Transcript A Demand Curve

Supply and Demand
1
Demand
Demand
represents the behavior of
buyers.
A Demand Curve shows the quantity
demanded at different prices.
◦ The Quantity Demanded: the quantity
that buyers are willing (and able) to
purchase at a particular price.
2
Law of Demand
Price
and Quantity Demanded are
negatively related
3
The Demand Curve
The Demand Curve for Oil
Price of
Oil per
Barrel
$55
$20
$5
Price
Quantity
Demanded
$55
5
$20
25
$5
50
Demand
5
25
50
Quantity of Oil
(MBD)
4
Reading Demand Curves
Demand
curves can be read in two
ways:
◦ Horizontally: How much buyers are
willing and able to purchase at a certain
price.
◦ Vertically: The highest price buyers are
willing to pay for a certain quantity.
5
What Shifts the Demand Curve?
An “increase in demand” means that
consumers buy more at every price
level, (or consumers are willing to pay
more for each quantity.)
On the graph: the demand curve shifts
outwards, up, and to the right.
6
An Increase in Demand
Price per
Unit
$50

Greater Willingness to
Pay for the Same
Quantity
Greater Quantity Demanded
at the Same Price
$25
New Demand
Curve
Old Demand
Curve
70
80
Quantity
7
What Shifts the Demand Curve?
A “decrease in demand” means that
consumers buy less at every price level,
(or they reduce the price they’re
willing to pay for a given quantity.)
◦ On the graph: the demand curve shifts
inwards, down, and to the left.
8
A Decrease in Demand
Price per
Unit

Lower Willingness to Pay
for the Same Quantity
$50
Less Quantity Demanded at
the Same Price
$25
Old Demand
Curve
New Demand
Curve
70
80
Quantity
9
Demand Shifters
Important
Demand Shifters:
1. Income
2. Population
3. Price of Substitutes
4. Price of Complements
5. Expectations
6. Tastes
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Important Demand Shifters:
Income
1.
The effect of changes in income on
demand depends on the nature of the
good in question.
◦ A Normal Good: demand increases when
income increases (and vice versa).
◦ An Inferior Good: demand decreases
when income increases (and vice versa)
11
Important Demand Shifters:
Population
2.
As the population of an economy
changes, the # of buyers of a
particular good also changes,
(thereby changing its demand.)
◦ What happens to the demand for
formula in a country as birth rates drop?
12
Important Demand Shifters:
Price of Substitutes
3.
Two goods are Substitutes if a
decrease in the price of one leads to
a decrease in demand for the other
(or vice versa).
- What happens to the demand for travel
in Hawaii if the (perceived) safety cost
of traveling to Mexico increases?
13
Important Demand Shifters:
Price of Complements
4.
Two goods are Complements if a
decrease in the price of one good
leads to an increase in the demand
for the other (or vice versa).
◦ What happens to the demand for
Sport Utility Vehicles when gasoline
gets more expensive?
14
Price of Complements
Consumers
often have to buy goods together.
An increase in price of gasoline will decrease the
demand for SUVs
15
Important Demand Shifters:
Expectations
5.
The expectation of a higher (lower) price
for a good in the future increases
(decreases) current demand for the
good.
◦ Consumers will adjust their current
spending in anticipation of the direction of
future prices in order to obtain the lowest
possible price.
 If prices for Xbox 360 consoles are expected
to drop right before Christmas, what will
happen to sales during November?
16
Important Demand Shifters:
Tastes
6.
Tastes and preferences are
subjective and will vary among
consumers.
◦
◦
Seasonal changes or fads have
predictable effects on demand.
What happens to demand for
boots in October? To carbohydrates
during the Atkins diet fad? Or to
Acai berries after newly perceived
health benefits?
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What Shifts the Demand Curve?
A
“change in quantity demanded” is NOT the same
as a “change in demand.”
◦ “Quantity demanded” changes only when the
price of a good changes.
 It is a movement along a fixed demand curve.
◦ “Demand” changes only when a non-price factor
(demand shifter) changes.
 It is a shift in the entire demand curve.
A “change in Quantity
Demanded”
A “change in
Demand”
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Supply
What made this oil field happen?
19
Supply
Supply
represents the behavior of
sellers.
A Supply Curve shows the quantity
supplied at different prices.
◦ The Quantity Supplied is the quantity that
producers are willing and able to sell at
a particular price.
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Law of Supply
What
do you think happens to the quantity
of human organs donated in Israel when the
government issues a point system that
rewards donors?
The Law of Supply: there is a direct
relationship between price and quantity
supplied.
◦ When price rises, all else equal, quantity
supplied rises and vice versa
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The Supply Curve
Price of Oil
per Barrel
The Supply Curve for Oil

Supply Curve for Oil
$55
$20
Price
Quantity
Supplied
$55
50
$20
30
$5
10
$5
10
30
50
Quantity of Oil
(MBD)
22
Reading Supply Curves
Supply
curves can be read in two
ways:
◦ Horizontally: How much suppliers are
willing and able to sell at a certain price.
◦ Vertically: The minimum price for which
suppliers are willing to sell a certain
quantity.
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Supply Curves
Why
is the supply curve upward
sloping?
◦ The cost of producing a good is not
equal across all suppliers.
 At a low price, a good is produced and
sold only by the lowest cost suppliers.
 At a high price, a good is also produced
and sold by higher cost suppliers.
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The Supply Curve for Oil
Price of
Oil per
Barrel
The Supply Curve for Oil

Supply
$60
Oil Shale
Profitable
Here
$40
Higher Cost Oil
Low Cost Oil
$20
20
40
60
80
Quantity of Oil
100 (MBD)
25
Change in Supply
Price of
Oil per
Barrel
$50

Old
Supply
Greater
Quantity
Supplied at
the Same
Price
New Supply
$10
Lower Costs Increase Supply
Willing to
Sell Same
Quantity at
Lower
Prices
20
80
Quantity of Oil
(MBD)
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Change in Supply
New Supply
Price of
Oil per

Barrel
Smaller
Quantity
Supplied at the
Same Price
Old
Supply
$10
Higher
Price
Needed to
Sell Same
Quantity
Higher Costs Decrease
Supply
20
80
Quantity of Oil
(MBD)
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Supply Shifters
Important
1.
2.
3.
4.
5.
6.
Supply Shifters
Technological Innovations
Input Prices
Taxes and Subsidies
Expectations
Entry or Exit of Producers
Changes in Opportunity Costs
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Important Supply Shifters:
1.
Technological Innovations
A technological innovation makes sellers willing
to offer more at a given price, or sell a their
quantity at a lower price.
◦ A technological innovation lowers costs and
increases supply.
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Production Technology
Supply will increase for products when
technology improves
Examples: Computers, gaming systems, laser hair
removal, flat screen TVs.
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Important Supply Shifters:
Input Prices
2.
A decrease in the price of an input (all
else equal) increases profits and
encourages more supply (and vice versa)
◦ What will happen to the amount of new
businesses if the government reduces the fees
and red tape associated with new business
licenses? What happens if the fees rise?
31
Important Supply Shifters:
Taxes and Subsidies
3.
A tax on output reduces profit and
makes sellers less willing to supply at a
given price, unless they can effectively
raise the price without losing any sales.
(for now, assume they cannot)
◦ A tax on output raises costs and decreases
supply.
32
Important Supply Shifters:
Taxes and Subsidies

A subsidy on production makes sellers
willing to supply a greater quantity at a
given price, or the subsidy allows
producers to sell a given quantity at a
lower price.
◦ A subsidy on production lowers costs and
increases supply.
◦ Graph the effect on supply of a new subsidy
to fast food producers aimed at helping them
market and sell overseas.
33
Taxes and Subsidies
Taxes and subsidies affect profits and therefore
supply.
 A 10% yacht tax reduced the supply of yachts
53% in the early 1990s.

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Cotton Supply
◦ When the U.S. decreases its cotton subsidies, U.S.
cotton supply decreases
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Important Supply Shifters:
Taxes and Subsidies
With a $10 Tax Suppliers Require a $10 Higher Price to Sell the Same Quantity

Price of
Oil per
Barrel
Supply With $10 Tax
$10
$10
$10
$50
Supply Without Tax
$40
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60
Quantity of Oil (MBD)
Important Supply Shifters:
Expectations
4.
The expectation of a higher price for a
good in the future decreases current
supply of the good – if they can store the
good- (and vice versa).
◦ Sellers will adjust their current offerings in
anticipation of the direction of future prices
in order to obtain the highest possible
price.
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Future Expectations
A
change in producers’ expectations
about profitability will affect supply
curves
◦ Windmill production increases as
producers expect sales and profitability
to increase.
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Important Supply Shifters:
Expectations
Expectations Can Shift the Supply Curve
Price
 Supply Today with
per Unit
Expectation of
Future Price
Increase
Supply Today
Into Storage
Quantity
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Important Supply Shifters:
Entry or Exit of Producers
5.
As producers enter and exit the
market, the overall supply changes.
◦ Entry implies more sellers in the market
increasing supply.
◦ Exit implies fewer sellers in the market
decreasing supply.
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Number of Producers
As
more producers enter a market, supply
increases (and vice versa)
As
more firms enter the
solar installation market,
the number of solar
installations available for
sale increases
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Important Supply Shifters:
Entry or
Exit
of
Producers
Entry Increases Supply

Price
Domestic
Supply
Greater Quantity
Supplied at the Same
Price
Domestic Supply Plus
Canadian Imports
Lower Price for the
Same Quantity
Supplied
Quantity
42
Important Supply Shifters:
Changes in Opportunity Costs
6.
Inputs used in production have opportunity
costs. Sellers will choose to use those inputs
where the profit is the highest
◦ Sellers will supply less of a good if the price of
an alternate good using the same inputs rises
(and vice versa).
◦ Sellers always chase the highest profit goods.
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Changes in Opportunity Costs
Producers
have the ability to produce other goods
An increase in the profitability of small cars will
decrease the supply of SUVs
3- 44
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Important Supply Shifters:
Changes in Opportunity Costs
Higher (Opportunity) Costs Reduce Supply- Rising Wheat Prices Reduce
Soybean Supply
Price per Unit
Higher Price Required
to Sell the Same
Quantity
$7
Supply with High Opportunity
Costs
Supply with Low Opportunity
Costs
$5
2,000
Smaller Quantity Supplied
at the Same Price
Quantity of
Soybeans (Millions
2,800
of Bushels)
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A
What Shifts the Supply Curve?
“change in quantity supplied” is NOT the same as
a “change in supply.”
◦ “Quantity supplied” changes only when the price of a
good changes.
 It is a movement along a fixed supply curve.
◦ “Supply” changes only when a non-price factor changes.
 It is a shift in the entire supply curve.
A “change in Quantity
Supplied”
A “change in
Supply”
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