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Chapter 3 Supply and Demand

Jan 02, 2016



Chapter 3 Supply and Demand. What Determines a Person’s Income in the Market?. This means… what is the value of the human being? Determined by: a) value of their product …. Rock singer, athlete, Shaq, Oprah, department store clerk, insurance salesman, teacher - PowerPoint PPT Presentation

  • Chapter 3 Supply and Demand

  • What Determines a Persons Income in the Market?This means what is the value of the human being?Determined by: a) value of their product. Rock singer, athlete, Shaq, Oprah, department store clerk, insurance salesman, teacherb) supply and demand. If lot of people doing same things you are not likely to be paid much.(underwater welders). As demand for product decreases, reduces number of available jobs gas station jobs!c) if demand for product lacking- rewards minimal and number of competing workers is few, demand high, wages high. 20 years ago heart surgeons

  • Who Determines the value of a product?The value of the product is the worth that society puts on it.What worth does society put on sports?What worth does society put on music industry? What about ---- sport cars, SUVs, large houses, motorcycles, eating out, designer clothes, entertainment. Etc, etc. etc. Education?

  • What if??? Will this be a recession?Banks will not loan money?People lose their jobs?Companies are not hiring?People are under-employed?Consumption decreases significantly?

  • Characteristics of Recession/InflationRecession:

    Businesses not selling what it producesInventories accumulateBusinesses then cut down on employment (hence unemployment/layoffs)Inflation:_____________________________Government and investors spending moreInventories begin to be depletedPrices increaseProduction increasesMore workers are hired

  • What is a Market?Any Place Where Goods and Services are Voluntarily Exchanged (brings together buyers and sellers)Price is a primary influence in determining allocation of resources in our free enterprise economy.Difference between Price, Value, UtilityPrice= value of product in terms of moneyValue= has to do with relative scarcity = exchange valueUtility = satisfaction that good or service can provide

  • Law of SupplyAs the price of the product increases, the quantity that the supplier tends to supply also increases.****Ceteris Paribus Ceteris Paribus Assumption [KAY-ter-us PEAR-uh-bus]Nothing changes except the factor or factors being studied.Other things constant equal

  • Economics as a Science (cont'd)Ceteris Paribus Assumption [KAY-ter-us PEAR-uh-bus]Nothing changes except the factor or factors being studied.Other things constantOther things equal

  • Law of supply

    = positive relationship between the quantity of a good supplied and price.


    Price moves first = cause Quantity follows = effect

  • Determinants of SupplyTechnique of production (technology)(ovens, organic farming)Resource Prices (Factor Costs) cost of inputsTaxes and SubsidiesPrices of Other Goods (decline in wheat will cause farmer to shift to corn)Expectations- (farmers expect price to rise.. Hold back production)Number of sellers in market more sellers, greater supply.

  • Important ConceptsChange in Supply (shifting of curve)OrChange in Quantity Supplied (movement along curve)

  • Ability to Respond to Price variesOften the ability of an individual firm to respond to an increase in price is limited or constrained by its existing scale of operations, or capacity, or ability to obtain resources.. IN SHORT RUNExamples:IN LONG RUN can adjust. The greater the amount of time producers have to adjust, the greater their output response.


    ***Ceteris ParibusPrice once again is the independent variable!

  • Wishing for a new boat does not constitute demand one must be WILLING AND ABLE to purchase a boat.

    Generally speaking. The higher the price obstacle, the less of a product a consumers will buy.

    Bargain days are based on law of demand.

  • The greater the want satisfaction. The greater the utilityMarginal Utility How much more utility do you get adding or subtracting units (more doughnuts more cars more steak in one day)DIMINISHING MARGINAL UTILITY.As the number of units of a product a consumer has increases, the satisfying power for each extra unit decreases.

  • UtilityPurpose of Utility analysis is to study how people behave not how they think.

    Theory of consumer choice is based on the idea that each consumer spends his/her income in a way that yields the greatest satisfaction.

  • Determinants of Demand1.Preferences2.Prices of Related Goods 3.Number of Buyers4.Expectations of future price5.Income

  • Determinants of DemandTastes and preferencesTaste changes throughout our lifetime.

  • # 2 Determinant: Prices of Related GoodsYour preference is Coke price skyrockets.

    Affected in the market by substitute goods and complimentary goods.*Substitute goods anything that can be substituted for the product or service desired (Coke/Pepsi, Millers/Coors, potato chips/popcorn). If price of Coke rises and consumer doesnt feel strongly about brand preference will buy Pepsi until Coke price declines)When two products are substitutes, the price of one good and the demand for the other are DIRECTLY RELATED.

  • *Complementary Goods Goods that go along with other goods consumers buypeanut butter/jelly, beer/pretzels, milk/cookies, golf balls/golf tees, When two goods are complements, an increase in the price of one good adversely affects the demand for the other and creates an inverse relationship.

  • Independent Goods No connection between price and demand (cars/bread)

  • Determinants Continued

    3. Number of buyersThe number of buyers will increase demand for the product which (if supply is fixed) will drive up the price.)

  • Determinant #4Income- RATHER OBVIOUS HERE.Show shifts Superior or Normal goods= commodities whose demand varies DIRECTLY with money income.INFERIOR OR POOR MANS GOODS.Goods whose demand varies inversely with a change in money income.

  • 5. ExpectationsIf you are in medical school or law school, the expectation of you getting a larger income when you get out of school will affect your demand for goods Inheriting money, winning the lottery!

  • IMPORTANT CONCEPTS OF DEMANDChange in Demand ORChange in Quantity Demanded

  • Terms to RememberProfit:TR-TCTotal RevenueP x QMarginal UtilityTo maximize utility, consumers should choose that good which delivers the most marginal utility per dollar. Optimal utility is then achieved. Optimal consumption= mix of output that maximizes total utility for the limited amount of income you have to spend.

  • EquilibriumEquilibrium = market clearing price supply and demand are in balance.Does not occur often if ever with the constantly changing invisible hand and the consumer fickleness. In our U.S. economy we have consumer sovereignty which tends to shift both curves or move along the curve almost continuously.

  • Ceilings and FloorsPrice Ceiling-a legally established maximum price that sellers may charge (rent control) Direct effect of a price ceiling is a shortageSecondary effect- reduction in the quality of the good, inefficient use, lower future supply, black markets,

  • Price FloorsPrice floor is a legally established minimum price that buyers must pay. (minimum wage)Direct effect= reduces employment of low-skilled laborIndirect effects reduction in nonwage component of compensation (perks), lesson-the-job training.

  • Recap Ceilings and Floors QSDPQSDP

  • Black MarketsMarkets that operate outside the legal systemHave a higher incidence of defective products, higher profit rates, greater violence (cigarettes, drugs {both prescription and illegal}, Levis during cold war)

  • Equilibrium TutorialEquilibrium

  • Quiz questions about supply and demandQuestion: A survey indicated that chocolate is Americans favorite ice cream flavor. For each of the following, indicate the possible effects on demand, supply, or both as well as equilibrium price and quantity of chocolate ice cream.

    a. A severe drought in the Midwest causes dairy farmers to reduce the number of milk-producing cattle in their herds by a third. These dairy farmers supply cream that is used to manufacture chocolate ice cream.

  • b. A new report by the American Medical Association reveals that chocolate does, in fact, have significant health benefits significant health benefits.What happens to Demand for chocolate?

  • C. The discovery of cheaper synthetic vanilla flavoring lowers the price of vanilla ice cream. *What happens to supply curve for ice cream?

    d. New technology for mixing and freezing ice cream lowers manufacturers costs of producing chocolate ice cream. *What happens to supply curve for ice cream

  • Supply and Demand for Cowboy Tickets


  • Kiley is my best friend SheSupplies a lot of love!


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