unit 2 - supply and demand the law of demand buyers of a product will purchase more of the product...

Unit 2 - Supply and DemandUnit 2 - Supply and Demand

The Law of DemandBuyers of a product will purchase more of the product if its price is lower and vice versa, assuming all other things remain constant (ceterisparibus).


Two Reasons Why Buyers Buy More at Lower Prices and Less at Higher Prices

The Substitution Effect The Income Effect


Substitution EffectWhen the price of a product decreases, ceteris paribus, the product becomes cheaper. It is, therefore, more attractive relative to other products (and vice versa).


Income EffectWhen the price of a product decreases, ceteris paribus, consumers have more relative income. They can, therefore, purchase additional products (and vice versa).


One Buyer

How much gasoline would you purchase at the following prices (gallons per month)?

Price Per Gallon

Quantity Demanded

$2.50 50

$3.00 45

$3.50 42

$4.00 35

$4.50 20

$5.00 10

Price in DollarsPer Gallon

Quantity Demanded

2.50

3.00

3.50

4.00

4.50

5.00

One Individual’s Demand Curve

D

Unit 2 - Supply and Demand - MicroUnit 2 - Supply and Demand - Micro

Why Do You Purchase 10 instead of 11 Gallons of Gasoline When You Visit the Gas Station?


Marginal Utility

Marginal utility is the increase in satisfaction (as measured in “utils”) per additional item consumed.


The Law of Diminishing Marginal UtilityAs consumers purchase more of a product, the value (satisfaction) of additional items purchased declines.


Several Buyers (the Market)

How much gasoline would you purchase at the following prices (gallons/month)?

Price Q1buyer 1

Q2buyer 2

Q3buyer 3

Q4buyer 4

Totalmarket

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00


Quantity Demanded

2.50

3.00

3.50

4.00

4.50

5.00

Market Demand Curve

D


The Demand CurveA change in the price is a movement along the demand curve. This is called a change in “quantity demanded”.

Price

Quantity Demanded

Individual product demand curves always extend from the upper left to the lower right. They are downward sloping.

Demand Curve

A

B

$4

$1.75

60 80


The Law of SupplyProducers supply more of a product at higher than at lower prices, ceteris paribus (and vice versa).

Cell Phones

Big Screen TVs

CDs


One Supplier

If you had a small oil well in your backyard and it took you some effort to get the oil out, and you were able to sell the oil, how much gasoline would you supply if you could sell the oil at the following prices in the market (gallons per month)?

Price Per Gallon

Quantity Supplied

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00


Quantity Supplied

2.50

3.00

3.50

4.00

4.50

5.00

Individual Supply Curve

S


Several Suppliers

If you had a small oil well in your backyard and it took you some effort to get the oil out, and you were able to sell the oil, how much gasoline would you supply at the following prices (gallons per month)?

Price Q1seller 1

Q2seller 2

Q3seller 3

Q4seller 4

Totalmarket

$2.50

$3.00

$3.50

$4.00

$4.50

$5.00


Quantity Supplied

2.50

3.00

3.50

4.00

4.50

5.00

Market Supply Curve

S


The Supply CurveA change in the price is a movement along the supply curve from point A to point B. This is called a change in “ _______.”

Price

Quantity Supplied

A supply curve is upward sloping.A

B

$2

$4.50

30 90

Supply Curve


Reasons why producers produce more at higher prices

The Substitution Effect

When the market price increases, other competing products will become less profitable and less attractive to produce (and vice versa).

The Income Effect

When the price increases, the product earns more money (income) and the supplier has more incentive to produce (and vice versa).


Equilibrium Price and QuantityIn a free market the equilibrium price and quantity occur where the supply and demand curves intersect.

Price

Quantity

S

D

$3

50

Rent

Quantity Demanded

D

S

$1,800

900

$1,000

700

The Case of Rent Control

Price of Labor

Quantity Demanded

of Labor

DL

SL

$6.00

1,000

Minimum Wage

$7.50

900 1,100

The Minimum Wage

Price of Labor

Quantity Demanded

of Labor

DL

SL

$10.00

1,000

Minimum Wage – New York Example

$7.50

900 1,100

$8.50


Demand Determinants

The following changes will shift the demand curve to the right or to the left. A change in real incomes or wealth (normal and inferior

products). A change in tastes or preferences. A change in the prices of related products (substitute and

complementary products). A change in the expectation of the product’s future price or

buyers’ future incomes. A change in the number of buyers (population).


Equilibrium Price and Quantity

Price

Quantity

S

D1

$3

50

D2

$4

70

When demand increases, the demand curve shifts to the right.

Equilibriumprice increases,and equilibriumquantity increases.


The Effect of a Change in Demand on Equilibrium Price and Quantity

In the short run, when demand increases1. the equilibrium price increases, and 2. the equilibrium quantity increases.

In the short run, when demand decreases 1. the equilibrium price decreases, and2. The equilibrium quantity decreases


Supply Determinants

The following changes will shift the supply curve to the right or to the left. An advance in technology.A change in input prices.A change in taxes, subsidies, or regulations.A change in the number of firms selling the

product.


Equilibrium Price and Quantity

Price

Quantity

S1

D

$3

50

S2

$2

60

When supply increases, the supply curve shifts to the right.

Equilibriumprice decreases,and equilibriumquantity increases.


The Effect of a Change in Supply on Equilibrium Price and Quantity

When supply increases (a rightward shift of the supply curve)

1. The equilibrium price decreases, and2. The equilibrium quantity increases.

When supply decreases (a leftward shift of the supply curve)

1. The equilibrium price increases, and2. The equilibrium quantity decreases.


Changes in Demand and Supply – Example 1

What happens to the equilibrium price and quantity of an Ipod (a normal product) when simultaneously:

Buyers’ incomes rise, and

Technology to make the

Ipods improves?

What happens to the price and quantity bought/sold of Ipods if incomes rise and technology advances?

What happens to the price and quantity bought/sold of Ipods if incomes rise and technology advances?

1. Price down; quantity up

2. Price same; quantity up

3. Price up; quantity up

4. Price down; quantity down

5. None of the above


Changes in Demand and Supply – Example 1 Answer

An increase in incomes will increase demand (price and quantity increase).

An advance in technology will increase supply (price decreases and quantity increases).

The combined effect is that price change is indeterminate and equilibrium quantity increases.


Changes in Demand and Supply – Example 2

What happens to the equilibrium price and quantity of paper towels when simultaneously

Buyers expect the future price of paper towels to be significantly higherin the near future.

The government taxes the production of paper towels.

Determine price and quantity of paper towels when future price is expected to rise and production tax rises

Determine price and quantity of paper towels when future price is expected to rise and production tax rises

1. Pe increases; Qe decreases

2. Pe increases; Qe change is unknown

3. Pe decreases; Qe decreases

4. Pe increases; Qe increases

5. Pe is unknown; Qe decreases

6. none


Changes in Demand and Supply -Example 2 Answer

The expectation of a higher future price increases the current demand for the product (price and quantity increase).

The imposition of a government tax reduces the supply (price increases and quantity decreases).

The combined effect is that the equilibrium quantity change is unknown (indeterminate) and the equilibrium price increases.


Consumer Surplus

is the difference in what consumers are willing to pay for the price of the product and what they are actually paying for it in the market.

Price

Quantity Demanded

Per Day

$5

$6

$7

$8

90 100110 120

D

SConsumer

Surplus


Producer Surplus

is the difference in what suppliers are willing to sell the product for and what they are actually receiving for it in the market.

Price

Quantity Demanded

Per Day

$5

$2

$3

$4

90 100 110120

D

S

Producer Surplus


The Free Market Economy

Free market economy = capitalist economy = laissez-faire economy = price system

In a free market economy prices of goods and services, wages, interest rates, foreign exchange values, etc., are determined by supply and demand


The Free Market Economy

Should all prices, including wages, be determined by supply and demand?

Celebrities receive millions of dollars per year in compensationBaltimore Sun photo by Ezra Shaw.


The Free Market Economy and Externalities

Do prices reflect their true market value?

Businesses that pollute:Businesses that pollute:

1. Should be fined by the government and the revenue should be used to help clean the environment

2. Should be forced to go out of business

3. Should be allowed to operate just like any other business

4. No opinion/other

Organizations that provide products that have positive externalities:Organizations that provide products that have positive externalities:

1. Should be subsidized by the government

2. Should be fully funded by the government

3. Should operate just like any other organization

4. No opinion/other


Prices of Manufactured Products

Manufactured products are abundantly available and are produced in competitive industries. Examples include computers, cell phones, CDs, and bicycles.

Prices of manufactured goods equal the cost of production plus a reasonable profit. Prices are rarely excessive, especially in the long run.


Prices of Limited-Supply Products

Examples of limited-supply products include land, office space, labor, Super Bowl tickets, and products sold by monopolies.

Prices of limited-supply products can be excessive, even in the long run.

unit 2 - supply and demand the law of demand buyers of a product will purchase more of the product...

Documents

market demand curve

price quantity

demand income effect

demand substitution

law of demand buyers

income effect slide

law of supply producers

price q1 buyer