Transcript Ppt

Chapter 6:
Demand, Supply & Markets
What is a Market?
• Any network that brings buyers and sellers
together so they can exchange goods and
services
• Doesn’t have to be a physical place, but can be
done over the internet, phone or fax
• Exists wherever supply and demand determine
the price and quantity of goods and services
sold
Demand
• Is the quantities of a good or service that
buyers are willing and able to purchase at
various prices
• Demand schedule shows the various
prices and quantity demanded at each
price
• Chocolate Bar Auction
Demand
• Economists consistently will gather data
and put it into a schedule and then to
make it visually easier to understand put
the schedule into graph form
• Law of Demand: An increase in price will
cause a decrease in quantity demanded
– P ↑  Qd ↓ and P ↓  Qd ↑
– Inverse relationship
The Demand Curve
P$
D
0
Q
Quantity Demanded
Application Questions
• # 1 – 3 pg. 119
• Work in pairs
• Check answers with others at your table
Law of Diminishing Marginal Utility
• Each additional unit of a good or service
that is consumed brings less satisfaction
or “utils” than the previous unit consumed
• This helps explain why the demand curve
is downward sloping
Elasticity of Demand
• Shows the responsiveness of the quantity
demanded to a change in price
• P x Qd = TR (Total Revenue)
• Elastic Demand
– %Δ P < %Δ Qd (P   TR )
• Inelastic Demand
– %ΔP > %ΔQd (P   TR )
• Unitary Demand – %ΔP = %ΔQd (P -  TR -)
FACTORS EFFECTING
ELASTICITY OF DEMAND
– # of substitutes (e.g.
margarine and butter)
– small items in a
budget (e.g. pepper,
salt)
– essential items (e.g.
water, electricity,
natural gas)
– time (e.g. gasoline)
Applications of Elasticity of Demand
• the more inelastic an item the more heavily
it can successfully be used to raise tax
revenue (e.g. cigarettes, gas & alcohol)
• Applications #4, 6 pgs. 119 – 120
• Work in pairs
• Check answers with others at your table
Effect of an Increase in Demand
P$
D
D1
0
Q
Quantity
An Increase In the Demand for Melons
P$
D
D1
$2.50
$2.00
$1.50
$1.00
$0.50
0
5
Q
Quantity Demanded (000’s)
10
15
20 25
Effect of a Decrease in
Demand
P$
D
D0
0
Q
Quantity Demanded
A decrease In the Demand for Melons
P$
D
D0
$2.50
$2.00
$1.50
$1.00
$0.50
0
5
Q
Quantity Supplied (000’s)
10
15
20 25
Demand Shifts
1. Market Size
2.
3.
4.
5.
6.
Income (Normal / Inferior Goods)
Price of Substitutes
“ “ Complements
Tastes
Consumer Expectations
- future prices
Application Questions
• # 5 pg. 119, #7 pg. 121
• Work in pairs
• Check answers with others at your table
The Supply Curve
Supply
• The quantities of a good or service that
sellers are willing and able to sell at
various prices
• Similar to demand, supply can be shown
as a schedule and then as a graph
The Law of Supply
Law of Supply
• Increase in price (P) will increase quantity
supplied (Qs) i.e., P ↑  Qs ↑
• Decrease in price (P) will decrease
quantity supplied (Qs) i.e., P ↓  Qs ↓
• Direct relationship between P and Qs
An Increase In the Supply of Melons
P$
S
S1
$2.50
$2.00
$1.50
$1.00
$0.50
0
5
Q
Quantity Supplied (000’s)
10
15
20 25
An Increase In the Supply of Melons
• An increase in supply is represented by a
shift in the supply curve to the right (S1).
• At each price point, producers are willing
to supply more goods.
– For example, at $1.00, producers were
supplying 10,000 units. Now producers are
willing to supply 15,000 (an increase of 5,000
units)
A Decrease in the Supply of Melons
P$
S0
S
$2.50
$2.00
$1.50
$1.00
$0.50
0
5
Q
Quantity Supplied (000’s)
10
15
20 25
Supply Shifts
1.
2.
3.
4.
5.
6.
Change in Nature
Resource Price
Technology
Labour Productivity
# of Producers
Producer Expectations
- future prices
Application Questions
•
•
•
•
#3 pgs. 134 – 135
Work in pairs
Check answers with others at your table
Supply – Demand Game
Demand & Supply Curve Shifts
Demand Causes
1.
2.
3.
4.
5.
6.
Market Size
Income (Normal / Inferior Goods)
Price of Substitutes
“ “ Complements
Tastes
Consumer Expectations
- future prices
Supply Causes
1.
2.
3.
4.
5.
6.
Change in Nature
Resource Price
Technology
Labour Productivity
# of Producers
Producer Expectations
- future prices
Market Equilibrium
• The point where the supply curve and the
demand curve intersect
• At this point, Qd = Qs
– (Quantity Demanded = Quantity Supplied)
Market Equilibrium
Supply=Demand
P$
S
D
0
Q
Quantity
Equilibrium in the Market for Melons
P$
D
S
$2.50
$2.00
$1.50
$1.00
$0.50
0
5
Q
Quantity Supplied (000’s)
10
15
20 25
An Increase in the Demand for Computers
5
D2
Shortage of 100
300
(thousands)
A Decrease in the Demand for Computers
Surplus of 100
3
D0
200
(thousands)
An Increase in the Supply of Computers
Surplus of 100
3
300
(thousands)
S2
A Decrease in the Supply of Computers
S0
5
Shortage of 100
200
(thousands)
Elasticity of Supply
• similar to Demand
• shows the responsiveness of the quantity
supply to a change in price
• key factor effecting supply elasticity is
time.
– Given more time a producer can supply more
of a product in response to higher prices
Elasticity of Supply
• Elastic Goods  stored easily,
inexpensively & for long periods of time
• Inelastic Goods  more perishable
Gov’t Involvement in the Market
• at times the market system is unfair
• so in our mixed market system the government
steps in to make the situation more fair
• if government feels the price is too high  make
the price legally lower.
• called a ceiling price  problem is Qd > Qs
– Excess Demand / Shortage
Gov’t Intervention in the Market
• If the government feels the price is too low
then they make the price legally higher
• called a floor price  problem is Qs > Qd
– Excess Supply / Surplus
Shortages & Surpluses
Application Questions
•
•
•
•
#1 – 2 pg. 134
#4 – 5 pg. 135
Work in pairs
Check answers with others at your table