Transcript Supply and Demand Notes

Chapter 3 – Demand, Supply, & Price
ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Patrick J. Welch
&
St. Louis University
Gerry F. Welch
St. Louis Community College
at Meramec
PowerPoint Presentation by:
Dr. Ray Everett
Pima Community College
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved.
Demand, Supply, & Price Determination
Contents
Demand: The Buyer’s Side
Supply: The Seller’s Side
Market Demand & Supply
Equilibrium Price & Quantity
Changes in Qty. Demanded & Supplied
Changes in Demand & Supply
Changes in Demand
Changes in Supply
Changes in Equilibrium Price & Quantity
Limiting Price Movements
Price Elasticity of Demand & Supply
Measuring Price Elasticity (Chapter 3 Appendix)
Demand, Supply, & Price Determination
Chapter Objectives
• To explain what economists mean by demand, the Law of Demand,
supply, and the Law of Supply.
• To demonstrate how demand and supply work, using schedules and
graphs.
• To explain how price changes affect the quantity of a good demanded
or supplied.
• To show how demand and supply curves shift with changes in
underlying nonprice influences.
• To distinguish between a change in the quantity demanded or supplied
(a movement along a curve), and a change in demand or supply (a shift
of a curve).
• To demonstrate how demand and supply interact in markets to
determine prices.
• To define and illustrate equilibrium price, equilibrium quantity,
shortages, and surpluses in a market.
Demand, Supply, & Price Determination
Chapter Objectives (cont.)
• To explain how changes in demand and changes in supply (shifts in
demand and supply curves) affect equilibrium prices and quantities in
markets. To illustrate how government-imposed price ceilings and
price floors influence market conditions.
• To introduce the concept of price elasticity, which measures buyers’
and sellers’ sensitivities to price changes.
• To calculate price elasticity of demand and of supply.
Demand: The Buyer’s Side
• Demand
 Different amounts of a product that a buyer would be
willing and able to purchase at different prices - over a
given period of time when all nonprice factors are held constant.
• Demand Schedule
 A list of amounts of a product that a consumer would be
willing and able to buy (demand) at different prices over a
given time period when all nonprice factors are held constant.
3-1a
Demand: The Buyer’s Side
• Law of Demand
 As price increases, the quantity of the product demanded
decreases, and as price decreases, the quantity
demanded increases - an inverse relationship exists
between the price and the quantity demanded.
• Demand Curve (a graph showing the relationship)
 A downward sloping line on a graph will illustrate a
demand schedule.
3-1b
Supply: The Seller’s Side
• Supply
 Different amounts of a product that a seller would offer
for sale at different prices in a defined time period when all
nonprice factors are held constant.
• Supply Schedule
 A list of the amount of a product that a seller would offer
for sale at different prices in a defined time period when all
nonprice factors are held constant.
3-2a
Supply: The Seller’s Side
• Law of Supply
 As price increases, the quantity of a good or service a
supplier is willing to offer will increase, and as price
decreases, the quantity supplied will decrease – a direct
relationship exists between price and quantity supplied.
• Supply Curve (a graph showing the relationship)
 An upward sloping line on a graph will illustrate a supply
schedule.
3-2b
Market Demand & Supply
• Market
 Place or situation in which the buyers and sellers of a
product interact for the purpose of exchange.
• Market Demand & Market Supply
 The demand of all buyers and supply of all sellers in a
market for a good or service; found by adding together
individual demand or supply schedules.
3-3
Equilibrium Price & Quantity
• Equilibrium Price
 Also called the market clearing price.
 Price that sets buyers’ plans equal to sellers’ plans.
• Equilibrium Quantity
 Quantity at which those plans are equal.
3-4a
Equilibrium Price & Quantity
• Surplus
 Occurs in a market when the quantity demanded is less
than the quantity supplied, or when the product’s price is
above equilibrium price.
3-4b
Equilibrium Price & Quantity
• Shortage
 Occurs in a market when the quantity demanded is
greater than the quantity supplied, or when the product’s
price is below the equilibrium price.
3-4c
Changes in Qty. Demanded & Supplied
• Change in Quantity Demanded
 Movement along a demand curve from one price-quantity
point to another due to a change in price.
• Change in Quantity Supplied
 Movement along a supply curve from one price-quantity
point to another due to a change in price.
3-5
Changes in Demand & Supply
• Change in Demand & Supply
 Change in the demand or supply schedule due to a
change in a nonprice factor.
 Causes the demand or supply curve to shift to the left or
the right depending on the nature of the change.
3-6
Changes in Demand
• Nonprice Factors Influencing Demand
 Taste, fashion, and popularity.
 Buyers’ incomes.
 Buyers’ expectations concerning future income, prices, or
availabilities.
 Prices of goods related as substitutes and compliments.
 The number of buyers in the market.
3-7a
Changes in Demand
• Increase in Demand
 Change in a nonprice factor that causes more of a
product to be demanded at each price.
 Demand curve shift to the right.
• Decrease in Demand
 Change in a nonprice factor that causes less of a product
to be demanded at each price.
 Demand curve shift to the left.
3-7b
Changes in Supply
• Nonprice Factors Influencing Supply




The cost of producing an item.
Expectations about future market conditions.
Other items the seller does, or could supply.
The number of sellers in a market.
3-8a
Changes in Supply
• Increase in Supply
 Change in a nonprice factor that causes more of a
product to be supplied at each price.
 Supply curve shift to the right.
• Decrease in Supply
 Change in a nonprice factor that causes less of a product
to be supplied at each price.
 Supply curve shift to the left.
3-8b
Changes in Equilibrium Price & Qty.
• Effect of an Increase in Demand
 Causes the equilibrium price and quantity to increase.
• Effect of a Decrease in Demand
 Causes the equilibrium price and quantity to decrease.
3-9a
Changes in Equilibrium Price & Qty.
• Effect of an Increase in Supply
 Causes the equilibrium price and quantity to increase.
• Effect of a Decrease in Supply
 Causes the equilibrium price and quantity to decrease.
3-9b
Limiting Price Movements
• Price Ceilings
 Government-set maximum price that can be charged for
a good or service.
 A shortage will develop if the equilibrium price is above
the price ceiling.
3-10a
Limiting Price Movements
• Price Floors
 Government-set minimum price that can be charged for a
good or service.
 A surplus will develop if the equilibrium price is below the
price floor.
3-10b
Price Elasticity of Demand & Supply
• Price Elasticity
 Measure of the strength of buyers’ or sellers’ responses
to a price change.
• Price Elastic
 Strong response to a price change.
 Occurs when the % of change in the quantity demanded
or supplied is greater than the % of change in price.
• Price Inelastic
 Weak response to a price change.
 Occurs when the % of change in the quantity demanded
or supplied is less than the % of change in price.
3-11a
Price Elasticity of Demand & Supply
• Factors Affecting Price Elasticity of Demand
 Necessities versus luxury goods
• Strong response to price changes in luxury goods.
• Weak response to price changes in necessities.
 Substitutes
• Strong response to price changes in products with many
substitutes or similar alternatives.
• Weak response to price changes in products that have few
substitutes or similar alternatives.
 Proportion of income
• Strong response to price changes in goods or services that
require a greater proportion of income.
• Weak response to price changes in goods or services that
require a lesser proportion of income.
• Factor Affecting Price Elasticity of Supply
 Time to react
3-11b
Price Elasticity of Demand & Supply
• Price Elasticity of Demand & Total Revenue
 Strong response to a price change
• Causes revenue to move in the opposite direction of the
change in price.
 Weak response to a price change
• Causes revenue to move in the same direction of the
change in price.
3-11b
Price Elasticity (Appendix Slide 1)
• Determining Percentage Changes
 Use the table below to assist you in determining
percentage changes.
• Determining Price Elasticity
 Use the table below and your elasticity coefficient to
assist you in determining if the demand or supply is
elastic, inelastic, or unitary elastic.
3-12
Chapter 3 – Demand, Supply, & Price
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ECONOMICS
THEORY AND PRACTICE
Seventh Edition
Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work
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