Download The Basics of Supply & Demand

The Basics of Supply & Demand
AP Micro
Module 3
Miller
Objectives
• By the end of this module, SWBAT
– Define and contrast the Laws of Supply and Demand
– Explain why the equilibrium point where supply and
demand curves meet is the most productive total
revenue
– Describe and explain situations in which entire supply
and demand curves shift left or right OR the
price/quantity demanded or supplied of a good simply
moves up or down a supply or demand curve
SLOs
• Academic excellence and lifelong learning
– Supply and demand, and curves like them, are the
backbone of rest of our course materials
– Variables might change names and so will curves but
plotting S&D is crucial to anyone who truly wants to
understand microecon
• Social responsibility
– The power you hold as a consumer (remember the
Western Euro-North American emphasis on the
freedom of choice?) will become visually evident
during this module
Demand Defined
• demand expresses the relationship between
the quantity of people who would buy a good
or a service and the price of aforementioned
good or service
• data table that expresses this price and
quantity data = demand schedule
– T Chart with a header that is the demand of a
certain good with P (price) and Q (quantity)
Demand Defined
• The points from a demand schedule are plotted on a
coordinate plane with
– X- axis of Q (quantity)
– Y- axis of P (price)
• Interesting trend is revealed
• The demand curve (labeled D) has a negative slope
• Law of Demand states that as the price of a good or service
(P) decreases, the quantity demanded of that good or
service (Q) increases
• If that price (P) increases, the quantity demanded (Q)
decreases
• Thus, in demand scenarios, the relationship between P and
Q is INVERSE
Demand Curve
Demand Defined
• We’ve seen an inverse relationship before
with the Law of Diminishing Returns
– As more time passes or more quantities of a good
are consumed, marginal utility decreases
• This relates well to the Law of Demand
– The only way to overcome Diminishing Returns is
to give consumers a financial incentive by
lowering prices
– The Costco principle – sell more than what people
might really need via rock bottom, bulk pricing
Changes in Price, Quantity
• simply moving up and down existing demand
curve does NOT cause the demand curve itself
to move
• very simple trap - BE CAREFUL in your analysis
Changing Demand
• if demand itself moves the whole curve shifts
either left or right
• right for increase in demand
• left for decrease in demand
• the causes of these shifts are called
determinants
Determinants of Demand
• Income - change in the overall amount of
discretionary income in the market
• Population - more people, more customers
• Trends and Fads- A positive or negative feeling
among consumers characterized w/ lots of
enthusiasm and energy over a short period of
time.
Determinants of Demand
• Complements - change in price of
complementary good will change the demand
for its complement (increase in price of
pancakes = decrease in demand for syrup)
• Substitutes - inverse of complement effect change in price of substitute will change the
demand for its substitute (increase in price of
pancakes = increase in demand for waffles)
Demand Shifts
Supply - the Behavior of the Seller
• counterintuitive for most demanders
• Law of Supply says as price of a good (P)
increases, quantity supplied (Q) will increase and
vice versa
• supply curve displays DIRECT relationship b/w P
&Q
• The Law of Supply is the graphic display of profit
motive – “sell the most you can for the most you
can”
• the term of “schedule” applies in same way for
supply
Supply Curve
Changes in Price, Quantity on S Curve
• a change in P or Q is NOT a change in S
• simply movement up and down the supply
curve
• supply curve CAN shift however, and it follows
the same rules in terms of direction as the
demand curve
Supply Meets Demand
• When plotted together, the two curves form
an X
• the magical place where they meet is called
equilibrium
• total revenue = P*Q is maximized there
• Think back to Bob and Ann with the fish and
bananas – two fish for one banana was the
natural price, quantity combo that suited both
of their needs
Equilibrium
Determinants of Supply
• # of firms - sort of like population effect for
demand - more companies producing same
product leads to more overall supply of that
product
• taxation - less taxes → increase in S, more taxes
→ decrease in S
• technology - most tech advances increase S
• cost of inputs - if a given product costs more to
make → S moves left, if given product costs less
to make → S moves right
Applications
• In which of the following scenarios does Total
Revenue increase?
– Price of a good decreases the quantity demanded
– Price of a good increases the quantity demanded
– Price of a good decreases the quantity supplied
– Price of a good increases the quantity supplied
Applications
• In which of the following scenarios does Total
Revenue increase?
– Demand of a good increases and moves the
equilibrium point
– Demand of a good decreases and moves the
equilibrium point
– Supply of a good increases and moves the
equilibrium point
– Supply of a good decreases and moves the
equilibrium point