Download Supply and Demand

Markets….
Learning Map…
Review components…
In textbook:
Page 40- Vocabulary and # 1-6
Page 179n- Vocabulary and #1-2
Page 194 Vocabulary and # 1-2
WHAT YOU WILL LEARN IN THIS CHAPTER





What a competitive market is and how it is
described by the supply and demand model
What the demand curve and supply curve are
The difference between movements along a
curve and shifts of a curve
How the supply and demand curves determine a
market’s equilibrium price and equilibrium
quantity
In the case of a shortage or surplus, how price
moves the market back to equilibrium
What are Markets?







Markets exist when buyers and sellers interact.
This interaction determines market prices and thereby allocates scarce
goods and services
Prices send signals and provide incentives to buyers and sellers.
When supply and demand change; markets adjust; affecting incentives.
The nation’s overall levels of income, employment, and prices are
determined by supply and demand decisions of: households, Factor
markets, Product Markets, Businesses, and Government.
The market clearing price= equilibrium price is the one price at which
quantity supplied equals quantity demanded.
PRICE impacts supply and demand! Supply and Demand DO NOT
IMPACT EACH OTHER! EVER!!!
Visual 1: The Magic of Markets















What did you have for breakfast this morning?
How did this type of food arrive in your house?
How did someone in the family know what and how much to
buy for breakfast?
How did the store it was purchased from know that someone
would buy it?
How does the local fast food restaurant know how many
workers to schedule for each shift during the week?
What would happen if a change in consumer preferences and
buying patterns significantly reduced the demand for a good or
service?
What would happen if higher production costs significantly
reduced the supply of a good or service?
Is a central authority needed to decide what, how, and for
whom to buy and sell in competitive markets?
What’s for lunch???





Rank the following menu items from your favorite to
your least favorite. (NO TIES!!!)
Menu 1: Veggie pizza
Menu 2: Cheeseburger
Menu 3: Chef salad
Menu 4: Chicken nuggets
Did you get what you wanted?








Is it likely that a random distribution of menu items, such as round 1, will
fully satisfy all consumers?
Did the trading in Round 2 increase total satisfaction?
ALLOCATIVE EFFICIENCY: is when it is not possible to benefit one
person without making someone else worse off… All resources are used
to their maximum satisfaction.
Was Round 1 an example of allocative efficiency? Why/ why not?
Was round 2? Why/ why not?
Does allocative efficiency guarantees everyone’s maximum satisfaction?
Can markets completely satisfy everyone’s maximum satisfaction? No?
why?
How do markets contribute to allocative efficiency?
Adam Smith: The Wealth of Nations
“But man has almost constant occasion for the help of
his brethren, and it is in vain for him to expect it from
their benevolence only. He will be more likely to prevail
if he can interest their self-love in his favor, and show
them that it is for their own advantage to do for him
what he requires of them. Whoever offers to another a
bargain of any kind, proposes to do this. Give me that
which I want, and you shall have this which you want, is
the meaning of every such offer; and it is in this manner
that we obtain from one another the far greater part of
those good offices which we stand in need of. It is not
from the benevolence of the butcher, the brewer, or the
baker, that we expect our dinner, but from their regard
to their own interest. We address ourselves, not to their
humanity, but to their self-love, and never talk to them
of our own necessities but of their advantages.”
Adam Smith, An Inquiry into the Nature and Causes of the Wealth of
Nations, 1776, (Book I, Chapter II, passage 2)
Natural Liberty and Laissez Faire are stressed.
Circular flow model…


Is a diagram that demonstrates the systematic
linkages between markets for goods and services
(Product markets) and the markets for resources
used in production (factor markets), and
Households, and Government.
LOOK AT PACKET AND BLUE POSTER FOR
EXAMPLE…

Each of you will get slips of paper that explain the
arrow of the circular flow model AND examples of
each… Arraign your slips of paper appropriately !!!
Supply and Demand

A competitive market:




Many buyers and sellers
Same good or service
The supply and demand model is a model of how
a competitive market works.
Five key elements:





Demand curve
Supply curve
Demand and supply curve shifts
Market equilibrium
Changes in the market equilibrium
Demand Schedule

A demand schedule
shows how much of
a good or service
consumers will want
to buy at different
prices.
Demand Schedule for Coffee Beans
Price of coffee
beans (per
pound)
Quantity of coffee
beans demanded
(billions of pounds)
$2.00
7.1
1.75
7.5
1.50
8.1
1.25
8.9
1.00
10.0
0.75
11.5
0.50
14.2
Demand Curve
Price of
coffee bean
(per gallon)
A demand curve is the graphical
representation of the demand schedule;
it shows how much of a good or service
consumers want to buy at any given
price.
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
0
As price rises,
the quantity
demanded falls
7
9
Demand
curve, D
11
13
15
17
Quantity of coffee beans
(billions of pounds)
From the math department…




Economics graphs have their X and Y axis
BACKWARDS from other graphs
Intercepts are where your line hits the Price line
and Quantity lines…
Finding the slope of the graph (rise over run)can
give you cool information: Demand: For every
$____ the price drops, I can sell _____ more units.
Supply: For every $____ the price goes up, I am
willing to supply _____ more units..
An Increase in Demand


An increase in the
population and other
factors generate an
increase in demand –
a rise in the quantity
demanded at any given
price.
This is represented by
the two demand
schedules - one
showing demand in
2002, before the rise in
population, the other
showing demand in
2006, after the rise in
population.
Demand Schedules for Coffee Beans
Quantity of coffee
beans demanded
(billions of pounds)
Price of coffee
beans (per
pound)
in 2002
$2.00
1.75
1.50
1.25
1.00
0.75
0.50
7.1
7.5
8.1
8.9
10.0
11.5
14.2
in 2006
8.5
9.0
9.7
10.7
12.0
13.8
17.0
An Increase in Demand
Price of
coffee beans
(per gallon)
$2.00
Increase in
population 
more coffee
drinkers
1.75
Demand curve
in 2006
1.50
1.25
1.00
0.75
0.50
0
Demand curve
in 2002
7
9
D
11
13
1
15
D
2
17
Quantity of coffee beans
(billions of pounds)
A shift of the demand curve is a change in the quantity demanded at any
given price, represented by the change of the original demand curve to a new
position, denoted by a new demand curve.
Movement Along the Demand Curve
Price of
coffee
beans (per
gallon)
A movement along the demand
curve is a change in the
quantity demanded of a good
that is the result of a change in
that good’s price.
A shift of the
demand curve…
$2.00
1.75
A
1.50
… is not the same
thing as a movement
along the demand
curve
C
1.25
B
1.00
0.75
0.50
0
D
7
8.1
9.7
10
13
1
15
D
2
17
Quantity of coffee
beans (billions of
pounds)
Shifts of the Demand Curve
Price
Increase in
demand
An“decrease
A
“increasein
indemand”,
demand”
means a rightward
leftward shift
shiftofof
the demand curve: at any
given price, consumers
demand a larger
smallerquantity
quantity
than before. (D1D2)
(D1D3)
Decrease in
demand
D
3
D
1
D
2
Quantity
What Causes a Demand Curve to Shift?

Changes in the Prices of Related Goods

Substitutes: Two goods are substitutes if a fall in the
price of one of the goods makes consumers less willing
to buy the other good.

Complements: Two goods are complements if a fall in
the price of one good makes people more willing to buy
the other good.
What Causes a Demand Curve to Shift?





Tastes and Fads
Overall incomes
Price and Availability of substitutes and
complements
Number of buyers
Future price expectations
Individual Demand Curve and the Market Demand
Curve
The market demand curve is the horizontal sum of the
individual demand curves of all consumers in that market.
(a)
(b)
(c)
Darla’s Individual
Demand Curve
Dino’s Individual
Demand Curve
Market Demand Curve
Price of
coffee
beans (per
pound)
Price of
coffee
beans (per
pound)
$2
Price of
coffee
beans (per
pound)
$2
$2
DMarket
1
1
1
DDarla
0
20
30
Quantity of coffee
beans (pounds)
DDino
0
10
20
Quantity of coffee
beans (pounds)
0
30
40
50
Quantity of coffee
beans (pounds)
Supply Schedule

A supply schedule
shows how much of a
good or service
would be supplied at
different prices.
Supply Schedule for Coffee Beans
Price of
coffee beans
(per pound)
Quantity of
coffee beans
supplied
(billions of
pounds)
$2.00
11.6
1.75
11.5
1.50
11.2
1.25
10.7
1.00
10.0
0.75
9.1
0.50
8.0
Supply Curve
Price of coffee
beans (per pound)
A supply curve shows
graphically how much of a
good or service people
are willing to sell at any
given price.
Supply
curve, S
$2.00
1.75
1.50
As price rises, the
quantity supplied rises.
1.25
1.00
0.75
0.50
0
7
9
11
13
15
17
Quantity of coffee beans (billions of pounds)
An Increase in Supply


The entry of Vietnam
Supply Schedule for Coffee Beans
into the coffee bean
Quantity of beans supplied
Price of
business generated
coffee beans
(billions of pounds)
an increase in
(per pound) Before entry After entry
supply—a rise in the
quantity supplied at
$2.00
11.6
13.9
any given price.
1.75
11.5
13.8
This event is
1.50
11.2
13.4
represented by the
1.25
10.7
12.8
two supply
schedules—one
1.00
10.0
12.0
showing supply before
0.75
9.1
10.9
Vietnam’s entry, the
0.50
8.0
9.6
other showing supply
after Vietnam came in.
An Increase in Supply
Price of coffee
beans (per
pound)
S
$2.00
S
1
2
A movement
along the supply
curve…
1.75
1.50
1.25
1.00
… is not the
same thing as a
shift of the
supply curve
0.75
0.50
0
7
9
11
13
15
17
Quantity of coffee beans
(billions of pounds)
A shift of the supply curve is a change in the quantity supplied of a good at any
given price.
Movement Along the Supply Curve
Price of coffee
beans (per
pound)
$2.00
A movement
along the supply
curve…
1.75
S
2
S
1
1.50
B
1.25
A
1.00
C
… is not the
same thing as
a shift of the
supply curve
0.75
0.50
0
7
10 11.2
12
15
17
Quantity of coffee beans
(billions of pounds)
A movement along the supply curve is a change in the quantity supplied of a
good that is the result of a change in that good’s price.
Shifts of the Supply Curve
Price
S
3
S
1
S
2
Increase in
supply
Decrease in
supply
Quantity
Any “decrease
“increase in
in
supply” means a
rightwardshift
leftward
shiftofofthe
the
supply curve: at any
given price, there is a
an
increase ininthe
decrease
the
quantity supplied.
(S1 S3)
S2)
What Causes a Supply Curve to Shift?





Price and Availability of land, labor, capital
Number of sellers
Technology
Price people are willing to pay on other goods that I
could produce instead
Government policies
Individual Supply Curve and the Market Supply
Curve
The market supply curve is the horizontal sum of the individual
supply curves of all firms in that market.
Price of
coffee
beans (per
pound)
(a)
(b)
(c)
Mr. Figueroa’s
Individual Supply Curve
Mr. Bien Pho’s Individual
Supply Curve
Market Supply Curve
SFigueroa
$2
1
0
Price of
coffee
beans (per
pound)
SBien Pho
$2
1
1
2
3
Quantity of coffee
beans (pounds)
0
Price of
coffee
beans (per
pound)
SMarket
$2
1
1
2
Quantity of coffee
beans (pounds)
0
1
2
3
4
5
Quantity of coffee
beans (pounds)
The Government’s role in the market









Promote the general welfare
Provider Public goods and services
Tax\Protect property rights
Regulate Interstate Commerce
Provide a money system
Insure Competition
Regulate businesses
Redistribute income
Correct for market externalities (inefficiencies)
Supply, Demand and Equilibrium

Equilibrium in a competitive market: when the quantity
demanded of a good equals the quantity supplied of
that good.

The price at which this takes place is the equilibrium
price (a.k.a. market-clearing price):

Every buyer finds a seller and vice versa.

The quantity of the good bought and sold at that price is the
equilibrium quantity.
Market Equilibrium
Price of
coffee beans
(per pound)
Supply
$2.00
1.75
1.50
Market equilibrium
occurs at point E,
where the supply
curve and the demand
curve intersect.
1.25
Equilibrium
price
E
1.00
Equilibrium
0.75
0.50
0
Demand
7
10
Equilibrium
quantity
13
15
17
Quantity of coffee beans
(billions of pounds)
Surplus
Price of coffee
beans (per pound)
There is a surplus of a
good when the quantity
supplied exceeds the
quantity demanded.
Surpluses occur when
the price is above its
equilibrium level.
Supply
$2.00
1.75
Surplus
1.50
1.25
E
1.00
0.75
0.50
0
Demand
7
8.1
10
11.2
13
15
17
Quantity of coffee beans
(billions of pounds)
Quantity
demanded
Quantity
supplied
Shortage
Price of
coffee beans
(per pound)
Supply
$2.00
1.75
1.50
1.25
There is a shortage of a
good when the quantity
demanded exceeds the
quantity supplied.
Shortages occur when
the price is below its
equilibrium level.
E
1.00
0.75
Shortage
0.50
0
7
9.1
10
Quantity
supplied
11.5
Quantity
demanded
Demand
13
15
17
Quantity of coffee beans
(billions of pounds)
Equilibrium and Shifts of the Demand Curve
Price of coffee
beans
An increase in
demand…
E
P
Price
rises
… leads to a
movement along the
supply curve due to a
higher equilibrium price
and higher equilibrium
quantity
2
2
E
P
Supply
1
1
D
D
Q
1
Q
Quantity rises
2
2
1
Quantity of coffee beans
Equilibrium and Shifts of the Supply Curve
Price of
coffee beans
S
2
P
S
1
E
2
2
… leads to a movement
along the demand curve
due to a higher
equilibrium price and
lower equilibrium quantity
Price
rises
P
A decrease
in supply…
E1
1
Demand
Q
2
Q
1
Quantity falls
Quantity of coffee beans
Technology Shifts of the Supply Curve
Price
An increase in
supply …
S1
S2
E1
Price
falls
P1
P2
E2
… leads to a movement
along the demand curve to
a lower equilibrium price
and higher equilibrium
quantity.
Technological innovation: In the early
1970s, engineers learned how to put
microscopic electronic components
onto a silicon chip; progress in the
technique has allowed ever more
components to be put on each chip.
Demand
Q
Q
1
2
Quantity increases
Quantity