Supply and Demand
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Supply and Demand . Supply and Demand Table of Contents . The Basics. Cross Price Elasticity of Demand. The Law of Demand. Income Elasticity of Demand. The Law of Supply . Market Failures- externalities . Equilibrium Price and Quantity . Equilibrium and Disequilibrium (2 slides).

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Supply and demand

Supply and Demand


Supply and demand

Supply and Demand

Table of Contents

The Basics

Cross Price Elasticity of Demand

The Law of Demand

Income Elasticity of Demand

The Law of Supply

Market Failures- externalities

Equilibrium Price and Quantity

Equilibrium and Disequilibrium (2 slides)

Price Controls - Price Floors and Price Ceilings

Consumer and Produce Surplus

Impacts of Price Control on Consumer/Produce surplus and deadweight lose

Shifts in Demand

Shifts in Supply

Double Shifts in Supply and Demand

Price Elasticity of Demand

Price Elasticity of Supply


Supply and demand

Supply and Demand

The Basics

Y

Price (P)

Supply (S)

Equilibrium (Qs= Qd)

P e

Demand (D)

X

Quantity (Q)

Q e

TC


Supply and demand

Supply and Demand

The Law of Demand

Demand- Different Quantities of goods and services that people are willing and able to buy at different prices.

The Law of Demand

Price (P)

Price:Quantity Demanded

Price:Quantity Demanded

P2

P1

Price and Quantity Demanded have an

Inverse Relationship

Q1

Q2

3 reasons why

Quantity (Q)

Substitution effect

Income effect- loss of purchasing power. The more expensive the less you can buy

Law of Diminishing maximum utility

TC


Supply and demand

Student Demand for a Slice of Pizza at a specific price

P

5.00

4.50

4.00

3.50

3.00

2.50

2.00

1.50

1.00

Qd

0

5

10

15

20

25

30


Supply and demand

Supply and Demand

The Law of Supply

Supply- Different Quantities of goods and services that people are willing and able to produce at different prices.

The Law of Demand

Price (P)

Price:Quantity Supplied

Price:Quantity Supplied

P2

P1

Price and Quantity Supplied have an

Direct Relationship

Q1

Q2

Trade off between Labor and Leisure.

The more money that can be made the more likely you will trade of leisure for labor.

Opportunity Cost.

Quantity (Q)

TC

Online Lesson

Articles


Supply and demand

Supply and Demand

Equilibrium

Equilibrium- The quantity where price has adjusted so that quantity demanded is equal to quantity supplied. The amount that the buyers are willing and able to purchase matches the amount that producers are willing and able to sell.

Price (P)

In nature water seeks its own level. Price does the same thing. Both Quantity supplied and Quantity demand works towards each other.

Supply (S)

Equilibrium (Qs= Qd)

P e

Demand (D)

Quantity (Q)

Q e

TC


Supply and demand

Supply and Demand

Equilibrium and Disequilibrium- Surplus

Price (P)

Surplus happens when Quantity supplied is greater than the quantity demanded

Almost always result from price controls

Surplus

Supply (S)

Price Floor

$20

$5 P e

Equilibrium (Qs= Qd)

Demand (D)

Quantity (Q)

Qd

Qs

Q e

TC


Supply and demand

Supply and Demand

Equilibrium and Disequilibrium- Shortages

Price (P)

Shortages happens when Quantity demanded is greater than the quantity supplied

Almost always result from price controls.

Supply (S)

Price Ceilings

$2

$5 P e

Equilibrium (Qs= Qd)

Shortage

Demand (D)

Quantity (Q)

Qd

Q s

Q e

TC

Online Lesson


Supply and demand

Supply and Demand

Price Floors and Price Ceilings

Surplus

Price Floors are created to keep prices over equilibrium.

Qd is less than Q s= surplus

Example- Minimum wage

Price (P)

Price (P)

Supply (S)

Supply (S)

Price Ceiling

Price Floor

$2 P

$20 P

Clip 2

Clip 1

$5 P e

$5 P e

Equilibrium (Qs= Qd)

Equilibrium (Qs= Qd)

Qs

Qd

Price Ceilings are created to keep prices under equilibrium.

Qs is less than Qd= shortage

Example- Rent Control

Demand (D)

Demand (D)

Quantity (Q)

Quantity (Q)

Q e

Q e

Price Controls are inefficient

Shortage

Qs

Qd

TC

Online Lesson

Articles


Supply and demand

Supply and Demand

Consumer and Producer Surplus

Consumer Surplus-= (Price that the consumer is willing to pay – The Equilibrium price)

Producer Surplus-= (The Equilibrium price- Price that the producer is willing to sell)

Price consumers are willing to pay. “I bought it for $5 but I would have paid $8.” Demand is value

Price (P)

Supply (S)

$4

CS

Products are consumed by the consumers who want them the most and would be willing to pay more if they had to.

Products are produced by the producers at the lowest price because they are willing to sell it for less.

$2 P e

Equilibrium (Qs= Qd)

PS

Demand (D)

$1

Quantity (Q)

Q e

Price producers are willing to sell. “I sold it for $5 but I would have sold it for $2.” Supply is production cost.

TC

Online Lesson


Supply and demand

Supply and Demand

Consumer and Producer Surplus with a Price Ceiling

Consumer Surplus-= (Price that the consumer is willing to pay – The Equilibrium price)

Producer Surplus-= (The Equilibrium price- Price that the producer is willing to sell)

Price (P)

Dead weight loss- represents product that was never produced.

Ceilings result in shortages

Supply (S)

$4

Dead weight loss

Price Ceiling

$1.50

$2 P e

Equilibrium (Qs= Qd)

CS

PS

Demand (D)

$1

Quantity (Q)

Q s

50

Q e

100

Q d

TC

Online Lesson


Supply and demand

Supply and Demand

Shifts in Demand- besides current price changes what other factors shift demand?

When there is an increase in Quantity demand

Price increases (direct)

When there is an decrease in Quantity demand

Price decreases (direct)

Price (P)

Price (P)

Supply (S)

Supply (S)

P 1

P 1

$5 P e

$5 P e

Equilibrium (Qs= Qd)

Equilibrium (Qs= Qd)

(D1)

(D1)

Q 1

Q 1

5 Demand Shifters

1. Change in Taste (Direct)

(D)

(D)

2. Change in income- normal products- direct, inferior products- inverse

3. Change in market size (number of consumers) - direct

Quantity (Q)

Quantity (Q)

Q e

Q e

4. Expectations of consumers (future price, future availability, future income)

5. Price of related goods (substitutes – direct, complements- inverse)

TC

Online Lesson

Shifter PPT


Supply and demand

Supply and Demand

Shifts in Supply- besides current price changes what other factors shift supply?

When there is an increase in Quantity supplied

Price decreases

When there is an decrease in Quantity supplied

Price increase

Price (P)

Price (P)

(S1)

(S1)

(S)

Supply (S)

P 1

P 1

$5 P e

$5 P e

Equilibrium (Qs= Qd)

Equilibrium (Qs= Qd)

Q 1

Q 1

7 Supply Shifters

1. Resource Cost (wages and raw materials)- inverse

2. Alternative output price change - inverse

(D)

(D)

3. Technological improvements

Quantity (Q)

Quantity (Q)

4. Number of Suppliers - direct

Q e

Q e

5. Producer expectations about future- inverse

6. Subsides – government gives money to produce - direct

7. Taxes- inverse

TC

Online Lesson

Shifter PPT


Supply and demand

Demand and Supply Shifters

TC


Supply and demand

Let's Take A Look At The

Five Demand Shifters

["TIMER"]

TC


Supply and demand

Warning

Concentration on these slides is guaranted

to improve your economics grade.

TC


Supply and demand

1."Change in Taste"

[Direct]

A decrease in taste

forvideos results in a

decrease in demand.

An increase in taste

for DVDs results in an

increase in demand.

D2

D1

D3

P

QD3

QD1

QD2

TC


Supply and demand

Peanut Butter Salmonella Scare

.

D1

11 have died and

529 have gotten sick.

[430 peanut products recalled]

D2

P

Wall Street has gotten

so bad that stockholders

try to kill themselves

by eating peanuts.

“Decrease in demand”

after the salmonella scare.

TC


Supply and demand

Example 2 on "Change in Taste" for Dark Chocolate

Increase in demand for dark chocolate after studies

revealed that there werehealth benefitsfrom eating it.

Scientists have discovered that smokers who ate dark chocolate had

less hardening of the arteries and a lowered risk of blood clots.

D2

D1

P

TC


Supply and demand

2. Change in Income

[Normal-Direct; Inferior-Inverse]

Used Cars

New Cars

D2

D1

Less income

results in

more demand

for used cars;

less demand

for new cars.

More income

results in

more demand

for new cars;

less demand

for used cars.

P

QD1

QD2

TC


Supply and demand

3. Change in Market Size [Direct]

[Number of Consumers]

This is what we told one billion Chinese, as new potential

consumers, when we opened trade relations with them in 1972.

D2

D1

P

New Cars

More demand

for both normal

& inferior goods

QD1

QD2

Used Cars

TC


Supply and demand

4. Expectations [of consumers]

[about future price, availibility, & income]

If Steve Jobs responds to iRate customers who

bought the iPhone at $599 and says, “iSorry,

we will raise the price back to $599 in 3 weeks.”

$399

D2

D1

Buy it now to save money.

iPhone

P

QD1

QD2

TC


Supply and demand

4. Expectations [of consumers]

[about future availibility of toilet tissue]

If there is expected to be a major shortage of toilet tissue,

then consumers will stock up now or risk not getting any.

D2

D1

P

QD1

QD2

TC


Supply and demand

4. Expectations [of consumers]

[about future income]

Let’s say that we are coming out of recession & consumers

feel secure about their jobs. [Positive future income]

D2

D1

P

QD1

QD2

TC


Supply and demand

4. Expectations [of consumers]

[about future income]

Let’s say that we are going into a recession and consumers

don’t feel secure about their jobs. [Negative future income]

D1

D2

P

QD2

QD1

TC


Supply and demand

5. Prices of Related Goods

[Substitutes-Direct; Complements-Inverse]

D1

D2

D

D1

P1

D2

P

P

P2

QD2

Complement

[Inverse]

QD1

Substitute

[Direct]

Cereal

Pop Tarts

Milk

TC


Supply and demand

Now, Let's Take A Look At

The Seven Supply Shifters

["RATNEST"]

TC


Supply and demand

1.ResourceCost[wages & raw materials][Inverse]

Wages

Raw Materials

Intel Pentium Chip

If resource cost

increases

supply

Decreases

[making less $]

If resource cost

decreases

supply

Increases

[making more $]

S

S

S

P


Supply and demand

2. Alternative Output Price Change [Inverse]

I only have 200 acres

“Substitutes in production”

Corn

S1

Broccoli

S2

P1

S

P2

P

QS1

QS2

Producers want to produce more of the good where price is increasing,

Corn

Broccoli

S1

S

P1

S2

P

P2

QS1

QS2

or at least, where the price is not going down.


Supply and demand

3. Technological Improvement

[Cow Waterbeds]

Waterbedsforcows.com

We love these cow waterbeds because we get better blood flow and can produce 30% more milk.

Less skin abrasions

so happier cows

produce more milk.

Because cows

produce more

milk,farmers

don’t have to

have as many

cows.[saves$]

Supply curve

moves “udderly”

to the right.

S

S

P

Mooooove over and give me that waterbed.


Supply and demand

P

S1

$50

Q

4. Number of Suppliers [Direct]

NFL

S2

XFL in 2001

8 new teams

More games

each year

QS1

QS2

Supply of FB games each week

XFL [Extreme Football League]

Supply of FB games increased when the XFL was formed.


Supply and demand

5. Producer Expectations about Future Price

[“INVERSE”]

S2

S1

S2

P

If the Bubba Gump Shrimp Companyexpects shrimp prices to decrease more in the future, they will supply (more/less) shrimp to the market now. 

If the Bubba Gump Shrimp Companyexpects shrimp prices to increase more in the future, they will supply (more/less) shrimp to the market now. 

TC


Supply and demand

6. Subsidies - free money from government

[Direct]

S3

S1

S2

P

Free money from the government (subsidies)

induces suppliers to supply more.

If subsidies are taken away, then suppliers are losing

money and will decrease supply.

TC


Supply and demand

7. Taxes Take Away Business Profits & Decrease Supply.

[Inverse]

S3

S1

S2

P

I’m losing

profits.”

If business have their taxes decreased,

it moves the supply curve to the right.

If business have their taxes increased,

it moves the supply curve to the left.

TC


Supply and demand

Market Failures

Imperfect Information- (making irrational decisions)

Principal Agent Problems- (Conflict of Interest)

Non- Competitive Markets (imperfect competition) – Monopolies, Oligopolies, and cartels)

Public Goods- when the private sector will not produce something

Externalities- Spillover effect both positive and negative

TC


Supply and demand

Market Failure

Positive Externalities (spillover benefit)

(P)

(S)- MSC

D1- MSB

P fm

Q optimal

MSC= MSB

Problem: At Q free market, to little is being produced. MSB>MSC@ Q fm

(D) MB (private)

Solution: Because the demand has increased, the price may increase as well. Government give a subsidy to consumer to help pay for the extra cost.

(Q)

Q fm

TC


Supply and demand

Market Failure

Positive Externalities

S1- MSC

(S)- private

(P)

P fm

Q optimal

MSC= MSB

Problem: At Q free market, to little is being produced. MSB>MSC@ Q fm

(D) MSB

Solution: The Government can give the private supplier an incentive to increase the supply by paying them a subsidy to make up for the decrease in price due to the increase in supply

(Q)

Q fm

TC


Supply and demand

Market Failure

Negative Externalities (spillover cost)

S1- mscmsc= private cost + external cost

(P)

(S) private

P fm

Q

MSC=

MSB

(D)= MSB

Problem: At Q free market, to much is being produced. MSB<MSC @ Q fm

Solution: Per unit tax on producers

(Q)

Q fm

TC


Supply and demand

http://www.washingtonpost.com/wp-dyn/articles/A42887-2005Jan27.html

http://articles.cnn.com/keyword/supply-and-demand

http://www.nytimes.com/keyword/price-controls

http://www.thefreemanonline.org/columns/price-floors-surpluses-and-the-minimum-wage/

http://economics.fundamentalfinance.com/price-ceiling.php

http://economics.fundamentalfinance.com/micro_price-floor.php


Supply and demand

Market Failures

TC


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