Download Demand and Supply

Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Individual
Markets:
Surpluses
Shortages
Demand & Supply
LAW OF DEMAND
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
An inverse relationship exists
between price and quantity
demanded
• As Price Falls…
…Quantity Demanded
Rises
• As Price Rises…
…Quantity Demanded
Falls
DOWNWARD SLOPE
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• Diminishing Marginal Utility
DOWNWARD SLOPE
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• Diminishing Marginal Utility
• Income Effect
• As prices fall, people have
relatively more income
DOWNWARD SLOPE
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
• Diminishing Marginal Utility
• Income Effect
• Substitution Effect
Surpluses
Shortages
• As prices rise, people will
purchase substitute goods
Diminishing Marginal Utility
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
As a person increases consumption
of a product - while keeping
consumption of other products
constant - there is a decline in the
marginal utility that person derives
from consuming each additional unit
of that product.
LAW OF DEMAND
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
• Diminishing Marginal Utility
• Income Effect
• Substitution Effect
Surpluses
Shortages
Demand Curve
- Graphically
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
Plot the Points
4
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
Plot the Points
4
3
2
1
o
10 20 30 40 5055 60 70 80
Quantity of Corn
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
Plot the Points
4
3
2
1
o
10 20 30 40 50 60 70 80
35
Quantity of Corn
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
Plot the Points
4
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
Plot the Points
4
3
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
Connect the Points
4
3
2
1
o
D
10 20 30 40 50 60 70 80
Quantity of Corn
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
4
3
2
What if
Demand
Increases?
1
o
D
10 20 30 40 50 60 70 80
Quantity of Corn
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
Increase
in Quantity
Demanded
P
Demand Graphed
CORN
P
$5
4
3
2
1
QD
10 30
20 40
35 60
55 80
80 +
$5
4
3
2
1
o
Increase
in
Demand
10 20 30 40 50 60 70 80
Quantity of Corn
D’
D
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10
20
35
55
80
$5
4
3
2
What if
Demand
Decreases?
1
o
D
10 20 30 40 50 60 70 80
Quantity of Corn
Q
GRAPHING DEMAND
Demand Defined
Price of Corn
P
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
CORN
P
$5
4
3
2
1
QD
10 -20 10
35 20
55 40
80 60
Decrease
in Quantity
Demanded
$5
4
3
2
1
o
Decrease
in
Demand
10 20 30 40 50 60 70 80
Quantity of Corn
D
D’
Q
Tastes and Preferences
Demand
Changes in
Demand
Supply
Changes in
Supply
Equilibrium
Surpluses &
Shortages
Welfare
Economics
3 - 18
• Goods and services become trendy
or fashionable
• Popularity of goods can change for
many reasons
– Decided that a new food is healthy
– Celebrity endorsements
Related Goods
Demand
Changes in
Demand
Supply
Changes in
Supply
Equilibrium
Surpluses &
Shortages
Welfare
Economics
• Substitutes
– Goods that are interchangeable
– Coke and Pepsi
– Price of Coke increases, demand for
Pepsi will increase
• Complements
3 - 19
– Goods that go together
– Milk and cookies
– Price of milk increases, demand for
cookies decreases
Income
Demand
Changes in
Demand
Supply
Changes in
Supply
Equilibrium
Surpluses &
Shortages
Welfare
Economics
• If income increases, demand will
increase
• EXCEPT for inferior goods
• As income increases, demand for
inferior goods will decrease
– Generic brand items, used goods, etc.
3 - 20
Number of Buyers
Demand
Changes in
Demand
Supply
Changes in
Supply
Equilibrium
Surpluses &
Shortages
Welfare
Economics
3 - 21
• Increase in number of buyers
increases demand
• Changes in population is the
biggest cause
Price Expectations
Demand
Changes in
Demand
Supply
Changes in
Supply
Equilibrium
Surpluses &
Shortages
Welfare
Economics
3 - 22
• People act rationally
• Price of good is expected to
increase in the future, demand
increases now
– Buy at a lower price
Demand
Changes in
Demand
Supply
Changes in
Supply
Equilibrium
Surpluses &
Shortages
Welfare
Economics
DETERMINANTS OF
DEMAND
• Tastes (Preferences)
• Prices of Related Goods
– Substitutes & Complements
• Income
– Normal (Superior) & Inferior
Goods
• Number of Buyers
• Expectations
3 - 23
LAW OF SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
A direct relationship exists
between price and quantity
supplied
• As Price Rises…
…Quantity Supplied Rises
• As Price Falls…
…Quantity Supplied Falls
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
Equilibrium
Surpluses
Shortages
2
1
o 5 10
20 30 40 50 60 70 80
Quantity of Corn
Q
60
50
35
20
5
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
Equilibrium
Surpluses
Shortages
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60
50
35
20
5
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
Equilibrium
Surpluses
Shortages
2
1
o
10 20 3035 40 50 60 70 80
Quantity of Corn
Q
60
50
35
20
5
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
Equilibrium
Surpluses
Shortages
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60
50
35
20
5
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
Plot the Points
$5
CORN
P QS
4
$5
4
3
2
1
3
Equilibrium
Surpluses
Shortages
2
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60
50
35
20
5
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
$5
S
CORN
P QS
4
$5
4
3
2
1
3
Equilibrium
Surpluses
Shortages
2
1
o
Connect the Points
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60
50
35
20
5
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
$5
4
3
Equilibrium
Surpluses
Shortages
2
S
What if
Supply
Increases?
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
CORN
P QS
$5
4
3
2
1
Q
60
50
35
20
5
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
$5
4
3
Equilibrium
Surpluses
Shortages
2
1
Increase
in
Supply
S
S’
CORN
P QS
$5
4
3
Increase 2
in Quantity 1
Supplied
o
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60 80
50 70
35 60
20 45
5 30
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn
P
$5
4
3
Equilibrium
Surpluses
Shortages
2
S
What if
Supply
Decreases?
1
o
10 20 30 40 50 60 70 80
Quantity of Corn
CORN
P QS
$5
4
3
2
1
Q
60
50
35
20
5
GRAPHING SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Price of Corn Decrease
P
$5
4
3
Equilibrium
Surpluses
Shortages
2
1
o
in
Supply
S’
S
CORN
P QS
$5
4
3
Decrease
2
in Quantity 1
Supplied
10 20 30 40 50 60 70 80
Quantity of Corn
Q
60 45
50 30
35 20
20 0
5 --
Demand
Changes in
Demand
Supply
Changes in
Supply
Equilibrium
Surpluses &
Shortages
Welfare
Economics
3 - 35
DETERMINANTS OF
SUPPLY
• Resource Prices
• Prices of Other Goods
• Technology
• Taxes & Subsidies
• Expectations
• Number of Sellers
Resource Prices
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• Resources are needed to
make goods and services
• If resources become more
expensive, supply will
decrease
• Ex: Price cattle increases.
Supply of hamburgers will
decrease
Prices of Other Goods
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• A business produces cricket bats
and hockey sticks.
• Price of hockey sticks increases,
they will produce more hockey
sticks and less cricket bats. As a
result, the supply of cricket bats
will be reduced.
• WE WILL NOT FOCUS ON THIS
DETERMINANT
Technology
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• Technology advancing
increases supply
• Think back to PPF (economic
growth)
Taxes and Subsidies
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• Government involvement
affects supply
• If taxes are higher, businesses
will decrease supply
• Subsidy: money given to a
business by the government
• If subsidies increase, supply
increases
Expectations
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• Businesses react to expected
price changes
• They want to sell at highest
price
• Future price increase will
decrease supply now
Number of Sellers
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• The number of sellers has a
direct relationship with
supply
• If businesses close, supply
will decrease
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
•
•
•
•
•
•
DETERMINANTS OF
SUPPLY
Resource Prices
Technology
Combining
Taxes &with
Subsidies
PricesDemand
of Other Goods
Price Expectations
Number of Sellers
MARKET DEMAND & SUPPLY
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
S
$5
CORN
MARKET
P Q
4
Market
S
$5 12,000
Clearing
Equilibrium 4 10,000
3
3 7,000
2 4,000
1 1,000
2
1
o
D
2
4
6
78
10 12 14 16
Quantity of Corn
Q
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
$5
Surplus
CORN
MARKET
S
P Q
At a $4 price
4
$5
supplied than 4
demanded 3
2
1
more is being
3
2
1
o
D
2
4
6
78
10 12 14 16
Quantity of Corn
Q
S
12,000
10,000
7,000
4,000
1,000
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
S
$5
CORN
MARKET
P Q
At a $2 price
4
$5
demanded than 4
3
supplied
2
1
Shortage
more is being
3
2
1
o
D
2
4
6
78
101112 14 16
Quantity of Corn
Q
S
12,000
10,000
7,000
4,000
1,000
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
MARKET DEMAND &
SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
4 4,000
3 7,000
2 11,000
1 16,000
P
$5
Surplus
S
4
3
2
Shortage
1
o
CORN
MARKET
P Q
$5
4
3
2
1
D
2
4
6
78
101112 14 16
Quantity of Corn
Q
S
12,000
10,000
7,000
4,000
1,000
MARKET EQUILIBRIUM
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
• Equilibrium Price & Quantity
• Free Markets Move Towards
Equilibrium
• Changes in Demand
• Changes in Quantity
Demanded
• Changes in Supply
• Changes in Quantity Supplied
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
Simple Cases
• Supply Increases
– What happens to Equilibrium Price
and Quantity
• Supply Decreases
– What happens to Equilibrium Price
and Quantity
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Surpluses
Shortages
Simple Cases
• Demand Increases
– What happens to Equilibrium Price
and Quantity
• Demand Decreases
– What happens to Equilibrium Price
and Quantity
Complex Cases
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Multiple Shifts…
• Supply Increases;
Demand Decreases
Surpluses
Shortages
• Supply Decreases;
Demand Increases
Complex Cases
Demand Defined
Demand Graphed
Changes in
Demand
Supply Defined
Supply Graphed
Changes in
Supply
Equilibrium
Multiple Shifts…
• Supply Increases;
Demand Increases
Surpluses
Shortages
• Supply Decreases;
Demand Decreases