Transcript SupplyandDemandLecture Without Pictures

Supply and
Demand
The Basics
Supply and Demand Schedules
 Demand Schedule
 Supply Schedule
 Price
QTY
 Price
QTY
 $0.50
1000
 $0.50
200
 $1.00
800
 $1.00
400
 $1.50
600
 $1.50
600
 $2.00
400
 $2.00
800
 $2.50
200
 $2.50
1000
Demand Schedule
 A data table of the
quantity demanded of
a good/service at
specific price points
•
Demand Schedule
•
Price
QTY
•
$0.50
1000
•
$1.00
800
•
$1.50
600
•
$2.00
400
•
$2.50
200
Supply Schedule
 A data table of the
quantity supplied of a
good/service at
specific price points
•
Supply Schedule
•
Price
QTY
•
$0.50
200
•
$1.00
400
•
$1.50
600
•
$2.00
800
•
$2.50
1000
3 Tasks of the Price System
 Rationing of goods and services.
(outputs; For Whom?)
 Allocation of limited resources. (inputs;
How?)
 Determination of wages. (inputs; how?)
Demand
 The desire, ability,
and willingness to
buy a good or
service at all
prices
Quantity Demanded
 The desire, ability, and willingness to buy a good or
service at a single price point
Law of Demand
 If nothing else changes, the quantity demanded of
a good or service is greater at lower prices than
higher.
Supply
 The quantity of a good or service a firm is willing to
produce at all prices.
Quantity Supplied
 The quantity
of a good or
service a firm
is willing to
produce at a
single price
point.
Law of Supply
 If nothing else changes, firms are willing to supply a
greater quantity of good or service at higher prices
than lower.
Demand Determinants
(Shift the Demand Curve)
• Price of substitutes or compliments (other
goods)
• Outlook (consumer expectation of
future income and prices)
• Income
▫ Positively correlated with normal goods
▫ Negatively correlated with inferior goods
• Number of potential customers (pop.of
market)
▫ Birthrate/Death rate (population growth)
▫ Immigration/Emigration
• Taste (fads or fashions)
Derived Demand
 The demand for a good or service based on its
contribution to the final product.
 Demand for inputs is driven by the demand for
outputs
 Has the same effect as a determinant
Derived Demand
 Gold Rush Example:
 Demand for gold =
increased gold mining
 Gold miners needed
picks and axes
 The demand for picks
and axes was derived
from the value of gold
 Demand for picks and
axes
increased/decreased
with demand for gold
Substitute
 A good or service
that can be used
instead of
another good or
service to meet
the same need.
Substitution Effect
 The change in quantity demanded because of the
change in the relative price of products.
If the price of Xbox increases
Consumers will substitute more Sony PlayStations
 Causes a
change in
quantity
demanded of
Xbox.
 Causes a
change in
demand for
PlayStations
Compliment
 A good or service whose use goes with
another good or service.
Inferior Good
 A good or
service one
tends to
consume more
of at lower
income levels
than higher.
Normal Good
 A good or
service one
tends to
consume
more of at
higher income
levels than
lower
Income Effect
 The change in quantity demanded because of a
change in price that alters consumers’ real income.
When prices drop, consumers spend less of their
income on those items – leaving extra real income
to spend
When prices
increase,
consumers spend
more of their
income on those
items – leaving less
real income to
spend
Real
 Adjusted for inflation (inflation subtracted out)
Nominal
 Not adjusted for inflation (includes inflation)
Demand Elasticity
 The extent to which a change in price causes a
change in the quantity demanded
Demand Elasticity
 If the price of a product changes slightly
+ quantity demanded changes
substantially = very elastic.
 If the price of a product changes
substantially + quantity demanded
changes slightly = very inelastic.
Change in Supply
 Change in Supply
A situation where suppliers offer
different amounts of products for sale
at all possible prices in the market.
Supply Determinants
(Shift the Supply Curve)
• Productivity (Improvements to the
production processes of a good or
service)
• Inputs ( Change in the price of inputs
required to produce the good or
service.)
• Government Actions (Subsidies, Taxes
and Regulations that affect
producers)
Supply Determinants
(Shift the Supply Curve)
• Technology (Improvements in
machines that produce a good or
service)
• Outputs ( Price changes in other
products produced by the firm)
• Expectations (outlook of future prices
and profits)
• Size of Industry (Number of firms in the
industry)
Tax
 When an entity
(household or
business) pays
money to the
government.
 If one wants less
of something,
one taxes it.
Subsidy
• When the government
pays benefits to an
entity (household or
business,) but not in
exchange for resources,
goods, or services.
• Also any payment in
excess of the fair market
value for a resource,
good, or service
• If one wants more of
something, one subsidizes
it.
• We tax work and subsidize
not working. Just
something to think about.
Regulation
 A rule imposed by
the government
on a business
restricting how it
may operate
Import Quota
 Governmentimposed trade
restriction that limits
the number or value
of goods and
services that can be
imported during a
particular time
period.
 Limit on exports =
export quota
Supply Elasticity
 A measure of the way in which quantity
supplied responds to a change in price
If the price for a product changes
slightly + the quantity supplied of that
product changes a lot = very elastic.
If the price for a product changes
substantially + the quantity supplied
changes slightly = very inelastic.
Equilibrium
 The condition that
exists when quantity
supplied and quantity
demanded are equal.
 No tendency for price
to change.
Shortage (Excess Demand)
 Quantity demanded
exceeds quantity
supplied
 Price tends to rise
towards equilibrium
Surplus (Excess Supply)
 Quantity supplied exceeds
quantity demanded
 Price tends to fall towards
equilibrium.
Changes in Equilibrium
 Increase in demand leads
to higher equilibrium price
and higher equilibrium
quantity.
 Increase in supply leads
to lower equilibrium price
and higher equilibrium
quantity.
Changes in Equilibrium
 Decrease in demand: lower
equilibrium price and lower
equilibrium quantity.
 Decrease in supply:
higher equilibrium price
and lower equilibrium
quantity.
Ceteris paribus
 Latin phrase meaning “all other things being equal or
held constant”
Price Ceiling
• A price control or limit on
how high a price can be
charged for a product,
usually imposed by the
government
• Usually produces
shortages.
Price Floor
• A price control or limit on how low a price can be
charged for a product, usually imposed by the
government.
• Usually
produces
surpluses.