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# Supply & demand pe student notes

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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 &amp; no repair shops -want to set up business in area where demand is greatest willingness means person’s want or desire to purchase &amp; 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 &amp; oranges, chicken &amp; beef) complements (cars &amp; 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 &amp; 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 &amp; 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 &amp; 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 &amp; 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 &amp; 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, &amp; air bags which increases production cost of car Natural Disaster/Crisis – somolian pirates slowing African shipping
• Elastic – kites &amp; 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, &amp; time needed to adjust to price change
• E price is also market-clearing price – market is cleared of all surpluses &amp; 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 &amp; producers come away satisfied (even though producers would like higher prices &amp; 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 &amp; want to get rid of inventories (storing extra goods is costly) &amp; produce less output
• ### Supply & demand pe student notes

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