Download Chapter 4 (Supply and Demand)

Unit II: The Price Discovery Mechanism
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Consumer Activity
• This requires full class participation
• All you need to do is raise your hand
• I will be polling the class on their willingness to
pay for a certain good or service
• We all will copy the data down in our notes…
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What Is a Market?
• A market is a group of buyers and
sellers of a particular good or service.
Apple Store: I-Phone 4 Launch
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Competitive Markets
• A market in which there are many
buyers and sellers so that no
individual has an impact on the
market price.
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Market’s in 100% Perfect
Competition
• Products are the same
• Numerous buyers and sellers so that
each has no influence over price
• Firms are price takers
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Demand and supply in a market
Buyers determine
demand.
Sellers determine
supply
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Demand!!!!
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Demand
• Shows the amount people are
willing to buy at every price
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Quantity Demanded
• The amount of a good that buyers
are able and willing to purchase
at a specific price.
• You want the good, and you can
afford it
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Would this factor into your quantity
demanded?
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The Law of Demand
• When a good’s price is lower,
consumers will buy more of it.
When the price is higher,
consumers will buy less of it.
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The Demand Curve: The Relationship
between Price and Quantity Demanded
• Demand Schedule
• The demand schedule is a table that
shows the relationship between the
price of the good and the quantity
demanded.
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Catherine’s Demand Schedule
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The Demand Curve: The Relationship
between Price and Quantity Demanded
• Demand Curve
• The demand curve is a graph of the
relationship between the price of a
good and the quantity demanded.
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Catherine’s Demand Schedule
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Figure 1 Catherine’s Demand Schedule and Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price ...
2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
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Market Demand versus
Individual Demand
• Market demand refers to the sum
of all individual demands for a
particular good or service.
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Brain Busta! Can you draw the market demand
curve for ice-cream cones?
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The Market Demand Curve
When the price is $2.00,
When
themarket
price is $2.00,
The
demand
curve is the
Nicholas
will demand 3
Catherine will demand
4
of thecones.
individual
demand
ice-cream
cones. curves!
ice-cream
Catherine’s Demand
Price of IceCream Cone
+
Nicholas’s Demand
Price of IceCream Cone
2.00
2.00
1.00
1.00
4
8
Quantity of Ice-Cream Cones
The market demand at
horizontal
sum
$2.00 will be 7 ice-cream
=
cones.
Market Demand
Price of IceCream Cone
2.00
1.00
3
5
Quantity of Ice-Cream Cones
When the price is $1.00, When the price is $1.00,
Catherine will demand 8 Nicholas will demand 5
ice-cream cones.
ice-cream cones.
7
13
Quantity of Ice-Cream Cones
The market demand at
$1.00, will be 13 icecream cones.
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Shifts in the Demand Curve
0
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First know this!!
• Quantity Demanded and Demand are two
different things!
• Quantity Demanded is referring to the amount
of demand at a give price
• Demand refers to the actual curve itself
• Let’s take a look…
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Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A $1 tax on sellers of
ice-cream cones raises
the price of ice-cream
cones. What will
happen to the quantity
demanded?
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
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Does a change in the price of goods shift the demand curve?
NO!!!
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Shifts in the Demand Curve
• This is called a “change in Demand”
• A shift in the demand curve, either to the left or
right.
• Caused by a change in a quantity at every price
other than a change in the price of the good/service.
• “Only 2 people would buy a dog for $200. Now, because
something changed other than price, 10 people would
buy a dog for $200.”
Day 1
Day 2
Day 3
If a Jimmy John’s
cookie was $1, 2
people would
buy one.
A new study has
proven eating Jimmy
John’s cookies
makes you 20%
more intelligent
After the study
was released,
now 20 people
would buy the
cookie for $1
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Figure 3 Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0
Quantity of
Ice-Cream
Cones
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What causes a shift in the Demand Curve
• Anything that changes Qd other than a
price change of the good/service
• Consumer income
• Prices of related goods
• Tastes & Advertisements
• Expectations
• Number of buyers
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Normal Goods vs Inferior Goods
Normal Goods
Inferior Goods
• a good that
consumers demand
more of when their
income increases
• A good that
consumers demand
less of when their
incomes increase
• Since you make
more money, you
can afford something
better.
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Normal or Inferior Good?
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Consumer Income Inferior Good
Price of Crappy
Televisions
1,800
1,500
An increase
in income...
1,200
Decrease
in demand
900
600
300
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Crappy
Televisions
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Consumer Income Normal Good
Price of Apples
$3.00
An increase
in income...
2.50
Increase
in demand
2.00
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
Apples
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Consumer Income Inferior Good
Price of Crappy
Car
1,800
1,500
An increase
in income...
1,200
Decrease
in demand
900
600
300
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Crappy Car
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Shifts in the Demand Curve
• Prices of Related Goods
• When a fall in the price of one good
reduces the demand for another good,
the two goods are called substitutes.
• When a fall in the price of one good
increases the demand for another good,
the two goods are called complements.
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Substitute Example
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If price goes up in…
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You may purchase the cheaper
alternative…
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Price of Totino’s
$3.00
2.50
Increase
in demand
2.00
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
Totino’s
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Complement Example
If price goes down
???
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Price of Mustard
$3.00
2.50
Increase
in demand
2.00
1.50
1.00
0.50
D1
0 1
2 3 4 5 6 7 8 9 10 11 12
D2
Quantity of
Mustard
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Consumer Expectations
• Expectations about the future
• What if someone told you a bike would be on
sale in a week, which way would the demand
curve shift on that day you found out about the
impending sale?
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Amount of Buyers
• An increase in population causes an increase in
demand for most goods
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Consumer Tastes and Advertising
• Fads affect demand
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Advertisements
• Good advertisements can increase demand
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Table 1 Variables That Influence Buyers
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SUPPLY
51
Quantity Supplied
• The amount of a good sellers are
willing and able to sell
Flu
Shot
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Law of Supply
When
Price
Increases
Quantity
Supplied
Increases
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Ben’s Supply Schedule
No-Friends Rabbit
No-Friends Rabbit
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The Supply Curve: The Relationship
between Price and Quantity Supplied
• Supply Curve
• The supply curve is the graph of the relationship
between the price of a good and the quantity
supplied.
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Figure 5 Ben’s Supply Schedule and Supply Curve
Price of
No-Friends
Rabbit
$3.00
1. An
increase
in price ...
2.50
2.00
1.50
1.00
0.50
0
1 2
3
4
5
6
7
8
9 10 11 12 Quantity of
No-Friends Rabbit
2. ... increases quantity of cones supplied.
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Market Supply versus Individual Supply
• Market supply refers to the sum of all
individual supplies for all sellers of a particular
good or service.
• Graphically, individual supply curves are
summed horizontally to obtain the market
supply curve.
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Figure 7 Shifts in the Supply Curve
Price of
Ice-Cream
Cone
Supply curve, S3
0
Supply
curve, S1
Supply
curve, S2
Quantity of
Ice-Cream Cones
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First know this!!!
• Quantity Supplied and Supply are two
different things!
• Quantity Supplied is referring to the amount
of supply at a given price
• Supply refers to the actual curve itself
• Let’s take a look…
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Change in Quantity Supplied
Price of IceCream
Cone
S
C
$3.00
A rise in the price
of ice cream
cones results in a
movement along
the supply curve.
A
1.00
0
1
5
Quantity of
Ice-Cream
Cones
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Shifts in the Supply Curve
• Change in Supply
• A shift in the supply curve, either to the left or right.
• Caused by a change in a quantity at every price
other than a change in the price of the good/service.
January
May
June-July
At $3 each, I will
put 5 mini
American flags
on my store shelf
The 4th of July
holiday is
approaching
At $3 each, I will
put 100 mini
American flags
on my store shelf
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Figure 7 Shifts in the Supply Curve
Price of
Ice-Cream
Cone
Supply curve, S3
Decrease
in supply
Supply
curve, S1
Supply
curve, S2
Increase
in supply
0
Quantity of
Ice-Cream Cones
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Shifts in the Supply Curve
•
•
•
•
•
Input prices
Technology
Expectations
Number of sellers
Government
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Input Costs
• Any change of an input cost
(production costs) will affect
supply
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Lets say you produce these…
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What would happen to supply if the
price of steel went up?
Supply
of buses
would
decrease
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Technology Example
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Early 1900’s Assembly Line
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Today’s Assembly Line
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Technology and Supply
• If technology increases, supply
increases (shift to the right)
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Government’s Influence on Supply
• Subsidy
–Government payment that supports
a business market
–Increases supply/shift to the right
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True Subsidy Story
• Tax authorities in the Netherlands agreed
to provide an education subsidy to a Dutch
woman who was studying and training to
be a witch. The woman’s attendance at
the 13-weekend witchery program, which
cost $3,003, was ruled a legitimate taxdeductible schooling expense by
government officials. Students in the
program reportedly learned to cast spells,
prepare herbs and potions, and to use
crystal balls while generally using magic
as “a force for good.”
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Other Examples
• Expectations
– If you expect the price of an input cost to rise
in the future, than you current supply will
increase and shift to the right
• Number of Sellers
– If a new hospital in Plainfield opens, the
following supply will increase and shift to the
right: doctors, hospital beds, MRI machines,
vaccinations, etc…
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Table 2: Variables That Influence Sellers
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Market Equilibrium
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Market Equilibrium
• Market for a good is stable
• Price and quantity is exactly what both
buyers and sellers are willing to give up
• Quantity supplied = Quantity demanded
Equilibrium?
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SUPPLY AND DEMAND TOGETHER
• Equilibrium Price
– The price that balances quantity supplied and
quantity demanded.
• Equilibrium Quantity
– The quantity supplied and the quantity
demanded at the equilibrium price.
• Both are found where supply and demand
intersect
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SUPPLY AND DEMAND TOGETHER
Demand Schedule
Supply Schedule
At $2.00, the quantity demanded
is equal to the quantity supplied!
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Figure 8 The Equilibrium of Supply
and Demand
Price of
Ice-Cream
Cone
Supply
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity
0
1
2
3
4
5
6
7
8
Demand
9 10 11 12 13
Quantity of Ice-Cream Cones
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Disequilibrium
• When quantity supplied is NOT equal to
quantity demanded in the market
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Two Types of Disequilibrium
• Shortage (excess demand)
– When quantity demanded is more than
quantity supplied
– Price is below equilibrium price
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Figure 9 Markets Not in Equilibrium
(b) Excess Demand
Price of
Ice-Cream
Cone
Supply
$2.00
1.50
Shortage
Demand
0
4
Quantity
supplied
7
10
Quantity of
Quantity
Ice-Cream
demanded
Cones
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Two Types of Disequilibrium
• Shortage (excess demand)
– When quantity demanded is more than
quantity supplied
– Price is below equilibrium price
• Surplus (excess supply)
– When quantity supplied is more than quantity
demanded
– Price is above equilibrium price
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Figure 9 Markets Not in Equilibrium
(a) Excess Supply
Price of
Ice-Cream
Cone
Supply
Surplus
$2.50
2.00
Demand
0
4
Quantity
demanded
7
10
Quantity
supplied
Quantity of
Ice-Cream
Cones
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Disequilibrium: Changes in demand and/or supply
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Table 3: Three Steps for Analyzing Changes in Equilibrium
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Figure 10 How an Increase in Demand Affects the Equilibrium
Price of
Ice-Cream
Cone
1. Hot weather increases
the demand for ice cream . . .
Supply
New equilibrium
$2.50
2.00
2. . . . resulting
in a higher
price . . .
Initial
equilibrium
D
D
0
7
3. . . . and a higher
quantity sold.
10
Quantity of
Ice-Cream Cones
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Figure 11 How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream
Cone
S2
1. An increase in the
price of sugar reduces
the supply of ice cream. . .
S1
New
equilibrium
$2.50
Initial equilibrium
2.00
2. . . . resulting
in a higher
price of ice
cream . . .
Demand
0
4
7
3. . . . and a lower
quantity sold.
Quantity of
Ice-Cream Cones
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Last one….
What happens to the equilibrium price
and equilibrium quantity if BOTH supply
and demand increase?
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Table 4: What Happens to Price and Quantity When Supply
or Demand Shifts?
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Summary
• Economists use the model of supply and
demand to analyze competitive markets.
• In a competitive market, there are many buyers
and sellers, each of whom has little or no
influence on the market price.
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Summary
• The demand curve shows how the quantity of a
good depends upon the price.
– According to the law of demand, as the price of a good
falls, the quantity demanded rises. Therefore, the demand
curve slopes downward.
– In addition to price, other determinants of how much
consumers want to buy include income, the prices of
complements and substitutes, tastes, expectations, and the
number of buyers.
– If one of these factors changes, the demand curve shifts.
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Summary
• The supply curve shows how the quantity of a
good supplied depends upon the price.
– According to the law of supply, as the price of a good rises,
the quantity supplied rises. Therefore, the supply curve
slopes upward.
– In addition to price, other determinants of how much
producers want to sell include input prices, technology,
expectations, and the number of sellers.
– If one of these factors changes, the supply curve shifts.
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Summary
• Market equilibrium is determined by the
intersection of the supply and demand curves.
• At the equilibrium price, the quantity
demanded equals the quantity supplied.
• The behavior of buyers and sellers naturally
drives markets toward their equilibrium.
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Summary
• To analyze how any event influences a market,
we use the supply-and-demand diagram to
examine how the event affects the equilibrium
price and quantity.
• In market economics, prices are the signals
that guide economic decisions and thereby
allocate resources.
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Supply or Demand Activity
• On a separate sheet of blank paper,
please do the following:
– Write a specific market at the top (Shoes for
example)
– Write a scenario that will affect that market
(Adidas spends 50 million dollars on a new
advertisement campaign).
– MAKE IT UNIQUE (take your time thinking)
– Pass the paper behind you (group at the
end…walk to the front)
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Partner Activity
• Read your market and the scenario.
• Determine if the scenario would have an
impact on supply or demand.
• Then, graph and provide a written
description of the market change
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Bringing it Back
• Each group will read their market and
scenario they received.
– Every student must write the market and
scenario they hear in their notes
• Each group will then explain the affect the
scenario had on their demand.
– Every student must write the effect in their
notes.
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