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Supply and Demand Issues - BrainMass · PDF fileSupply and Demand Issues Supply and demand are the starting point of all economic analysis The essence of choice is being able to balance

Oct 19, 2019

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  • Touro University International 1

    Supply and Demand Issues

    Supply and demand are the starting point of all

    economic analysis

    The essence of choice is being able to balance the

    two

  • Touro University International 2

    S U P P L Y

    The different quantities that a producer or producers will make available to the market at different prices over a given period of time.

  • Touro University International 3

    LAW OF SUPPLY

    As price increases, producers are willing to

    produce and sell more

    As price decreases, producers are willing to

    produce and sell less

    Price and Quantity Supplied are directly related

  • Touro University International 4

    Supply Table

    Price Quantity

    $4.00 1500

    $5.00 1800

    $6.00 2000

    $7.00 2500

    $8.00 3000

    Widgets Per Week

  • Touro University International 5

    Quantity

    P ri

    ce

    $3

    $4

    $5

    $6

    $7

    $8

    1500 1800 2000 2500 3000

    Supply Graph

  • Touro University International 6

    Producer Costs

    Fixed Costs:

    Costs that don't change as production levels change

    Ex: Rent, Insurance, Loan Payments, Taxes

    Variable Costs:

    Costs that increase and decrease with changes in the

    production levels

    Ex: Labor costs, Materials, Utilities

    Total Costs = Fixed Costs + Variable Costs

  • Touro University International 7

    Changes in Supply

    Production Costs Ex: Materials, Labor, Technology,

    Taxes

    Number of Producers in the Market

    Profitability of other production options

    Expectation of future market price

    Supply in the market will change if there is a change in:

  • Touro University International 8

    Increase in Supply

    Q

    P

    P1

    Q1

    S1

    Q2

    S2

  • Touro University International 9

    DEMAND

    The various quantities that a

    person or group is willing to buy

    at various prices

  • Touro University International 10

    Law of Demand

    As prices increase, the quantity

    people are willing to buy decreases

    As prices decrease, the quantity

    people are willing to buy increases

    Indirect price/quantity relationship

  • Touro University International 11

    DEMAND TABLE

    (Coca-Colas per week)

    Price Quantity

    $.25 20

    $.50 10

    $.75 7

    $1.00 5

  • Touro University International 12

    Demand Graph

    Quantity

    P ri

    c e

    $0.00

    $0.25

    $0.50

    $0.75

    $1.00

    5 7 10 20

  • Touro University International 13

    REASONS FOR DEMAND

    Income Effect (Price Effect)

    When price rises, a consumer cannot afford to buy as

    much. But, when price declines, a consumer can afford

    to buy more. Price changes affect “purchasing power”

    of income

  • Touro University International 14

    REASONS FOR DEMAND

    Substitution Effect

    When prices increase on one product, consumers

    will buy a substitute product instead. But when

    prices decrease on a product, consumers will switch

    to that product from other substitutes.

    Substitutes are products that can be used in place

    of each other. Complements are products that are

    used together

  • Touro University International 15

    REASONS FOR DEMAND

    Law of Diminishing Marginal Utility

    As we have more and more units of a product, the

    satisfaction we get from each additional unit

    decreases.

    Marginal = additional, next, or last

    Utility = satisfaction

  • Touro University International 16

    Changes in Demand

    If Demand changes, then people

    want more or less of the product

    even when the price remains

    constant

    There are several reasons why Demand might

    change…...

  • Touro University International 17

    Changes in Demand

    A change in people’s income...

    When people have more money, they buy

    more of everything, and when they have

    less, they buy less.

  • Touro University International 18

    Change in Demand

    People’s tastes and preferences

    change…..

    Advertising changes people’s attitudes,

    desires, etc. Styles change, fads come

    and go.

  • Touro University International 19

    Change in Demand

    Situation and needs change...

    Get a new job? You might need different

    clothes. Move? A baby on the way? A

    new product get invented?

  • Touro University International 20

    Changes in Demand

    There’s a change in the number of

    consumers in the market...

    When there are more consumers,

    Demand goes up, and visa-versa

  • Touro University International 21

    Changes in Demand

    Expectations of future price...

    If we expect the price to go down soon,

    we will have reduced Demand now,

    and visa-versa

  • Touro University International 22

    Changes in Demand

    The prices of substitutes or

    complements change….

    If apples go up in price, the Demand

    for pears might increase because

    people will substitute pears for apples.

  • Touro University International 23

    Increase in Demand

    D1

    Q

    P

    P1

    Q1

    D2

    Q2

  • Touro University International 24

    Decrease in Demand

    Q2

    D2

    Q

    P

    P1

    Q1

    D1

  • Touro University International 25

    CHANGES IN DEMAND

    Demand will change if there are changes

    in:

    •Income, Wealth, Credit

    •Personal Tastes and Preferences

    •Situation

    •Number of Consumers in the Market

    •Expectation of Future Price

    •The prices of Complements or Substitutes

  • Touro University International 26

    Putting Demand

    and Supply Together

    Equilibrium

    The situation when quantity supplied equals quantity

    demanded at a particular price

  • Touro University International 27

    Putting Demand

    and Supply Together

    Shortages

    The situation when quantity demanded

    is greater than quantity supplied

    Exists at any price below the equilibrium price

    Is not the same as scarcity

  • Touro University International 28

    Putting Demand

    and Supply Together

    Surpluses

    The situation when quantity supplied

    is greater than quantity demanded

    Exists at any price above the equilibrium price

  • Touro University International 29

    Summary

    The law of demand says that prices and quantity

    demanded are inversely related.

    Relative prices must be distinguished from money,

    since people respond

    to changes in relative prices.

  • Touro University International 30

    Summary

    A change in quantity demanded

    versus a change in demand A change in quantity demanded

    is a movement along a demand curve

    A change in demand is a shift

    of the demand curve

    The law of supply states that price and quantity

    supplied are directly related.

  • Touro University International 31

    Summary

    A change in quantity supplied

    versus a change in supply

    A change in quantity supplied

    is a movement along a supply curve

    A change in supply is a shift of the supply curve

  • Touro University International 32

    Summary

    Determining market price

    and equilibrium quantity

    The demand and supply curves

    intersect at the equilibrium point.

    Shortages exist when the price of a good is below the

    market price.

    Surpluses exist if the price of the good

    is greater than the market price.

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