Download Chapters 4, 5, 6 - Supply and Demand PowerPoint Notes

DEMAND
DEMAND OR EFFECTIVE DEMAND…
3 COMPONENTS…
 1. wants
 2. the ability to buy
 3. the willingness to buy
Graphing Supply and Demand…
 I. Graph
 A. PRICE is always on the vertical axis
 B. QUANTITY is always on the horizontal axis.
 P

Q
 II. The Law of Demand…
As price increases, the quantity of goods and
services purchased decreases and vice versa
a. DEMAND: quantities of a product that
people are willing and able to purchase at
various possible prices at a particular TIME
and PLACE
b. Demand is expressed as a series of prices
and quantities in the form of a DEMAND
SCHEDULE
DEMAND CURVES…
 I. CHANGE IN QUANTITY DEMANDED:
(movement along the curve) A change in the price of the good
itself
D
graph for oranges
(decrease in the price of oranges)
 II. CHANGE IN DEMAND
A shift to the right or left of the ENTIRE CURVE…the
quantity demanded at each price changes
A. to the RIGHT—increase in demand
B. to the LEFT—decrease in demand
(increase in demand)
D D1
SHIFT VARIABLES…
 1. the price of substitute goods
 2. the price of complementary goods
 3. changes in income
 4. changes in taste
 5. changes in population
 6. expectation/anticipation of future price
changes
Why are demand curves
downward sloping to the
right?
 A. Substitution effect—change in the mix of
goods purchased as a result of increasing and
decreasing relative prices
 B. Income effect—the effect that increasing
or decreasing prices has on the buying power
of income (when prices rise, you have less
buying power)
 Product: hamburger
 Event: the price of hot dogs increases
D
The demand for hamburgers would shift to the right due to a change in the
Price of a SUBSTITUTE good
Change in Quantity demanded
Product: refrigerators
Event: the price of refrigerators decreases
Original price
New price
D
Q
Q demanded at new price
There is a change in the quantity demanded for refrigerators…At the lower price,
there is a greater quantity demanded…this is a movement along the original
demand curve. The curve doesn’t shift …
UTILITY…
 Marginal Utility—the amount of satisfaction a
person gets from one additional unit of a
product
 Diminishing Marginal Utility—as additional
units of a product are consumed during a
given period of time, the additional
satisfaction decreases
SUPPLY…
 I. Change in QUANTITY SUPPLIED: movement
along the curve (change in the price of the good
itself)
s
 Graph for chi a pets
 Event: the price for chi a pets fall
 II. Change in Supply: a shift to the left or
right of the entire supply curve—the quantity
supplied at each and every price changes
 A. shift to the right—increase in supply
 B. shift to the left—decrease in supply
S
S1
Shift variables for supply…
 1. entrance/exit of firms within an industry
 2. price of the factors of production used to
produce the good (CELL, taxes, subsidies,
govt. regulations)
 3. weather/disaster
 4. technology
 5. expectation of future price change
PRACTICE PROBLEMS…
 Product: Cars
 Event: price of steel increasess
S1
s
Decrease in supply due to a change in cost of production for firms
 Product: Grapes
 Event: California grape pickers strike for
higher wages
s
Decrease in supply due to an increase in the cost of production for firms
 Product: Major League Baseballs
 Event: a new machine stitches baseballs
better and in one-tenth the time of hand
stitching
s
Increase in supply due to an advancement in technology
 Product: bananas
 Event: due to a genetic mutation, the
monkey population explodes in Central
America
s
Decrease in supply due to a disaster
 Product: steel
 Event: the EPA relaxes air pollution standards
s
Increase in supply due to a decrease in the cost of production for firms
 Product: Peanuts
 Event: the price of peanuts rises
s
There will be a change in the quantity supplied of peanuts—there will be a
larger quantity supplied at the higher price. The supply curve doesn’t shift
because it’s just a change in the price of peanuts
Marginal Analysis
 Productivity: a measure of efficiency, the
way in which inputs are combined to produce
outputs
 An increase in productivity would be greater
output from the same amount of inputs
 Diminishing marginal product:
 as more of one input is added to a fixed amount of
other inputs, the marginal product decreases
Supply and Demand together
 Product: Pizza
 Event: the price of tomato sauce increases
s
P1
P
d
Q1
Q
The supply decreased due to an increase in the cost of production for firms.
Resulting in an increase in the equilibrium price and a decrease in the equilibrium
quantity supplied and demanded
Supply and demand together
 Product: cars
 Event: incomes rise in the U.S.
s
P1
P
d
Q
d1
Q1
The demand for cars increases due to an increase in income. Resulting
in an increase in the equilibrium price and an increase in the equilibrium
quantity demanded and supplied