Download Supply and Demand Section

Climbing the Economic Mountain!
Section 4
Twelve Key Elements of Practical Personal
Finance
Section 3
Ten Elements of Clear Thinking About
Economic Progress and the Role of Government
Section 2
• The Financial Crisis of 2008
• Lessons from the Great Depression
• The Seven Major Sources of Economic Progress
Supply and Demand
• Supply and Demand: Applications and Extensions
• Supply and Demand: Basics
Section 1
Twelve Key Elements of
Economics
Supply and Demand !!!!
Basics, Applications, and
Extensions
2
Overview
1. Demand

the demand curve

consumer surplus

quantity demanded vs. demand

shifters of demand
2. Supply
 the supply curve
 producer surplus
 quantity supplied vs. supply
 shifters of supply
3
Overview
3. Market Equilibrium:


Efficiency
Single and double shifts of supply and demand
4. The resource market (particularly the labor
market)
5. Price Controls: price floors and ceilings
(surpluses and shortages)
6. Impact of a tax
7. The tax system
8. The Laffer curve
9. Subsidies
4
The Demand Curve
Law of demand: There is an inverse
(negative) relationship between the price
of a good and the quantity that buyers are
willing to purchase
Results in a downward sloping demand
curve.
5
The Demand Curve
Ex. Deriving the Demand Curve
*Note*: As price increases, quantity
demanded decreases.
6
The Demand Curve
The height of the demand curve at any
quantity shows the maximum price that
consumers are willing to pay for an
additional unit.
Notice that when consumers have more of
the good they value it less.
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Consumer surplus
Consumer surplus: The difference
between the maximum amount consumers
would be willing to pay and the amount
that they actually pay.
Consumer surplus is the area below the
demand curve but above the price.
ex. What happens if price falls? rises?
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Demand vs. Quantity Demanded
Change in quantity demanded: A
movement along the curve
Caused by: a change in the price of that
good
 Increase in quantity demanded:
movement down the curve (to the right)
 Decrease in quantity demanded:
movement up the curve (to the left)
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Demand vs. Quantity Demanded
Change in demand: a shift of the curve
Caused by: a change in anything that
affects demand other than the price of the
good


Increase in demand: curve shifts right
Decrease in demand: curve shifts left
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Shifters of Demand
1. Change in consumer income
A. Normal goods (shrimp)
B. Inferior goods
Ramen Noodles
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Shifters of Demand
2. Change in number of consumers
Ex. Change in class size
12
Change in Number of Consumers
13
Shifters of Demand
3. Change in the price of a related good
A. Substitutes (Beef and Chicken)
B. Compliments (Milk and Cereal)
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Shifters of Demand
4. Change in expectations
A. Expected change in price
B. Expected change in income
15
Shifters of Demand
5. Change in consumer tastes and
preferences.
Ex. What do you think happened to the
demand for Michael Phelps posters?
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Shifting Demand: change in
consumer tastes and preferences
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Examples
What would happen to demand?
1.
2.
3.
What would happen to the demand for
Beef if the price of chicken increased?
What would happen to your demand for
steak (a normal good) if your income
decreased?
What would happen to the demand for
milk if the price of milk fell?
18
The Supply Curve
The law of supply: There is a direct
(positive) relationship between the price
of a good or service and the amount that
suppliers are willing to produce
Results in an upward sloping supply curve
19
The Supply Curve
Ex. Deriving the Supply Curve
*Note*: As price increases, quantity
supplied increases.
20
The Supply Curve
The height of the supply curve indicates the
minimum price necessary to induce
producers to supply that additional unit
21
Producer Surplus
Producer surplus: The difference between
the minimum price suppliers are willing to
accept and the price they actually receive.
Producer surplus is the area above the
supply curve but below price.
ex. What happens if price falls? Rises?
22
Example of consumer and
producer surplus
23
Supply vs. Quantity Supplied
Change in quantity supplied: a
movement along the curve
Caused by a change in the price of that
good:
 Increase in quantity supplied: Movement
up the curve (to the right)
 Decrease in quantity supplied: Movement
down the curve (to the left)
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Supply vs. Quantity Supplied
Change in supply: A shift of the curve
Caused by a change in anything that affects
supply other than the price of the good


Increase in supply: curve shifts right
Decrease in supply: curve shifts left
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Shifters of Supply
1. A change in resource price
ex. An increase in the price of steel
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Shifters of Supply
2. A change in technology
ex. The printing press
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Shifters of Supply
3. Changes in nature and politics
ex. Crop Freeze
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Shifters of Supply
4. Changes in taxes
ex. Yacht tax
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Elasticity
Inelastic: Changes in quantity are not
sensitive to changes in price (inelastic
curves are steeper).
Elastic: Changes in quantity are sensitive
to changes in price (elastic curves are
flatter).
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Market Equilibrium!
A state in which the conflicting forces of
supply and demand are in balance.
Occurs where the demand curve intersects
the supply curve.
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Market Equilibrium!
In market equilibrium:



all trades that generate more benefit then costs
are undertaken
No trades where costs exceed benefits are
undertaken
The combined area of consumer and producer
surplus is maximized
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Market Equilibrium!
The market equilibrium is economically
efficient.
Efficient: no excess supply or excess
demand
 Excess supply: quantity supplied >
quantity demanded
 Excess demand: quantity demanded >
quantity supplied
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Changes in Demand
Demand changes:
 Price: moves in same direction
 Quantity: moves in same direction
ex. Demand increases
 Price increases
 Quantity increases
34
Changes in Supply
Supply changes:
 Price: moves in opposite direction
 Quantity: moves in same direction
ex. Supply increases
 Price decreases
 Quantity increases
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Changes In Both?
What happens if supply and demand both
change at the same time?
36
The Labor Market


Price for labor is called the wage (W)
Quantity of labor is called employment (E)
*Note: works just like the market for
goods, only with a different name for price
(wage) and quantity (employment)
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Labor Demand
1. Firms demand labor
2. Labor demand curve is downward
sloping because as wage decreases,
firms will want to employ more people
38
Changes in Labor Demand
1. An increase in labor demand (labor
demand shifts right)
2. A decrease in labor demand (labor
demand curve shifts left)
39
Labor Supply
1. Workers supply labor
2. Labor supply curve is upward sloping
because as wage increases, people will
want to work more.
40
Changes in Labor Supply
1. Increase in labor supply: (labor supply
curve shifts right)
2. Decrease in labor supply: (labor supply
curve shifts left)
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Linking the Markets
There is a close relationship between the
demand for products and the demand for
resources used to make those products
42
Linking the Markets
when the demand for a product changes,
the demand for the resources used to
produce it will change in the same
direction
43
Price Floor
Price floor: A legally established minimum
price buyers must pay for a good or
resource


A price floor above equilibrium price
creates a surplus
A price floor below equilibrium price does
nothing
44
Application: Minimum Wage
The minimum wage is an example of a price
floor.
Raising minimum wage increases excess
labor supply (unemployment).
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Application: Minimum Wage
46
Price Ceiling
Price ceiling: A legally established
maximum price sellers can charge for a
good or resource


A price ceiling below market equilibrium
price creates a shortage
A price ceiling above market equilibrium
price does nothing
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Application: Disaster Markets
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Application: Rent Control
Rent controls lead to shortages as well as:
1.
2.
3.
4.
5.
A decline in the supply of future rental
housing
A decline in quality of rental housing
Non-price methods of rationing
Inefficient housing match-ups
Black Markets
49
Black Markets
Should we legalize drugs?
What are the costs and benefits?
Should we legalize prostitution?
What are the costs and benefits?
50
Impact of a tax – Lessons from
Snooki
51
Impact of a Tax
A tax on a product will cause the supply curve to
shift left by the amount of the tax.
1.
2.
3.
4.
5.
Raises the price that buyers pay
Reduces the amount sellers receive
Reduces the quantity sold
Increases government revenue
Creates deadweight loss
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Deadweight loss
The loss to society that results from the loss
of gains to trade that does not occur
because a tax was imposed.
53
Tax Incidence
Tax Incidence: The way the burden of a
tax is distributed among economic units
(also known as the tax burden)
It does not depend on whom the tax is
imposed.
54
Tax Incidence
Tax incidence does depend on elasticity:
The burden of the tax will fall on those who
are relatively inelastic.
Deadweight loss will be lower if taxes are
placed on goods that are relatively
inelastic.
55
The Tax System
Average tax rate (ATR): the percentage of
income paid in taxes
ATR = tax liability / taxable income
56
The Tax System
3 possibilities:
1. Progressive tax: average tax rate rises with
income
2. Regressive tax: average tax rate falls with
income
3. Proportional tax: average tax rate is the same
at all income levels
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The Tax System
Marginal tax rate (MTR): The additional
tax liability a person faces divided by his
or her additional taxable income.
MTR = change in tax liability / change
in taxable income
*Note: Marginal tax rates are what is
important in personal decision making.
58
Fairness and Efficiency
1.
2.
Is the progressive tax system
economically efficient?
Is the progressive tax system fair?
59
The Laffer Curve
The Laffer Curve: A curve illustrating the
relationship between the tax rate and tax
revenue.
Higher tax rates will not always lead to more tax revenue!!
60
Subsidies
Subsidy: A payment the government
makes to either the buyer or seller when a
good or service is purchased or sold.
ex. Subsidizing treadmills
*Note: Subsidies are costly
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Farm Subsidies
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Review
1. Know why supply curve is upward sloping
and demand curve is downward sloping
2. Find producer and consumer surplus
3. Know the shifters of demand
4. Know the shifters of supply
5. Know the characteristics of market equilibrium
6. Be able to do single and double shifts of
demand and supply curves
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Review
7. Know why the labor demand curve is
downward sloping and the labor supply
is upward sloping
8. Know the effects of price controls
9. Understand the impact of a tax
10. Be able to calculate average tax rate
and marginal tax rate
11. Understand the Laffer Curve
12. Understand the impacts of a subsidy
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