Download Demand - Senior Shepard Academy

Demand and
Supply
CHAPTER CHECKLIST
When you have completed your study of this
chapter, you will be able to
1
Distinguish between quantity demanded and
demand and explain what determines demand.
2
Distinguish between quantity supplied and supply
and explain what determines supply.
3
Explain how demand and supply determine price
and quantity in a market and explain the effects of
changes in demand and supply.
4.1 DEMAND
Law of Demand
Other things remaining the same,
• If the price of the good rises, the quantity
demanded of that good decreases.
• If the price of the good falls, the quantity
demanded of that good increases.
4.1 DEMAND
Quantity demanded
One quantity and one price
Demand
List of quantities at different prices (uses a curve and
schedule)
4.1 DEMAND
4.1 DEMAND
Individual Demand and Market Demand
Market demand
The sum of the demands of all the buyers in a market.
4.1 DEMAND
Checking for Understanding
On a separate piece of
paper, write out a scenario
involving changing prices.
Make a demand schedule
and demand curve to
illustrate it.
4.1 DEMAND
Changes in Demand
4.1 DEMAND
Figure 4.3 shows
changes in demand.
1. When demand
decreases, the
demand curve shifts
leftward from D0 to D1.
2. When demand
increases, the demand
curve shifts rightward
from D0 to D2.
4.1 DEMAND
The main influences on buying plans that change
demand are
• Prices of related goods
• Income
• Expectations
• Number of buyers
• Preferences
4.1 DEMAND
Prices of Related Goods
Substitute Goods
Complementary Goods
4.1 DEMAND
Income
Normal good
Inferior good
4.1 DEMAND
Expectations
Number of Buyers
Preferences
4.1 DEMAND
Change in Quantity Demanded Versus
Change in Demand
Change in the quantity demanded
A change in the quantity of a good that people plan to
buy that results from a change in the price of the good.
Change in demand
A change in the quantity that people plan to buy when
any influence other than the price of the good changes.
4.1 DEMAND
Figure 4.4 illustrates and summarizes the distinction.
CHECKING FOR UNDERSTANDING
In the market for cell phones, several events occur, one at a
time. For each scenario, tell whether the demand or
quantity demanded changes. When demand changes, tell
whether the curve shifts to the left or the right.
The events are:
• The price of a cell phone falls
• The price of a call made from a cell phone falls
• After a public outcry against the ringing of cell phones, cities
and towns ban cell phones from public places
• Incomes increase
• Rumor has it that the price of a cell phone will rise next
month
• With the introduction of camera phones, cell phones are
more popular
p. 97
5.1 THE PRICE ELASTICITY
OF DEMAND
ELASTIC
VS.
INELASTIC
DEMAND
5.1 THE PRICE ELASTICITY
OF DEMAND
• Computing the Price Elasticity of
Demand
Percentage change in quantity demanded
Price elasticity
=
of demand
Percentage change in the price
• If the price elasticity of demand is greater than 1,
demand is elastic.
• If the price elasticity of demand equals 1, demand is
unit elastic.
• If the price elasticity of demand is less than 1, demand
is inelastic.
5.1 THE PRICE ELASTICITY
OF DEMAND
• Computing the Price Elasticity of
Demand
Percentage change in quantity demanded
Price elasticity
=
of demand
Percentage change in the price
We can use this formula to calculate the price
elasticity of demand for a Starbucks latte:
Price elasticity of demand
=
100%
50%
=
2
5.1 THE PRICE ELASTICITY
OF DEMAND
•
Interpreting the Price Elasticity of Demand Number
The elasticity of demand for a Starbucks latte of 2 tell us
three things:
1. The demand for a Starbucks latte is elastic--it
has substitutes and the proportion of a
buyer’s income spent is small.
2. If Starbucks raised its price, revenue per cup
will rise but it will lose lots of potential
business.
3. Even a slightly lower price could bring in a lot
more revenue.
5.1 THE PRICE ELASTICITY
OF DEMAND
Figure 5.1(a) shows a
perfectly elastic demand.
1. For a small change in
the price of spring water,
2. The quantity demanded
of spring water changes
by a large amount.
3. The demand for spring
water is perfectly elastic.
5.1 THE PRICE ELASTICITY
OF DEMAND
Figure 5.1(e) shows a
perfectly inelastic demand.
1. When the price rises,
2. The quantity demanded
does not decrease.
3. Demand is perfectly
inelastic.
INFLUENCES ON THE PRICE
ELASTICITY OF DEMAND
–Availability of Substitutes
–Luxury Versus Necessity
–Narrowness of Definition
–Time Elapsed Since Price
Changed
–Proportion of Income Spent
Beverly Hills
Weezer
4.2 SUPPLY
Quantity supplied
Supply
 The Law of Supply
Other things remaining the same, (Ceteris Paribus)
• If the price of a good rises, the quantity supplied
of that good increases.
• If the price of a good falls, the quantity supplied of
that good decreases.
4.2 SUPPLY
4.2 SUPPLY
Individual Supply and Market Supply
Market supply
The sum of the supplies of all sellers in a market.
The market supply curve is the horizontal sum of the
supply curves of all the sellers in the market.
4.2 SUPPLY
4.2 SUPPLY
Changes in Supply
4.2
4.2SUPPLY
SUPPLY
Figure 4.7 shows
changes in supply.
1. When supply
decreases, the supply
curve shifts leftward
from S0 to S1.
2. When supply
increases, the supply
curve shifts rightward
from S0 to S2.
4.2 SUPPLY
The main influences on selling plans that change supply
are
• Prices of resources and other Inputs
• Expectations
• Number of sellers
• Productivity (technology)
4.2 SUPPLY
Change in Quantity Supplied Versus a
Change in Supply
Change in quantity supplied
A change in the quantity of a good that suppliers plan to
sell that results from a change in the price of the good.
Change in supply
A change in the quantity that suppliers plan to sell when
any influence on selling plans other than the price of the
good changes.
4.2 SUPPLY
Figure 4.8 illustrates and summarizes the distinction
CHECKING FOR UNDERSTANDING
Timber beams are made from logs, and in the process of
making beams, the mill produces sawdust, which is made
into pressed wood. Explain the influence of each event on
the quantity supplied and supply of timber beams. For each
event that affects supply, tell whether the curve will move to
the left or right.
• The wage rate of sawmill workers rises.
• The price of sawdust rises.
• The price of a timber beam rises.
• The price of a timber beam is expected to rise next year.
• Environmentalists convince Congress to introduce a new
law that reduces the amount of forest that can be cut for
timber products.
• A new technology lowers the cost of producing timber
beams.
Price Elasticity of Supply
• Elastic Supply: Change in price
results in change in supply
• Inelastic Supply: Supply is
constant, regardless of a change
in price
Determinants of Price Elasticity of Supply
• Production possibilities: how much of the
product can ever be available?
– Silicon is made from sand (plentiful)
– There is a limited number of lots available in
a subdivision.
• Storage
– If an item is perishable (and cannot be
stored) its supply is inelastic.
– If an item can be stored, you can decide to
release more supply later. It is elastic
4.3 MARKET EQUILIBRIUM
Market equilibrium
When the quantity demanded equals the
quantity supplied—when buyers’ and
sellers’ plans are consistent.
Equilibrium price
The price at which the quantity demanded
equals the quantity supplied.
4.3 MARKET EQUILIBRIUM
Figure 4.9 shows the
equilibrium price and
equilibrium quantity.
1. Market equilibrium at
the intersection of the
demand curve and the
supply curve.
2. The equilibrium
price is $1 a bottle.
3. The equilibrium
quantity is 10 million
bottles a day.
4.3 MARKET EQUILIBRIUM
Price: A Market’s Automatic Regulator
Law of market forces
• When there is a shortage, the price rises.
• When there is a surplus, the price falls.
Shortage or Excess Demand
The quantity demanded exceeds the quantity supplied.
Surplus or Excess Supply
The quantity supplied exceeds the quantity demanded.
4.3 MARKET EQUILIBRIUM
Figure 4.10(a) market
achieves equilibrium.
At 75 cents a bottle:
1. Quantity is demanded
11 million bottles.
2. Quantity supplied is
9 million bottles.
3. There is a shortage of
2 million bottles.
4. Price rises until the
shortage is eliminated and
the market is in equilibrium.
4.3 MARKET EQUILIBRIUM
Figure 4.10(b) market
achieves equilibrium.
At $1.50 a bottle:
1. Quantity supplied is
11 million bottles.
2. Quantity demanded is
9 million bottles.
3. There is a surplus of
2 million bottles.
4. Price falls until the surplus
is eliminated and the
market is in equilibrium.
4.3 MARKET EQUILIBRIUM
 Effects of Changes in Demand
Event: A new study says that tap water is unsafe.
To work out the effects on the market for bottled water:
1. With tap water unsafe, demand for bottled water
changes.
2. The demand for bottled water increases, the demand
curve shifts rightward.
3. What are the new equilibrium price and equilibrium
quantity and how have they changed?
4.3 MARKET EQUILIBRIUM
Figure 4.11(a) illustrates
the outcome.
1. An increase in demand
shifts the demand curve
rightward.
2. At $1.00 a bottle, there is a
shortage, so the price rises.
3. Quantity supplied increases
along the supply curve.
4. Equilibrium quantity
increases.
4.3 MARKET EQUILIBRIUM
Event: A new zero-calorie sports drink is invented.
To work out the effects on the market for bottled water:
1. The new drink is a substitute for bottled water, so the
demand for bottled water changes
2. The demand for bottled water decreases, the
demand curve shifts leftward.
3. What are the new equilibrium price and equilibrium
quantity and how have they changed?
4.3 MARKET EQUILIBRIUM
Figure 4.11(b) shows the
outcome.
1. A decrease in demand shifts
the demand curve leftward.
2. At $1.00 a bottle, there is a
surplus, so the price falls.
3. Quantity supplied decreases
along the supply curve.
4. Equilibrium quantity
decreases.
4.3 MARKET EQUILIBRIUM
 Effects of Changes in Supply
Event: Europeans produce bottled water in the United
States.
To work out the effects on the market for bottled water:
1. With more suppliers of bottled water, supply changes.
2. The supply of bottled water increases, the supply
curve shifts rightward.
3. What are the new equilibrium price and equilibrium
quantity and how have they changed?
4.3 MARKET EQUILIBRIUM
Figure 4.12(a) shows the
outcome.
1. An increase in supply shifts
the supply curve rightward.
2. At $1.00 a bottle, there is a
surplus, so the price falls.
3. Quantity demanded
increases along the
demand curve.
4. Equilibrium quantity
increases.
4.3 MARKET EQUILIBRIUM
Event: Drought dries up some springs in the United
States.
To work out the effects on the market for bottled water:
1. Drought changes the supply of bottled water.
2. The supply of bottled water decreases, the supply
curve shifts leftward.
3. What are the new equilibrium price and equilibrium
quantity and how have they changed?
4.3 MARKET EQUILIBRIUM
Figure 4.12(b) shows the
outcome.
1. A decrease in supply shifts
the supply curve leftward.
2. At $1.00 a bottle, there is a
shortage, so the price rises.
3. Quantity demanded
decreases along the
demand curve.
4. Equilibrium quantity
decreases.
Governmental Influence
• Price Ceiling (maximum price allowed)
• Price Floor (minimum price allowed)
Amarillo Sky