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Chapter 6: Demand, Supply & Markets What is a Market? • Any network that brings buyers and sellers together so they can exchange goods and services • Doesn’t have to be a physical place, but can be done over the internet, phone or fax • Exists wherever supply and demand determine the price and quantity of goods and services sold Demand • Is the quantities of a good or service that buyers are willing and able to purchase at various prices • Demand schedule shows the various prices and quantity demanded at each price • Chocolate Bar Auction Demand • Economists consistently will gather data and put it into a schedule and then to make it visually easier to understand put the schedule into graph form • Law of Demand: An increase in price will cause a decrease in quantity demanded – P ↑ Qd ↓ and P ↓ Qd ↑ – Inverse relationship The Demand Curve P$ D 0 Q Quantity Demanded Application Questions • # 1 – 3 pg. 119 • Work in pairs • Check answers with others at your table Law of Diminishing Marginal Utility • Each additional unit of a good or service that is consumed brings less satisfaction or “utils” than the previous unit consumed • This helps explain why the demand curve is downward sloping Elasticity of Demand • Shows the responsiveness of the quantity demanded to a change in price • P x Qd = TR (Total Revenue) • Elastic Demand – %Δ P < %Δ Qd (P TR ) • Inelastic Demand – %ΔP > %ΔQd (P TR ) • Unitary Demand – %ΔP = %ΔQd (P - TR -) FACTORS EFFECTING ELASTICITY OF DEMAND – # of substitutes (e.g. margarine and butter) – small items in a budget (e.g. pepper, salt) – essential items (e.g. water, electricity, natural gas) – time (e.g. gasoline) Applications of Elasticity of Demand • the more inelastic an item the more heavily it can successfully be used to raise tax revenue (e.g. cigarettes, gas & alcohol) • Applications #4, 6 pgs. 119 – 120 • Work in pairs • Check answers with others at your table Effect of an Increase in Demand P$ D D1 0 Q Quantity An Increase In the Demand for Melons P$ D D1 $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Demanded (000’s) 10 15 20 25 Effect of a Decrease in Demand P$ D D0 0 Q Quantity Demanded A decrease In the Demand for Melons P$ D D0 $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Supplied (000’s) 10 15 20 25 Demand Shifts 1. Market Size 2. 3. 4. 5. 6. Income (Normal / Inferior Goods) Price of Substitutes “ “ Complements Tastes Consumer Expectations - future prices Application Questions • # 5 pg. 119, #7 pg. 121 • Work in pairs • Check answers with others at your table The Supply Curve Supply • The quantities of a good or service that sellers are willing and able to sell at various prices • Similar to demand, supply can be shown as a schedule and then as a graph The Law of Supply Law of Supply • Increase in price (P) will increase quantity supplied (Qs) i.e., P ↑ Qs ↑ • Decrease in price (P) will decrease quantity supplied (Qs) i.e., P ↓ Qs ↓ • Direct relationship between P and Qs An Increase In the Supply of Melons P$ S S1 $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Supplied (000’s) 10 15 20 25 An Increase In the Supply of Melons • An increase in supply is represented by a shift in the supply curve to the right (S1). • At each price point, producers are willing to supply more goods. – For example, at $1.00, producers were supplying 10,000 units. Now producers are willing to supply 15,000 (an increase of 5,000 units) A Decrease in the Supply of Melons P$ S0 S $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Supplied (000’s) 10 15 20 25 Supply Shifts 1. 2. 3. 4. 5. 6. Change in Nature Resource Price Technology Labour Productivity # of Producers Producer Expectations - future prices Application Questions • • • • #3 pgs. 134 – 135 Work in pairs Check answers with others at your table Supply – Demand Game Demand & Supply Curve Shifts Demand Causes 1. 2. 3. 4. 5. 6. Market Size Income (Normal / Inferior Goods) Price of Substitutes “ “ Complements Tastes Consumer Expectations - future prices Supply Causes 1. 2. 3. 4. 5. 6. Change in Nature Resource Price Technology Labour Productivity # of Producers Producer Expectations - future prices Market Equilibrium • The point where the supply curve and the demand curve intersect • At this point, Qd = Qs – (Quantity Demanded = Quantity Supplied) Market Equilibrium Supply=Demand P$ S D 0 Q Quantity Equilibrium in the Market for Melons P$ D S $2.50 $2.00 $1.50 $1.00 $0.50 0 5 Q Quantity Supplied (000’s) 10 15 20 25 An Increase in the Demand for Computers 5 D2 Shortage of 100 300 (thousands) A Decrease in the Demand for Computers Surplus of 100 3 D0 200 (thousands) An Increase in the Supply of Computers Surplus of 100 3 300 (thousands) S2 A Decrease in the Supply of Computers S0 5 Shortage of 100 200 (thousands) Elasticity of Supply • similar to Demand • shows the responsiveness of the quantity supply to a change in price • key factor effecting supply elasticity is time. – Given more time a producer can supply more of a product in response to higher prices Elasticity of Supply • Elastic Goods stored easily, inexpensively & for long periods of time • Inelastic Goods more perishable Gov’t Involvement in the Market • at times the market system is unfair • so in our mixed market system the government steps in to make the situation more fair • if government feels the price is too high make the price legally lower. • called a ceiling price problem is Qd > Qs – Excess Demand / Shortage Gov’t Intervention in the Market • If the government feels the price is too low then they make the price legally higher • called a floor price problem is Qs > Qd – Excess Supply / Surplus Shortages & Surpluses Application Questions • • • • #1 – 2 pg. 134 #4 – 5 pg. 135 Work in pairs Check answers with others at your table