Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Principles of Economics by Fred M Gottheil prepared by Adnan A, Alshiha Chap. 3 SUPPLY AND DEMAND ©1999 South-Western College Publishing 1 What is Supply and Demand? A model of price behavior in competitive markets 2 Note that Demand is not • The same as wants • The same as needs • necessarily the same as the actual quantity purchased 3 The Law of Demand When price increases the quantity demanded decreases and vice versa, ceteris paribus ©1999 South-Western College Publishing 4 What assumption is always made when the price changes? Ceteris paribus or everything else stays the same-abbreviated cet.par. ©1999 South-Western College Publishing 5 What is a Demand Schedule? Shows the specific quantity of a good or service that people are willing and able to buy at different prices ©1999 South-Western College Publishing 6 Price Quantity Demanded $10 0 $9 1 $8 2 $7 3 $6 4 $5 5 ©1999 South-Western College Publishing 7 7 What is a Demand Curve? A graph that depicts the relationship between price and quantity demanded ©1999 South-Western College Publishing 8 P1 P2 Q1 Q2 ©1999 South-Western College Publishing 9 9 Reasons for the Law of Demand?? • The substitution (relative price) effect • The real income effect 10 What is a change in Demand? A change in the amount demanded of a good that is caused by factors other than a change in the price of that good ©1999 South-Western College Publishing 11 P Shift in Demand Curve D2 D1 Q ©1999 South-Western College Publishing 121 A rightward shift in the demand curve is an increase in demand, a leftward shift is a decrease in demand. 13 What causes a shift in Demand? •Change in tastes •Income changes •Changes in Population •Changes in the prices of related goods •Changes in Expectations 14 Income changes: 2 possibilities: • Normal goods: as income rises, demand rises, cet. par. • Inferior goods: As income rises, demand falls, cet. par. 15 Changes in related goods prices: 2 cases: • Substitute goods: As the price of Y increases, the demand for X increases • Complementary goods: As the price of Y increases, the demand for X decreases 16 Changes in future price expectations The expectation of a future rise in price leads to an increase in demand now, cet. par. 17 What is Market Demand? The sum of all individual demands in a market 18 NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND ©1999 South-Western College Publishing 19 Changes in demand vs. changes in quantity demanded • Changes in quantity demanded only caused by changes in the products own price, a movement along a demand curve • Changes in demand--a shift in the demand curve caused by factors other than the price of the product 20 P P P1 P2 D1 D D Q A change in demand Q1 Q2 Q A change in quantity demanded 21 Do you understand? Do you really understand????? 22 Which of the following would increase the current demand for cd’s? a. b. c. d. e. A decrease in the price of cd’s A decline in the teenage population A lower cost for producing cd’s An expectation of a drop in cd prices A decrease in the price of cd players The correct answer is…….E 23 1. According to the "Law of Demand," as the price of a good increases a. the demand for the good increases. b. the demand for the good decreases. c. the quantity demanded increases. d. the quantity demanded decreases. 2. Tea and Coffee are ____________. Peanut butter and jelly are ____________. a. complements; substitutes b. complements; complements c. substitutes; complements d. substitutes; substitutes 24 3. Which of the following will increase the demand for pencils? a. a decrease in the price b. a decrease in the student population c. a decrease in the price of pens d. a decrease in the price of erasers 25 The supply side of the market Supply refers to willingness and ability to produce something 26 The Law of Supply As price rises, the quantity supplied rises, cet. par. 27 Reasons for the Law of Supply? • Monetary incentives • The Law of Increasing Opportunity Costs 28 What is a Supply Schedule? Shows the specific quantity of a good or service that suppliers are willing and able to provide at different prices ©1999 South-Western College Publishing 29 Price Quantity Supplied $5 0 $6 1 $7 2 $8 3 $9 4 $10 5 ©1999 South-Western College Publishing 3 30 0 What is a Supply Curve? Depicts the relationship between price and quantity supplied ©1999 South-Western College Publishing 31 P2 S P1 Q1 ©1999 South-Western College Publishing Q2 32 32 What is Market -day Supply? A market situation in which the quantity of a good supplied is fixed, regardless of price ©1999 South-Western College Publishing 33 P2 S P1 Q ©1999 South-Western College Publishing 34 34 What is a change in Supply? A change in the amount supplied of a good that is caused by factors other than a change in the price of that good ©1999 South-Western College Publishing 35 P Shift in Supply S1 S2 Q ©1999 South-Western College Publishing 36 3 A rightward shift in the supply curve is an increase in supply, a leftward shift is a decrease in supply. 37 What causes a shift in Supply • Technology changes • Changes in resource prices • Changes in the number of suppliers • Changes in other good prices • Changes in expectations 38 Increases in supply can be caused by: Improved technology Lower resource prices Greater number of firms Expected lower future prices 39 NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY ©1999 South-Western College Publishing 40 Changes in supply vs. changes in quantity supplied • Changes in quantity supplied only caused by changes in the products own price, a movement along a supply curve • Changes in supply--a shift in the supply curve caused by factors other than the price of the product 41 P S S1 S P P2 P1 Q A change in supply Q1 Q2 Q A change in quantity supplied 42 Supply and demand together • Put supply and demand curves on the same graph • Intersection gives the equilibrium price and quantity 43 Price S PE D QE Quantity PE and QE represent the equilibrium price and quantity 44 What is Equilibrium Price? The price that equates the quantity demanded and the quantity supplied ©1999 South-Western College Publishing 45 What happens if price is below equilibrium? A shortage, or excess demand, arises 46 At P2, QD > QS, thus a shortage or excess demand exists S P2 D Shortage QS QD 47 47 How is the shortage eliminated? The price rises, leading to a decrease in quantity demanded and an increase in quantity supplied. 48 What happens if price is above equilibrium? A surplus, or excess supply, arises 49 At P1, QD < QS, thus a surplus or excess supply exists Surplus P1 S D QD QS 50 50 How is the surplus eliminated? The price falls, leading to a decrease in quantity supplied and an increase in quantity demanded. 51 Summary, shortages, surpluses, and equilibrium P1 Surplus S P3 P2 Shortage Q3 ©1999 South-Western College Publishing D 52 52 How shifts in S and D affect equilibrium price and quantity 53 Right Shift in Demand S P2 P1 D2 D1 Q1 Q2 ©1999 South-Western College Publishing 54 54 Left Shift in Demand S1 P1 P2 D2 Q2 Q1 ©1999 South-Western College Publishing D1 55 55 Summary, demand changes Increased demand, price and quantity both rise Decreased demand, price and quantity both fall 56 Right Shift in Supply S1 P1 P2 S2 D Q1 Q2 ©1999 South-Western College Publishing 557 7 Left Shift in Supply S2 P2 P1 S1 D Q2 Q1 ©1999 South-Western College Publishing 558 8 Summary, supply changes Increased supply, price falls, quantity rises Decreased supply, price rises, quantity falls 59 If both curves shift, can predict price or quantity, but not both unless the magnitude of the shifts are known 60 Examples: shifts in both S and D curves Say both S and D increase, what can we say about equilibrium P and Q? 61 ANSWER Q will increase, but P is indeterminate 62 Examples: shifts in both S and D curves Say S increases but D decreases, what can we say about equilibrium P and Q? 63 ANSWER: P will decrease, but Q is indeterminate 64 • What assumption is always made when the price changes? • What is a Demand Curve? • What is a Supply Curve? • What is equilibrium Price? • What are shortages and surpluses? • What happens when demand and supply curves shift? 65 Supply and demand problems Suppose apples and oranges are substitutes to consumers: Bad weather destroys many apple orchards--what happens to equilibrium price and quantity in the apple market? In the Orange market?? Illustrate graphically. 66 S1 P S P S P2 P2 P1 P1 D1 D Q2 Q1 Q Apple market, supply decreases, price rises, quantity falls D Q1 Q2 Q Orange market, demand increases, price and quantity rise 67 Oprah Winfrey says on tv that she will never eat another hamburger. What might happen to the equilibrium price and quantity in the beef market? Show graphically with supply and demand curves. 68 Decrease in demand in the beef market, price and quantity fall S1 P1 P2 D2 Q2 Q1 D1 69 69 The demand for computers has clearly increased over time, due to higher incomes and changing preferences towards computers. Despite the increased demand, the price of computers has continued to fall. Show graphically with supply and demand curves how this could happen, and give some possible explanations. 70 S S1 P2 P1 P3 D1 D If supply increases more than demand, price falls--greater supply due possibly to lower input costs, better technology, more firms 71 An increase in the wages paid to fishermen will have what effect on the fish market equilibrium? a. Price will decrease, and quantity will decrease. b. Price will increase, and quantity will increase. c. Price will decrease, and quantity will increase. d. Price will increase, and quantity will decrease. e. Price and quantity will stay the same. 72 Over the past couple of years, prices for personal computers have fallen dramatically, but suppliers have offered more and more of them for sale. Does this refute the law of supply? Explain. 73