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Supply & Demand

Supply & Demand . “Teach a parrot the terms ‘supply’ and ‘demand’, and you’ve got an economist .” Thomas Carlyle Scottish Historian (1795 – 1881). TWO. Supply and Demand. In this chapter: Demand Law of Demand Things that Change Demand Supply Law of Supply Things that Change Supply

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Supply & Demand

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  1. Supply & Demand “Teach a parrot the terms ‘supply’ and ‘demand’, and you’ve got an economist.” Thomas Carlyle Scottish Historian (1795 – 1881) TWO

  2. Supply and Demand • In this chapter: • Demand • Law of Demand • Things that Change Demand • Supply • Law of Supply • Things that Change Supply • Process of Price Determination • Equilibrium Price and Quantity • Shortages and Surpluses • Changes in Equilibrium when Demand Changes

  3. Demand Market Mechanism for buyers (demanders) and sellers (suppliers) to negotiate exchange. Demand Quantities of a good or service that buyers are willing and able to purchase at various prices during a given time period, holding all other things constant.

  4. Demand Demand for Shoes DEMAND There is a negative relationship between price and quantity demanded (price and qty move in opposite directions) Quantity Demanded

  5. Demand Demand for Shoes P Quantity Demanded $100 $80 DEMAND $60 $40 $20 D 0 Q 2,000 6,000

  6. Law of Demand • The quantity demanded of a good is negatively (inversely) related to its price • - or - • When price goes up, quantity demanded goes down (and vice versa) • - or - • Price and quantity demanded move in opposite directions

  7. Determinants of Demand • When the price of a good changes, we get a change in quantity demanded, just a movement along the demand curve. • BUT . . . • When anything else that can influence demand changes (those things held constant), we get a change in demand, a shift of the demand curve (a NEW demand curve). • We call these things the determinants of demand:

  8. Determinants of Demand • Changes in these things will change demand (shift the demand curve): • Income • Normal Goods (Income & demand positively related) • Inferior Goods (Income & demand negatively related) • Tastes and Preferences • Excise Taxes / Subsidies • Price of Related Goods • Substitutes (If X and Y are subs, price of X & demand for Y positively related) • Complements (If X and Y are comps, price of X & demand for Y negatively related) • Number of Buyers in Market

  9. Determinants of Demand P P D D 0 0 Q Q • Normal Good • Market for New York Strip Steaks • Income Increases • Demand Increases • Inferior Good • Market for Ramen Noodles • Income Increases • Demand Decreases

  10. Determinants of Demand P P D D 0 0 Q Q • Tastes &Preferences • Market for SlimFast • Oprah loses 50 pounds on a SlimFast diet • Demand for SlimFast increases • Tastes & Preference • Market for US Beef • Mad Cow disease found in Iowa cows • Demand for US beef decreases

  11. Determinants of Demand P P D D 0 0 Q Q • Excise (Use) Tax • Market for Cigarettes • Government raises excise tax • Demand for cigarettes decreases • Subsidy • Market for New Homes • Government grants subsidy • Demand for new homes increases

  12. Determinants of Demand P P D D 0 0 Q Q • Substitute • Market for Beef • Price of chicken increases • Demand for beef increases • Complement • Market for DVD players • Price of DVD’s increases • Demand for DVD players decreases

  13. Determinants of Demand P P D D 0 0 Q Q • # Buyers (Market Size) • Market for Cadillacs • Baby Boomers get older • Demand for Cadillacs increases • # Buyers (Market Size) • Market for Textbooks • UNCC declares all textbooks optional • Demand for textbooks decreases

  14. Supply Supply Quantities of a good or service that producers are willing and able to offer for sale at various prices during a given time period, ceteris paribus(when all factors other than the good’s price remain constant).

  15. Supply Supply of Shoes SUPPLY There is a positive relationship between price and quantity supplied (price and qty move in the same direction) Quantity Supplied

  16. Supply Supply of Shoes P Quantity Supplied S $100 SUPPLY $80 $60 $40 $20 0 Q 2,000 6,000 10,000

  17. Law of Supply • The quantity supplied of a good is positively (directly) related to its price • - or - • When price goes up, quantity supplied goes up (and vice versa) • - or - • Price and quantity supplied move in the same direction

  18. Determinants of Supply When the price of a good changes, we get a change in quantity supplied, just a movement along the supply curve. BUT . . . When anything else that can influence supply changes (those things held constant), we get a change in supply, a shift of the supply curve (a NEW supply curve). We call these things the determinants of supply:

  19. Determinants of Supply • Changes in these things will change supply(shift the supply curve): • Price of Inputs • Technology • Number Sellers in Market • Excise Taxes / Subsidies • Same effect as on demand side

  20. Determinants of Supply P P S S 0 Q 0 Q • Price of Inputs(Cost of Production) • Market for Automobiles • Price of steel decreases • Supply of automobiles increases • Price of Inputs(Cost of Production) • Market for Gasoline • Price of oil increases • Supply of gasoline decreases

  21. Determinants of Supply P P S S 0 Q 0 Q • Technology • Market for Beef • More efficient way of slaughtering cows is developed • Supply of beef increases • # Sellers • Market for American Flags • Terrorist attack on US • Supply Increases (as more firms start to make flags)

  22. Price Determination: EQUILIBRIUM • Competing motivations of buyers and sellers interact to find a price and quantity determined by impersonal market forces (It’s a beautiful thing). • Equilibrium price and quantity is where quantity demanded equals quantity supplied (QD = QS). • Equilibrium is a resting place – when market price is not at equilibrium, market forces work to achieve equilibrium.

  23. Price Determination: EQUILIBRIUM Market for Shoes EQUILIBRIUM

  24. Price Determination: EQUILIBRIUM P S Equilibrium, QD = QS PE D 0 Q QE

  25. Price Determination: EQUILIBRIUM P S Surplus, QD<QS Too many resources PE D 0 Q QD QS

  26. Price Determination: EQUILIBRIUM P S PE Too few resources Shortage, QD>QS D 0 Q QD QS

  27. Price Determination: EQUILIBRIUM P S Equilibrium, QD = QS PE D 0 Q QE

  28. How Change in Demand Changes Equilibrium EXAMPLE • Normal Good • Market for Filet Mignon • Income Increases • Demand Increases P S PE D 0 Q QE

  29. How Change in Demand Changes Equilibrium EXAMPLE • Normal Good • Market for Filet Mignon • Creates Shortage • Price is BELOW new equilibrium P S D2 D1 0 Q

  30. PE How Change in Demand Changes Equilibrium EXAMPLE • Normal Good • Market for Filet Mignon • Market won’t allow shortage to persist, will push price up to new equilibrium P S D2 D1 QE 0 Q

  31. PE How Change in Demand Changes Equilibrium EXAMPLE • Normal Good • Market for Filet Mignon • New equilibrium at higher price, higher quantity because income increased. P S D2 0 Q QE

  32. Supply and Demand • Key Terms: • Change in Demand/Supply • Change in quantity demanded/supplied • Complement • Demand • Demand curve • Determinants of demand/supply • Equilibrium • Equilibrium price • Equilibrium quantity • Excise Tax • Inferior good • Law of demand/supply • Normal good • Shortage • Subsidy • Substitute • Supply • Supply curve • Surplus • Technology

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