Chapter 3 Market Demand and Supply - PowerPoint PPT Presentation

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Chapter 3 Market Demand and Supply
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Chapter 3 Market Demand and Supply

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  1. Chapter 3Market Demand and Supply • Key Concepts • Summary • Practice Quiz ©2004 Thomson/South-Western

  2. What is thelaw of demand? The principle that there is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus

  3. What does “ceteris paribus” mean? All else remains the same

  4. What is a demand curve? Depicts the relationship between price and quantity demanded

  5. Individual’s Demand Curve for Compact Discs P A $20 B $15 C $10 D $5 Demand Curve Q 4 8 12 16

  6. Why do demand curves have a negative slope? At a higher price consumers will buy fewer units, and at a lower price they will buy more units

  7. What is ademand schedule? Shows the specific quantity of a good or service that people are willing and able to buy at different prices

  8. What ismarket demand? The summation of the individual demand schedules

  9. IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND

  10. When price changes, what happens? The curve does not shift - there is a change in the quantity demanded

  11. Increase in Quantity Demanded Decrease in Price

  12. P Fred’s Demand Curve $20 $15 $10 $5 D1 Q 1 2 3 4 5 6 7 8 9

  13. P Mary’s Demand Curve $20 $15 $10 D2 $5 Q 1 2 3 4 5 6 7 8 9

  14. P Market Demand Curve $20 $15 $10 D3 $5 Q 3 4 5 6 7 8 9 10 11 12

  15. Market Demand Schedule for Compact Discs Price Fred Mary Total Demanded $25 1 + 0 = 1 $20 2 1 3 $15 3 3 6 $10 4 5 9 $5 5 7 12

  16. P A change in price causes a change in the quantity demanded $20 A $15 B $10 D $5 Q 10 20 30 40 50

  17. When something changes other than price, what happens? The whole curve shifts,there is a change in demand

  18. P When the ceteris paribus assumption is relaxed, the whole curve can shift $20 A B $15 $10 D2 D1 $5 Q 10 20 30 40 50

  19. Change in demand Change innonpricedeterminant

  20. What can cause a shift in a demand curve? • Number of buyers in the market • Tastes and preferences • Income • Expectations of consumers • Prices of related goods

  21. Decrease in quantity demanded Upward movement along the demand curve Price increases

  22. Increase in quantity demanded Downward movement along the demand curve Price decreases

  23. Decrease or increase in demand Leftward or rightward shift in the demand curve Nonprice determinant

  24. What is a normal good? Any good for which there is a direct relationship between changes in income and its demand curve

  25. What is aninferior good? Any good for which there is an inverse relationship between changes in income and its demand curve

  26. What aresubstitute goods? Goods that compete with one another for consumer purchases

  27. What happens when the price increases for a good that has a substitute? The demand curve for the substitute good increases

  28. What happens when the price decreases for a good that has a substitute? The demand curve for the substitute good decreases

  29. What does a direct relationship between price and quantity mean? The two move in the same direction

  30. What are complementary goods? Goods that are jointly consumed with another good

  31. What happens when the price increases for a good that has a complement? The demand curve for the substitute good decreases

  32. What happens when the price decreases for a good that has a complement? The demand curve for the substitute good increases

  33. What does an inverse relationship between price & quantity mean? It means that price and quantity move in opposite directions

  34. What does a direct relationship between price & quantity mean? It means that price and quantity move in the same direction

  35. What is thelaw of supply? The principle that there is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus

  36. Why do supply curves have a positive slope? Only at a higher price will it be profitable for sellers to incur the higher opportunity cost associated with supplying a larger quantity

  37. P A company’s Supply Curve for Compact Discs SupplyCurve A $20 $15 B $10 C $5 Q 10 20 30 40

  38. An Individual Seller’s Supply for Compact Discs Point Price Quantity A $20 40 B 10 30 C 6 20

  39. P Super Sound Supply Curve S1 $25 $20 $15 $10 Q 10 15 20 25

  40. P High Vibes Supply Curve S2 $25 $20 $15 $10 Q 20 25 30 35

  41. What is a market? Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged

  42. What is market supply? The horizontal summation of all the quantities supplied at various prices that might prevail in the market

  43. P Market Supply Curve $25 $20 S total $15 $10 Q 40 45 55 60

  44. Market Supply Schedule for Compact Discs Price Super Sound High Vibes Total $25 25 + 35 = 60 $20 20 30 50 $15 15 25 40 $10 10 20 30 $5 5 15 20

  45. IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY

  46. When price changes, what happens? The curve does not shift - there is a change in the quantity supplied

  47. P A change in price causes a change in the quantity supplied SupplyCurve A $20 $15 B $10 C $5 Q 10 20 30 40

  48. Increase in Quantity Supplied Increase in Price

  49. When something changes other than price, what happens? The whole curve shifts - there is a change in supply