1 principles of economics by fred m gottheil chap. 3 supply and demand
TRANSCRIPT
1
Principles of Economicsby Fred M Gottheil
Principles of Economicsby Fred M Gottheil
Chap. 3 Chap. 3 SUPPLY AND DEMANDSUPPLY AND DEMAND
2
What is Supply and Demand?
What is Supply and Demand?
A model of price behavior in
competitive markets
3
Note that Demand is notNote that Demand is not
• The same as wants• The same as needs• necessarily the same as the actual quantity purchased
4
The Law of Demand The Law of Demand
When price increases the quantity demanded decreases and vice versa, ceteris paribus
©©1999 South-Western College Publishing
5
What assumption is always made when the price
changes?
What assumption is always made when the price
changes?Ceteris paribus or
everything else stays the same-abbreviated cet.par.
©©1999 South-Western College Publishing
6
What is a Demand Schedule?
What is a Demand Schedule?
Shows the specific quantity of a good or service that people are willing and able to buy at different prices
©©1999 South-Western College Publishing
77
Price Quantity Demanded
$10 0
$9 1
$8 2
$7 3
$6 4
$5 5©©1999 South-Western College Publishing
8
What is a Demand Curve?
What is a Demand Curve?
A graph that depicts the relationship between price and quantity demanded
©©1999 South-Western College Publishing
9
Demand Curve
Demand Curve
P1
Q1
P2
Q29©©1999 South-Western College Publishing
10
Reasons for the Law of Demand??
Reasons for the Law of Demand??
• The substitution (relative price) effect
• The real income effect
11
What is a change in Demand?
What is a change in Demand?
A change in the amount demanded of a good that is caused by factors other than a change in the price of that good
©©1999 South-Western College Publishing
12
Shift in Demand CurveShift in Demand Curve
D1
D2
P
Q1122
©©1999 South-Western College Publishing
13
A rightward shift in the demand curve is an increase in demand, a leftward shift is a decrease in demand.
14
What causes a shift in Demand?
What causes a shift in Demand?•Change in tastes
•Income changes
•Changes in Population
•Changes in the prices of related goods
•Changes in Expectations
15
Income changes: 2 possibilities:
Income changes: 2 possibilities:
• Normal goods: as income rises, demand rises, cet. par.
• Inferior goods: As income rises, demand falls, cet. par.
16
Changes in related goods prices: 2 cases:
Changes in related goods prices: 2 cases:
• Substitute goods: As the price of Y increases, the demand for X increases
• Complementary goods: As the price of Y increases, the demand for X decreases
17
Changes in future price expectations
Changes in future price expectations
The expectation of a future rise in price leads to an increase in demand now, cet. par.
18
What is Market Demand?What is Market Demand?The sum of all individual
demands in a market
19
NOTENOTE - KNOW THE - KNOW THE DIFFERENCE DIFFERENCE BETWEEN A CHANGE BETWEEN A CHANGE IN THE QUANTITY IN THE QUANTITY DEMANDED AND A DEMANDED AND A CHANGE IN DEMANDCHANGE IN DEMAND
©©1999 South-Western College Publishing
20
Changes in demand vs. changes in quantity demanded
Changes in demand vs. changes in quantity demanded
• Changes in quantity demanded only caused by changes in the products own price, a movement along a demand curve
• Changes in demand--a shift in the demand curve caused by factors other than the price of the product
21
P P
Q Q
DD1
A change in demand A change in quantity demanded
D
P1
P2
Q1 Q2
22
Do you understand?Do you understand?
Do you really understand?????
23
Which of the following would increase the current demand for cd’s?
Which of the following would increase the current demand for cd’s?
a. A decrease in the price of cd’sb. A decline in the teenage populationc. A lower cost for producing cd’sd. An expectation of a drop in cd pricese. A decrease in the price of cd players
The correct answer is…….E
24
1. According to the "Law of Demand," as the price of a good increases
a. the demand for the good increases. b. the demand for the good decreases. c. the quantity demanded increases. d. the quantity demanded decreases. 2. Tea and Coffee are ____________. Peanutbutter and jelly are ____________. a. complements; substitutes b. complements; complements c. substitutes; complements d. substitutes; substitutes
25
3. Which of the following will increase the demand for pencils?
a. a decrease in the price b. a decrease in the student population c. a decrease in the price of pens d. a decrease in the price of erasers
26
The supply side of the market
The supply side of the market
Supply refers to willingness and ability to produce something
27
The Law of SupplyThe Law of Supply
As price rises, the quantity supplied
rises, cet. par.
28
Reasons for the Law of Supply?
Reasons for the Law of Supply?
• Monetary incentives• The Law of Increasing
Opportunity Costs
29
What is a Supply Schedule?
What is a Supply Schedule?
Shows the specific quantity of a good or service that suppliers are willing and able to provide at different prices
©©1999 South-Western College Publishing
3030
Price Quantity Supplied
$5 0
$6 1
$7 2
$8 3
$9 4
$10 5©©1999 South-Western College Publishing
31
What is a Supply Curve?What is a Supply Curve?Depicts the relationship
between price and quantity supplied
©©1999 South-Western College Publishing
32
Supply Curve
Supply Curve S
P1
Q1
P2
Q2
32©©1999 South-Western College Publishing
33
What is Market -day Supply?
What is Market -day Supply?A market situation in
which the quantity of a good supplied is fixed, regardless of price
©©1999 South-Western College Publishing
34
Sup
ply
Cur
veS
uppl
y C
urve
S
P1
Q
P2
34©©1999 South-Western College Publishing
35
What is a change in Supply?
What is a change in Supply?
A change in the amount supplied of a good that is caused by factors other than a change in the price of that good
©©1999 South-Western College Publishing
36
S1S2
P
Q
Shift in SupplyShift in Supply
3366
©©1999 South-Western College Publishing
37
A rightward shift in the supply curve is an increase in supply, a leftward shift is a decrease in supply.
38
What causes a shift in Supply
What causes a shift in Supply
• Technology changes• Changes in resource prices• Changes in the number of suppliers• Changes in other good prices• Changes in expectations
39
Increases in supply can be caused by:
Increases in supply can be caused by:
Improved technologyLower resource pricesGreater number of firmsExpected lower future prices
40
NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY
©©1999 South-Western College Publishing
41
Changes in supply vs. changes in quantity supplied
Changes in supply vs. changes in quantity supplied
• Changes in quantity supplied only caused by changes in the products own price, a movement along a supply curve
• Changes in supply--a shift in the supply curve caused by factors other than the price of the product
42
P P
Q Q
A change in supply A change in quantity supplied
P2
P1
Q1 Q2
SS1 S
43
Supply and demand together
Supply and demand together
• Put supply and demand curves on the same graph
• Intersection gives the equilibrium price and quantity
44
D
S Price
Quantity
PE
QE
PE and QE represent the equilibrium price and quantity
45
What is Equilibrium Price?
What is Equilibrium Price?
The price that equates the quantity demanded and the quantity supplied
©©1999 South-Western College Publishing
46
What happens if price is below equilibrium?
What happens if price is below equilibrium?
A shortage, or excess demand, arises
47
D
S
P2
47QDQS
At P2, QD > QS, thus a shortage or excess
demand exists
Shortage
48
How is the shortage eliminated?
How is the shortage eliminated?
The price rises, leading to a decrease in quantity
demanded and an increase in quantity supplied.
49
What happens if price is above equilibrium?
What happens if price is above equilibrium?
A surplus, or excess supply, arises
50
D
SP1
Surplus
50QD
QS
At P1, QD < QS, thus a surplus or excess supply exists
51
How is the surplus eliminated?
How is the surplus eliminated?
The price falls, leading to a decrease in quantity supplied and an increase in quantity
demanded.
52
D
SP3
Q3
P1 Surplus
P2
Shortage
52©©1999 South-Western College Publishing
Summary, shortages, surpluses, and equilibrium
53
How shifts in S and D affect equilibrium price
and quantity
How shifts in S and D affect equilibrium price
and quantity
54
S
D2P1
Right Shift in Demand Right Shift in Demand
P2
Q2Q1D1
54©©1999 South-Western College Publishing
55
S1
D1
Left Shift in Demand Left Shift in Demand
D2
P2
Q2
P1
Q155©©1999 South-Western College Publishing
56
Summary, demand changes
Summary, demand changes
Increased demand, price and quantity both rise
Decreased demand, price and quantity both fall
57
S1
S2P1
Right Shift in SupplyRight Shift in Supply
P2
Q2Q1D
5577
©©1999 South-Western College Publishing
58
S2
S1P2
Left Shift in SupplyLeft Shift in Supply
P1
Q1Q2D
5588
©©1999 South-Western College Publishing
59
Summary, supply changes
Summary, supply changes
Increased supply, price falls, quantity rises
Decreased supply, price rises, quantity falls
60
If both curves shift, can predict price or quantity, but not both unless the magnitude of the shifts
are known
If both curves shift, can predict price or quantity, but not both unless the magnitude of the shifts
are known
61
Examples: shifts in both S and D curves
Examples: shifts in both S and D curves
Say both S and D increase, what can we say about equilibrium P and Q?
62
Q will increase, but P is indeterminate
Q will increase, but P is indeterminate
ANSWER
63
Examples: shifts in both S and D curves
Examples: shifts in both S and D curves
Say S increases but D decreases, what can we say about equilibrium P and Q?
64
P will decrease, but Q is indeterminate
P will decrease, but Q is indeterminate
ANSWER:
65
• What assumption is always made when the price changes?
• What is a Demand Curve?• What is a Supply Curve?• What is equilibrium Price?• What are shortages and surpluses?• What happens when demand and s
upply curves shift?
66
Supply and demand problems
Supply and demand problems
Suppose apples and oranges are substitutes to consumers: Bad weather destroys many apple orchards--what happens to equilibrium price and quantity in the apple market? In the Orange market?? Illustrate graphically.
67
P P
Q Q
S
S1
D
D1P1
P2
Q1Q2
Apple market, supply decreases, price rises,
quantity falls
D
S
Orange market, demand increases, price and
quantity rise
P1
P2
Q1 Q2
68
Oprah Winfrey says on tv that she will never eat another hamburger. What might happen to the equilibrium price and quantity in the beef market? Show graphically with supply and demand curves.
69
S1
D1
Decrease in demand in the beef Decrease in demand in the beef
market, price and quantity fallmarket, price and quantity fall
D2
P2
Q2
P1
Q169
70
The demand for computers has clearly increased over time, due to higher incomes and changing preferences towards computers. Despite the increased demand, the price of computers has continued to fall. Show graphically with supply and demand curves how this could happen, and give some possible explanations.
71
S
S1
D
D1
P1
P2
P3
If supply increases more than demand, price falls--greater supply due possibly to lower input costs, better technology, more firms
72
An increase in the wages paid to fishermen will have what effect on the fish market equilibrium?
a. Price will decrease, and quantity will decrease.
b. Price will increase, and quantity will increase.
c. Price will decrease, and quantity will increase.
d. Price will increase, and quantity will decrease.
e. Price and quantity will stay the same.
73
Over the past couple of years, prices for personal computers have fallen dramatically, but suppliers have offered more and more of them for sale. Does this refute the law of supply? Explain.