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
CHAPTER 3 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM AP ECONOMICS 1 MICROECONOMICS That part of economics that deals with behavior and decision making by small units, such as individuals and firms 2 The Market Forces of Supply and Demand Supply and Demand are the two words that economists use most often. Supply and Demand are the forces that make market economies work! Modern microeconomics is about supply, demand, and market equilibrium. 3 Markets and Competition The terms supply and demand refer to the behavior of people. . . . . .as they interact with one another in markets. 4 Market: any institution, mechanism, or arrangement which facilitates exchange. A market is a group of buyers and sellers of a particular good or service. Buyers determine demand... Sellers determine supply... Markets bring together buyers and sellers. Examples: Gas station E-commerce site Local music store Farmer’s roadside stand NYSE Auctions 5 DEMAND For this to work there has to be “wanting” of a product Consumers have to desire the product and have the willingness and ability to buy a product Use schedules and graphs to represent approximations of consumer behavior 6 Ceteris Paribus . . . ...implies that all the relevant variables (e.g. determinants of demand) are held constant, except the one(s) being studied at the time. 7 DEMAND Demand Schedules a table listing that shows the quantity demanded at all prices that might prevail in the market at a given time Demand Curves graphs that plot the quantity demanded at all prices 8 The Concept of Demand. . . Quantity Demanded refers to the amount P (quantity) of a good that buyers are willing and able to purchase at alternative prices for a given point in time. Point in time is a specific period could mean a day, a week, or a month D Q 9 LAW OF DEMAND Demand for an economic product varies inversely with its price Prices Quantity Demanded Prices Quantity Demanded The movement along a demand curve shows a CHANGE IN THE QUANTITY DEMANDED or a change in the quantity of the product purchased in response to a change in price 10 Determinant of Demand: Market Price Law of Demand: There exists an inverse relationship between Price and Quantity Demanded. P (Negative Relationship) D Q 11 Price of Ice Cream Example: Demand For Ice Cream Demand D Quantity of Ice Cream 12 UTILITY Usefulness or satisfaction from consumption MARGINAL UTILITY the extra usefulness or satisfaction a person gets from acquiring one more unit of a product Example: Drinking glass of ice-cold lemonade after playing a hard game of tennis or basketball on a hot summer afternoon 13 MARGINAL UTILITY CONT. Consumers keep on buying a product until they reach a point where the last unit consumed gives enough, and only enough, satisfaction to justify the price. When consumers reach the point that the marginal utility is less than the price, you will stop buying. 14 DIMINISHING MARGINAL UTILITY The more units of a certain economic product a person can acquire, the less eager that person is to buy still more. As people’s wants for a particular product become more fully satisfied, they become less willing to spend their limited incomes to buy more of that product. The principle of diminishing marginal utility can also be used to explain the downwardsloping nature of the demand curve 15 EFFECTS OF QUANTITY DEMANDED Income Effect the change in the quantity demanded because of a change in the consumer’s real income when the price of a commodity changes Increases the purchasing power of a buyer’s money income enabling the buyer to purchase more of the product than before Substitution Effect the change in quantity demanded because of the change in relative price of the product Buyers have the incentive to substitute a less expensive product for similar products that are now relatively more expensive 16 QUANTITY DEMANDED AND DEMAND ARE NOT THE SAME When QUANTITY DEMANDED (Qd) changes, it does so because of a change in the PRICE (P) of a product, and movement occurs along the current demand curve When DEMAND (D) changes, the entire demand curve moves or shifts. The change in demand results in an entirely new curve. 17 Determinant of Demand: Prices of Related Goods When the fall in price of one good increases the demand for another good, the two goods are complements. 18 Changes in Quantity Demanded Price $2.00 D Quantity 7 19 Changes in Quantity Demanded Price $2.00 $1.00 D 7 Quantity 13 20 Change in Demand Price $2.00 D Quantity 7 21 Change in Demand Price $2.00 D2 D Quantity 7 10 22 Market Demand Adding all the quantities demanded by all consumers at each of the various possible prices, we can get from individual demand to market demand 23 Determinants of Demand What factors determine how much ice cream you will buy? What factors determine how much will you really purchase? Demand Shifters 24 Determinants of Demand 1. Consumers’ Tastes and Preferences 2. Number of Consumers (buyers) 3. Consumers’ Income 4. Price of Related Goods 5. Consumer Expectations 25 CAUSES FOR CHANGES IN DEMAND (DETERMINANTS) Consumer Income Consumer Tastes Price of Related Goods Substitutes Complements 26 Determinant of Demand: Prices of Related Goods When the fall in price of one good reduces the demand for another good, the two goods are substitutes. 27 CHANGE IN DEMAND OR SHIFT IN DEMAND Shift to the Right increase in demand Shift to the Left decrease in demand 28 GOODS Normal Goods Goods for which demand increases when income increases Most goods are normal goods Inferior Goods Goods and services for which demand decreases when income increases. Inferior is not the products quality Generic brand products, hamburgers, and used clothing 29 Determinant of Demand: Income As income increases the demand for a normal good will increase. P D D2 Q 30 Determinant of Demand: Income As income increases the demand for a normal good will increase. As income increases the demand for a inferior good decrease. P D2 D Q 31 CHAPTER 3--SUPPLY AP ECONOMICS 32 SUPPLY The quantity of goods and services that producers are willing to offer at various possible prices other things equal during a given time period Example: During the winter months, for example, jacket manufacturers offer a certain quantity of jackets at each price. 33 Supply of Ice Cream Price S Quantity 34 LAW OF SUPPLY States that producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices Quantity supplied is directly related to the prices that producers can charge for their goods and services Example: If producers of a compact disc (CD) players can charge $300 for their products, they will make more CD players than if they could charge only $200. PRICE PRICE QUANTITY SUPPLIED QUANTITY SUPPLIED 35 The Concept of Supply. . . Quantity Supplied refers to the amount P S (quantity) of a good that sellers are willing and able to make available for sale at alternative prices for a given point in time. Q 36 QUANTITY SUPPLIED The amount of a good and service that a producer is willing to sell at each particular price PRICE is the key factor affecting not only quantity demanded but also the quantity supplied 37 Changes in Quantity Supplied S Price $2.00 Quantity 7 38 Changes in Quantity Supplied S Price $2.00 $1.00 Quantity 1 7 39 SUPPLIERS WANT A PROFIT Suppliers actions are based on the pursuit of profits PROFIT is the amount of money remaining after producers have paid all of their costs Businesses make a profit when revenues are greater than the costs of production 40 COSTS OF PRODUCTION Wages, salaries, rent, interest on loans, bills for electricity, raw materials, and any other goods and services used to manufacture a product To make a PROFIT, producers must provide goods and services that consumers want—at prices that consumers are willing and able to pay 41 PROFIT MOTIVE Governs how individual companies make decisions and it also helps direct the use of resources in the entire market It can cause an increase or a decrease in production for one company or many companies 42 SUPPLY Supply Schedule Lists each quantity of a product that producers are willing to supply at various market prices It shows the relationship between the price of a good or service and the quantity that producers will supply Supply Curves Plot the relationship on a graph between the price of a good or service and the quantity supplied 43 CHANGES IN SUPPLY PRICE CHANGES affect the QUANTITY SUPPLIED DETERMINANTS OF SUPPLY are the non-price factors that can shift an entire supply curve of a product. 44 Change in Supply S Price $2.00 Quantity 7 45 Change in Supply S Price S2 $2.00 Quantity 7 11 46 DETERMINANTS OF SUPPLY Prices of resources Government tools Taxes and Subsidies and Regulations Technology Prices of related goods Producer expectations Competition or # of sellers (producers) 47 Determinant of Supply: Market Price Law of Supply S P There exists an direct (positive) relationship between Price and Quantity Supplied. Q 48 RESOURCES CAUSE SHIFTS A change in the price of resources or factors of production can shift an entire supply curve A RESOURCE is anything that can be used in the production of a good or service Resources include raw materials, electricity, and workers’ wages These resources contribute to a business’s costs of production 49 RESOURCES CONT. Any price change for a resource increases or decreases a business’s production costs When the price of a resource falls, production costs fall accordingly. Lower production costs mean that a business can supply more of the product for the same cost Lower production costs also create greater profits, which will cause the businesses to increase production even more Higher production costs mean that the company cannot supply as much of the product at the same cost as before 50 TECHNOLOGY Makes production more efficient and less expensive This causes the costs of production to decrease and producers are able to supply more goods and services at each and every price and increase their profits Technology also has a cost A company may have to pay researchers or other companies for the desired technology 51 GOVERNMENT TOOLS Can cause the supply curve for goods and services to shift either right or left The three main tools are Taxes Businesses treat them as cost Increase in sales tax or property tax will increase production costs Reduce supply Subsidies Lowers the producer’s cost Increases supply 52 REGULATIONS Rules passed by the government to protect the public as to how companies conduct business REGULATIONS are designed to prevent pollution, discrimination, and other problems that affect citizens Loose government regulations tend to increase supply Strict government regulations tend to decrease supply Example: Strict pollution controls force companies to spend more money on finding safe ways to dispose of waste and toxic materials. Complying with these regulations cause a companies production costs to increase. Supply curve would shift to the left because higher production costs lower the supply. 53 COMPETITION Tends to increase supply, while a lack of competition tends to decrease supply Suppliers can leave as well as enter the market 54 PRICES OF RELATED GOODS Means that the changes in a product’s price can affect the supply for the product’s related goods Substitutes Complements These changes in prices can cause the supply curve to shift left or right 55 PRODUCER EXPECTATIONS Cause production decisions to change based on their expected future income Producers’ income depends on the prices they can charge for their products The expectations they have of future changes in the price of the product can affect how much of their product they supply to the market now These expectations can cause the supply curve to shift left or right 56 CHAPTER 3—MARKET EQUILIBRIUM AP ECONOMICS 57 MARKET EQUILIBRIUM A situation in which prices are relatively stable, and the quantity of goods and services supplied is equal to the quantity demanded Qs=Qd 58 Supply and Demand Together Equilibrium Price--Ep or Pe The price at which the supply and demand curve intersect. Quantity Supplied and Quantity Demanded are equal. Equilibrium Quantity—Eq or Qe The quantity at which the supply and demand curve intersect. 59 Forces of Demand and Supply. . . Price S E EP Quantity D EQ 60 Forces of Demand and Supply At Rest Market Equilibrium Price S E EP $2.00 Quantity D 7 EQ 61 SURPLUS Quantity Supplied > Quantity Demanded Qs>Qd Suppliers may have built up inventories in their warehouses, only to find that they did not receive enough orders for the products Lower their prices to attract more buyers Offer fewer products for sale at the next trading period 62 Actions of buyers and sellers that move toward equilibrium. Price S E D Quantity 63 Actions of buyers and sellers that move toward equilibrium. Price Excess Supply S E D Quantity 64 SHORTAGE Quantity Demanded > Quantity Supplied Qd>Qs Producers have no more products to sell even though additional buyers are willing to purchase them at the existing price Suppliers wish they had charged higher prices for what they already sold Price and Quantities would have to increase in the next trading period 65 Actions of buyers and sellers that move toward equilibrium. Price S E D Quantity 66 Actions of buyers and sellers that move toward equilibrium. S Price E Excess Demand D Quantity 67 EQUILIBRIUM PRICE Quantity Demanded = Quantity Supplied Price that “clears the market” There is not a surplus or shortage 68 Change in demand due to hot weather S Price E2 New Equilibrium Pe E Pe D Qe Qe D2 Quantity 69 PRICES ARE FIXED? Special interest groups result in government policies that fix prices people either receive or pay Price supports prevent the price system from effectively transmitting information in the market Economists argue that fixed prices are government policies whose costs usually outweigh their benefits 70 TYPES OF FIXED COSTS PRICE CEILINGS The maximum legal price that can be charged Affects the allocation of resources PRICE FLOORS The lowest legal price that can be paid for a good or service Ex: minimum wage Ex: rental property 71 Government Set Prices Price S Price Floors E Price Ceilings D Quantity 72 WITHOUT PRICES Rationing – A system under which a government agency decides everyone’s fair share Ration Coupon – A ticket or receipt that allows the holder to purchase a certain amount of the product Used during wartime Problems w/o prices Fairness High Administrative Costs Diminished Incentives 73 Efficient Allocation MC = MB MC = Productive Efficiency (Producer) (S Slope) Productive Efficiency Production of a particular good in the least costly way Making available more valuable resources to produce other goods Supply reflects the marginal cost (MC) MB = Allocative Efficiency (Consumer) (D Slope) Allocative Efficiency Particular mix of goods and services most highly valued by society Assignment of certain resources for the production of these goods Demand reflects the marginal benefit (MB) based on utility Equilibrium MB=MC and thus allocative efficiency 74