Attachments 2012 08_9

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Attachments 2012 08_9

  1. 1. Chapter 3Supply and DemandSupply and Demand
  2. 2. The Law of Demand•• The law of demand holds that other things The law of demand holds that other things equal, as the price of a good or service rises, its equal, as the price of a good or service rises, its quantity demanded falls. quantity demanded falls. – The reverse is also true: as the price of a good or – The reverse is also true: as the price of a good or service falls, its quantity demanded increases. service falls, its quantity demanded increases.
  3. 3. Demand CurveThe demand curve has a negative slope, consistent with The demand curve has a negative slope, consistent withthe law of demand. the law of demand.
  4. 4. The Law of Supply•• The law of supply holds that other things equal, The law of supply holds that other things equal, as the price of a good rises, its quantity as the price of a good rises, its quantity supplied will rise, and vice versa. supplied will rise, and vice versa.•• Why do producers produce more output when Why do producers produce more output when prices rise? prices rise? – They seek higher profits – They seek higher profits – They can cover higher marginal costs of production – They can cover higher marginal costs of production
  5. 5. Supply CurveThe supply curve has a positive slope, consistent with The supply curve has a positive slope, consistent withthe law of supply. the law of supply.
  6. 6. Equilibrium•• In economics, an equilibrium is a situation in In economics, an equilibrium is a situation in which: which: – there is no inherent tendency to change, – there is no inherent tendency to change, – quantity demanded equals quantity supplied, and – quantity demanded equals quantity supplied, and – the market just clears. – the market just clears.
  7. 7. EquilibriumEquilibrium occurs at a price of $3 and a quantity of 30Equilibrium occurs at a price of $3 and a quantity of 30units.units.
  8. 8. Shortages and Surpluses•• A shortage occurs when quantity demanded A shortage occurs when quantity demanded exceeds quantity supplied. exceeds quantity supplied. – A shortage implies the market price is too low. – A shortage implies the market price is too low.•• A surplus occurs when quantity supplied A surplus occurs when quantity supplied exceeds quantity demanded. exceeds quantity demanded. – A surplus implies the market price is too high. – A surplus implies the market price is too high.
  9. 9. Shift in the Demand Curve•• A change in any variable other than price that A change in any variable other than price that influences quantity demanded produces a shift in influences quantity demanded produces a shift in the demand curve or a change in demand. the demand curve or a change in demand.•• Factors that shift the demand curve include: Factors that shift the demand curve include: – Change in consumer incomes – Change in consumer incomes – Population change – Population change – Consumer preferences – Consumer preferences – Prices of related goods: – Prices of related goods: •• Substitutes: goods consumed in place of one another Substitutes: goods consumed in place of one another •• Complements: goods consumed jointly Complements: goods consumed jointly
  10. 10. Shift in the Demand CurveThis demand curve has shifted to the right. QuantityThis demand curve has shifted to the right. Quantitydemanded is now higher at any given price.demanded is now higher at any given price.
  11. 11. Equilibrium After a Demand ShiftThe shift in the demand curve moves the marketThe shift in the demand curve moves the marketequilibrium from point A to point B, resulting in aequilibrium from point A to point B, resulting in ahigher price and higher quantity.higher price and higher quantity.
  12. 12. Shift in the Supply Curve•• A change in any variable other than price that A change in any variable other than price that influences quantity supplied produces a shift in influences quantity supplied produces a shift in the supply curve or a change in supply. the supply curve or a change in supply.•• Factors that shift the supply curve include: Factors that shift the supply curve include: – Change in input costs – Change in input costs – Increase in technology – Increase in technology – Change in size of the industry – Change in size of the industry
  13. 13. Shift in the Supply CurveFor an given rental price, quantity supplied is now lower For an given rental price, quantity supplied is now lowerthan before. than before.
  14. 14. Equilibrium After a Supply ShiftThe shift in the supply curve moves the market equilibrium from The shift in the supply curve moves the market equilibrium frompoint A to point B, resulting in aahigher price and lower quantity. point A to point B, resulting in higher price and lower quantity.
  15. 15. Price Ceilings & Floors•• A price ceiling is a legal maximum that can be A price ceiling is a legal maximum that can be charged for a good. charged for a good. – Results in a shortage of a product – Results in a shortage of a product – Common examples include apartment rentals and – Common examples include apartment rentals and credit cards interest rates. credit cards interest rates.•• A price floor is a legal minimum that can be A price floor is a legal minimum that can be charged for a good. charged for a good. – Results in a surplus of a product – Results in a surplus of a product – Common examples include soybeans, milk, – Common examples include soybeans, milk, minimum wage minimum wage
  16. 16. Price CeilingA price ceiling is set at $2 resulting in a shortage ofA price ceiling is set at $2 resulting in a shortage of20 units.20 units.
  17. 17. Price FloorA price floor is set at $4 resulting in a surplus of 20A price floor is set at $4 resulting in a surplus of 20units.units.

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