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- 1. Unit #2 SUPPLY & DEMAND
- 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. 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. 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 <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. 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. 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 <ul><li>Shown by movement along the demand curve </li></ul><ul><li>PRICE changes always cause changes in Qd!! </li></ul>
- 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. 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 <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. 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. 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>
- 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>
- 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>
- 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 <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>
- 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>
- 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>
- 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>
- 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 <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>
- 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>
- 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>
- 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>
- 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>
- 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>
- 43. Market Equilibrium <ul><li>Price equilibrium can be found where the supply curve intersects the demand curve </li></ul>
- 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 <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>
- 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 <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>
- 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”? <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>
- 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>
- 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 <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>
- 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

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