Download Introduction to Demand and Supply curves

Lesson 1: Introduction to Demand and Demand
curves
Learning objectives:
1. Define the terms ‘demand’, and
‘utility’
2. Identify and describe the factors
Influencing demand
3. Explain the nature of demand
curves.
4. Explain movements along and shifts
in demand curves
1
Demand - Definition
• Demand is the amount of a good that
consumers are willing and able to buy
at a given price.
• Desire refers to people's willingness
to own a good.
2
Utility defined
• Utility is the satisfaction people get from
consuming (using) a good or a service.
Utility varies from person to person.
• Some people get more satisfaction from
eating chips than others. Even the same
person can gain greater satisfaction by
eating chips when hungry than when he
has lost his appetite.
3
Factors Influencing Demand
The amount of a good demanded depends
on:
1. the price of the good;
2. the income of consumers;
3. the demand for alternative goods which
could be used (substitutes);
4. the demand for goods used at the same
time (complements);
5. whether people like the good (consumer
taste).
4
Demand curves
• The demand curve
indicates how many
consumers will buy
the product at a given
price.
5
Movements Along and Shifts in Demand
Curves
• In the figure an
increase in price
results in a movement
up the demand curve.
• A change in price
never shifts the
demand curve for that
good.
6
Contraction of demand
• The demand curve shows
the amount of a good one
or more consumers are
willing and able to buy at
different prices.
• The fall in the quantity
demanded from Q1 to Q2
is sometimes called a
contraction in demand.
7
Shifts in the demand curve
• A demand curve shifts only if there is a
change in income, in taste or in the
demand for substitutes or complements.
• In other words, in some factor other than
price.
8
Shifts in the demand curves
• In the diagram, a
decrease in demand
has shifted the
demand curve to the
left.
9
End of lesson 1
Questions:
Reference: Hosein & Stanlake – Chap: 6
1. Identify and describe those factors which
would cause a movement of or shift in
the demand curve.
2. Research the following terms:
- Competitive demand
- Joint demand
- Joint supply
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Lesson 2: Introduction to Supply and
Supply Curves
Learning Objectives:
1. Define the term ‘supply’
2. Identify and describe the factors
influencing supply
3. Explain the nature of supply curves
4. explain movements along and shifts in
supply curves
11
Supply defined:
Supply is the amount of a good
producers are willing and able to
sell at a given price.
12
Factors Influencing Supply
Supply depends on:
1. the price of the good;
2. the cost of making the good;
3. the supply of alternative goods the
producer could make with the same
resources (competitive supply);
4. the supply of goods actually produced at
the same time (joint supply);
5. unexpected events that affect supply.
13
Supply curves
• The supply curve
shows the amount of
a good one or more
producers are
prepared to sell at
different prices.
14
Movements Along the Supply Curve
• An increase in price
results in a movement
up the supply curve.
• The increase in
quantity supplied from
Q1 to Q2 is
sometimes called an
expansion in supply.
15
Shifts in the supply curve
A change in price never shifts the
supply curve for that good.
A supply curve shifts only if there
is:
1. a change in costs;
2. a change in the number of
goods in competitive or joint
supply; or
3. some unforeseen event
which affects production.
16
End of lesson 2
Questions:
1. Identify and describe those factors which
would cause a movement of or shift in
the supply curve.
17
Lesson 3: Equilibrium Price and
Quantity
Learning Objectives:
1. Define equilibrium price and
equilibrium quantity
2. Draw demand and supply curves
18
Introduction to Demand and Supply
curves: Equilibrium Price
• The price where
the amount
consumers want
to buy equals the
amount producers
are prepared to
sell is the
equilibrium price.
19
Equilibrium price and quantity
• At prices above the
equilibrium (P*) there is
excess supply while at
prices below the
equilibrium (P*) there is
excess demand. The
effect of excess supply is
to force the price down,
while excess demand
creates shortages and
forces the price up.
20
Demand and Supply Curves
• By drawing the two
curves together, it is
possible to calculate
the equilibrium price
for the product.
21
Drawing demand and supply curves
• The downward
sloping line is the
demand curve, while
the upward sloping
line is the supply
curve. The demand
curve indicates that if
the price were $10,
the demand would be
zero.
22
Drawing demand and supply curves
• However, if the price
dropped to $8, the
demand would
increase to 4
units. Similarly, if the
price were to drop to
$2, the demand would
be for 16 units.
23
Drawing demand and supply curves
• The supply curve
indicates how much
producers will supply
at a given price. If the
price were zero, no
one would produce
anything. As the price
increases, more
producers would
come forward.
24
Drawing demand and supply curves
• At a price of $5, there
would be 5 units
produced by various
suppliers. At a price
of $10, the suppliers
would produce 10
units.
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Equilibrium Price and Equilibrium Quantity
• The intersection of
the supply curve and
the demand curve,
shown by (P*, Q*), is
the equilibrium
condition.
• In this example, the
equilibrium price is
P*= 6.67
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• The equilibrium
quantity is
Q*=6.67. At the price
of $6.67, various
producers supply a
total of 6.67 units, and
various consumers
demand the same
quantity.
27
Drawing demand and supply curves
• There is no reason
why the curves have
to be straight
lines. They could be
different shapes such
in the examples
below. However, for
the sake of simplicity,
we will work with
straight line demand
and supply functions.
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Demand Schedule
Price
Quantity demanded per
week
10
9
8
20
30
50
7
6
5
70
90
120
4
3
2
150
190
240
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Effect of Change in Quantity
demanded
Price
10
9
Quantity demanded after
increase in demand
50
70
8
7
6
5
4
3
2
90
110
140
170
220
270
340
30
Supply Schedule
Price
Quantity supplied per
week (units)
10
9
8
80
70
60
7
6
5
50
40
30
4
3
2
20
10
5
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Supply Schedule 2
Price
Quantity supplied per
week (units)
10
9
8
160
140
120
7
6
5
100
80
60
4
3
2
40
20
10
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Supply Schedule 3
Price
Quantity supplied per
week (units)
10
9
8
300
250
225
7
6
5
200
175
150
4
3
2
125
100
75
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Effect of Indirect Taxes
• An indirect tax has
been added to SS.
This has the effect
of shifting the
supply curve up
vertically by the
amount of the tax.
34
Effect of Subsidies
• A subsidy has been
given to the firm. This
has the effect of
making firms willing to
supply more at each
price and so shifts the
supply curve
downwards. The shift
is equivalent to the
value of the subsidy.
35
End of lesson 3
Questions:
1. Page 105 – 107, question numbers 1 – 7
2. Page 108 Case Study #6.
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Lesson 4: Elasticity
Learning Objectives:
1. Define the term ‘elasticity’
2. Identify and describe the types of
elasticity
3. Identify and describe the factors affecting
elasticity of demand
37
Elasticity defined
• Elasticity is the degree of
responsiveness of one variable to
another.
Or
• The degree to which a demand or
supply curve reacts to a change in
price is the curve's elasticity.
38
Elasticity, necessary goods and normal goods
• Elasticity varies among products because
some products may be more essential to
the consumer.
• Products that are necessities are more
insensitive to price changes because
consumers would continue buying these
products despite price increases.
39
Elasticity, necessary goods and normal goods
• A price increase of a good or
service that is considered less of
a necessity will deter more
consumers because the
opportunity cost of buying the
product will become too high.
40
Elastic vs Inelastic
• A good or service is considered to be
highly elastic if a slight change in price
leads to a sharp change in the quantity
demanded or supplied. Usually these
kinds of products are readily available in
the market and a person may not
necessarily need them in his or her daily
life.
41
Elastic vs Inelastic
• An inelastic good or service is one in
which changes in price witness only
modest changes in the quantity
demanded or supplied, if any at all.
These goods tend to be things that
are more of a necessity to the
consumer in his or her daily life.
42
Elastic and Inelastic
• If elasticity is greater than or
equal to one, the curve is
considered to be elastic. If it is
less than one, the curve is said to
be inelastic.
43
Elasticity
• Elasticity = (% change in
quantity / % change in price)
44
Elasticity of demand
• If there is a large
decrease in the
quantity demanded
with a small increase
in price, the demand
curve looks flatter, or
more horizontal. This
flatter curve means
that the good or
service in question is
elastic.
45
Elasticity of demand
• Inelastic demand is
represented with a
much more upright
curve as quantity
changes little with a
large movement in
price.
46
Types of Elasticity
1. Price elasticity of demand (PED)
2. Income elasticity of demand
(YED)
3. Cross elasticity of demand
(XED)
4. Price elasticity of supply (PES)
47
Price Elasticity of Demand
• Price elasticity of demand measures the
responsiveness of demand to a given
change in price and is found using the
equation:
• PED = Percentage change in quantity
demanded/Percentage change in price
48
Features of price elasticity of demand
Feature
Elastic goods
Inelastic goods
PED value
Greater than 1
Less than 1
A rise in price means
A larger fall in demand A smaller fall in
demand
Slope of demand
curve
Flat
Steep
Number of substitutes
Many
Few
Type of good
Luxury
Necessity
Price of good
Expensive
Cheap
Example
Maestro cars
Petrol
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HOMEWORK
• PAGE 129
• CASE STUDY #7 (1) AND (2)
50
Income Elasticity of Demand
• If price increases while income stays the
same, demand will decrease.
• It follows, then, that if there is an increase
in income, demand tends to increase as
well.
• The degree to which an increase in
income will cause an increase in demand
is called income elasticity of demand.
51
Income Elasticity of Demand
• Income elasticity of demand
(YED) measures the
responsiveness of demand to a
given change in income:
• YED = Percentage change in
quantity demanded/Percentage
change in income
52
Income Elasticity of Demand
• If YED is greater than one, demand for the
item is considered to have a high income
elasticity. If however YED is less than one,
demand is considered to be income
inelastic.
• Luxury items usually have higher income
elasticity because when people have a
higher income, they don't have to forfeit as
much to buy these luxury items.
53
An example of a luxury good: air travel.
Bob has just received a $10,000 increase
in his salary, giving him a total of $80,000
per annum. With this higher purchasing
power, he decides that he can now afford
air travel twice a year instead of his
previous once a year. With the following
equation we can calculate income demand
elasticity:
54
Income elasticity of demand
• Income elasticity of demand for Bob's air travel
is seven - highly elastic.
YED = Percentage change in quantity
demanded/Percentage change in income
Change in Q demanded: from 1 to 2
Change in income: from $70,000 to $80,000
Thus: YED?
55
Income elasticity of demand
• With some goods and services, we
may actually notice a decrease in
demand as income increases. These
are considered goods and services of
inferior quality that will be dropped by
a consumer who receives a salary
increase.
56
Income elasticity of demand and inferior goods
Example
• The increase in the demand of DVDs as
opposed to video cassettes, which are
generally considered to be of lower quality.
57
Income elasticity of demand
• Products for which the demand decreases
as income increases have an income
elasticity of less than zero.
• Products that witness no change in
demand despite a change in income
usually have an income elasticity of zero these goods and services are considered
necessities.
58
Income Elasticity of Demand
• If YED is negative then the good is inferior.
People use an increase in income to buy
less of this good and more of a superior
substitute.
• If YED is positive then the good is normal.
Consumers use an increase in income to
buy more of the good.
59
Cross Elasticity of Demand
• Cross elasticity of demand (XED)
measures the responsiveness of demand
for one good (z) to a given change in the
price of a second good (w):
• XED = Percentage change in quantity
demanded of good z/Percentage change
in the price of good w
60
Cross Elasticity of Demand
• If XED is positive then the two
goods are substitutes. If XED is
negative then the two goods are
complements.
61
Price Elasticity of Supply
• Price elasticity of supply (PES) measures
the responsiveness of supply to a given
change in price.
• PES = Percentage change in quantity
supplied/Percentage change in price
62
Price Elasticity of Supply
• If a change in price
results in a big
change in the amount
supplied, the supply
curve appears flatter
and is considered
elastic. Elasticity in
this case would be
greater than or equal
to one.
63
Price elasticity of Supply
• If a big change in
price only results in a
minor change in the
quantity supplied, the
supply curve is
steeper and its
elasticity would be
less than one or
Inelastic.
64
Features of elasticity of supply
Feature
Elastic goods
Inelastic goods
PES value
Greater than 1
Less than 1
A rise in price means
A larger rise in supply
A smaller rise in
supply
Slope of supply curve
Flat
Steep
The good is produced
Rapidly
Slowly
The time period is
Months
Days
The firm has
Large stocks
Limited stocks
Example
Screws
Beef
65
HOME WORK
SEE TEXT.
66
Factors Affecting Demand Elasticity
There are three main factors that
influence a demand's price elasticity:
1. The availability of substitutes
2. Amount of income available to spend on
the good
3. Time
67
The availability of substitutes
• This is probably the most important factor
influencing the elasticity of a good or service. In
general, the more substitutes, the more elastic
the demand will be.
• For example, if the price of a cup of coffee went
up by $0.25, consumers could replace their
morning caffeine with a cup of tea. This means
that coffee is an elastic good because a raise in
price will cause a large decrease in demand as
consumers start buying more tea instead of
coffee.
68
The availability of substitutes
• Therefore, caffeine can be considered as
an inelastic product because of its lack of
substitutes. Thus, while a product within
an industry is elastic due to the availability
of substitutes, the industry itself tends to
be inelastic. Usually, unique goods such
as diamonds are inelastic because they
have few if any substitutes.
69
Amount of income available to spend on the good
• This factor affecting demand elasticity
refers to the total a person can spend on a
particular good or service. Thus, if the
price of a can of Coke goes up from $0.50
to $1 and income stays the same, the
income that is available to spend on coke,
which is $2, is now enough for only two
rather than four cans of Coke.
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Amount of income available to spend on the good
• In other words, the consumer is forced to
reduce his or her demand of Coke.
• Thus if there is an increase in price and no
change in the amount of income available
to spend on the good, there will be an
elastic reaction in demand; demand will be
sensitive to a change in price if there is no
change in income.
71
Time
• The third influential factor is time.
• If the price of cigarettes goes up $2 per
pack, a smoker with very few available
substitutes will most likely continue buying
his or her daily cigarettes. This means that
tobacco is inelastic because the change in
price will not have a significant influence
on the quantity demanded.
72
Time
However, if that smoker finds that he
or she cannot afford to spend the
extra $2 per day and begins to kick
the habit over a period of time, the
price elasticity of cigarettes for that
consumer becomes elastic in the long
run.
73
Lesson 5: Elasticity of demand 2
Learning objectives:
1. Explain the following terms:
• Perfectly inelastic demand,
• Inelastic demand,
• Unitary elastic demand,
• Perfectly elastic demand.
• Elastic demand.
74
Perfectly inelastic demand
• If a good has a perfectly inelastic demand,
the quantity demanded will remain
unchanged regardless of price changes.
Thus elasticity of demand = zero (0)
75
Inelastic demand
• When demand is inelastic, the change in
quantity demanded will be less than the
proportionate change in price.
76
Perfectly elastic demand
• Where the quantity demanded is highly
responsive to change in price, demand is
said to be perfectly elastic. This type of
elasticity of demand exist only in theory.
• With perfectly elastic demand, the
elasticity of demand = infinity
77
Unitary elastic demand
This means that a change in price
will bring about a proportionate
change in quantity demanded.
Thus elasticity of demand = 1
78
Elastic demand
• This means that a change in price
will lead to a more than
proportionate change in quantity
demanded.
79
Lesson 6: Elasticity of supply 2
Learning objectives:
Explain the following terms:
• Perfectly inelastic supply
• Perfectly elastic supply
• Unitary elastic supply
• Inelastic supply
• Elastic supply
80
Perfectly inelastic supply
• When the price of a good
changes but the supply does not
respond to the change in price, it
is known as perfectly inelastic
supply. The elasticity of supply =
zero (0)
81
Perfectly elastic supply
• Where the quantity supplied is highly
responsive to the change in price, supply
is said to be perfectly elastic, and = infinity.
• This type of elasticity of supply exists only
in theory.
82
Unitary elastic supply
• This means that a change in price
will bring about a proportionate
change in quantity supplied. Thus
elasticity = 1
83
Inelastic supply
• When supply is inelastic, this means that
the change in quantity supplied is less
than the change in price. Here elasticity of
supply is greater than zero but less than 1.
84
Elastic supply
• This means that a change in price will lead
to a more than proportionate change in
quantity supplied.
• Elastic supply is greater than 1 but less
than infinity.
85
Evaluation
QUESTION 1
Moonbucks, a national coffee house
franchise, moves into your village. They
face the following demand schedule.
86
Cups of coffee demanded per week
Price per cup ($)
Quantity demanded
6
80
5
100
4
120
3
140
2
160
1
180
0
200
87
Required
1. Represent the information on a graph.
2. What is the price elasticity of demand
when price changes from $1 to $2?
3. What is the price elasticity of demand
when price changes from $5 to $6?
4. Is demand elastic, unitary elastic or
inelastic? Explain.
88
QUESTION 2
Figure 1 shows the supply schedule for cups
of coffee in a particular market.
You are required to sketch the supply curves
on the same graph as the demand curve,
and answer the questions which follow.
89
Supply schedule
Quantity
(Millions)
50
Supply price
before tax
($ per unit)
.10
Supply price
after tax
($ per unit)
.24
100
.15
.30
150
.20
.335
200
.25
.40
250
.30
.45
300
.35
.50
90
Questions
1. Are the supply curves elastic, unitary elastic or
inelastic? Explain.
2. Label all equilibrium points and state the
equilibrium prices at those points.
3. What is the price elasticity of supply when
price changes from $0.15 to $0.15 before tax?
4. What is the price elasticity of supply when
price changes from $.40 to $.45 after tax?
91
END OF LESSON
END OF SLIDE PRESENTATION
92