© 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Basic Decision-Making UnitsT...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Circular Flow of Economic Ac...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Input Markets and Output Markets...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Input MarketsInput Markets
Input...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Determinants of Household Demand...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Quantity DemandedQuantity Demand...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Demand in Output MarketsDemand i...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Demand CurveThe Demand Curve...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Law of DemandThe Law of Dema...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Other Properties of Demand Curve...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Income and WealthIncome and Weal...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Related Goods and ServicesRelate...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Related Goods and ServicesRelate...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Shift of Demand Versus Movement ...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
• When demand shifts to
the righ...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Demand Versus a Chan...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Impact of a Change in Income...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Impact of a Change in the Pr...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Household to Market DemandF...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Household Demand to MarketF...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Supply in Output MarketsSupply i...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Supply Curve andThe Supply C...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Law of SupplyThe Law of Supp...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Determinants of SupplyDeterminan...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Supply VersusA Chang...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
• When supply shifts
to the righ...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
A Change in Supply VersusA Chang...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
From Individual SupplyFrom Indiv...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market SupplyMarket Supply
• As ...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market EquilibriumMarket Equilib...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market EquilibriumMarket Equilib...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market DisequilibriaMarket Diseq...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Market DisequilibriaMarket Diseq...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Increases in Demand and SupplyIn...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Decreases in Demand and SupplyDe...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Relative Magnitudes of ChangeRel...
© 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
Relative Magnitudes of ChangeRel...
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Demand and supply (usama shehzad sr ii s)

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Demand and supply (usama shehzad sr ii s)

  1. 1. © 2002 Prentice Hall Business Publishing© 2002 Prentice Hall Business Publishing Principles of Economics, 6/ePrinciples of Economics, 6/e Karl Case, Ray FairKarl Case, Ray Fair CHAPTERCHAPTER 33 Prepared by: Fernando QuijanoPrepared by: Fernando Quijano and Yvonn Quijanoand Yvonn Quijano Demand, Supply, andDemand, Supply, and Market EquilibriumMarket Equilibrium
  2. 2. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Basic Decision-Making UnitsThe Basic Decision-Making Units • AA firmfirm is an organization that transformsis an organization that transforms resources (inputs) into products (outputs).resources (inputs) into products (outputs). Firms are the primary producing units in aFirms are the primary producing units in a market economy.market economy. • AnAn entrepreneurentrepreneur is a person who organizes,is a person who organizes, manages, and assumes the risks of a firm,manages, and assumes the risks of a firm, taking a new idea or a new product andtaking a new idea or a new product and turning it into a successful business.turning it into a successful business. • HouseholdsHouseholds are the consuming units in anare the consuming units in an economy.economy.
  3. 3. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Circular Flow of Economic ActivityThe Circular Flow of Economic Activity • TheThe circular flow ofcircular flow of economic activityeconomic activity showsshows the connections betweenthe connections between firms and households infirms and households in input and output markets.input and output markets.
  4. 4. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Input Markets and Output MarketsInput Markets and Output Markets • Output, or product,Output, or product, marketsmarkets are the marketsare the markets in which goods andin which goods and services are exchanged.services are exchanged. • Input marketsInput markets are theare the markets in whichmarkets in which resources—labor, capital,resources—labor, capital, and land—used toand land—used to produce products, areproduce products, are exchanged.exchanged. • Payments flow in the oppositePayments flow in the opposite direction as the physical flow ofdirection as the physical flow of resources, goods, and servicesresources, goods, and services (counterclockwise).(counterclockwise).
  5. 5. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Input MarketsInput Markets Input markets include:Input markets include: • TheThe labor marketlabor market, in which households supply, in which households supply work for wages to firms that demand labor.work for wages to firms that demand labor. • TheThe capital marketcapital market, in which households supply, in which households supply their savings, for interest or for claims to futuretheir savings, for interest or for claims to future profits, to firms that demand funds to buy capitalprofits, to firms that demand funds to buy capital goods.goods. • TheThe land marketland market, in which households supply, in which households supply land or other real property in exchange for rent.land or other real property in exchange for rent.
  6. 6. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Determinants of Household DemandDeterminants of Household Demand • TheThe price of the productprice of the product in question.in question. • TheThe incomeincome available to the household.available to the household. • The household’s amount ofThe household’s amount of accumulated wealthaccumulated wealth.. • TheThe prices of related productsprices of related products available to theavailable to the household.household. • The household’sThe household’s tastes and preferencestastes and preferences.. • The household’sThe household’s expectationsexpectations about futureabout future income, wealth, and prices.income, wealth, and prices. A household’s decision about the quantity of a particularA household’s decision about the quantity of a particular output to demand depends on:output to demand depends on:
  7. 7. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Quantity DemandedQuantity Demanded • Quantity demandedQuantity demanded is the amountis the amount (number of units) of a product that a(number of units) of a product that a household would buy in a given timehousehold would buy in a given time period if it could buy all it wanted atperiod if it could buy all it wanted at the current market price.the current market price.
  8. 8. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Demand in Output MarketsDemand in Output Markets • AA demand scheduledemand schedule is a table showingis a table showing how much of a givenhow much of a given product a householdproduct a household would be willing towould be willing to buy at different prices.buy at different prices. • Demand curves areDemand curves are usually derived fromusually derived from demand schedules.demand schedules. PRICE (PER CALL) QUANTITY DEMANDED (CALLS PER MONTH) $ 0 30 0.50 25 3.50 7 7.00 3 10.00 1 15.00 0 ANNA'S DEMAND SCHEDULE FOR TELEPHONE CALLS
  9. 9. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Demand CurveThe Demand Curve • TheThe demand curvedemand curve isis a graph illustratinga graph illustrating how much of a givenhow much of a given product a householdproduct a household would be willing towould be willing to buy at different prices.buy at different prices. PRICE (PER CALL) QUANTITY DEMANDED (CALLS PER MONTH) $ 0 30 0.50 25 3.50 7 7.00 3 10.00 1 15.00 0 ANNA'S DEMAND SCHEDULE FOR TELEPHONE CALLS
  10. 10. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Law of DemandThe Law of Demand • TheThe law of demandlaw of demand states that there is astates that there is a negative, or inverse,negative, or inverse, relationship betweenrelationship between price and the quantityprice and the quantity of a good demandedof a good demanded and its price.and its price. • This means thatThis means that demand curves slopedemand curves slope downward.downward.
  11. 11. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Other Properties of Demand CurvesOther Properties of Demand Curves • Demand curves intersectDemand curves intersect the quantity (the quantity (XX)-axis, as a)-axis, as a result of time limitations andresult of time limitations and diminishing marginal utility.diminishing marginal utility. • Demand curves intersectDemand curves intersect the (the (YY)-axis, as a result of)-axis, as a result of limited incomes and wealth.limited incomes and wealth.
  12. 12. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Income and WealthIncome and Wealth • IncomeIncome is the sum of all householdsis the sum of all households wages, salaries, profits, interestwages, salaries, profits, interest payments, rents, and other forms ofpayments, rents, and other forms of earnings in a given period of time. It isearnings in a given period of time. It is aa flowflow measure.measure. • WealthWealth, or, or net worthnet worth, is the total value, is the total value of what a household owns minus whatof what a household owns minus what it owesit owes.. It is aIt is a stockstock measure.measure.
  13. 13. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Related Goods and ServicesRelated Goods and Services • Normal GoodsNormal Goods are goods for whichare goods for which demand goes up when income isdemand goes up when income is higher and for which demand goeshigher and for which demand goes down when income is lower.down when income is lower. • Inferior Goods are goods for which demand falls when income rises.
  14. 14. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Related Goods and ServicesRelated Goods and Services • SubstitutesSubstitutes are goods that can serve asare goods that can serve as replacements for one another; when thereplacements for one another; when the price of one increases, demand for theprice of one increases, demand for the other goes up.other goes up. Perfect substitutesPerfect substitutes areare identical products.identical products. • Complements are goods that “go together”; a decrease in the price of one results in an increase in demand for the other, and vice versa.
  15. 15. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Shift of Demand Versus Movement Along aShift of Demand Versus Movement Along a Demand CurveDemand Curve • A change inA change in demanddemand isis not the same as a changenot the same as a change inin quantity demandedquantity demanded.. • In this example, a higherIn this example, a higher price causes lowerprice causes lower quantity demandedquantity demanded.. • Changes in determinantsChanges in determinants of demand, other thanof demand, other than price, cause a change inprice, cause a change in demanddemand, or a, or a shiftshift of theof the entire demand curve, fromentire demand curve, from DDAA toto DDBB..
  16. 16. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair • When demand shifts to the right, demand increases. This causes quantity demanded to be greater than it was prior to the shift, for each and every price level. A Change in Demand Versus a Change inA Change in Demand Versus a Change in Quantity DemandedQuantity Demanded
  17. 17. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair A Change in Demand Versus a Change inA Change in Demand Versus a Change in Quantity DemandedQuantity Demanded To summarize: Change in price of a good or service leads to Change in quantity demanded (Movement along the curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve).
  18. 18. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Impact of a Change in IncomeThe Impact of a Change in Income • Higher income decreases the demand for an inferior good • Higher income increases the demand for a normal good
  19. 19. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Impact of a Change in the PriceThe Impact of a Change in the Price of Related Goodsof Related Goods • Price of hamburger rises • Demand for complement good (ketchup) shifts left • Demand for substitute good (chicken) shifts right • Quantity of hamburger demanded falls
  20. 20. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair From Household to Market DemandFrom Household to Market Demand • Demand for a good or service can beDemand for a good or service can be defined for andefined for an individual householdindividual household, or, or for a group of households that make up afor a group of households that make up a marketmarket.. • Market demandMarket demand is the sum of all theis the sum of all the quantities of a good or service demandedquantities of a good or service demanded per period by all the households buying inper period by all the households buying in the market for that good or service.the market for that good or service.
  21. 21. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair From Household Demand to MarketFrom Household Demand to Market DemandDemand • Assuming there are only two households in theAssuming there are only two households in the market, market demand is derived as follows:market, market demand is derived as follows:
  22. 22. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Supply in Output MarketsSupply in Output Markets • AA supply schedulesupply schedule is a tableis a table showing how much of a productshowing how much of a product firms will supply at differentfirms will supply at different prices.prices. • Quantity suppliedQuantity supplied represents therepresents the number of units of a product thatnumber of units of a product that a firm would be willing and able toa firm would be willing and able to offer for sale at a particular priceoffer for sale at a particular price during a given time period.during a given time period. PRICE (PER BUSHEL) QUANTITY SUPPLIED (THOUSANDS OF BUSHELS PER YEAR) $ 2 0 1.75 10 2.25 20 3.00 30 4.00 45 5.00 45 CLARENCE BROWN'S SUPPLY SCHEDULE FOR SOYBEANS
  23. 23. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Supply Curve andThe Supply Curve and the Supply Schedulethe Supply Schedule • AA supply curvesupply curve is a graph illustrating how muchis a graph illustrating how much of a product a firm will supply at different prices.of a product a firm will supply at different prices. 0 1 2 3 4 5 6 0 10 20 30 40 50 Thousands of bushels of soybeans produced per year Priceofsoybeansperbushel($) PRICE (PER BUSHEL) QUANTITY SUPPLIED (THOUSANDS OF BUSHELS PER YEAR) $ 2 0 1.75 10 2.25 20 3.00 30 4.00 45 5.00 45 CLARENCE BROWN'S SUPPLY SCHEDULE FOR SOYBEANS
  24. 24. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair The Law of SupplyThe Law of Supply • TheThe law of supplylaw of supply states that there is astates that there is a positive relationshippositive relationship between price andbetween price and quantity of a goodquantity of a good supplied.supplied. • This means thatThis means that supply curvessupply curves typically have atypically have a positive slope.positive slope. 0 1 2 3 4 5 6 0 10 20 30 40 50 Thousands of bushels of soybeans produced per year Priceofsoybeansperbushel($)
  25. 25. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Determinants of SupplyDeterminants of Supply • TheThe priceprice of the good or service.of the good or service. • TheThe costcost of producing the good, which inof producing the good, which in turn depends on:turn depends on: • TheThe price of required inputsprice of required inputs (labor,(labor, capital, and land),capital, and land), • TheThe technologiestechnologies that can be used tothat can be used to produce the product,produce the product, • TheThe prices of related products.prices of related products.
  26. 26. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair A Change in Supply VersusA Change in Supply Versus a Change in Quantity Supplieda Change in Quantity Supplied • A change inA change in supplysupply isis not the same as anot the same as a change inchange in quantityquantity suppliedsupplied.. • In this example, a higherIn this example, a higher price causesprice causes higherhigher quantity suppliedquantity supplied, and, and aa move alongmove along thethe demand curve.demand curve. • In this example, changes in determinants of supply, otherIn this example, changes in determinants of supply, other than price, cause anthan price, cause an increase in supplyincrease in supply, or a, or a shiftshift of theof the entire supply curve, fromentire supply curve, from SSAA toto SSBB..
  27. 27. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair • When supply shifts to the right, supply increases. This causes quantity supplied to be greater than it was prior to the shift, for each and every price level. A Change in Supply VersusA Change in Supply Versus a Change in Quantity Supplieda Change in Quantity Supplied
  28. 28. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair A Change in Supply VersusA Change in Supply Versus a Change in Quantity Supplieda Change in Quantity Supplied To summarize: Change in price of a good or service leads to Change in quantity supplied (Movement along the curve). Change in costs, input prices, technology, or prices of related goods and services leads to Change in supply (Shift of curve).
  29. 29. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair From Individual SupplyFrom Individual Supply to Market Supplyto Market Supply • The supply of a good or service can be definedThe supply of a good or service can be defined for an individual firm, or for a group of firms thatfor an individual firm, or for a group of firms that make up a market or an industry.make up a market or an industry. • Market supplyMarket supply is the sum of all the quantities ofis the sum of all the quantities of a good or service supplied per period by all thea good or service supplied per period by all the firms selling in the market for that good orfirms selling in the market for that good or service.service.
  30. 30. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Market SupplyMarket Supply • As with market demand, market supply is the horizontal summation of individual firms’ supply curves.
  31. 31. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Market EquilibriumMarket Equilibrium • The operation of the marketThe operation of the market depends on the interactiondepends on the interaction between buyers and sellers.between buyers and sellers. • AnAn equilibriumequilibrium is the conditionis the condition that exists when quantity suppliedthat exists when quantity supplied and quantity demanded are equal.and quantity demanded are equal. • At equilibrium, there is no tendencyAt equilibrium, there is no tendency for the market price to change.for the market price to change.
  32. 32. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Market EquilibriumMarket Equilibrium • Only in equilibrium isOnly in equilibrium is quantity suppliedquantity supplied equal to quantityequal to quantity demanded.demanded. • At any price levelAt any price level other thanother than PP00, the, the wishes of buyerswishes of buyers and sellers do notand sellers do not coincide.coincide.
  33. 33. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Market DisequilibriaMarket Disequilibria • Excess demandExcess demand, or, or shortage, is the conditionshortage, is the condition that exists when quantitythat exists when quantity demanded exceedsdemanded exceeds quantity supplied at thequantity supplied at the current price.current price. • When quantity demandedWhen quantity demanded exceeds quantityexceeds quantity supplied, price tends tosupplied, price tends to rise until equilibrium isrise until equilibrium is restored.restored.
  34. 34. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Market DisequilibriaMarket Disequilibria • Excess supplyExcess supply, or, or surplus, is the conditionsurplus, is the condition that exists when quantitythat exists when quantity supplied exceeds quantitysupplied exceeds quantity demanded at the currentdemanded at the current price.price. • When quantity suppliedWhen quantity supplied exceeds quantityexceeds quantity demanded, price tends todemanded, price tends to fall until equilibrium isfall until equilibrium is restored.restored.
  35. 35. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Increases in Demand and SupplyIncreases in Demand and Supply • Higher demandHigher demand leads toleads to higher equilibrium price andhigher equilibrium price and higher equilibrium quantity.higher equilibrium quantity. • Higher supplyHigher supply leads toleads to lower equilibrium price andlower equilibrium price and higher equilibrium quantity.higher equilibrium quantity.
  36. 36. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Decreases in Demand and SupplyDecreases in Demand and Supply • Lower demandLower demand leads toleads to lower price and lowerlower price and lower quantity exchanged.quantity exchanged. • Lower supplyLower supply leads toleads to higher price and lowerhigher price and lower quantity exchanged.quantity exchanged.
  37. 37. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Relative Magnitudes of ChangeRelative Magnitudes of Change • The relative magnitudes of change in supply andThe relative magnitudes of change in supply and demand determine the outcome of market equilibrium.demand determine the outcome of market equilibrium.
  38. 38. © 2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Relative Magnitudes of ChangeRelative Magnitudes of Change • When supply and demand both increase, quantityWhen supply and demand both increase, quantity will increase, but price may go up or down.will increase, but price may go up or down.

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