Transcript DEMAND

DEMAND
ONE OF THE KEYS OF
CAPITALISM
WHAT IS DEMAND?
• Demand is the willingness and ability to buy a product.
• It is both a microeconomic and macroeconomic concept.
• Introduction to Demand
• Demand Schedule for Infiniti Automobiles
• Price (x 1000) Quantity Demanded (x 1000)
• $ 75
5
$75
DEMAND CURVE
•
70
8
•
65
15
A (60, 20)
•
60
20
•
55
27
•
50
38
price
•
45
80
B ( 30, 200)
•
40
90
•
35
130
•
30
200
•
0
INF
0
•
QD
200
LAW OF DEMAND
• As price increases, demand decreases.
As price decreases, demand increases.
• In economic terms: the quantity demanded of goods
and services varies inversely with its price.
• Foundations for the Law of Demand
• The Law of Demand has been proven in almost all
studies.
• Price is an obstacle which discourages consumers.
• It is also demonstrated every time a store has a sale.
• Fallacies concerning the Law of Demand
• 1. “Change –over-time” fallacy
• 2. Paradoxical Demand Theory
“NON-PRICE” FACTORS THAT HAVE AN EFFECT ON DEMAND
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•
•
I. CHANGE IN THE QUANTITY DEMANDED: (demonstrated by
different points on a demand curve)
– 1. Diminishing marginal utility
– 2. The Income Effect
• Massive lay-offs, or increase in aggregate income (BMW or Boeing)
– 3. The Substitution Effect
• A lower price for one product could effect the QD for a similar item
(CHICKEN---BEEF)
II. CHANGE IN DEMAND: (demonstrated by a shift in the entire curve at the same prices)
– 1. Consumer Income
• Change in the inflation rate., new factory moves to an area or one closes
down
– 2. Consumer tastes
• Things go in and out of fashion (tastes and preferences), or something
new has been invented or developed.
– 3. Substitutes
• Butter and margarine, or “name brand” v. generic
– 4. Complementary Items
J
P
• Peanut butter and jelly
B
– 5. Change in Expectations
• Outlook toward the future. If future looks good demand increases,
snowstorm forecast results in a short term increase in the demand for
bread and milk.
– 6. Number of Consumers
• Increase in retired people in an area will increase the demand for
retirement facilities.
EFFECT OF SUPPLY, DEMAND AND PRICE ON THE MARKET
ELASTICITY OF DEMAND
•
How sensitive is demand to a change in price?
•
The demand is elastic when a change in price causes a relatively
larger change in quantity demanded.
–
•
•
Jewelry, clothing, vegetables, ice cream, meat, coffee, sugar
The demand is inelastic when a change in price causes a relatively
small change in the quantity demanded.
[But the market must be noted—is it nationwide or local]
–
Gasoline, bread, milk, salt, medical services, candy
•
Demand is unit elastic when there is a one-to-one (proportional)
change in demand based on price.
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•
Total Receipts Test for Elasticity:
Formula
Compare Total Receipts of pt. A with pt. B
TR= P X QD
If P and TR move in the same direction the product is inelastic.
If P and TR move opposite then the product is elastic.
If change in P results in no change in TR then the product is unit
elastic.
• CALCULATE THE ELASTICITY OF DEMAND:
7
P
6
A
5
P
R
I
C
E
B
4
5
R
4
I
3
B
C
2
3
E
2
1
1
0
0 1 2 3 4 5 6 7 8 9
QD/QS
A
1 2 3 4 5 6 7 8 9
Qd/qs
• What determines demand elasticity?
• 1. Can the purchase be delayed?
– If the answer is no, the product tends to have inelastic demand
– Tobacco products, insulin, necessities, gas on the interstate
• 2. Are adequate substitutes available?
– If there are adequate substitutes, then the demand is elastic.
– Gas in general appears to be inelastic, but on the local level it is
elastic because of all the gas stations to choose from
• 3. Does the purchase use a large portion of income?
– If the answer is yes, the product tends to have elastic demand.
– Cars, appliances. Exceptions: medical services
SUPPLY
PRODUCER
CONSUMER
• WHAT IS IT??
LAW OF SUPPLY
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The amount supplied of a product increases as price increases.
•
The Supply Schedule
Price
Quantity Supplied
$30
350
25
305
20
235
15
140
10
60
5
0
•
SUPPLY CURVE
CHANGE IN THE QUANTITY SUPPLIED
• Quantity supplied is the amount that producers bring to the
market at any given price.
• Factors that cause a change in supply:
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•
•
•
•
•
1. cost of inputs (raw materials)
2. productivity levels (lack of or increase in technology)
3. taxes and/or the level of government subsidies
4. Number of Sellers
5. Future expectations
– Price of oil increasing
– Bad forecast for wheat—affect bread producers
6. Government regulations
– Govt. mandate 45 mpg by 2015
– Carbon emissions reduction by 50% by 2020
Decrease
In supply
Increase in
supply
• ELASTICITY OF SUPPLY
– Elasticity of Supply is a measure of the way quantity supplied adjusts to a
change in price
– Elastic= small increase in price—large increase in supply
– Inelastic= small increase in price—little change in supply
– Unit=change in price results in a proportional change in supply.
Chan
In the
Quan
suppl
DETERMINANTS OF SUPPLY
ELASTICITY
•
•
1. If companies can respond quickly to an increase price then the
elasticity of supply is elastic.
– Usually they are products that are relatively easy to produce.—
candy, paper products, etc.
2. Conversely, if a product takes longer to produce or is more difficult
to make it is more likely to have inelastic supply.—drilling for oil,
making more cars, high tech products., consumer durables, food.
– Things like substitutes, delay of purchase, % of consumer income
have no bearing on the elasticity of supply—it is purely price.
• THE THEORY OF PRODUCTION
•
•
Deals with the relationship between the factors of production and the
output of goods and services.
This theory is based on the short run and only one variable
changed [ labor], and not on the long run—where all the factors
change.
LAW OF VARIABLE PROPORTIONS
This law states that in the short run output will change as one input is
varied while the others are held constant.
How is the output of the final product affected as more units of variable of
input or resource are added to a fixed amount of other resources?
(EX)--Farmer changing the brand of fertilizer used while all other factors
of growing a crop stay the same.—What will the result be??
THE PRODUCTION FUNCTION
This an illustration of the Law of Variable Proportions. Figure 5.5i
Stage 1= # of workers increase for better
efficiency. Marginal product increases.
Stage 2
Stage 2= Marginal product continues to
Diminishing
rise as new workers are added but not
lreturnsl Negative
Returns
by as much. Output has reached the point
Stage 3
of diminishing returns.
Stage 1
Stage 3= Here marginal product becomes
negative and the total output decreases.
COST, REVENUE AND PROFIT MAXIMIZATION
• MEASURES OF COST:
• 1. Fixed Costs
– These are costs one pays whether a product is being produced or not.
– Overhead
– Salaries for “salaried” personnel, interest on bonds, rent or mortgage
payments, property taxes
– Depreciation
• 2. Variable Costs
– Wages for hourly employees
– Utility costs
– Shipping costs
• 3. Total Cost
– The total of fixed and variable costs
• 4. Marginal Costs
– This is the cost of the “extra” workers hired to produce additional products.
VC
divided by Marginal Product = marginal cost
– #Wrks
MEASURES OF REVENUE
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•
PRODUCTION, COSTS AND REVENUES:
COSTS
REVENUES
PROFIT
PRODUCTION
SCHEDULE
# WRKERS TOT
PROD
0
1
2
3
4
5
6
7
8
9
10
0
14
42
75
112
150
180
203
216
207
190
MARG FIXED VAR. TOT MARG. TOT MARG.
PROD COSTS
REV REV
0
14
28
33
37
38
30
23
13
-9
-17
70
70 46
70 92
70 138
70 184
70 230
70 276
70 322
70 368
70 414
70 460
70
116
162
208
254
300
346
392
438
484
530
-3.29
1.64
1.39
1.24
1.21
1.53
2.00
3.54
---------
0
28
84
150
224
300
360
406
432
414
380
-2
2
2
2
2
2
2
2
2
2
TOTAL PROF.
-70
-88
-78
-58
-30
0
14
14
-6
-70
-150
TERMS:
TOTAL REVENUE= TOTAL PRODUCT SOLD X AVE. PRICE PER UNIT.
MARGINAL REVENUE= PROFIT MADE OFF THE SALE OF EACH UNIT.
TOTAL PROFIT= TOTAL REVENUE-TOTAL COST
1
2
3
APPLYING COST PRINCIPLES
• COSTS OF A SELF-SERVICE GAS STATION (EX)
– 7 GAS PUMPS (6 gasoline and 1 diesel)
– 1 WORKER PER SHIFT, IN SMALL ENCLOSED BOOTH
• HIGH FIXED COSTS
• RELATIVELY SMALL VARIABLE COSTS
• RATIO OF FIXED TO VARIABLE COSTS IS LOW
• STORE PROBABLY OPEN 24/7/365
• COSTS OF INTERNET STORE (EX)
INDIVIDUAL
LOW OVERHEAD
WEB ACCESS
E-COMMERCE SOFTWARE
LOW INVENTORY
SPECIALTY WAREHOUSES
SHIP THE PRODUCT
• Marginal Revenue = the change in total revenue divided by
marginal product.
• Marginal analysis involves comparing the costs and benefits of
decisions that are made in small incremental steps.
• Break even point is the total output the business needs to sell
in order to cover its total costs.
• Adding the 8th worker is where the total profit begins to drop.
• The profit-maximizing quantity of output= marginal cost and
marginal revenue are equal.
• THE PRICE SYSTEM AT WORK
• Price Adjustment Process: The market is voluntary, and benefits both.
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Price
$1.50
1.25
1.00
.75
.50
.25
Q. demanded
50
75
110
115
130
200
•
Q. Supplied
Surplus/shortage
150
+100
140
+65
120
+10
115
___
100
-30
75
-125
DEMAND AND SUPPLY CURVES
EQUILIBRIUM
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MARKET EQUILIBRIUM
– A SITUATION IN WHICH PRICES ARE RELATIVELY STABLE AND THE
QUANTITY OF GOODS AND SERVICES ARE EQUAL TO DEMAND.
SURPLUS
– QUANTITY SUPPLIED IS GREATER THAN DEMAND. SURPLUSES
FORCE PRICES DOWN.
SHORTAGE
– QUANTITY SUPPLIED IS LESS THAN DEMAND. SHORTAGES FORCE
PRICES UP.
EQUILIBRIUM PRICE
– THIS IS THE PRICE THAT “CLEARS THE MARKET” BY LEAVING
NEITHER A SURPLUS NOR SHORTAGE AT THE END OF A TRADING
PERIOD.
• THE COMPETITIVE PRICE THEORY
PRICES CAN VARY BECAUSE OF:
- ADVERTISING
- LOCATION (GAS STATIONS).
- FUTURE EXPECTATIONS
BUT PRICES TEND TO BE REASONABLY COMPETITIVE.
THE MARKET ECONOMY “RUNS ITSELF”.
EQUILIBRIUM PRICE
Decrease in supply results in
a shortage, which forces prices
up.
Change In Supply
D1
S2
Increase in demand has
resulted again in a shortage
which has forced prices up.
Change In Demand
S1
D2
S1
D1
x
x
x
x
D1
S1
D2
X
x
Decrease in demand has resulted in a surplus of
supply therefore forcing prices down.