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Chapter 4 Supply and Demand Agenda Market vs Economy Supply Fanpop.com Market What is a market? Market – What do the following have in common? Market 1. In economics the term “market” can have many meanings A space for buyers and sellers to interact 2. Corner store, stock exchange, internet WHERE? All of the buyers and sellers of a good or service Global copper market WHO? Market 3. Demand for a good or service 4. The housing market is up WHAT? The process of establishing a price Market forces are pushing the value of the Canadian dollar up HOW? Studying the Market Economists build models to explain the market and predict future trends Econometrics: combines economic theory with statistics to analyze and test economic relationships Ceteris Paribus Latin: “All things being equal” A key assumption in economic models To examine cause and effect of two variables, all other variables must be held constant (ignored) Assumes everything else will stay the same Ceteris Paribus - Example If the price of beef increases – ceteris paribus – the quantity of beef demanded will decrease Which variables are being held constant? Price of other meats Fear of Mad Cow Trend towards vegetarianism ??? Supply and Demand Demand The quantity of a good or service that consumers are WILLING and ABLE to buy at a particular price Able = $$$$ to buy it Willing - Able Demand Example Would Love an iPod has lots of $ Would Love an iPod has $30 Would Like an iPod has lots of $ Would Like an iPod has $20 Has an iPod Might buy one for younger brother if it is cheap Wants a Zune. Hates Apple. Has lots of $ Demand Schedule PRICE $50 $40 $30 $20 $10 NUMBER SOLD Demand Schedule PRICE $50 $40 $30 $20 $10 NUMBER SOLD 1 2 3 4 5 Demand Curve NUMBER SOLD $60 $50 Price $40 $30 $20 $10 $0 0 1 2 3 Quantity 4 5 6 Law of Demand The Quantity Demanded (Qd) varies inversely with price – Ceteris Paribus Pg. 77 Questions 1-3 Ready, Set, Go!! P 77 1 – 3 1. 2. The Market is one part of the economy Willing and able 1. 2. 3. 4. 5. 3. A luxury car A Pizza A Computer A hammer A Post Secondary education Price decrease quantity demanded will increase. 1. 2. Income Substitution Law of Demand Law of Demand As prices go up QUANTITY demanded goes down As prices go down QUANTITY demanded goes up Quantity Demanded Prices Prices Quantity Demanded Factors that lead to law of demand Substitute Effect: As prices go up we seek out alternative products or services (CP) If Coca-Cola went up to $3 a can People would buy Pepsi or PC cola Income Effect: As prices fall people have more REAL income (Purchasing Power) Some people will use their extra income to buy more product (CP) If Coca-Cola decreased its price to 0.50 a can Supply and Demand Supply The quantity of a good or service that businesses are WILLING and ABLE to provide at a particular price Willing: Profitable and Ethical Able: Knowledge and Profitable Willing Able Willing Able Willing Able Supply example Each store can sell 1 iPod Is profitable when the price is $10 Is profitable when the price is $20 Is profitable when the price is $30 Is profitable when the price is $40 Is profitable when the price is $50 Supply Schedule PRICE $50 $40 $30 $20 $10 NUMBER SUPPLIED Supply Schedule PRICE $50 $40 $30 $20 $10 NUMBER SUPPLIED 5 4 3 2 1 Supply Curve SUPPLY CURVE FOR iPODs $60 $50 Price $40 $30 NUMBER SUPPLIED $20 $10 $0 0 1 2 3 Quantity 4 5 6 Law of Supply The QUANTITY supplied will increase if price increases and fall if prices fall, ceteris paribus Law of Supply Law of Supply As prices go up QUANTITY supplied goes up As prices go down QUANTITY supplied goes down Prices Quantity Demanded Price Quantity Demanded Market Equilibrium Where quantity Supplied and quantity demand are equal This is the point where the most needs and wants of both consumers and suppliers will be maximised Efficient use of resources as there is neither a shortage nor a surplus Supply and Demand Schedule PRICE $50 $40 $30 $20 $10 Quantity Demanded 1 2 3 4 5 Quantity Supplied 5 4 3 2 1 Equilibrium Supply and Demand for iPods $60 $50 Price $40 E Pe Quantity SUPPLIED $30 Quantity DEMANDED $20 $10 $0 0 1 2 3 Qe Quantity 4 5 6 Surplus P > Pe (Excess Supply) Supply and Demand for iPods $60 $50 Ps Price $40 E Quantity SUPPLIED $30 Quantity DEMANDED $20 $10 $0 0 1 Qd 2 3 Quantity Qs 4 5 6 Shortage P < Pe (Not enough Supply) Supply and Demand for iPods $60 $50 Price $40 E Quantity SUPPLIED $30 Quantity DEMANDED P $20 $10 $0 0 1 Qs 2 3 Quantity Qd 4 5 6 P 79 1-2 P93 7 Replace C with the following Draw a shortage or surplus area if the price is 2.20 Draw a shortage or surplus area if the price is 1.80 http://www.cbc.ca/video/#/ID=144931784 4 Does demand stay the same Factors that influence demand (p 81) Income Population Tastes and Preference Future Expectations Prices of substitute goods Prices of complementary goods Shift in Demand These factors will shift the entire demand curve to the left or right Shifts to the left will cause both Quantity Demanded and Price to decrease – CP Shifts to the right will cause both Quantity Demanded and Price to increase – CP Change in Quantity Demanded A CHANGE IN PRICE WILL LEAD TO A CHANGE IN QUANTITY DEMANDED NOT A CHANGE (SHIFT) IN DEMAND A CHANGE IN PRICE = A SHIFT ALONG THE CURVE Increase in real income Demand for Flat screen TV - CP Price P1 S1 E1 D1 Q1 Quantity Increase in real income Demand for Flat screen TV - CP Price S1 P2 P1 E1 D1 Q1 Q2 D2 Quantity Increase in real income Demand for Kraft Dinner - CP Price P1 S1 E1 D1 Q1 Quantity Increase in real income Demand for Kraft Dinner - CP Price S1 E1 P1 P2 D1 D2 Q2 Q1 Quantity Increase in Population http://images.google.ca/imgres?imgurl=http://www.statcan.gc.ca/kits-trousses/animat/img/edu06a_0000_01-eng.jpg&imgrefurl=http://www.statcan.gc.ca/kitstrousses/animat/edu06a_0000eng.htm&usg=__ZPXcDrtPiTJPrf1idxxiTkSbXk4=&h=124&w=192&sz=9&hl=en&start=4&um=1&itbs=1&tbnid=pMruy35llSmgTM:&tbnh=67&tbnw=103&prev=/images%3 Fq%3Dcanadian%2Bpopulation%2Bpyramid%2Banimated%26um%3D1%26hl%3Den%26tbs%3Disch:1 Increase in Population Increase in demand 1965 Diapers 1985 Cars Starter homes Anti-aging products 2005 2025 Canes, caskets, decrease in demand Baby products Change in consumer tastes Price P1 With the advent of the iPod what happened to demand for mp3 players S1 CP E1 D1 Q1 Quantity Change in consumer tastes Price With the advent of the iPod what happened to demand for iPod’s - CP S1 P2 P1 E1 D1 Q1 Q2 D2 Quantity Change in consumer tastes Price P1 With the advent of the iPod what happened to demand for tape players - CP S1 E1 D1 Q1 Quantity Change in consumer tastes Price With the advent of the iPod what happened to demand for tape players S1 Change in consumer tastes E1 P1 P2 D1 D2 Q2 Q1 Quantity Future Expectations Price P1 What effect will future expectations of the HST and possible interest rate hike have on the housing market CP S1 E1 D1 Q1 Quantity Future Expectations Price What effect will future expectations of the HST and possible interest rate hike have on the housing market CP S1 P2 P1 E1 D2 D1 Q1 Q2 Quantity Price of Substitute good Price P1 The price of beef has doubled. What will happen to demand for Chicken - CP S1 E1 D1 Q1 Quantity Price of Substitute good Price The price of beef has doubled. What will happen to demand for Chicken - CP S1 P2 P1 E1 D2 D1 Q1 Q2 Quantity Price of Complementary Good Price P1 The price of gas is $2 a litre. What will happen to demand for hybrid cars - CP S1 E1 D1 Q1 Quantity Price of Substitute good Price The price of gas is $2 a litre. What will happen to demand for hybrid cars - CP S1 P2 P1 E1 D2 D1 Q1 Q2 Quantity Price of Complementary Good • Price P1 The price of gas is $2 a litre. What will happen to demand for SUVs - CP S1 E1 D1 Q1 Quantity Price of Substitute good Price The price of gas is $2 a litre. What will happen to demand for SUVs - CP S1 E1 P1 P2 D1 D2 Q2 Q1 Quantity Factors that could cause a shift in demand T I P E D Factors that could cause a shift in demand Tastes and Preference Income Prices substitute goods complementary goods (ex. Price of hotdogs decreases resulting in increase in demand for hotdogs) Expectations Demographics (Population) NOTE A shift in the demand curve will result in a shift ALONG the supply curve Factors that influence supply P E N T UP Factors that influence supply Production Cost Environment Number of suppliers Technology price of related oUtPuts Production Cost Supply of plastic if the price of oil increases Price P1 S1 E1 D1 Q1 Quantity Production Cost Supply of plastic if the price of oil increases Price S2 S1 E2 P2 E1 P1 D1 Q2 Q1 Quantity Production Cost Remember suppliers must be Able Have the capital to produce (technology) Have the labour to produce (Know how) Willing Produce profitably Number of suppliers Supply and demand for tools Price P1 S1 E1 D1 Q1 Quantity Number of suppliers Supply and demand for tools Price S1 S2 P1 E1 E2 P2 D1 Q1 Q2 Quantity Technology Price P1 Supply and demand for cars with the introduction of robotic assembly lines S1 E1 D1 Q1 Quantity Technology Price Supply and demand for cars with the introduction of robotic assembly lines S1 S2 P1 E1 E2 P2 D1 Q1 Q2 Quantity Nature and the environment Price P1 There is a frost in Florida. What will be the impact on the supply of oranges S1 E1 D1 Q1 Quantity Nature and the environment Price There is a frost in Florida. What will be the impact on the supply of oranges S1 S2 P2 E2 E1 P1 D1 Q2 Q1 Quantity Prices of Related Goods Price Oats are discovered to have anti aging properties OATS S1 Price E1 BARLEY S1 E1 P1 P1 D1 D1 Q1 Quantity Q1 Quantity Prices of Related Goods Price Oats are discovered to have anti aging properties what will the impact be on the supply of barley? OATS S1 Price BARLEY S1 E2 P2 E1 P1 P1 D1 D2 Q1 Q2 Quantity D1 Q1 Quantity Prices of Related Goods Price Oats are discovered to have anti aging properties OATS S1 Price BARLEY S2 S1 E2 P2 P2 P1 E1 P1 D1 D2 Q1 Q2 Quantity D1 Q2 Q1 Quantity Prices of Related Goods Price Oats are discovered to have anti aging properties OATS S1 Price E2 BARLEY S1 S2 E2 P2 P2 P1 P3 P1 E1 D1 D2 Q1 Q2 S2 Quantity D1 Q2 Q1 Quantity Changes in Demand Prices changes that cause consumers to buy more or less of a product are represented by a movement ALONG the demand curve Not a movement of the curve Changes in Supply Prices changes that cause businesses to supply more or less of a product are represented by a movement ALONG the supply curve Not a movement of the curve Homework Do case study on page 87 and Check your understanding on page 88. It is good prep for your quiz. Study for your quiz on Tuesday Monday March 26th In class assignment that is due by the end of class. It will be marked You can use your notes and textbook but must be completed individually Those who are not in class on Monday can complete it Wednesday in class Quiz - Tuesday KNOW YOUR SUPPLY AND DEMAND CURVES Be able to interpret supply and demand curves GRAPHS GRAPHS GRAPHS! TIPED and PENTUp Wednesday Work Period Starting Chapter 5 – Elasticity Take up Test Case study p87 Demand Since 1981 what has happened to demand for the PC Is this a shift along the curve or a shift of the curve Which factors explain your answer Supply Since 1981 what has happened to supply for the PC Is this a shift along the curve or a shift of the curve Which factors explain your answer Case study p87 Demand Tastes Preferences Echo generation grew up with computers Boomers adopted it Income Library Mail Typewriter TIME = $ Population Gambling Shopping Price of substitute goods Cheaper technology = increase in real income Expectation Technology Internet Higher quality Lower Price Supply Technology Production Costs Economies of scale Has increased More energy efficient Computers in everything dive down cost Number of seller Environment Related outputs Costs Flash memory Fewer moving part Computers S2 Price P1 S1 E1 P2 D1 D2 Q1 Q2 Quantity Check your understanding P88 question 1 a. b. c. d. Demand shifts right for product x due to advertising (TASTES) Demand shifts left for product x because consumers have less income (INCOME) Demand shifts left for product x because consumers switch to product y (PRICE SUBSTITUTE) Demand shifts right for product x because consumers want to avoid higher future prices (EXPECTATIONS) Check your understanding P88 question 2 a. b. c. Supply shifts right as manufacturers are able to produce X at a lower unit cost (Technology) Supply shifts left as manufacturers face higher unit costs for product x because of wage increase (Production Costs) Quantity supplied of x increases (movement along the curve) because manufacturers want to take advantage of the higher prices (Increase profits) Check your understanding P88 question 2 d. e. Supply shifts right as manufacturers face higher unit costs for product x because of tax decrease (Production Costs) Supply shifts left as there are few manufacturers of product X (Number of Producers)
