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demandsupplyandequilibrium-160710114855.pptx
- 1. TOPIC TWO; PART TWO Demand, Supply, Equilibrium and Elasticity
- 2. Introduction and Overview •Supply and demand are the two words that economists use most often. •Supply and demand are the forces that make market economies work. •Modern microeconomics is about supply, demand, and market equilibrium.
- 3. Demand The amount of a good, service, or resource that people are willing and able to buy during a specified period at a specified price. •Quantity demanded is the amount of a good that buyers are willing and able to purchase. •Law of Demand The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.
- 4. •DemandSchedule •The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.
- 5. DemandCurve The demand curve is a graph of the relationship between the price of a good and the quantity demanded. Market demand refers to the sum of all individual demands for a particular good or service. Change inQuantity Demanded “Movement of demand curve” Movement along the demand curve. Caused by a change in the price of the product.
- 7. 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A B 8 1.00 $2.00 4
- 8. These are the main determinant of demand ‘’ as they change the demand make a change’’ • Price of the product • Taste or preference of consumers • Income of the consumers • Price of related goods • Consumers expectation of income and price • Number of buyers in the market
- 9. Copyright©2003 Southwestern/Thomson Learning Priceof Ice-Cream Cone Quantityof Ice-CreamCones Increase indemand Decrease in demand Demand curve, D2 Demand curve, D1 Demand curve, D3 0 Shifting demand curve
- 10. A change in non-price determinant of demand causes a change in the demand of the product with same price. This effect can be shown in the demand curve and causes a shift od demand curve The movement can be either right-ward shift ‘’ indicating an increase in demand’’ or left-ward shift ‘’indicating a decrease in demand curve’’
- 11. Supply • The amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price. The Law of Supply Other things remaining the same, •If the price of a good rises, the quantity supplied of that good increases. •If the price of a good falls, the quantity supplied of that good decreases.
- 12. when all Supply schedule A list of the quantities supplied at each different price other influences on selling plans remain the same. Supply curve supplied and selling plans A graph of the relationship between the quantity the price of the good when all other influences on remain the same. • Market supply The sum of the supplies of all sellers in a market. The market supply curve is the sum of the supply curves of all the sellers in the market.
- 15. Determinants of Supply Price of the product Price of the inputs Technology Price of related goods Governmental interventions Number of Sellers in the market
- 16. Movement of Supply curve 1 5 Price of Ice- CreamCone Quantityof Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve.
- 17. Shifting Of supply curve Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-CreamCones 0 Increase in supply Decrease insupply Supply curve, S3 Supply curve, S1 Supply curve, S2
- 18. EQUILIBRIUM •The word equilibrium means a state of balance. •An equilibrium is the condition that exists when quantity supplied and quantity demanded are equal.
- 19. EQUILIBRIUM •An equilibrium is the condition that exists when quantity supplied and quantity demanded are equal. •Only in equilibrium is quantity supplied equal to quantity demanded.
- 20. •Equilibrium Price •The price that balances quantity supplied and quantity demanded. •On a graph, it is the price at which the supply and demand curves intersect. •Equilibrium Quantity •The quantity supplied and the quantity demanded at the equilibrium price. •On a graph it is the quantity at which the supply and demand curves intersect.
- 21. •Excess demand, or shortage of Supply is the condition that exists when quantity demanded exceeds quantity supplied at the current price. •Excess supply, or shortage of Demand, is the condition that exists when quantity supplied exceeds quantity demanded at the current price.
- 22. EQUILIBRIUM POINT A Price per DVD $5.00 4.00 3.50 3.00 2.50 2.00 1.50 1.00 S C Excess demand D 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of DVDs supplied and demanded Excesssupply E
- 23. At $2.00, the quantity demanded is equal to the quantity supplied! Demand Schedule Supply Schedule
- 24. Elasticity • Types of Elasticity: 1. Price elasticity 2. Income elasticity 3. Cross elasticity
- 25. 1.Types of price elasticity of demand Inelastic Demand Percentage change in price is greater than percentage change in quantity demand. Price elasticity of demand is less than one. Elastic Demand Percentage change in quantity demand is greater than percentage change in price. Price elasticity of demand is greater than one.
- 26. Unit Elastic When percentage change in price equal to the percentage change in quantity demanded. Unit elastic equal one. Perfect inelastic Situation where a change in price doesn’t lead to change in quantity demanded Perfect elastic Situation where a price is constant at any variation in quantity demanded
- 27. Perfectly Inelastic Demand - Elasticity equals 0 Quantity Price 4 $5 Demand 100 2. ...leavesthequantitydemandedunchanged. 1.An increase inprice...
- 28. Inelastic Demand - Elasticity is less than 1 Quantity Price 4 $5 1.A25% increase inprice... Demand 90 100 2. ...leadstoa10%decreaseinquantity .
- 29. Unit Elastic Demand - Elasticity equals 1 Quantity Price 4 $5 1.A25% increase inprice... Demand 75 100 2. ...leadstoa25%decreaseinquantity .
- 30. Elastic Demand - Elasticity is greater than 1 Quantity 4 Price 1.A25% $5 increase inprice... Demand 50 100 2. ...leadstoa50%decreaseinquantity .
- 31. Perfectly Elastic Demand - Elasticity equals infinity Quantity Price Demand $4 1.Atanyprice above$4,quantity demandedis zero. 2.Atexactly$4, consumerswill buyanyquantity . 3.Atapricebelow$4, quantitydemandedisinfinite.
- 32. Income Elasticity of demand 1.Inferior goods: an increase in income leads to decrease the demand for inferior goods. 2.Normal goods: an increase in income leads to increase the quantity demanded of normal goods
- 33. Cross Elasticity of Demand 1.Complementary goods: increase in price of petroleum will decrease the demand of cars. 2.Substitute goods: increase in price of coca cola will increase the quantity demanded of Pepsi.