Transcript Introduction to Supply and Demand

Introduction to Supply
and Demand
Demand
• Demand: a schedule showing the quantities of a good or
service consumers are willing and able to purchase at various
prices during a time period and ceterus paribus
Price
Quantity
demanded
Demand continued
• Demand curve—a graphic
representation of the
schedule, (all graphs must
always be labeled) prices on
right axis, quantity on
horizontal axis
• The graph represents the Law of
Demand: quantity demanded of a
product is negatively related to its
price as the curve slopes
downward because
• Income effect-when prices are
lower, consumers purchase larger
quantities
• Substitute effect-as price goes up,
consumers will find substitutes,
thus demand goes down
Utility
• The demand curve represents the economic idea of utility
• Marginal utility: the extra usefulness a person gets from using one
more unit of a product
• We buy something because it gives us satisfaction, but as we
use it the extra satisfaction we get from using additional
quantities decreases, which is the law of diminishing marginal
utility
• Why do you only buy one drink at Sonic (another question—
why does Sonic encourage you to buy the larger size)
Determinants of
Demand
The Curve assumes
constants and a change
on the curve is a change
in the quantity
demanded, but changes
in demand will shift the
curve right or left
• Preferences- “how well you like one product
compared to another”
• Expectation-of prices rising in the future the curve
shifts to right, if prices are lowered curve shifts to
left
• Number of consumers in market-more consumers
in the market causes curve to shift right, less
consumers, left
• Tastes-same as preferences
• Income-a change in income will cause one curve to
shift one direction, and another curve to shift in
another
• Price of related goods-substitute goods: products
used in place of other products; complimentary
goods: products purchased along with other goods
• Opportunity Costs
Examples
• (foreign beef market) outbreak of mad cow
disease causes a ban on imported beef;
(local beef market) same scenario
• (Coke and Pepsi) Pepsi raises prices
• (gas) OPEC increase oil production
• (Ford) government forces auto makers to
meet new emissions standards
• (Burger King burgers) Burger King lowers
the price of fries
• (Nike shoes) begin advertising campaign
aimed toward women
• (Levi’s jeans) Levi’s raises prices 20%
• (Orange juice) Hurricanes in Florida destroy
orange crops
Supply
• A schedule showing the quantity of goods and services
producers are willing and able to supply
Quantity
Supplied
Price
Supply Continued
• Supply curve—a graphic
representation of the
schedule, (all graphs
must always be labeled)
prices on right axis,
quantity on horizontal
axis
• The graph represents the
Law of Supply: quantity
supplied of a product is
positively related to its
price as the curve slopes
upward because it allows
producers to recover their
costs
Determinants of
Supply
• Technology-influences the types of machines we
use, so a technological advance changes the
curve because it uses fewer resources
• Sellers-number of producers in the market,
more producers the greater supply so curve
shifts to the right
• Taxes and subsidies-taxes are costs to
businesses and reduce supply, subsidies are
income and allow producers to increase supply
• Other goods made from resources• Resource Prices-because the curve assumes
prices of resources remains unchanged, an
increase in resource prices allow the curve to
shift left or vice-versa
• Expectations of supplies in the future
Determining Supply
• Measures of Cost
•
•
•
•
Fixed costs or overhead: costs incurred even if output is zero
Variable cost: costs that change such as labor
Total cost
Marginal cost: the extra cost incurred when a business produces
one additional unit
• 24 hour gas station
• Internet shopping
Determining Supply
• Total revenue—units sold times price
• More important is marginal revenue—extra revenue made with the
production and sale of one additional unit of output
Price
determination
Crossing the two curves
will create an Equilibrium
price and Equilibrium
Quantity
Surplus: a situation in which quantity supplied is greater than quantity demanded
Shortage: a situation in which quantity demanded is greater than quantity supplied
Analyze changes in Equilibrium:
1. Decide whether the event shifts the supply curve or demand curve (or both)
2. Decide which direction the curve shifts
3. Use the supply and demand diagram to see how the shift changes the equilibrium