Download Supply and Demand Ch 4 Book lecture

What Is a Market?
• A market is a group of buyers and sellers of a
particular good or service.
• The terms supply and demand refer to the
behavior of people . . . as they interact with one
another in markets.
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What Is a Market?
• Buyers determine demand.
• Sellers determine supply.
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What Is Competition?
• Competitive market is a market in which …
• there are many buyers and sellers
• each has a negligible impact on the market price
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DEMAND
• Law of Demand
– the quantity demanded of a good falls when the
price of the good rises.
• Quantity demanded is the amount of a good
that buyers are willing and able to purchase.
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The Demand Curve:
The Relationship between Price and
Quantity Demanded
• Demand Schedule is …
• a table showing the relationship between
• the price of the good
• 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 is …
• A graph showing the relationship between
• the price of the good
• the quantity demanded
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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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Shifts in the Demand Curve
• Change in Quantity Demanded
• Movement along the demand curve.
• Caused by a change in the price of the product.
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Changes in Quantity Demanded
Price of IceCream
Cones
B
$2.00
A tax on sellers of icecream cones raises the
price of ice-cream
cones and results in a
movement along the
demand curve.
A
1.00
D
0
4
8
Quantity of Ice-Cream Cones
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Shifts in the
Demand Curve are caused by …
•
•
•
•
•
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers
• Shifts in the Demand Curve result in …
• Curve shifting either to the left or right.
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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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Shifts in the Demand Curve
• Prices of Related Goods
– Substitutes – used in place of each other
• A fall in the price of one good reduces the demand
for another good
– Complements – used together
• a fall in the price of one good increases the
demand for another good
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Shifts in the Demand Curve
• Consumer Income
• As income increases the demand for a normal good
will increase.
• As income increases the demand for an inferior
good will decrease.
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Consumer Income Normal Good
Price of IceCream Cone
$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
Ice-Cream
Cones
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Consumer Income Inferior Good
Price of IceCream Cone
$3.00
2.50
An increase
in income...
2.00
Decrease
in demand
1.50
1.00
0.50
D2
0 1
D1
2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream
Cones
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Table 1 Variables That Influence Buyers
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SUPPLY
• Law of Supply states …
– that, other things equal,
– the quantity supplied of a good
price of the good
rises when the
rises.
• Quantity supplied is …
the amount of a good that sellers are
willing and able to sell.
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The Supply Curve: The Relationship
between Price and Quantity Supplied
• Supply Schedule is …
• a relationship table
• between the price of the good and the quantity
supplied.
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Ben’s Supply Schedule
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The Supply Curve: The Relationship
between Price and Quantity Supplied
• Supply curve is …
• A relationship graph
• between the price of a good and the quantity supplied.
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Ben’s Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
$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
Ice-Cream Cones
2. ... increases quantity of cones supplied.
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Market Supply versus Individual Supply
• Market supply is …
• the sum of all individual supplies for all sellers of a
particular good or service.
• Individual supply curves are …
• summed to obtain the market supply curve.
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Market Supply as the Sum of Individual
Supplies
Price of
Ice-Cream Cone
Ben
$0.00
0
0
0 cones
0.50
0
0
0
1.00
1
0
1
1.50
2
2
4
2.00
3
4
7
2.50
4
6
10
3.00
5
8
13
+
Jerry
=
Market
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Shifts in the Supply Curve
•
•
•
•
•
Input prices
Prices of related good or services
Technology
Expectations
Number of sellers
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Shifts in the Supply Curve
• Change in Quantity Supplied is …
• Movement along the supply curve.
• Caused by a change in anything that alters the
quantity supplied at each price.
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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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Variables That Influence Sellers
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Shifts v. Movement
• Supply curve shift is called a change in supply.
• Movement along a supply curve is called a change
in quantity supplied.
• Demand curve shift is called a change in demand.
• Movement along a demand curve is called a change
in quantity demanded.
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DO NOW
1. What causes a movement along a curve?
2. List two things which cause the demand curve
to shift.
3. List two things which cause the supply curve
to shift.
4. Explain the difference between a change in
supply and a change in quantity supplied.
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SUPPLY AND DEMAND TOGETHER
• Equilibrium is when …
– quantity supplied equals quantity demanded
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SUPPLY AND DEMAND TOGETHER
• Equilibrium Price is …
– the price at which the supply and demand curves
intersect on a graph.
• Equilibrium Quantity is …
– the quantity at which the supply and demand
curves intersect on a graph.
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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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Equilibrium
• Surplus is when …
• price > equilibrium price
• then quantity supplied > quantity demanded
• excess supply
• Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
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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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Equilibrium
• Shortage is when …
• price < equilibrium price
• quantity demanded > the quantity supplied.
• excess demand
• Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward
equilibrium.
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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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Equilibrium
• Law of Supply and Demand is …
• the price of any good adjusts to bring
• the quantity supplied and the quantity demanded into balance.
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Three Steps for Analyzing Changes in Equilibrium
1. What shifter is at work in the market?
2. Which curve is shifting ( or both ) and in what direction?
3. What happens to equilibrium price and quantity?
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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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DO NOW
1.
2.
3.
4.
What is a surplus?
Draw a graph showing a surplus.
What is a shortage?
Draw a graph showing a shortage.
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Draw the Graph: During a recession, people buy fewer new
cars and trucks? What happens to the price of a new car or
truck?
1. Draw equilibrium for new cars. Correctly label the graph.
2. Answer the three steps for determining what changes.
3. Draw the shift for the demand curve. Correctly label the graph.
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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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Draw the Graph: Production technology has greatly
improved in agriculture, producing more corn on the same
amount of land. How has the better technology affected the
price of corn?
1. Draw equilibrium for the corn market. Correctly label the graph.
2. Answer the three steps for determining what changes.
3. Draw the shift for the supply curve. Correctly label the graph.
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Demand and Supply Curves Shift
• Four possibilities.
• D
and S
• D
and S
• D and S
• D and S
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Draw the Graph: Suppose the price of cheeseburgers is
rising. In addition, the price of pepperoni is rising. How will
these two events affect the market for pizza?
1.
2.
3.
4.
5.
Draw equilibrium for the pizza market. Correctly label the graph.
Answer the three steps for determining what changes the curve(s).
Draw the shift for the curve(s). Correctly label the graph.
What can we say about the price of pizza?
What can we say about the change in quantity?
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What Happens to Price and Quantity When Supply or
Demand Shifts?
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