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Demand and Supply

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  • 1. Demand & Supply
  • 2. MARKETS DEFINED MARKETS POTENTIAL SELLERS POTENTIAL BUYERS
  • 3. $5 4 3 2 1 DEMAND DEFINED P QD 10 20 35 55 80 A schedule or a curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices.
  • 4. LAW OF DEMAND • As Price Falls… …Quantity Demanded Rises • As Price Rises… …Quantity Demanded Falls An inverse relationship exists between price and quantity demanded
  • 5. LAW OF DEMAND • Diminishing Marginal Utility
  • 6. LAW OF DEMAND • Diminishing Marginal Utility • Income Effect
  • 7. LAW OF DEMAND • Diminishing Marginal Utility • Income Effect • Substitution Effect
  • 8. GRAPHING DEMAND P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80
  • 9. 55 P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 GRAPHING DEMAND
  • 10. 35 P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 GRAPHING DEMAND
  • 11. P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 GRAPHING DEMAND
  • 12. P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 Price of Corn Quantity of Corn CORN Plot the Points 10 20 30 40 50 60 70 80 GRAPHING DEMAND
  • 13. P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN Connect the Points 10 20 30 40 50 60 70 80 GRAPHING DEMAND
  • 14. P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 What if Demand Increases? GRAPHING DEMAND
  • 15. P Qo $5 4 3 2 1 P QD $5 4 3 2 1 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 D’ Increase in Demand Increase in Quantity Demanded10 20 35 55 80 30 40 60 80 + GRAPHING DEMAND
  • 16. P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 What if Demand Decreases? GRAPHING DEMAND
  • 17. P Qo $5 4 3 2 1 P QD $5 4 3 2 1 10 20 35 55 80 D Price of Corn Quantity of Corn CORN 10 20 30 40 50 60 70 80 -- 10 20 40 60 D’ Decrease in Demand Decrease in Quantity Demanded GRAPHING DEMAND
  • 18. DETERMINANTS OF DEMAND • Tastes • Number of Buyers • Income – Normal (Superior) & Inferior Goods • Prices of Related Goods – Substitutes & Complements – Unrelated Goods • Expectations
  • 19. SUPPLY DEFINED $1 2 3 4 5 P QS CORN Supply is a schedule or a curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices. 5 20 35 50 60
  • 20. LAW OF SUPPLY • As Price Rises… …Quantity Supplied Rises • As Price Falls… …Quantity Supplied Falls A direct relationship exists between price and quantity supplied
  • 21. 5 P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY
  • 22. P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY
  • 23. 35 P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY
  • 24. P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY
  • 25. P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN Plot the Points GRAPHING SUPPLY
  • 26. S P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN Connect the Points GRAPHING SUPPLY
  • 27. S P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN What if Supply Increases? GRAPHING SUPPLY
  • 28. S P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 Price of Corn Quantity of Corn $5 4 3 2 1 60 50 35 20 5 P QS CORN 80 70 60 45 30 S’Increase in Supply Increase in Quantity Supplied GRAPHING SUPPLY
  • 29. S P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN What if Supply Decreases? GRAPHING SUPPLY
  • 30. S P Qo $5 4 3 2 1 10 20 30 40 50 60 70 80 $5 4 3 2 1 60 50 35 20 5 P QS Price of Corn Quantity of Corn CORN S’ 45 30 20 0 -- Decrease in Supply Decrease in Quantity Supplied GRAPHING SUPPLY
  • 31. DETERMINANTS OF SUPPLY • Resource Prices • Technology • Taxes & Subsidies • Prices of Other Goods • Price Expectations • Number of Sellers
  • 32. DETERMINANTS OF SUPPLY • Resource Prices • Technology • Taxes & Subsidies • Prices of Other Goods • Price Expectations • Number of Sellers Combining with Demand
  • 33. MARKET DEMAND & SUPPLY $5 4 3 2 1 10 20 35 55 80 $5 4 3 2 1 60 50 35 20 5 200 B U Y E R S P QD BUSHELS OF CORN MARKET DEMAND 2,000 4,000 7,000 11,000 16,000 200 S E L L E R S 12,000 10,000 7,000 4,000 1,000 P QS BUSHELS OF CORN MARKET SUPPLY EQUILIBRIUM x x
  • 34. 7 S P Qo $5 4 3 2 1 2 4 6 8 10 12 14 16 P QD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D P Q S Price of Corn Quantity of Corn CORN MARKET CORN MARKET Market Clearing Equilibrium MARKET DEMAND & SUPPLY
  • 35. 7 S P Qo $5 4 3 2 1 2 4 6 8 10 12 14 16 P QD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D P Q S Price of Corn Quantity of Corn CORN MARKET CORN MARKETSurplus At a $4 price more is being supplied than demanded MARKET DEMAND & SUPPLY
  • 36. 117 S P Qo $5 4 3 2 1 2 4 6 8 10 12 14 16 P QD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D P Q S Price of Corn Quantity of Corn CORN MARKET CORN MARKET At a $2 price more is being demanded than supplied Shortage MARKET DEMAND & SUPPLY
  • 37. 117 S P Qo $5 4 3 2 1 2 4 6 8 10 12 14 16 P QD $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D P Q S Price of Corn Quantity of Corn CORN MARKET CORN MARKET Shortage MARKET DEMAND & SUPPLY Surplus
  • 38. Equilibrium • Equilibrium price – the price toward which the invisible hand drives the market. • Equilibrium quantity – the amount bought and sold at the equilibrium price.
  • 39. What Equilibrium Isn’t • Equilibrium isn’t a state of the world, it is a characteristic of a model. • Equilibrium isn’t inherently good or bad, it is simply a state in which dynamic pressures offset each other. • When the market is not in equilibrium, you get either excess supply or excess demand, and a tendency for price to change.
  • 40. Excess Supply • Excess supply – a surplus, the quantity supplied is greater than quantity demanded • Prices tend to fall.
  • 41. Excess Demand • Excess demand – a shortage, the quantity demanded is greater than quantity supplied • Prices tend to rise.
  • 42. Price Adjusts • The greater the difference between quantity supplied and quantity demanded, the more pressure there is for prices to rise or fall. • When quantity demanded equals quantity supplied, prices have no tendency to change
  • 43. The Graphical Interaction of Supply and Demand Price (per DVD) Quantity Supplied Quantity Demanded Surplus (+) Shortage (-) $3.50 7 3 +4 $2.50 5 5 0 $1.50 3 7 -4
  • 44. A The Graphical Interaction of Supply and Demand PriceperDVD $5.00 4.00 3.50 3.00 2.50 2.00 1.50 1.00 S D Quantity of DVDs supplied and demanded C Excess demand 1 2 3 4 5 6 7 8 9 10 11 12 Excess supply E
  • 45. The Graphical Interaction of Supply and Demand • When price is $3.50 each, quantity supplied equals 7 and quantity demanded equals 3. • The excess supply of 4 pushes price down.
  • 46. The Graphical Interaction of Supply and Demand • When price is $1.50 each, quantity supplied equals 3 and quantity demanded equals 7. • The excess demand of 4 pushes price up.
  • 47. The Graphical Interaction of Supply and Demand • When price is $2.50 each, quantity supplied equals 5 and quantity demanded equals 5. • There is no excess supply or excess demand, so price will not rise or fall.
  • 48. The Graphical Interaction of Supply and Demand • When price is $2.50 each, quantity supplied equals 5 and quantity demanded equals 5. • There is no excess supply or excess demand, so price will not rise or fall.
  • 49. Shifts in Supply and Demand • Shifts in either supply or demand change equilibrium price and quantity.
  • 50. Increase in Demand • An increase in demand creates excess demand at the original equilibrium price. • The excess demand pushes price upward until a new higher price and quantity are reached.
  • 51. A S0 Quantity of DVDs (per week) $2.50 2.25 0 98 10 Excess demand D1 Increase in Demand D0 B
  • 52. The Effects of a Shift of the Demand Curve
  • 53. Decrease in Supply • A decrease in supply creates excess demand at the original equilibrium price. • The excess demand pushes price upward until a new higher price and lower quantity are reached.
  • 54. A Decrease in Supply Quantity of DVDs (per week) $2.50 2.25 0 98 10 D0 S1 S0 C B Excess demand
  • 55. Government Set Prices • Price Ceilings –Shortages –Rationing Problem –Black Markets –Rent Controls • Price Floors –Surpluses
  • 56. Price Ceiling •A maximum price that sellers may charge for a good, usually set by government. • Excess Demand (Shortage) Created by a Price Ceiling
  • 57. Price ceiling • Price Rationing :The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied. • Ration coupons Tickets or coupons that entitle individuals to purchase a certain amount of a given product per month. • Black market A market in which illegal trading takes place at market-determined prices.
  • 58. •PRICE FLOORS •Price floor A minimum price below which exchange is not permitted. •Minimum wage A price floor set under the price of labor. •Agricultural Products