Supply and Demand (By Peiming and Christine)

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Supply and Demand (By Peiming and Christine)

  1. 1. By: Peiming Lin Christine Wu
  2. 2. <ul><li>A market is a group of buyers and sellers of a particular good or service </li></ul><ul><li>Competitive market </li></ul><ul><ul><li>Perfectly competitive </li></ul></ul><ul><ul><li>“ Price-takers ” </li></ul></ul>
  3. 3. <ul><li>Quantity demanded: amount of a good that buyers are willing and able to purchase </li></ul><ul><li>Law of Demand: negative relationship between price of good and quantity demanded </li></ul><ul><li>Demand schedule: table showing the law of demand </li></ul><ul><li>Market demand: sum of the quantities demanded for each individual buyer at each price </li></ul>
  4. 4. <ul><li>Shifts when people change how much they wish to buy at each price </li></ul><ul><li>Increase in quantity demanded at every price  demand shifts right (“increase in demand”) </li></ul><ul><li>Decrease in quantity demanded at every price  demand shifts left (“decrease in demand”) </li></ul>
  5. 5. <ul><li>Income </li></ul><ul><ul><li>Normal good: a good where an increase in income leads to an increase in demand </li></ul></ul><ul><ul><li>Inferior good: a good where an increase in income leads to a decrease in demand </li></ul></ul>
  6. 6. <ul><li>Prices of Related Goods </li></ul><ul><ul><li>Substitutes: two goods for which an increase in the price of one leads to an increase in the demand for the other </li></ul></ul><ul><ul><li>Complements: two goods for which an increase in the price of one leads to a decrease in the demand for the other </li></ul></ul>
  7. 7. <ul><li>Tastes </li></ul><ul><li>Expectations </li></ul><ul><li>Number of Buyers </li></ul>
  8. 8. <ul><li>Quantity supplied: amount that sellers are willing to and able to sell </li></ul><ul><li>Law of Supply: quantity supplied is positively related to the price of a good </li></ul><ul><li>Supply schedule: a table that shows the relationship between the price of a good and the quantity supplied </li></ul><ul><li>Supply curve: the curve relating price and quantity supplied; the supply curve slopes upward due to the law of supply </li></ul><ul><li>Market supply: the sum of the supplies of all sellers </li></ul>
  9. 9. <ul><li>Input prices </li></ul><ul><li>Technology </li></ul><ul><li>Expectations </li></ul><ul><li>Number of sellers </li></ul>
  10. 10. <ul><li>Equilibrium: the intersection of supply and demand </li></ul><ul><ul><li>Quantity supplied = Quantity demanded </li></ul></ul><ul><li>Surplus: quantity supplied > quantity demanded (excess supply of a good) </li></ul><ul><li>Shortage: quantity supplied < quantity demanded (excess demanded of a good) </li></ul>
  11. 11. <ul><li>Law of Supply and Demand: in case of surplus or shortage, the price adjusts to reach equilibrium </li></ul><ul><li>Adam Smith’s Wealth of Nations theorized that an invisible hand guides everything towards market equilibrium </li></ul>
  12. 12. <ul><li>A shift in the supply or demand curve changes the market equilibrium </li></ul><ul><li>To analyze changes in equilibrium: </li></ul><ul><ul><li>Determine which changes- supply or demand </li></ul></ul><ul><ul><li>Decide if the shift is to the right or the left </li></ul></ul><ul><ul><li>Show the shift in equilibrium price and quantity </li></ul></ul>
  13. 13. <ul><li>Note that a change in quantity supplied is different from a change in supply </li></ul><ul><ul><li>Change in quantity supplied refers to movements along the curve </li></ul></ul><ul><ul><li>Change in supply refers to a shift in the supply curve </li></ul></ul><ul><li>When both supply and demand change, the change in price and quantity do not necessarily increase or decrease (it remains ambiguous) </li></ul>
  14. 14. <ul><li>Prices are the signals that guide the allocation of resources; prices are the mechanism for rationing scarce resources </li></ul>

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