Transcript Unit 2 Sup and Dem ppt part 1

Unit 2
Supply and Demand
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p. 1
I. The Law of Demand
• The law of demand holds that other things
equal, as the price of a good or service rises, its
quantity demanded falls.
– The reverse is also true: as the price of a good or
service falls, its quantity demanded increases.
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Demand Curve
a. The demand curve has a negative slope, consistent
with the law of demand.
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II. The Law of Supply
• The law of supply holds that other things
equal, as the price of a good rises, its quantity
supplied will rise, and vice versa.
• Why do producers produce more output when
prices rise?
– They seek higher profits
– They can cover higher marginal costs of production
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Supply Curve
a. The supply curve has a positive slope, consistent
with the law of supply.
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III. Equilibrium
• In economics, an equilibrium is a situation in
which:
– there is no inherent tendency to change,
– quantity demanded equals quantity supplied, and
– the market just clears. Explain -
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Equilibrium
Equilibrium occurs at a price of $3 and a quantity of 30
units.
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IV. Shortages and Surpluses
• A shortage occurs when quantity demanded
exceeds quantity supplied.
• Draw and Label
– A shortage implies the market price is too low.
• A surplus occurs when quantity supplied
exceeds quantity demanded.
• Draw and Label
– A surplus implies the market price is too high.
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V. Invisible Hand
The “Invisible Hand” - the market forces of
S + D will push the price up or down to
equilibrium
• Explain the “Invisible Hand” -
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VI. Shift vs. Movement in the Demand Curve
• A change in any variable other than price
produces a shift in the demand curve or a change
in demand.
• If the Price changes – then it is just a
movement along the curve = change in QD
• Know the difference : Change in QD vs.
Change in D
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VII. Factors that Shift D Curve
a. Change in consumer incomes (normal or
inferior goods)
b. Number of buyers
c. Change in Taste (consumer preferences)
d. Price of Related goods
- Substitute goods (goods consumed in place of
one another)
- Complimentary goods (goods consumed with
one another )
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VIII. Shift in the Demand Curve
This demand curve has shifted to the right. Quantity
demanded is now higher at any given price.
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Equilibrium After a Demand Shift
**Careful: What Came First?
The Chicken or the Egg?
Many people will get confused
after the shift in D. They see a
higher price and increase in Q
and then ask…”why are we
buying more if the P went
up?”…..
..but need to understand that
the Price was a result of a
change in the Demand and
not the other way.
The shift in the demand curve moves the market equilibrium from
point A to point B, resulting in a higher price and higher quantity.
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Practice with Demand
• If income increases and the good is
“normal”….
• If income increases and the good is
“inferior”….
• If income decreases and the good is
“normal”…
• If income decreases and the good is
“inferior”…
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Practice with Demand
• If the number of buyers increases…..
• If the number of buyers decreases…..
• If consumers tastes change in favor of a
good….
• If consumers tastes change away from a
good…
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Practice with Demand
• If Price of good x increases – what happens to
good y (substitute)
• If Price of good x decreases – what happens to
good y (substitute)
• If Price of good x increases – what happens to
good y (complement)
• If the price of good x decreases – what happens
to good y (complement)
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