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Graphing using Demand &
Supply Analysis
Ch. 4,5,6
Economics
4.1 Objective:
• Interpret a demand schedule and a
demand curve.
OVERVIEW:
• Market primary building blocks:
– Demand and supply
• Consumers
– Demand goods and services that maximize
their utility.
• Producers
– Supply goods and services that maximize
their profit.
• Prices increase – buy less
• Prices decrease – buy more
Demand Concepts
Demand – A willingness to buy a product at a certain price
Demand Schedule – A list of the quantity of a product that
people are willing to buy at various prices.
Quantity Demanded
Price
$25
10
20
20
15
30
10
40
5
50
Law of Demand – Other things being equal, people will
buy more of a product at a lower price than a higher price
Demand Curve – A downward sloping line from left to
right. The reason for the downward slope is that as one of
the variables (Price) goes down, the other variable
(Quantity Demanded) goes up.
Demand Concepts
Price
Quantity
Demanded
$25
10
20
20
15
30
10
40
5
50
4.3 Objective:
• Identify the determinants of demand and
explain how a change in each will affect
the demand curve.
Overview
• Movement along a demand curve is
limited to the relationship between price
and quantity.
• The determinants of demand are isolated
(remain constant) when looking at
movement along a demand curve.
• The determinants of demand affect the
demand curve by shifting the demand at
every price.
• Determinants of Demand:
1. Consumer tastes and preferences
2. Potential customers (number & composition)
3. Money income of consumers
4. Complimentary and substitute goods
5. Price expectations
• Increases in demand shift the Demand Curve to the right.
• Decreases in demand shift the Demand Curve to the left.
• Change in Demand – Curve Shifts to either the left or to the
right.
• Change in Quantity Demanded – Curve does not shift. A
price change simply moves you to a new point on the same
curve.
An Increase in the
Market Demand
$15
b
f
Price per pizza
12
9
6
3
0
8
14
20
26
Millions of pizzas per week
D
32
D'
A Decrease in the
Market Demand
$15
j
b
Price per pizza
12
9
6
3
0
8
14
20
D' D
26 32
Millions of pizzas per week
5.1 The Supply Curve
• Objectives:
– 1. Understand the Law of supply.
– 2. Describe elasticity of supply, and explain
how it is measured.
Overview
• Just as consumer behavior shapes the
demand curve, producer behavior shapes
the supply curve.
• You think like a consumer.
• You have producers all around you:
– Wal-Mart, Sony, McDonald’s, Ford, Sears,
Home Depot, Gap, ARCO.
SUPPLY CONCEPTS
• Supply – A willingness to sell a product at a certain price.
• Supply Schedule – A list of the quantity of a product that people
are willing to sell at various prices.
Price
Quantity
Supplied
$25
50
20
40
15
30
10
20
5
10
• Law of Supply – Other things being equal, people will sell more of a
product at a higher price than a lower price.
• Supply Curve – An upward sloping line from left to right. The
reason for the upward slope is that both variables (Price & Quantity
Supplied) are going up at the same time.
5.2 Determinants of Supply
• Objectives:
• 1. Identify the determinants of supply, and
explain how a change in each will affect
the supply curve.
• 2. Contrast a movement along a supply
curve with a shift of the supply curve.
Overview
• Determinants of supply are assumed
constant in a supply curve that illustrates
the relation between the price of a good
and the quantity supplied.
• In contrast with the change in price of a
good, a change in one of the determinants
causes a shift in the supply curve.
• Determinants of Supply:
•
1. Resource prices (costs, inputs)
•
2. Production technology
•
3. Labor productivity
4. Taxes, subsidies, and regulations
• Increase in supply shift the Supply Curve to the right.
• Decreases in supply shift the Supply Curve to the left.
• Change in Supply – Curve shifts either to the left or to
the right
• Changes in Quantity Supplied – Curve does not shift.
A price change simply moves to a new point on the
same curve.
An Increase in the
Market Supply for Pizza
S
$15
Price per pizza
g
12
h
9
6
3
0
12 16 20 24 28
Millions of pizzas per week
S'
An Decrease in the
Market Supply for Pizza
S''
Price per pizza
$15
12
i
S
g
9
6
3
0
12 16 20 24 28
Millions of pizzas per week
Elasticity of Supply
• The elasticity of supply measures how
responsive producers are to a price
change.
Measurement
• Elasticity of supply equals percentage
change in quantity supplied divided by
percentage change in price.
Elasticity
of supply
=
Percentage change in
quantity supplied
Percentage
change in price
Categories of
Supply Elasticity
• Supply is elastic if supply elasticity
exceeds 1.0.
• Supply is unit elastic if supply elasticity
equals 1.0.
• Supply is inelastic if supply elasticity is
less than 1.0.
Determinants of
Supply Elasticity
• One important determinant of supply
elasticity is the length of the adjustment
period under consideration.
• The elasticity of supply is typically greater
the longer the period of adjustment.
Market Supply Becomes More
Elastic Over Time
Sm
Sw
Sy
Price per gallon
$1.25
1.00
0
100
200
Millions of gallons per day
300
6.1 Price, Quantity, and Market
Equilibrium
•
•
•
Objectives:
Understand how markets reach
equilibrium.
Explain how markets reduce transaction
costs.
Overview
As a buyer, or demander, you have a
different view of the price than a seller.
• As the price rises,
– Consumers reduce their quantity
demanded along the supply curve.
– Producers increase their quantity supplied
along their supply curve.
• Market forces resolve the differences.
– (the invisible hand)
Key Terms:
• Equilibrium – The quantity consumers are willing and
able to buy equals the quantity producers are willing and
able to sell.
• surplus – At a given price, the amount by which quantity
supplied exceeds quantity demanded; a surplus usually
forces the price down.
• Shortage – At a given price, the amount by which
quantity demanded forces the price up.
•
Transaction cost – The cost of time and information
needed to carry out market exchange.
Price
Equilibrium
Quantity
• Equilibrium – The point at which the Demand Curve
and Supply Curve intersect.
• At this point, Demand = Supply.
• In the graph, equilibrium would be at point C.
Price
Equilibrium
Quantity
• At this point there is no pressure to change price and
quantity at equilibrium because plans of buyers and
sellers exactly match.
Price
Equilibrium
Quantity
• Surplus – Demand < Supply. Usually caused by the
selling price being above equilibrium.
– At a selling price of $25, quantity demanded is 10 while
quantity supplied is 50.
– At a selling price of $20, quantity demanded is 20 while
quantity supplied is 40.
– Prices are forced down when quantity supplied exceeds
quantity demanded.
Price
Equilibrium
Quantity
• Shortage – Demand > Supply. Usually
caused by the selling price being below
equilibrium.
– At a selling price of $10, quantity demanded is
40 while Quantity supplied is 20.
– At a selling price of $5, quantity demanded is
50 while Quantity supplied is 10.
Equilibrium
A surplus puts a downward pressure on the price,
and a shortage puts upward pressure.
• “the invisible hand”
– Market competition promotes the general
welfare, not because of any central plan but
because of individual self-interests.
• Market prices transmit information (signals)
about scarcity and provide incentives for the
most productive uses of Resources.
– Response: A higher price encourages
consumers to economize by finding
substitutes.
• Higher prices help people recognize market
opportunities and encourage producers to
allocate more resources to the production of
one good and fewer resources to the
production of another good.
• Markets reduce transaction costs by
decreasing the amount of time and
information to carry out an exchange.
– Example: The use of elements of the job
market: Newspapers and the internet.
6.2 Shifts of Demand and Supply
Curves
• Objectives:
Overview
Change in Demand
Change in Supply
Increases
Decreases
Equilibrium price change
is indeterminate.
Equilibrium price falls.
Equilibrium quantity
increases.
Equilibrium quantity
change is indeterminate.
Equilibrium price rises.
Equilibrium price change
is indeterminate.
Equilibrium quantity
change is indeterminate.
Equilibrium quantity
decreases.
6.3 Market Efficiency and gains
from Exchange
• Objectives:
Overview
Competition and Efficiency
• Productive efficiency
– Making stuff right
• Allocative efficiency
– Making the right stuff
Price Floor
Price Ceiling