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The law of supply and demand

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  • More consumers; or decrease in taste
  • More workers for a certain profession; or less workers
  • Example: family incomes increase from OCW remittances; more home depots
  • Consumers tighten buying due to rising oil prices; producers curb production due to rising resource costs from rising oil prices; moving towards recession
  • Speculation and fears of scarcity drives people to consume more fuel; Nigerian bomb blast of two fuel plants decreases fuel supply
  • Less consumption of fuel; more production of fuel

The law of supply and demand The law of supply and demand Presentation Transcript

  • The Law of Supply and Demand by Jean Lee C. Patindol, c2011-12
  • Demand and Supply Determinants
      • Price of the good
      • Non-price determinants:
        • Taste or level of desire for the good by the buyer
        • Income of the buyer
        • Prices of related products
          • Substitute products (directly competes with the good in the opinion of the buyer)
          • Complementary products (used along with the good in the opinion of the buyer
        • Future expectations
          • Expected income of the buyer
          • Expected price of the good
        • For the total demand: the number of buyers in the market
      • Price of the good
      • Non-price determinants:
        • Changes in number of producers
        • Resource prices (prices of the inputs necessary to produce the good)
        • Technological changes
        • Prices of other goods
          • Substitute
          • Complementary
        • Expectations of future prices
        • Natural bounty/ calamity
        • Government incentives/disincentives:
          • Subsidies
          • Taxes
    by Jean Lee C. Patindol, c2011-12
  • The Law of Demand, The Law of Supply
    • As the price of a good decreases/increases, ceteris paribus, the quantity of that good that consumers are willing and able to buy increases/decreases
    • There is an inverse relationship between price and quantity demanded.
    • Consumers want the lowest price possible.
    • As the price of a good decreases/increases, ceteris paribus, the quantity of that good that producers are willing and able to sell increases/decreases
    • There is a direct relationship between price and quantity supplied.
    • Producers want the highest price possible
    by Jean Lee C. Patindol, c2011-12
  • The Law of Supply and Demand P Q D S Pe Qe by Jean Lee C. Patindol, c2011-12
  • The Law of Supply and Demand
    • At any price except one (Pe), the amounts that buyers are willing to buy and the amounts that sellers are willing to sell are unequal.
    • It is only at the price where the amount that buyers are willing to buy and the amount that buyers are willing to sell are equal that there is market equilibrium (“the market clears”).
    • The intersection of supply and demand curves determines the equilibrium price and quantity.
    • In a competitive market, price functions to equalize the quantity demanded by consumers and the quantity supplied by producers, resulting in an economic equilibrium of price and quantity .
    • Any point above the equilibrium price and quantity is a surplus (B in next diagram ) ; any point below the equilibrium price and quantity is a shortage (A in next diagram). Therefore, price floors and price ceilings become ineffective over the long term.
    by Jean Lee C. Patindol, c2011-12
  • The Law of Supply and Demand Price floor Price ceiling by Jean Lee C. Patindol, c2011-12
  • Demand increases/decreases; Supply is constant
    • More consumers
    • Decrease in taste
    P Q D S Pe Qe D1 P1 Q1 D2 P2 Q2 by Jean Lee C. Patindol, c2011-12
  • Demand is constant; Supply increases/decreases P Q D S Pe Qe S1 P1 Q1 S2 P2 Q2 by Jean Lee C. Patindol, c2011-12
    • More workers
    • Less workers
  • Demand increases; Supply increases
    • Family incomes increase from OCW remittances
    • More home depots
    P Q D S Pe Qe D1 S1 P1 Q1 by Jean Lee C. Patindol, c2011-12
  • Demand decreases; Supply decreases
    • Consumers tighten buying due to rising oil prices
    • Producers curb production due to rising resource costs from rising oil prices; moving towards recession
    P Q D S Pe Qe D1 S1 P1 Q1 by Jean Lee C. Patindol, c2011-12
  • Demand increases; Supply decreases
    • Speculation and fears of scarcity drives people to consume more fuel
    • Nigerian bomb blast of two major fuel plants decreases world fuel supply
    P Q D S Pe Qe D1 S1 P1 Q1 by Jean Lee C. Patindol, c2011-12
  • Demand decreases; Supply increases
    • Due to climate change consciousness, people consume less fuel
    • Due to oil deregulation law; Producers produce more fuel
    P Q D S Pe Qe D1 S1 P1 Q1 by Jean Lee C. Patindol, c2011-12