Transcript Supply and Demand

SUPPLY AND DEMAND
The Mechanism for Pricing
Demand
The four reasons for the law of demand:
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1.
2.
3.
4.
Common Sense
The Income Effect
The Substitution Effect
Diminishing Marginal Return
Demand
The Determinants of Demand
1.
Tastes and Preferences
2.
Number of Buyers
3.
Prices of related goods
–
Substitutes
–
Complements
–
Independent goods
4.
Consumer expectations
5.
Income
–
Normal Goods
–
Inferior Goods
The Law of Supply
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The Law of Supply states the higher the price, the higher the
quantity supplied.
Please remember Ceteris Paribus
Determinants of Supply
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Resource Prices
Technology
Taxes and Subsidies
Prices of Other Goods
Expectations
Number of Sellers
Shift vs. Slide
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A shift of the curve is caused by a change in one of the
determinants of demand
A slide on the existing curve is caused by a change in price only
Will these cause a shift or a slide? In what direction?
 A rise in the price of ground beef…market for ground beef.
 A rise in the price of movies…market for popcorn at the
movies.
 A decrease in the price of soda…market for soda.
 An increase in the price of golf balls…the market for golf.
 A decrease in the price of computers…the market for
computers.
Equilibrium
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Equilibrium exists at the point where quantity supplied equals
quantity demanded
Each time there is a shift or a slide there is a change in
equilibrium
An increase in demand will generally increase price and increase
quantity
An increase in supply will generally mean a decrease in price and
an increase in quantity
ELASTICITY
How stretchy is demand?
Important Questions:
Does the law of demand apply equally
to all products?
 If so, why?
 If not, why not?
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Extreme elasticities
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Perfectly elastic demand
A
situation where a small change in price will
cause consumers to shift their QD from zero
to all they could obtain
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Perfectly inelastic demand
A
situation where buyers will continue to
purchase the same amount no matter what the
change in price
Perfectly Elastic
Perfectly Inelastic
Determinants of Price Elasticity
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Time The longer a period of time available to make the decision the more elastic
the demand
Substitutability The more substitutes a product has, the more elastic the demand
Proportion of income The larger the proportion of income on a product or service, the more
elastic will be the demand
Luxury v. Necessity Luxury items tend to be more elastic, while necessities tend to be more
inelastic
Supply Elasticity
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How quickly can a producer respond to a change in market price
In the short run it is difficult to change production, therefore
most firms are somewhat inelastic in the short run
The Total Revenue Test
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The total revenue test is
another way to determine
elasticity
If price and total revenue
move in opposite
directions, demand is
elastic
If price and total revenue
move in the same
direction, demand is
inelastic