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  • Most of time we are looking for Market Demand, or the sum of all the individuals quantities demanded in a market Example: Suppose you want to start a TV repair service -set up shop in neighborhood with many TVs & no repair shops -want to set up business in area where demand is greatest willingness means person’s want or desire to purchase & ability is having enough money to pay for the good (need both for demand!) example: Jack doesn’t have $34,000 to buy a specific car, has the willingness but not the money so there is NO demand
  • Prices of Related goods – substitutes (apples & oranges, chicken & beef) complements (cars & gas) Preferences: people are beginning to favor small gas-efficient cars so D shifts right while people are favoring other laptops other than Dell recently so their D curve shifts left Complements-Tennis rackets & tennis balls (demand moves in the opposite direction of the price) # of buyers - the more buyers the higher the D, the fewer the buyers the lower the D (higher birthrate, immigration, migration, death rate, or migration)
  • Elastic ex. – T-Bone steaks are elastic b/c $6 a pound compared to $3.50 a pound is going to cause a huge change in QtD (designer clothing / luxury items) Elastic curves – more horizontal Inelastic curves – more vertical Inelastic – higher or lower price on salt will not change Qtd greatly (ex. Toothpaste) Elastic - when quantity demanded is greater than percentage change in price Inelastic-when quantity demanded is less than percentage than price Unit elastic- when Qd changes by the same % as price
  • 1. Tobacco is inelastic b/c addictive & insulin needed for diabetic no matter what
  • Once again, dealing with Market Supply, or sum of all the individual quantities supplied Supply example: supply of TVs is the number of sets manufacturers are likely to produce at $700, $500, $300, or any other price Supply: economists think about people’s ability & willingness to offer products for sale over a wide range of prices Supplier-offer economic product for sale
  • Based on idea of trying to maximize revenues, or profits as a business
  • Cost of inputs – in T-shirt, supply may have increased because of a decline in the cost of such inputs as cotton or ink = if price of inputs goes down, producer can produce more T-shirts at each and every price Prod. – more T-shirts can be produced in a production period = supply increases, if workers are unhappy/unmotivated, untrained supply decreases Technology- introduce new machine, chemical/industrial process can lower cost of production, so when costs are down producers are willing to produce more at each & every price in the market (supply down if technology breaks down) Subsidies – government payments to individuals, businesses, or other groups to encourage or protect a certain type of economic activity have opposite effect & supply increases (ex. Farmers historically receive subsidies to offset costs of production)
  • Government Regulations ex. Government mandates safety features to automobiles like emission controls, stronger bumpers, & air bags which increases production cost of car Natural Disaster/Crisis – somolian pirates slowing African shipping
  • Elastic – kites & candy because not much needed to increase production (therefore if prices rise they can increase output quickly) Inelastic – oil (need lots of machinery, capital, labor to increase production so it is inelastic), banana plantations Elasticity is influenced by availability of inputs, mobility of inputs, storage capacity, & time needed to adjust to price change
  • E price is also market-clearing price – market is cleared of all surpluses & shortages E is like the point reached on a balance scale when each side holds an object of equal mass When supply matches demand, both consumers & producers come away satisfied (even though producers would like higher prices & consumers lower prices)
  • At farmer’s market, no farmer goes home with leftover melons, and no consumer leaves empty handed at $5.00 a melonn
  • New video game or movie release = too many consumers! Shortage in real world – have a playoff high school football game that stadium seats 2,000 people but 2,500 people want to come to game (shortage) Price rises b/c buyers will offer to buy products at higher prices so they get the products, higher pices will also motivate sellers to produce more output
  • Surplus = clearance rack in any store Surplus in real world – high school football playoff has stadium for 2,000 seats but only 500 people attend (surplus of seats) Price falls because suppliers cannot sell all of their products & want to get rid of inventories (storing extra goods is costly) & produce less output

Supply & demand pe student notes Presentation Transcript

  • 1. Unit #2 SUPPLY & DEMAND
  • 2. Markets
    • What is a market?
      • It is any place where people come together to buy and sell goods or services
        • market has two sides
          • 1. Buying side = demand
          • 2. Selling side = supply
      • TODAY we focus on DEMAND!
  • 3. What is demand?
    • Demand is the amount of a good/service that consumers are willing and able to buy at all prices
    • To analyze demand, we use a…
      • Demand schedule : a table that lists the quantities of a good that consumers will buy at various prices
      • Demand Curve : a graph of the demand schedule
  • 4. Example Demand Schedule
  • 5. Demand Curve for Movie Tickets $10 8 0 Number of Movie Tickets per Month Price of Movie Tickets 1 1 2 3 4 5 6 7 8 9 2 3 4 5 6 7 A B
  • 6. Law of Demand
    • Two scenarios:
      • High prices = low quantities demanded
      • Low prices = high quantities demanded
    • Law represents an inverse relationship between price and quantity demanded
    • Quantity Demanded
      • Amount of a good or service that consumers are willing and able to buy at a specific price
  • 7. What can cause demand to change?
    • Week 1: I buy 1 bag of peanuts at $2.00.
    • Week 2: I buy 2 bags of peanuts at $1.00 each.
    • The PRICE decrease of peanuts caused my demand to change.
    • This is called a CHANGE IN QUANTITY DEMANDED!
  • 8. Change in Quantity Demanded Quantity Price D $10 $5 20 10
  • 9. Change in Quantity Demanded Quantity Price D $10 $5 20 10
  • 10. Change in Quantity Demanded Quantity Price D $10 $5 20 10
  • 11. Change in Quantity Demanded
    • Shown by movement along the demand curve
    • PRICE changes always cause changes in Qd!!
  • 12. What can cause demand to change?
    • Week 1: I buy 1 bag of peanuts at $2.00.
    • Week 2: I buy 5 bags of peanuts at $2.00 each.
    • This time PRICE did NOT change.
    • Task! Provide a reason for my demand change.
    • Any of these reasons cause a CHANGE IN DEMAND (not the Qd at one specific price). In this case the Qd at all prices will change!
  • 13. Increase in Demand Quantity Demanded Price
  • 14. Increase in Demand Quantity Demanded Price D 1
  • 15. Increase in Demand Quantity Demanded Price D 1
  • 16. Increase in Demand –Curve Shift to the Right Quantity Demanded Price D 1 D 2
  • 17. Decrease in Demand Quantity Demanded Price
  • 18. Decrease in Demand Quantity Demanded Price D 1
  • 19. Decrease in Demand Quantity Demanded Price D 1
  • 20. Decrease in Demand - Curve Shift to Left Quantity Demanded Price D 2 D 1
  • 21. Demand Shifters– reasons why the demand curve shifts
    • Consumer Income
      • as income rises consumers can buy more at each & every price
    • Number of Consumers
      • More consumers = more demand
    • Consumer Expectations
      • News reports or expected price changes
    • Consumer Tastes/Preferences
      • Advertising, celebrity endorsements, trends can cause these shifts
    • Prices of Related Products
      • Substitutes – products that can be used in place of other products
        • Increase in price of one increases demand for other
        • Example – Butter & margarine
      • Complements - related goods used together
        • Use of one increases the use of the other
        • Example – film & camera
  • 22. Reminders
    • PRICE is NOT a demand shifter. When price changes, there is movement along the curve.
    • A change in demand, caused by factors other than the price of a particular good, is when the curve shifts.
      • Shift to right = increase in demand
      • Shift to left = decrease in demand
  • 23. Elasticity of Demand
    • Elasticity of Demand – the degree to which the quantity demanded changes in response to a change in price
    • Consumers care about changes in price
      • Demand is:
        • Elastic when a small change in price = large change in quantity demanded
        • Inelastic when change in price causes only small change in quantity demanded
  • 24.  
  • 25. Determinants of Elasticity
    • 1. Needs vs. Wants
      • The more necessary a good/service is, the more inelastic it becomes
      • Examples: insulin, gasoline, & tobacco (all inelastic)
      • Things that are wants are usually elastic
    • 2. Availability of Substitutes
      • Consumers regularly switch back & forth to get best price of similar products
      • If product has more substitutes = elastic demand
    • 3. Amount of Income Required to Purchase
      • When products are high priced (luxury items) = elastic demand
        • Example: buying a car
      • When products are lower priced = inelastic demand
        • Example: buying salt
  • 26. What is supply?
    • Supply is the amount of a product that producers are willing and able to offer for sale at all prices
    • To analyze supply, we use a…
      • Supply Schedule – a table that lists the quantities supplied at different prices in a market
      • Supply Curve – a graph of the supply schedule
  • 27. Supply Schedule for Painting Services
  • 28. Supply Curve for Painting Services $200 5 0 Rooms Painted per Week Price per Room 1 20 40 60 80 100 120 140 160 180 2 3 4
  • 29. Law of Supply
    • Law says
      • If prices are high = quantity supplied increases
      • If prices are low = quantity supplied decreases
    • Price and quantity supplied have a direct relationship
    • Quantity Supplied
      • amount of a good or service that producers are willing and able to offer for sale at a specific price
  • 30. What can cause supply to change?
    • Week 1: I try to sell 10 pretzels at $0.75.
    • Week 2: I try to sell 20 pretzels at $1.00 each.
    • The PRICE increase of pretzels caused my supply to change.
    • This is called a CHANGE IN QUANTITY SUPPLIED!
  • 31. Change in Quantity Supplied $200 5 0 Rooms Painted per Week Price per Room 1 20 40 60 80 100 120 140 160 180 2 3 4 A B
    • Shown by movement along the supply curve
    • PRICE changes always cause changes in Qs!!
  • 32. What can cause supply to change?
    • Week 1: I try to sell 10 pretzels at $0.75.
    • Week 2: I try to sell 30 pretzels at $0.75.
    • This time PRICE did NOT change.
    • Task! Provide a reason for my supply change.
    • Any of these reasons cause a CHANGE IN SUPPLY (not the Qs at one specific price). In this case the Qs at all prices will change!
  • 33. Increase in Supply Quantity Supplied Price S 1
  • 34. Increase in Supply – Curve Shift to the Right Quantity Supplied Price S 1 S 2
  • 35. Decrease in Supply Quantity Supplied Price S 1
  • 36. Decrease in Supply – Curve Shift to the Left Quantity Supplied Price S 1 S 1
  • 37. Supply Shifters
    • Cost of Inputs
      • Input costs refer to costs of production
      • Increasing or decreasing costs will impact supply
    • Productivity
      • The more productive workers are or the more efficiently businesses use resources then supply increases!
    • Number of Producers/Sellers
      • When more businesses enter the market = supply increases or vice-versa
    • Technology
      • New technology usually shifts curve to the right
    • Natural Disasters or International Events
      • Hurricanes, floods, wildfires decrease supply
      • Wars and revolutions can have similar effects
  • 38. Supply shifters continued…
    • Government Policy
    • Increased regulations restrict supply
      • Relaxed regulations increase supply
      • Tax on the manufacture or sale of a good = decreases supply
      • Subsidy (cash payment to producers) = increases supply
    • Producer Expectations
      • Anticipation of future events can affect supply curve
        • 1. Producers think prices will go up = decrease supply NOW
        • 2. Producers think prices will go down = increase supply NOW
  • 39. Reminders
    • PRICE is NOT a supply shifter. When price changes, there is movement along the curve.
    • A change in price, caused by factors other than the price of a particular good, is when the curve shifts.
      • Shift to right = increase in supply
      • Shift to left = decrease in supply
  • 40. Elasticity of Supply
    • Supply elasticity measures the sensitivity of producers to a change in price
      • Small increase in price leads to larger increase in output = elastic
      • Small increase in price leads to little change in quantity supplied = inelastic
      • Examples of elastic & inelastic
        • Candy
        • Bananas
        • Oil
        • Yogurt
  • 41. Supply & Demand Interaction
    • In a perfectly competitive market, supply & demand work together to determine prices.
    • The interaction usually creates 3 scenarios:
      • Equilibrium
      • Shortage
      • Surplus
  • 42. Market Equilibrium
    • Equilibrium – point at which quantity supplied = quantity demanded
      • IN OTHER WORDS: Qd = Qs
    • Price in equilibrium is the equilibrium price and the quantity in equilibrium is the equilibrium quantity
  • 43. Market Equilibrium
    • Price equilibrium can be found where the supply curve intersects the demand curve
  • 44. Market Equilibrium Price 0 Quantity
  • 45. Market Equilibrium Price S D 0 Quantity
  • 46. Market Equilibrium Price S D A Q 1 0 P 1 Quantity
  • 47. Market Equilibrium Price S D A Equilibrium Q 1 0 P 1 Quantity
  • 48. Market Equilibrium Price S D A Equilibrium Q 1 0 P 1 Equilibrium Price Quantity
  • 49. Market Equilibrium Equilibrium Quantity Price S D A Equilibrium Q 1 0 P 1 Quantity Equilibrium Price The equilibrium price is also known as the “market-clearing” price. At this price, both consumers and producers are satisfied.
  • 50. Equilibrium Changes
    • If demand increases…
      • P _______ & Q _______
    • If demand decreases…
      • P _______ & Q _______
  • 51. An Increase in Demand Quantity Price 0 P 1 Q 1 A S 1 D 1
  • 52. An Increase in Demand Quantity Price 0 P 1 Q 1 A ( Original Market Equilibrium ) S 1 D 2 D 1
  • 53. An Increase in Demand Quantity Price B 0 P 1 Q 1 A S 1 D 2 D 1
  • 54. An Increase in Demand Quantity Price B Q 2 0 P 2 P 1 Q 1 A S 1 D 2 D 1
  • 55. An Increase in Demand Quantity Price B( New Market Equilibrium ) Q 2 0 P 2 P 1 Q 1 A S 1 D 2 D 1
  • 56. Equilibrium Changes
    • If supply increases…
      • P _______ & Q _______
    • If supply decreases…
      • P _______ & Q _______
  • 57. An Increase in Supply Quantity Price A (original market equilibrium) Q 1 0 P 1 D 1 S 1
  • 58. An Increase in Supply Quantity Price A Q 1 0 P 1 D 1 S 1 S 2
  • 59. An Increase in Supply Quantity Price A Q 1 0 P 1 P 2 Q 2 B (New Market Equilibrium) D 1 S 1 S 2
  • 60. What happens when the price isn’t “right”?
    • When prices are set above or below the equilibrium price, disequilibrium occurs and results in…
      • shortages
      • surpluses
  • 61. Shortage
    • Shortage – is a situation in which the quantity demanded is greater than the quantity supplied at a given price
      • IN OTHER WORDS: Qd > Qs
    • Shortage can also be called “Excess Demand”
      • When price is below the equilibrium price, there is a shortage and the price tends to rise towards equilibrium
  • 62. Excess Demand Quantity Price S D 0 P 1 Equilibrium Price Equilibrium
  • 63. Excess Demand Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price below Equilibrium Price
  • 64. Excess Demand Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price below Equilibrium Price Q s 0
  • 65. Excess Demand Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price below Equilibrium Price Q s 0 Q d 0
  • 66. Surplus explained by Michael Scott
  • 67. Surplus
    • Surplus– is a situation in which the quantity supplied is greater than the quantity demanded at a given price
      • IN OTHER WORDS: Qd < Qs
    • Surplus can also be called “Excess Supply”
      • When price is above the equilibrium price, there is a surplus and the price tends to fall towards equilibrium
  • 68. Excess Supply Quantity Price D Equilibrium 0 P 1 Equilibrium Price S
  • 69. Excess Supply Quantity Price D Equilibrium 0 P 2 Price above Equilibrium Price P 1 Equilibrium Price S
  • 70. Excess Supply Quantity Price D Equilibrium 0 P 2 Price above Equilibrium Price P 1 Equilibrium Price S Q d 2
  • 71. Excess Supply Quantity Price D 0 P 2 Price above Equilibrium Price P 1 Equilibrium Price S Equilibrium Q s 2 Q d 2