Transcript Demand and Supply

Demand and Supply
Demand and Supply
• What is a Market?
– The process of freely exchanging goods and
services between buyers and sellers.
• Where does the market exist?
– Local Market
– National Market
– International Market
Demand and Supply
• Voluntary Exchange
– A transaction in which a buyer and a seller
exercise their economic freedom by working
out their own terms of exchange.
Demand and Supply
• Demand
– The amount of a good or service that
consumers are able and willing to buy at
various prices during a specified time period.
• Quantity Demanded
– The amount of a good or service that a
consumer is willing and able to purchase at a
specific price.
Demand and Supply
• Law of Demand
– Economic rule stating that the quantity
demanded and price move in opposite
directions.
Price
Quantity
demanded
Price
Quantity
demanded
Demand and Supply
• Real Income Effect
– Economic rule stating that individuals cannot
keep buying the same quantity of a product if
its price rises while their income stays the
same.
Demand and Supply
• Substitution Effect
– Economic rule stating that if two items satisfy
the same need and the price of one rises,
people will buy the other.
Demand and Supply
• Utility
– The ability of any good or service to satisfy
consumer wants.
• Marginal Utility
– An additional amount of satisfaction.
Demand and Supply
• Law of Diminishing Marginal Utility
– Rule stating that the additional satisfaction a
consumer gets from purchasing one more unit
of a product will lessen with each additional
unit purchased.
Law of Diminishing Marginal Utility
Episodes of House
Satisfaction
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Law of Diminishing Marginal Utility
Double Cheeseburgers
Satisfaction
w/ ketchup and pickle only
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Demand and Supply
• Demand Schedule
– Table showing quantities demanded at
different possible prices.
• Demand Curve
– Downward sloping line that shows in graph
form the quantities demanded at each
possible price.
Demand Schedule
Price
Quantity Demanded
$5
10
$4
20
$3
30
$2
40
$1
50
Demand Curve
Price
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Quantity
Demand and Supply
• A change in quantity demanded is caused
by a change in price and is shown as
movement along the demand curve.
Demand Curve
Price
Change in quantity demanded
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Demand and Supply
• A change in demand is caused by
something other than price and is shown
as a shift of the entire demand curve.
Demand Shift
Price
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A Change in demand
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Quantity
Determinants of Demand
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Changes in Population
Changes in Income
Changes in Tastes and Preferences
Substitutes
Complementary Goods
Demand and Supply
• Complementary Good
– A product often used with another product
• Camera and Memory Cards
• Peanut Butter and Jelly
• Golf Balls and Golf Clubs
Demand and Supply
• Elasticity
– Consumers’ responsiveness to an increase or
decrease in price of a product.
• Price elasticity of demand
– Economic concept that deals with how much
demand varies according to changes in price.
Demand and Supply
• We can determine price elasticity of
demand with the following formula:
– Q1) / [ (Q1 + Q2) / 2]
(P2 – P1) / [ (P1 + P2 ) / 2]
Price elasticity of demand = (Q2
• If the answer is less than one it is said to
be inelastic, and if it is greater than one it
is elastic.
Demand and Supply
• Examples:
Insulin
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Q1 = 12 injections per week
Q2 = 14 injections per week
P1 = $20.00 per injection
P2 = $10.00 per injection
Orange Juice
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Q1 = 1 quart per week
Q2 = 3 quarts per week
P1 = $2.50 per quart
P2 = $2.25 per quart
Demand and Supply
• Elastic Demand
– Situation in which the rise or fall in a product’s
price greatly affect the amount that people are
willing to buy.
Elastic Demand
Demand and Supply
• Inelastic Demand
– Situation in which a product’s price change
has little impact on the quantity demanded by
consumers.
• Create a demand schedule and demand
curve for the following data.
• The demand for corn:
– Price range per bushel is $1 - $5
– Quantity demanded per bushel is 10, 20, 35,
55, 80
The Demand Curve
P
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P Qd
$5 10
4 20
3 35
2 55
Price (per bushel)
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D
1 80
0
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Q
Quantity Demanded (bushels per week)
LO1
3-29
• Demand is a consumer based analogy of
how market interactions take place.
• Supply, on the other hand, is a producer
based analogy of market interacitons.
Demand and Supply
• Supply
– The amount of a good or service that
producers are able and willing to sell at
various prices during a specified time period.
• Quantity Supplied
– The amount of a good or service that a
producer is willing and able to supply at a
specific price.
Demand and Supply
• Law of Supply
– Economic rule stating that price and quantity
supplied move in the same direction.
Price
Quantity
supplied
Price
Quantity
supplied
Demand and Supply
• Supply Schedule
– Table showing quantities supplied at different
possible prices.
• Supply Curve
– Upward-sloping line that shows in graph form
the quantities supplied at each possible price.
Supply Schedule
Price
Quantity Supplied
$1
10
$2
20
$3
30
$4
40
$5
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Supply Curve
Price
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Quantity
Demand and Supply
• A change in quantity supplied is caused by
a change in price and is shown as
movement along the supply curve.
Supply Curve
Price
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A change in quantity supplied
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Demand and Supply
• A change in supply is caused by
something other than price and is shown
as a shift of the entire supply curve.
Supply Curve
Price
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Quantity
Determinants of Supply
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Price of Inputs
Number of Firms in the Industry
Taxes
Technology
Law of Diminishing Returns
• Economic rule that says as more units of a
factor of production are added to other
factors of production, after some point total
output continues to increase but at a
diminishing rate.
Workers
Total output
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• Change in Output
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Demand and Supply
• In the real world, demand and supply
operate together. As the price of a good
goes down, the quantity demanded rises
and the quantity supplied falls. As the
price goes up, the quantity demanded falls
and the quantity supplied rises.
Demand and Supply
• Equilibrium price
– The price at which the amount producers are
willing to supply is equal to the amount
consumers are willing to buy.
Quantity Demanded
Price
Quantity Supplied
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$5
$4
$3
$2
$1
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Price
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Price
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Demand and Supply
• Shortage
– Situation in which the quantity demanded is
greater than the quantity supplied at the
current price.
• Surplus
– Situation in which the quantity supplied is
greater than the quantity demanded at the
current price.
Price
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Surplus
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Shortage
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Quantity
Demand and Supply
• Price ceiling
– A legal maximum price that may be charged
for a particular good or service.
Government Set Prices
P
$1,200 P0
S
ceiling
800 PC
D
Shortage
Qs
LO5
Q0
Qd
Q
3-51
Demand and Supply
• Price floor
– A legal minimum price below which a good or
service may not be sold.
Government Set Prices
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S
Surplus
floor
$7.25 Pf
5.00 P0
D
Q
Qd
LO5
Q0
Qs
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Demand and Supply
• Rationing
– The distribution of goods and services based
on something other than price.
• Black market
– “underground” or illegal market in which
goods are traded at prices above their legal
maximum prices or in which illegal goods are
sold.