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Supply and Demand The determinants of supply and demand Plot the following Price Quantity $9 8 2 3 5 9 7 6 What kind of curve is it? Price P Quantity Demanded Qd $9 8 2 3 5 9 7 6 P 9 8 7 6 To be on the demand curve a person must be WILLING and ABLE to purchase the product or service. 2 3 Qd just a point on the curve. D is the entire curve. 5 9 Q Price P Quantity Demanded Qd $9 8 2 3 5 9 7 6 There is an inverse ___________ relationship between price and quantity. P 9 8 7 6 Qd just a point on the curve. D is the entire curve. 2 3 5 9 Q 9 8 7 6 Definitions: D 2 3 5 9 Q Quantity demanded--it is the amount that will be purchased at a specific P. Demand--it is a schedule of quantities of goods and services that will be purchased at various prices at a specified time, all other things held constant. 9 8 7 6 Qd just a point on the curve. D is the entire curve. 2 3 5 9 Q Price changes Quantity Demanded Price does not change demand The 8 Determinants of Demand There are 8 reasons or factors that can change a demand curve. 1. Number of consumers. Eight Determinants of Demand: 1. Number of consumers 2. Income--Normal Goods As people’s incomes go up demand for normal goods increases. As people’s income go down, demand for normal goods decrease. 3. Income--Inferior Goods As people’s incomes go up demand for inferior goods decreases. As people’s income go down, demand for inferior goods increases. Eight Determinants of Demand: 1. Number of consumers 2. Income--Normal Goods 3. Income--Inferior Goods 4. Preferences Eight Determinants of Demand: 1. # of consumers 2. Income--Normal Goods 3. Income--Inferior Goods 4. Preferences 5. Price of related products: Substitutes Eight Determinants of Demand: 1. # of consumers 2. Income--Normal Goods 3. Income--Inferior Goods 4. Preferences 5. Price of related products: Substitutes 6. Price of related products: Complements Eight variables that shift Demand: 1. # of consumers 2. Income--Normal Goods 3. Income--Inferior Goods 4. 5. 6. 7. 8. Preferences Price of related products: Substitutes Price of related products: Complements Expected future of prices by consumers Expected future of income by consumers Supply Curve Determinants of supply Price Quantity Supplied 2 3 4 5 $3 $4 $5 $6 P $6 $5 $4 $3 S 2 3 4 5 Q Price Quantity Supplied $3 $4 $5 $6 2 3 4 5 P $6 Quantity supplied $5 is just a point on $4 the curve. $3 S 2 3 4 5 Q Price Quantity Supplied 2 3 4 5 $3 $4 $5 $6 P $6 $5 $4 $3 Supply is the entire curve. S 2 3 4 5 Q Price Quantity Supplied 2 3 4 5 $3 $4 $5 $6 There is a Direct _________ relationship between P and Q. P $6 $5 $4 $3 S 2 3 4 5 Q Price Quantity Supplied $3 $4 $5 $6 2 3 4 5 P $6 Only one variable $5 changes QS $4 and that is_____. $3 S 2 3 4 5 Q Price Quantity Supplied 2 3 4 5 $3 $4 $5 $6 PRICE DOES NOT CHANGE SUPPLY!!!! P $6 $5 $4 $3 S 2 3 4 5 Q P S Definitions: Q Quantity supplied--it is the amount that will be sold at a specific P. Supply--it is a schedule of quantities of goods and services that will be sold at various prices at a specified time, all other things held constant. Determinants of Supply There are 5 determinants that can change a supply curve. Five determinants of Supply: 1. Number of suppliers 2. Costs 3. Physical Availability of Resources 4. Technology 5. Expected Future Prices by Consumer What happens to the market for oranges when there is a frost that hits Florida? S1 P S Decrease in the physical availability of resources. P1 P D Q1 Q Your market is: Oranges Q What happens to the market for CD’s when iPods and downloaded music become popular? P S Decrease in Preferences. P P1 D1 Q1 Your market is: Q CD’s D Q What happens to the market for downloaded music when the royalties paid to the song artist go up? P S1 S Increase in costs. P1 P D Q1 Q Your market is: Q Downloaded Music The U.S. goes through a boom economy, what happens to the market for steak? P S Increase in incomes— Normal goods. P1 P D1 D Q Your market is: Steak Q1 Q The price of milk doubles; what happens to the market for cereal? P S Price of related product— complement. P P1 D1 Q1 Q Your market is: Cereal D Q U.S. automakers use robots to produce their cars; what happens to the market for foreign automobiles? P S Price of related product— substitute. P P1 D1 Q1 Q Your market is: Foreign autos D Q The price of airline tickets doubles, what happens to the market for bus tickets? P S P1 P D1 D Q Q1 Your market is: Bus Tickets Q Increase in price of related product— Substitute Shifts in both Demand and Supply Curves P S S Quantity will definitely increase. P1 P1 P D1 D Q Q1Q1 Q Increase in demand Increase in supply Price is Indeterminate It will either go up. P S P1 S Quantity will definitely increase. D1 Price is Indeterminate P P1 D Q Q1 Q1 Increase in demand Increase in supply It stayed the same. P S Quantity S will definitely increase. P1 P P1 D1 D Q Q1 Increase in demand Increase in supply Q1 Price is Indeterminate It went down. P S P D Q Q What happens to the price and quantity if there is an increase in demand and a decrease in supply? Price definitely goes up; Quantity is indeterminate P S P D Q Q What happens to the price and quantity if there is a decrease in demand and an increase in supply? Price definitely goes down; Quantity is indeterminate P S P D Q Q What happens to the price and quantity if there is a decrease in demand and an decrease in supply? Price is indeterminate; Quantity will definitely decrease Example 1 Gillette Shaving Company mails out millions of Fusion shaver handles to households for “free.” Show what happens to the market for the Fusion attachable razor blades? Determinant: ______________ Price: ___________ Fusion Razor Blades Quantity: ____________ Example 2 Salaries of airline pilots go up while the economy goes into a recession. Show what will happen to the market for airline tickets? Determinant: ______________ Price: ___________ Airline Tickets Quantity: ____________ Example 3 New technology starts to be used in producing computer chips, and at the same time, the government publishes a report that long-term exposure to computers causes long-term damage to users’ eyes. Determinant: ______________ Determinant: ____________ Price: ___________ Computers Quantity: ____________ Surplus What happens when we look at a price that it is NOT the equilibrium price? P S Surplus: P Qs > Qd P D Qd Q Qs Q Shortage S Shortage: Qd > Qs P P D Qs Q Qd Q