Transcript Chapter 3 - Demand and Supply

PRINCIPLES OF ECONOMICS
Chapter 3 Demand and Supply
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DEMAND & SUPPLY
Organic vegetables and fruits locally grown and sold
should cost less than regular produce because of low
transportation cost. That is not, however, usually the case.
FREE MARKET SYSTEM
Supply and Demand: the name of the most important
model in all economics
Market: a network of buyers and sellers negotiating
prices
Price: the amount of money that must be paid for a
unit of a good or service
Quantity: the amount of a good or service bought or
sold
DEMAND AND SUPPLY
Consumers: market participants buying
goods and services
Producers: market participants selling goods
and services
Equilibrium Price: the money payment at
which consumers and producers agree to
transact
Equilibrium Quantity: the amount of output
exchanged at the equilibrium price
DEMAND AND SUPPLY
Quantity Demanded: the amount of a
good or service consumers are willing
and able to buy at a particular price
Quantity Supplied: the amount of a
good or service producers are willing
and able to sell at a particular price
DEMAND AND SUPPLY
Demand shows the relationship between
price and quantity demanded, all being
equal.
Supply shows the relationship between
price and quantity supplied, all being equal.
DEMAND
The Law of Demand: quantity demanded and price are
negatively related. The demand is downward sloping.
Reasons: income effect and substitution effect.
SUPPLY
The Law of Supply: quantity supplied and price are
positively related. The supply is upward sloping.
Reason: Profitability
DEMAND AND SUPPLY
Market Equilibrium: A condition at which
independent plans of consumers and
producers coincide in the market
Demand = Supply to determine the
equilibrium price and quantity
No shortage or surplus
DEMAND AND SUPPLY
Shortage: At a price lower then the
equilibrium price, quantity demanded
exceeds quantity supplied
Surplus: At a price higher then the
equilibrium price, quantity supplied exceeds
quantity demanded
In a “free market,” price adjustments
eliminate shortage or surplus
MARKET EQUILIBRIUM
MARKET EQUILIBRIUM
QD = QS @ PRICE = $1.40
Price Quantity Demanded Quantity Supplied Shortage/Surplus
$1.00
800
500
300
$1.20
700
550
150
$1.40
600
600
0
$1.60
550
640
-90
$1.80
500
680
-180
$2.00
460
700
-240
$2.20
420
720
-300
SHIFT IN DEMAND
Increased demand is a shift to the right from D0 to D1.
Decreased demand is a shift to the left from D0 to D2.
DETERMINANTS OF DEMAND
• Consumer Taste or Preference
• Consumer Income
• Price of Substitute and Complementary Goods
• Population: Number of Buyers
• Expectations of Price Change
• Sales Taxes
• Government Subsidies
DETERMINANTS OF DEMAND
With an increase in income, consumers will purchase
larger quantities, causing the demand curve to increase
(shifting to the right).
SHIFT IN SUPPLY
Increased supply is a shift to the right from S0 to S2.
Decreased supply is a shift to the left from S0 to S1.
DETERMINANTS OF SUPPLY
• Price of Inputs (e.g., wages and salaries)
• Production Technology
• Price of Related Goods
• Number of Sellers
• Expectations of Price Change
MARKET FOR SALMON
Good weather to fish leads to and increase in supply
of salmon, causing its price to decline and quantity to
increase.
MARKET FOR NEWSPAPER
A change in tastes from print news sources to digital
sources results in a leftward shift in demand for the
former. The result is a decrease in both equilibrium
price and quantity.
MARKET FOR POSTAL SERVICES
(a) Higher wages causes the supply to decline,
decreasing the quantity, but increasing the price.
(b) Communicating by E-mail & Text-message causes the
demand to decline, decreasing both quantity and price.
SHIFT IN DEMAND & SUPPLY
Supply and demand shifts cause changes
in equilibrium price and quantity.
PRICE CEILING
When the government set the market price below the
equilibrium price, causing a shortage.
At P = 500, shortage = 19 – 15 = 4
PRICE FLOOR
When the government set the market price above the equilibrium
price, causing a surplus.
At Pf > Pe, surplus = 19 – 15 = 4
GAINS FROM TRADE
GAINS FROM TRADE
Consumer Surplus: Total benefit to the consumer as a
result of buying a good at the equilibrium price.
Area of triangle F = 0.5(180 – 80)(28 – 0) = $1,120
Producer Surplus: Total benefit to the producer as a
result of selling a good at the equilibrium price.
Area of triangle G = 0.5(80 – 30)(28 – 0) = $700
GOVERNMENT & GAINS FROM TRADE
Price ceiling and price floor cuts into consumer
surplus and producer surplus causing market
disequilibrium and inefficiency.
Triangles (U + W) and (J + K) are called Dead Weight
Loss due to deviation of market price from equilibrium
price.
GOVERNMENT & GAINS FROM TRADE