a good decreases, consumers substitute that good instead of other competing (substitute) goods<br />1. When the price of Coke decreases…<br />2. Consumption of Pepsi decreases…<br />3. Consumption of Coke increases<br />
  35. 35. Income Effect<br /> A decrease in the price of a commodity is essentially equivalent to an increase in consumers’ income<br />SUPPLY AND DEMAND<br />22<br />
  36. 36. Lower Prices = Higher Income<br />SUPPLY AND DEMAND<br />23<br />If income rises, Situation A becomes Situation B. <br />If prices fall, Situation A becomes Situation C. <br />Q: Which change is better?<br />A: They are both equally desirable. A fall in prices is equivalent to an increase in income.<br />
  37. 37. Income Effect<br />SUPPLY AND DEMAND<br />24<br />Coke<br />Books<br />Movies<br />Clothes<br />Pepsi<br />Consumers respond to a decrease in the price of a commodity as they would to an increase in income<br />They increase their consumption of a wide range of goods, including the good that had a price decrease<br />1. When the price of Coke decreases…<br />2. Consumers feel richer…<br />3. Consumption of Coke and other goods increases<br />
  38. 38. supply<br />SUPPLY AND DEMAND<br />25<br />
  39. 39. SUPPLY<br />Quantity supplied is the amount of a good that sellers are willing and able to sell<br />Supply is a full description of how the quantity supplied of a commodity responds to changes in its price<br />SUPPLY AND DEMAND<br />26<br />
  40. 40. Ben’s supply schedule and supply curve<br />27<br />Price of<br /> Ice-Cream<br />Cones <br />Supply curve<br />$3.00<br />2.50<br />2.00<br />1.50<br />1.00<br />0.50<br />2. . . . increases quantity<br />of cones supplied.<br />1. An increase<br />in price . . .<br />0<br />12<br />10<br />11<br />9<br />1<br />2<br />3<br />4<br />5<br />6<br />7<br />8<br />Quantity of Ice-Cream Cones <br />
  41. 41. Market supply and individual supplies<br />28<br />
  42. 42. Market supply and individual supplies<br />29<br />Price of<br /> Ice<br />Cream<br />Cones<br />Price of<br /> Ice<br />Cream<br />Cones<br />Price of<br /> Ice<br />Cream<br />Cones<br />Ben’s<br />supply<br />Jerry’s<br />supply<br />+<br />=<br />Market<br />supply<br />SBen<br />SMarket<br />SJerry<br />$3.00<br />2.50<br />2.00<br />1.50<br />1.00<br />0.50<br />$3.00<br />2.50<br />2.00<br />1.50<br />1.00<br />0.50<br />$3.00<br />2.50<br />2.00<br />1.50<br />1.00<br />0.50<br />12<br />10<br />11<br />9<br />1<br />2<br />3<br />4<br />5<br />6<br />7<br />8<br />1<br />2<br />3<br />4<br />5<br />6<br />7<br />18<br />2<br />4<br />6<br />8<br />10<br />12<br />14<br />16<br />0<br />0<br />0<br />Quantity of Ice-Cream Cones <br />Quantity of<br /> Ice-Cream Cones <br />Quantity of Ice-Cream Cones <br />
  43. 43. Law of Supply<br />The law of supply states that, the quantity supplied of a good rises when the price of the good rises, as long as all other factors that affect suppliers’ decisions are unchanged<br />SUPPLY AND DEMAND<br />30<br />
  44. 44. Law of Supply—Explanation <br />How can we make sense of the numbers in Ben’s supply schedule?<br />The best guess is that his costs must be something like the cost schedule below.<br />SUPPLY AND DEMAND<br />31<br />In this way, the Law of Supply follows from the assumption of Increasing Costs (or, Diminishing Returns)<br />
  45. 45. SUPPLY AND DEMAND<br />32<br />Supply curve, <br />S<br />3<br />Supply<br />curve, <br />S<br />1<br />Supply<br />curve, <br />S<br />Decrease<br />2<br />in supply<br />Increase<br />in supply<br />Shifts in the Supply Curve: What causes them?<br />Price of<br />Ice-Cream<br />Cone<br />Quantity of<br />0<br />Ice-Cream Cones<br />
  46. 46. Shifts in the Supply Curve…<br />… are caused by changes in<br />Input prices<br />Technology<br />Number of sellers (short run)<br />The market supply will shift right if<br />Raw materials or labor becomes cheaper<br />The technology becomes more efficient<br />Number of sellers increases<br />SUPPLY AND DEMAND<br />33<br />
  47. 47. A Change in Supply Versus a Change in Quantity Supplied<br /><ul><li>A change in supply is not the same as a change in quantity supplied.
  48. 48. In this example, a higher price causes higher quantity supplied, and a move alongthe supply curve.
  49. 49. In this example, changes in determinants of supply, other than price, cause an increase in supply, or a shift of the entire supply curve, from SA to SB.</li></li></ul><li>Change in price of a good or service<br /> leads to<br /> Change in quantity supplied(Movement along the curve).<br />Change in costs, input prices, technology, or prices of related goods and services<br /> leads to<br /> Change in supply (Shift of curve).<br />A Change in Supply Versusa Change in Quantity Supplied<br />To summarize:<br />
  50. 50. equilibrium<br />SUPPLY AND DEMAND<br />36<br />
  51. 51. Interaction of demand and supply<br />We have seen what demand and supply are<br />We have seen why demand and supply may shift<br />Now it is time to say something about how buyers and sellers collectively determine the market outcome<br />To do this, we assume equilibrium<br />SUPPLY AND DEMAND<br />37<br />
  52. 52. Equilibrium <br />We assume that the price will automatically reach a level at which the quantity demanded equals the quantity supplied<br />SUPPLY AND DEMAND<br />38<br />
  53. 53. Supply-Demand Equilibrium<br />qD = 1000 - 100p<br />qS = -125 + 125p<br />Equilibrium qD = qS<br />1000 - 100p = -125 + 125p<br />225p = 1125<br />p* = 5<br />q* = 500<br />39<br />
  54. 54. At $2.00, the quantity demanded is equal to the quantity supplied!<br />SUPPLY AND DEMAND TOGETHER<br />SUPPLY AND DEMAND<br />40<br />Demand Schedule<br />Supply Schedule<br />
  55. 55. Equilibrium of supply and demand<br />41<br />Price of<br /> Ice-Cream<br />Cones <br />Equilibrium<br />price<br />Equilibrium<br />Supply<br />Equilibrium<br />quantity<br />$3.00<br />2.50<br />2.00<br />1.50<br />1.00<br />0.50<br />Demand<br />0<br />12<br />10<br />11<br />9<br />1<br />2<br />3<br />4<br />5<br />6<br />7<br />8<br />Quantity of Ice-Cream Cones <br />
  56. 56. Market Dis-equilibrium<br />42<br />
  57. 57. SUPPLY AND DEMAND<br />43<br />Supply<br />Surplus<br />$2.50<br />2.00<br />Demand<br />4<br />10<br />7<br />Quantity<br />Quantity<br />demanded<br />supplied<br />Markets Not in Equilibrium<br />(a) Excess Supply<br />Price of<br />Ice-Cream<br />Cone<br />0<br />Quantity of<br />Ice-Cream<br />Cones<br />
  58. 58. Markets Not in Equilibrium<br />Surplus<br />When price exceeds equilibrium price, then quantity supplied is greater than quantity demanded<br />There is excess supply or a surplus<br />Suppliers will lower the price to increase sales, thereby moving toward equilibrium<br />SUPPLY AND DEMAND<br />44<br />
  59. 59. SUPPLY AND DEMAND<br />45<br />Supply<br />$2.00<br />1.50<br />Shortage<br />Demand<br />10<br />7<br />4<br />Quantity<br />Quantity<br />supplied<br />demanded<br />Markets Not in Equilibrium<br />(b) Excess Demand<br />Price of<br />Ice-Cream<br />Cone<br />0<br />Quantity of<br />Ice-Cream<br />Cones<br />
  60. 60. Markets Not in Equilibrium<br />Shortage<br />When price is less than equilibrium price, then quantity demanded exceeds the quantity supplied<br />There is excess demand or a shortage<br /> Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium<br />SUPPLY AND DEMAND<br />46<br />
  61. 61. Equilibrium<br />Law of supply and demand<br />The price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance<br />SUPPLY AND DEMAND<br />47<br />
  62. 62. Let’s make some predictions<br />We can use our understanding of the factors that shift the demand and supply curves to predict the consequences of<br />Alternative policy proposals, and<br />Events outside our control<br />SUPPLY AND DEMAND<br />48<br />
  63. 63. SUPPLY AND DEMAND<br />49<br />1. An increase in the<br />price of sugar reduces<br />the supply of ice cream. . .<br />S2<br />S1<br />New<br />equilibrium<br />$2.50<br />2.00<br />2. . . . resulting<br />in a higher<br />price of ice<br />cream . . .<br />Demand<br />7<br />4<br />3.<br /> . . . <br />and a lower<br />quantity sold.<br />How a Decrease in Supply Affects the Equilibrium<br />Price of<br />Ice-Cream<br />Cone<br />Initial equilibrium<br />Quantity of <br />0<br />Ice-Cream Cones<br />
  64. 64. A Shift in Both Supply and Demand<br />SUPPLY AND DEMAND<br />50<br />
  65. 65. A Shift in Both Supply and Demand<br />SUPPLY AND DEMAND<br />51<br />
  66. 66. Queries…??<br />SUPPLY AND DEMAND<br />52<br />
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