Top Banner

Click here to load reader

Chapter 3: Supply & Demand - Shana M. McDermott, · PDF fileChapter 3: Supply & Demand Price ($) Quantity ... about the ENTIRE DEMAND schedule or curve. ... What happens when the...

Feb 08, 2018

ReportDownload

Documents

phungtuong

  • Chapter 3: Supply & Demand

    Price ($)

    Quantity (Units)

    Supply

    Demand

    P*

    Q*

    1

  • Value, Prices, & Markets

    Prices communicate information about the value of a good or service.

    Prices arise from the interaction of supply and demand in a market economy.

    Supply and Demand, and thus prices, coordinate the production and distribution of goods and services in the economy.

    2

  • Competitive Markets

    Definition: A competitive market is a market in which there are many buyers and sellers of the same good or service.

    A completely competitive market is one where no one individual or firm can make a noticeable impact on the price.

    Think about monopoly or oligopoly.

    3

  • Supply & Demand

    Supply & Demand: A simple model that describes how competitive markets work, and how prices are determined.

    The Elements of the Model:

    Supply and Demand Curves

    What Factors Cause the Curves to Shift

    Equilibrium Price and Changes in Equilibrium

    4

  • Other Things Equal

    When analyzing the relationship between the price and quantity demanded other variables must be kept constant.

    Ceteris paribus (all else equal)

    5

  • The Demand Schedule

    The Demand Schedule is a Table which shows how much consumers will want to buy at each price.

    Price ($ per ticket)

    Quantity demanded (tickets)

    350 5,000

    300 6,000

    250 8,000

    200 11,000

    150 15,000

    100 20,000

    6

  • The Demand Curve

    The Demand Curve is a Graph of the Demand Schedule which shows how much consumers will want to buy at each price.

    7

  • The LAW of DEMAND

    The Law of Demand says that a higher price for a good, other things constant, means people will demand a smaller quantity of the good.

    8

  • Individual vs. Market Demand

    For each price level sum the individual quantity demanded to get the market quantity demanded at that price level.

    9

  • Individual vs. Market Demand

    For each price level sum the individual quantity demanded to get the market quantity demanded at that price level.

    10

  • Demand vs. Quantity Demanded

    When we talk about Demand we are talking about the ENTIRE DEMAND schedule or curve.

    When we talk about Quantity Demanded we are talking about a SPECIFIC POINT on the demand curve the quantity on the demand curve at SPECIFIC PRICE.

    11

  • Movement Along vs. Shift

    A movement along the demand curve is a change in the quantity demanded of a good that is the result of a change in that goods price.

    from point A to

    point B: increase in

    quantity demanded

    reflects a

    movement along

    the demand curve

    it is the result of a

    fall in the price of

    the good.

    from point A to

    point C: increase in

    quantity demanded

    reflects a shift of

    the demand curve

    It is the result of an increase in the quantity demanded at any given price.

    12

  • Movement Along vs. Shift

    Causes of a Movement Along

    Causes of a Shift

    Change in Price Changes in the Prices of Other Goods

    Changes in Incomes

    Changes in Tastes & Preferences

    Changes in Expectations

    13

  • Shifts in Demand

    A change in quantity demanded at any given price represents a shift in the demand curve.

    an increase

    in demand,

    means a

    rightward shift of

    the demand

    A decrease in

    demand means

    a leftward shift of

    the demand

    curve.

    Price

    Quantity

    D1 D2

    Increase

    D3

    Decrease

    14

  • Change in Prices of Other Goods

    Substitutes: Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good. Ex.: muffins and donuts.

    Complements: Two goods are complements if a fall in the price of one good makes people more willing to buy the other good. Ex: PB&J, Computers/Monitors

    15

  • Changes in Income

    Normal Goods: When a rise in income increases the demand for a goodthe normal casewe say that the good is a normal good.

    Inferior Goods: When a rise in income decreases the demand for a good, it is an inferior good. Ex: instant noodles.

    16

  • Changes in Tastes or Expectations

    Tastes & Preferences are constantly changing with Fads, Fashions, Needs and Wants. Can you think of any examples?

    Expectations: Consumers choose not only which products to buy but also when to buy them.

    17

  • Shifts in Demand

    Suppose Tom Brady announces retirement and that the next game is his last game! What happens at the next game?

    18

  • Check Understanding Question A

    What would be the effect of a sharp increase in the price of squash balls on the demand for squash racquets? Why?

    Price

    Quantity

    D1 D2

    Decrease

    If the price of a compliment good rises, then demand decreases for the good in question and the demand curve shifts left.

    19

  • Check Understanding Question B

    What would be the effect of a sharp increase in the price of Pepsi on the demand for Coke? Why?

    Price

    Quantity

    D1

    If the price of a substitute good rises, then demand increases for the good in question and the demand curve shifts right.

    D2

    Increase

    20

  • Check Understanding Question C

    As Larissas income goes up, she buys less instant noodles. What kind of a good is instant noodles for Larissa?

    Price

    Quantity

    D1 D2

    Decrease

    Goods for which demand decreases if your income rises are called inferior goods. In this case, instant noodles are an inferior good.

    21

  • Check Understanding Question D

    Following David Beckham and Sting, more men start to follow the fashion of wearing skirts. What would the effect of this change in tastes be on the demand for skirts?

    Price

    Quantity

    D1

    If tastes change in favor of a certain good, then demand increases for the good.

    D2

    Increase

    22

  • Supply

    Producers or Firms must make a decision about how much of a good or service to sell in the market place.

    Quantity Supplied: The actual amount of a good or service that people are willing to sell at some specific price.

    23

  • The Supply Schedule

    The Supply Schedule is a Table which shows how much of good or service will be supplied at different prices.

    Supply Schedule for Tickets

    Price ($ per ticket)

    Quantity Supplied (tickets)

    350 8,800

    300 8,500

    250 8,000

    200 7,000

    150 5,000

    100 2,000 24

  • The Supply Curve

    The Supply Curve is a Graph of the Supply Schedule which shows how much sellers will want to sell at each price.

    25

  • Law of supply holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

    26

  • Individual vs. Market Supply

    Price (DVDs) Firm 1 Firm 2 Market Supply

    A $0.50 2 0 2

    B $1.00 3 1 4

    C $1.50 4 2 6

    D $2.00 5 3 8

    27

  • Supply vs. Quantity Supplied

    When we talk about Supply we are talking about the ENTIRE SUPPLY schedule or curve.

    When we talk about Quantity Supplied we are talking about a SPECIFIC POINT on the supply curve the quantity on the supply curve at a SPECIFIC PRICE.

    28

  • Movement Along vs. Shift

    Causes of a Movement Along

    Causes of a Supply Shift

    Change in Price Changes in Input Prices

    Changes in Technology

    Changes in Expectations

    29

  • Movement Along vs. Shift

    A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that goods price.

    from point A to point

    B: decrease in

    quantity supplied

    reflects a movement

    along the supply

    curve

    it is the result of a

    fall in the price of the

    good.

    from point A to point

    C: decrease in

    quantity supplied

    reflects a shift of the

    supply curve

    It is the result of an decrease in the quantity supplied at any given price.

    30

  • Shifts in Supply

    A change in quantity supplied at any given price represents a shift in the supply curve.

    an increase

    in supply,

    means a

    rightward shift of

    the supply curve.

    A decrease in

    supply means a

    leftward shift of

    the supply curve.

    Price

    Quantity

    S3

    Decrease

    S2

    Increase

    S1

    31

  • Change in Input Prices

    Why might input prices matter?

    If the price of inputs rises, your costs go up, therefore you want to supply fewer goods at each price supply decreases (shifts left)

    If the price of inputs falls, your costs go down, therefore you are willing to supply more goods at each price supply increases (shifts right)

    32

  • Changes in Technology

    A change in technology doesnt necessarily mean just changes in electronics. Changes in technology can simply be changes in how things are done.

    If a change in technology improves

Welcome message from author
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.