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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
Supply & Demand

“Teach a parrot the terms ‘supply’ and ‘demand’, and you’ve got an economist.”

Thomas Carlyle

Scottish Historian

(1795 – 1881)

TWO

slide2

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
slide3

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.

demand
Demand

Demand for Shoes

DEMAND

There is a negative relationship between price and quantity demanded

(price and qty move in opposite directions)

Quantity Demanded

demand1
Demand

Demand for Shoes

P

Quantity Demanded

$100

$80

DEMAND

$60

$40

$20

D

0

Q

2,000

6,000

slide6

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
slide7

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:
slide8

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
slide9

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
slide10

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
slide11

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
slide12

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
slide13

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
slide14

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).

supply
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

supply1
Supply

Supply of Shoes

P

Quantity Supplied

S

$100

SUPPLY

$80

$60

$40

$20

0

Q

2,000

6,000

10,000

slide17

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
slide18

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:

slide19

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
slide20

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
slide21

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)
slide22

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.
slide23

Price Determination: EQUILIBRIUM

Market for Shoes

EQUILIBRIUM

slide24

Price Determination: EQUILIBRIUM

P

S

Equilibrium, QD = QS

PE

D

0

Q

QE

slide25

Price Determination: EQUILIBRIUM

P

S

Surplus, QD<QS

Too many resources

PE

D

0

Q

QD

QS

slide26

Price Determination: EQUILIBRIUM

P

S

PE

Too few resources

Shortage, QD>QS

D

0

Q

QD

QS

slide27

Price Determination: EQUILIBRIUM

P

S

Equilibrium, QD = QS

PE

D

0

Q

QE

slide28

How Change in Demand Changes Equilibrium

EXAMPLE

  • Normal Good
  • Market for Filet Mignon
  • Income Increases
  • Demand Increases

P

S

PE

D

0

Q

QE

slide29

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

slide30

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

slide31

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

slide32

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