supply and demand chp 2

8/4/2019 Supply and Demand Chp 2

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SUPPLY AND DEMAND


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Markets represent the interaction ofbuyers and sellers.

They set the prices we pay for goods and services,therefore allocating scarce goods and services.

Effect

Developing out of this process are MARKETS.

CauseIn communities around the country, people and

firms act in their own best interest to answer the 3

basic economic questions.


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What is Demand?

Definition

The desire, ability, and willingnessto buy a product.

In order for demand to be counted inthe market place,

2 conditions must exist.

Consumers mustbe willing and able

to buy G&S

Demand for aproduct must beexamined for a

specific timeperiod.


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What is Microeconomics?

Definition:Part of the economy that deals with behavior anddecision-making by small units (individuals,

business firms).

Knowledge of microeconomic concepts helps explain howprices are determined, and how individual economic decisionsare made.


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What is Quantity-demanded?

Definition

Describes the amountof a G/S that a consumer is willing andable to buy at each particular price during a given time period.


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The Demand Schedule

Listing that shows the quantityof G/S consumers are willingand able to buy atALL pricesthat might prevail in themarket at a given time.

Priceper

DVD

Number ofDVDs

Demanded

$ 30 0

$ 25 0

$ 20 1

$15 3

$10 5

$5 8


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The Demand Curve

Graphic depiction of points corresponding to ademand schedule.

Illustrates the quantity that consumers will demand

at each and every price. Downward sloping.

Price

Quantity

Demanded

Demand Curve


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Law of Demand

Other things equal, consumers buymore of aproduct when the price decreases, and lesswhen theprice increases.

When pricegoes up

Q-demandedgoes down.

When pricegoes down

Q-demandedgoes up.


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What types of things af fectconsumers spending behavior?

Understanding the Inverse

Relationship between

Price and Quantity-demanded


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Income Effect and Substitution Effect

Price of a good , consumersexperience in purchasingpower.

Price of a good , consumersexperience in PP.

IncomeEffect

When the price of a good changes,consumers have a tendency to

substitute a similar, lower pricedproduct for another product thatis relatively more expensive.

SubstitutionEffect

P.P. amount of G/S

you can buy with a

unit of currency.


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Critical Terms and Understandings

Usefulness of a product OR Amount of satisfaction an individual

receives from consuming a product.Utility

Extra usefulness or satisfaction a persongets from acquiring one more unit of aproduct.

MarginalUtility

As consumers, we want to get the mostuseful and satisfying combination ofG/S when spending our $$$.

WHY ITMATTERS


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~ Debriefing the Simulation ~

Law of Diminishing Marginal Utility

As more units of a product are consumed, thesatisfaction received from consuming each additionalunit declines.

In the donut simulation, your classmate received themost MU from the 1st donut, and each additionaldonut gave some MU but not as must as the first.

As consumers, you would continue to buy (consume) a productuntil eventually you reach negative utility.

This helps explain why the demand curve

is downward sloping!


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A Change in Quantity-Demanded

Movement along the demand curve

Shows a change in the quantity of the productpurchased in response to a change in price,other things equal.

Example:If the price of an I-Phone

decreases, thequantity-demanded ofI-phones would increase.

Price

Quantity

Demanded

400

200

2 4


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Other things equal, a change inany of the five non-pricedeterminants of demand shift

the ENTIRE demand curve left orright, and this means a different

quantity will be demandedat each and every price.


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Demand Shifters

Change in Consumer Income

When income goes up,demand goes up(consumers buy more)

When income goes down,demand goes down(consumers buy less)

Price

Quantity

Demanded

D1D2

Demand =Rightward Shift

Price

Quantity

Demanded

D2D1

Demand =Leftward Shift


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Demand Shifters

Change in Consumer Tastes and Preferences

Then Now

What are somefactors that may

influence changes intastes and

preferences?

C.T./C.P. =D

C.T./C.P. =D


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Demand Shifters - # of Consumers (Buyers)

When # of buyers goes up,demand goes up

When # of buyers goes down,demand goes down

P

Qd

D1 D2

P

Qd

D2 D1


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Demand Shifters

Change in Consumer Expectations

If your income will rise inthe future, demand

goes up today

If your income will decline inthe future, demand

goes down today

Price

Quantity

Demanded

D1

Price

Quantity

Demanded

D2D2 D1

Your expectations about the future may affect the demand for a G/S today.


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Demand Shifters

Change in Price/Availability of Substitute Goods

When the priceof a product ,

demand forsubstitute


demand forsubstitute


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Demand Shifters

Change in Price/Availability of Complement Goods


demand forcomplement


demand forcomplement


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Change in Quantity-Demanded

v. Change in Demand

Caused by a change in the price of theproduct, other things equal.

Illustrated by a movement along thecurrent demand curve.

Change inquantity-

demanded

Caused by a change in one of the fournon-price determinants of

demand, other things equal.

Illustrated by a shift of the entiredemand curve left or right.

Change indemand


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What images come to mindwhen you hear this term?

Define


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Elasticity of Demand

Measures how sensitive consumers are to a change inprice.

Have you ever boughta product that you

needed and the costwas not important?

What was it?Why didnt the cost

matter to you?

Formula for calculating

Demand Elasticity

change in q-demandedx 100

change in price


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Types of Demand Elasticity

Elastic

Responsive to achange in price spending

habits altered

DemandElasticity

Calculation > 1

UnitElastic

Change in pricecauses aproportional

change inquantity-

demanded

DemandElasticity

Calculation = 1

Inelastic

Unresponsive toa change in price spendinghabits notimpacted

DemandElasticity

Calculation < 1


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Determinants

of DemandElasticity

Are thereadequate

substitutes?

Can thepurchase be

delayed? Does thepurchase use alarge portion

of yourincome?


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Ways to Estimate Elasticity of Demand

Decision-making grid

Total-revenue test

Generalization

Elastic demand results in a drop in Total Revenue as price .

Inelastic demand results in a rise in Total Revenue as price .

Quantity-demanded

Price

TotalRevenue

(TotalIncome)


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What is Supply?

Definition The ability and

willingness of producersto offer products for sale

at various prices duringa given time period.

This decisiondepends on the

cost of producinggoods andservices.


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What is Quantity-supplied?

Definition Describes the amountof a G/S that a producer is willing to

see at each particular price during a given time period.


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The Supply Schedule

Listing that shows the quantityof G/S producers are willingto supply at various marketprices.

Priceper

Sneaker

Number ofSneakers

Supplied

$ 30 4

$ 40 5

$ 50 6

$60 7

$70 8

$80 9

$90 10


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The Supply Curve

Graphic depiction of points corresponding to asupply schedule.

Illustrates the quantity that producers will supply at

each and every price. Upward sloping.

Price

Quantity

Supplied

Supply

Curve


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Law of Supply

Other things equal, producers will supplymore of aproduct when the price increases, and lesswhen theprice decreases.

When pricegoes up Q-suppliedgoes up. When pricegoes down Q-suppliedgoes down.


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PROFIT

MOTIVE

GOAL:

Revenue >Costs ofProduction

Profit is the $remaining

after all costsof production

are paid


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A Change in Quantity-Supplied

Movement along the supply curve Shows a change in the quantity of the product

supplied in response to a change in price,other things equal.

Example:If the price of an I-Phoneincreases, thequantity-supplied ofI-phones would increase.

Price

Quantity

Supplied

400

200

4mil

8mil


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Changes in Supply

shift entire curve LEFT or RIGHT

1. Cost of Resources

2. Taxes

3. Subsidies

4. Government Regulations

5. Technology / Productivity

6. Competition (# of sellers)

7. Future Expectations

Remember:Suppliers want to sell

more at a higher price.Anything that will affect

the cost of producing aproduct will impact the

quantity supplied at each

and every price.


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Changes in Supply

The following situationswill lower the costs ofproduction, thus supply and shifting thesupply curve.

Cost of resources Taxes

Subsidies

Government regulations

Technology / Productivity

Number of sellers*

Future expectations*

The following situationswill raise the costs of

production, thus supply and shifting thesupply curve.

Cost of resources Taxes

Subsidies

Government regulations

Technology / Productivity Number of sellers*

Future expectations*


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Manipulating a Supply Curve

Price

Quantity

Supplied

S1 S2

Supply

Rightward Shift

Price

Quantity

Supplied

S2 S1

Supply

Leftward Shift

Ch i Q tit li d


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Change in Quantity-supplied

v. Change in Supply

Caused by a change in the price of theproduct, other things equal.

Illustrated by a movement along thecurrent supply curve.

Changein

quantity-

supplied

Caused by a change in one of the sevennon-price determinants ofsupply, other things equal.

Illustrated by a shift of the entiresupply curve left or right.

Changein Supply


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Who determines the

price of agood/service?

Price is determined by both

the buyer and the seller.

Hypothesize


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Hypothesize

How do you think the goals of

buyers and sellers differ?

Buyers

Buy more at lower prices

Sellers

Sell more at higher prices

ResultCompromise is needed to balance

the forces of supply and demand

Review


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Review

Characteristics of a Free Enterprise Economy

What role do pricesplay in a modernmixed economy?

Convey information, motivateworkers, help markets respond tochanging conditions, allocateresources efficiently

Bottom Line, a free enterpriseeconomy relies on the pricesystem to answer the 3 basiceconomic questions

Hypothesize


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Hypothesize

How do you think the goals of

buyers and sellers differ?

Market Equilibrium

At a given price, quantity supplied

equalsquantity demanded

Everyone is happy!


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Disequilibrium in the Price System


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Shortage Q-d > Q-s

Exists whenPrice is below market equilibrium

At a lower price

Consumers want to buy moreProducers want to supply less

To fix the shortage

Producers raise the price

As price , Q-s and Q-d

The market will adjust until it reaches

market equilibrium, and at this point the

excess demandis eliminated.

Surplus Q d < Q s


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Surplus Q-d < Q-sAll who want it, have it

Exists whenPrice is above market equilibrium

At a higher price

Consumers want to buy lessProducers want to supply more

To fix the surplus

Producers lower the price

As price , Q-s and Q-d

The market will adjust until it reaches

market equilibrium, and at this point the

excess supplyis eliminated.


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Sometimes the government intervenes andsets prices; ultimately rationing goods.


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Government Intervention

Cause

To achieve socialgoals, the

governmentfixes

prices.

EffectPrices cannot adjustto their equilibrium

levels.


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Price Ceiling

Government sets a maximum legal price that can bepaid for a good or service.

Ceiling ~ Producerscannot charge prices

above this level.

Example:Rent Control


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Drawbacks of a Price Ceiling

Causes a persistent shortage

Leads to rationing of goods

Consequence:

A Black Marketcould develop andgoods/services are exchanged illegally atprices higher than the official market price.


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Price Floor

Government sets a minimum legal price that can bepaid for a good or service.

Floor ~ Producers cannotcharge prices below this

level

Examples:Minimum Wage

Agricultural Products


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Drawbacks of a Price Floor

Causes a persistentsurplus

Problem Arises:

How can we disposeof a surplus of goods?


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Illustrating Price Floors and Price Ceilings

Persistent

Surplus

Persistent

Shortage

supply and demand chp 2

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