supply and demand: demand increase and decrease
Post on 10-Jun-2015
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Time to get slapped upside the head with “The Invisible
Hand”
Supply AND Demand Together
NOTE: If during the power-point transitions the slides appear “Jumpy” well…they Are…My PPT skills are very average …it is the best I can do…Bear with me…
Price of
___
Quantity of _________
Demand*
Supply*
Pe
Qe
Market for _______________
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
NOW: Something in thisMarket causes DEMANDTo INCREASE by 50%.
Qd=Qs
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
This means that at EVERY GIVEN PRICE the Quantity Demanded is Going to be 50% more.
Qd=Qs
Demand*
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qd=Qs
This means that at EVERY GIVEN PRICE relative to Demand* the
Quantity Demanded is going to be 50% more.
$2.00
$.50
50 75 225
+50%
+50%
+50%
Demand 1Demand*
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qd=Qs
Now we have a NEW Demand CurveDemand 1
The Demand Curve has shifted to the RIGHT
$2.00
$.50
50 75 225
Demand 1Demand*
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Let’s assume for the moment that the PRICE does NOT change in reaction to this INCREASE in DEMAND
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
At a price of $1.00 the Quantity Demanded is going to be 150 BUT at a price of $1.00 there is still going to be a Quantity Supplied of 100. OUR MARKET IS IN DIS-EQUILIBRIUM!!
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100 Notice: Quantity DemandedIs greater than Quantity SuppliedAt this price
At this Price and Quantity DemandedThere is no market---The Market Suppliers are NOT going to Supply thatQuantity at that price. Quantity Demanded is GREATER than QuantitySupplied
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100 Notice: Quantity DemandedIs greater than Quantity SuppliedAt this price
Why are Producers NOT going to supply 150 units at $1.00? Because to produce that additional 50 units it is going to cost them more in labor, materials, etc…To produce the additional 50 units they are going to have to get a higher price!!!
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100 Notice: Quantity DemandedIs greater than Quantity SuppliedAt this price
We have a SHORTAGE in the Market!
ShortageShortage
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100 Notice: Quantity DemandedIs greater than Quantity SuppliedAt this price
How do we eliminate this SHORTAGE?Adam Smith said “the Invisible Hand” Of the market will work to shrink the Shortage.
ShortageShortage
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100 Notice: Quantity DemandedIs greater than Quantity SuppliedAt this price
This is where it is crucial to understand the difference between a CHANGE in DEMAND or Supply vs a CHANGE in Quantity Demanded or Quantity Supplied
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100 Notice: Quantity DemandedIs greater than Quantity SuppliedAt this price
With our change in DEMAND finished we now turn the focus to MOVEMENTS along our new DEMAND CURVE Relative to MOVEMENTS along our SUPPLY CURVE…PRICE is going to dictate our changes in Quantity Demanded AND changes in Quantity Supplied
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100
Because there is a SHORTAGE in this market, the pressure on the price of the good is going to be UPWARD.Let’s assume the Price INCREASES to $1.20.
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100
At $1.20 the Quantity Demanded (dictated by DEMAND 1) is 135 AND the Quantity Supplied (Dictated by Supply*) in 115.
$1.20
135115
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100
We are STILL not in Market Equilibrium…Quantity Demanded (135) is GREATER than Quantity Supplied (115)…A Shortage STILL exists in this market. The gap has closed some, but we are not in Market Equilibrium yet where Qd=Qs.
$1.20
135
Shortage
115
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100
The pressure on the price is going to continue...Can you see where we are heading???? The SHORTAGE will only be cleared when we reach the intersection of Demand and Supply!!
$1.20
135115
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100
Some Demanders are falling by the wayside because as the price increases the quantity demanded decreases (Law of Demand).
$1.20
135115
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100
Current suppliers (producers) are INCREASING production (Quantity Supplied) in response to the higher price they are receiving (The Law of Supply) $1.20
135115
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1
Qd=150Qs-100
At a Price of $1.40 (roughly) Qd = Qs at 120 Units.
The market is back in Equilibrium.$1.20
135115
$1.40
120
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
D*
Supply*
Pe
D1
This is a correctly labeled Supply and Demand graph showing an INCREASE in DEMAND…Notice I have replaced the numerical price and quantity with alphabetical designations and abbreviated the Demand and Supply Curves. This makes this is the way I would like you to draw and label your supply and demand graphs from now on.
P1
Q1Qe
DECREASE IN DEMAND
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
ASSUMPTIONS:1. The Demand and Supply CurvesAre rigid (they keep the same Shape/slope)2. The market equilibrium price is $1.00 and the equilibrium quantity (Qd=Qs) is 100 units.
Qd=Qs
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Demand*
Supply*
100
$1.00
NOW: Something in thisMarket causes DEMANDTo DECREASE by 50%.
Qd=Qs
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
This means that at EVERY GIVEN PRICE the Quantity Demanded is Going to be 50% LESS.
Qd=Qs
Demand*
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qd=Qs
This means that at EVERY GIVEN PRICE relative to Demand* the
Quantity Demanded is going to be 50% LESS.
$2.00
$.50
50 75 225
-50%
-50%
-50%
Demand 1Demand*
25
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qd=Qs
This means that at EVERY GIVEN PRICE relative to Demand* the
Quantity Demanded is going to be 50% LESS.
$2.00
$.50
50 75 225
-50%
-50%
-50%
Demand 1Demand*
25
Supply and DemandDemand INCREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
-50%
-50%
-50%
Demand 1 Demand*
25
Now we have a NEW Demand CurveDemand 1
The Demand Curve has shifted to the LEFT
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1 Demand*
25
Now we have a NEW Demand CurveDemand 1
The Demand Curve has shifted to the LEFT
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1 Demand*
25
Let’s assume for the moment that the PRICE does NOT change in reaction to this INCREASE in DEMAND
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qd=Qs
$2.00
$.50
50 75 225
Demand 1 Demand*
25
At a price of $1.00 the Quantity Demanded is going to be 50 BUT at a price of $1.00 there is still going to be a Quantity Supplied of 100. OUR MARKET IS IN DIS-EQUILIBRIUM!!
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25
At this Price and Quantity DemandedThere is no market---The Market Demanders are NOT going to Demand that Quantity at that price. Quantity Supplied is GREATER than Quantity Demanded
Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
We have a SURPLUS in the Market!
SurplusSurplus
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
This is where it is crucial to understand the difference between a CHANGE in DEMAND or Supply vs a CHANGE in Quantity Demanded or Quantity Supplied
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
With our change in DEMAND finished we now turn the focus to MOVEMENTS along our new DEMAND CURVE Relative to MOVEMENTS along our SUPPLY CURVE…PRICE is going to dictate our changes in Quantity Demanded AND changes in Quantity Supplied
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
Because there is a SURPLUS in this market, the pressure on the price of the good is going to be DOWNWARD. Let’s assume the Price DECREASES to $.85
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
At $.85 the Quantity Demanded (dictated by DEMAND 1) is 60 AND the Quantity Supplied (Dictated by Supply*) in 85.
$.85
60 85
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
$.85
60 85
We are STILL not in Market Equilibrium…Quantity Demanded (60 ) is LESS than Quantity Supplied (85)…A SURPLUS STILL exists in this market. The gap has closed some, but we are not in Market Equilibrium yet where Qd=Qs.
Surplus
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
$.85
60 85
The pressure on the price is going to continue...Can you see where we are heading???? The SURPLUS will only be cleared when we reach the intersection of Demand and Supply!!
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
$.85
60 85
As the price decreases Demanders are increasing their Quantity Demanded because as the price Decreases the quantity demanded Increases (Law of Demand).
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
$.85
60 85
Current suppliers (producers) are DECREASING production (Quantity Supplied) in response to the LOWER price they are receiving (The Law of Supply)
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
Supply*
100
$1.00
150Qs=100
$2.00
$.50
50 75 225
Demand 1 Demand*
25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price
Qd=50
$.85
60 85
At a Price of $.60 (roughly) Qd = Qs at 75 Units.
The market is back in Equilibrium.
$.60
Supply and DemandDemand DECREASES
Price of
___
Quantity of _________
S*
Pe
Q1
D 1 D*
P1
This is a correctly labeled Supply and Demand graph showing an DECREASE in DEMAND…Notice I have replaced the numerical price and quantity with alphabetical designations and abbreviated the Demand and Supply Curves. This is the way I would like you to draw and label your supply and demand graphs from now on.
Qe
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