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Principles of Economics by Fred M Gottheil

Principles of Economics by Fred M Gottheil. prepared by Adnan A, Alshiha. Chap. 3 SUPPLY AND DEMAND. © 1999 South-Western College Publishing. What is Supply and Demand?. A model of price behavior in competitive markets. Note that Demand is not. The same as wants The same as needs

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Principles of Economics by Fred M Gottheil

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  1. Principles of Economicsby Fred M Gottheil prepared by Adnan A, Alshiha Chap. 3 SUPPLY AND DEMAND ©1999 South-Western College Publishing

  2. What is Supply and Demand? A model of price behavior in competitive markets

  3. Note that Demand is not • The same as wants • The same as needs • necessarily the same as the actual quantity purchased

  4. The Law of Demand When price increases the quantity demanded decreases and vice versa, ceteris paribus ©1999 South-Western College Publishing

  5. What assumption is always made when the price changes? Ceteris paribus or everything else stays the same-abbreviated cet.par. ©1999 South-Western College Publishing

  6. What is a Demand Schedule? Shows the specific quantity of a good or service that people are willing and able to buy at different prices ©1999 South-Western College Publishing

  7. Price Quantity Demanded $10 0 $9 1 $8 2 $7 3 $6 4 $5 5 7 ©1999 South-Western College Publishing

  8. What is a Demand Curve? A graph that depicts the relationship between price and quantity demanded ©1999 South-Western College Publishing

  9. P1 Demand Curve P2 Q2 Q1 9 ©1999 South-Western College Publishing

  10. Reasons for the Law of Demand?? • The substitution (relative price) effect • The real income effect

  11. What is a change in Demand? A change in the amount demanded of a good that is caused by factors other than a change in the price of that good ©1999 South-Western College Publishing

  12. Shift in Demand Curve P D2 D1 Q ©1999 South-Western College Publishing 12

  13. A rightward shift in the demand curve is an increase in demand, a leftward shift is a decrease in demand.

  14. What causes a shift in Demand? • Change in tastes • Income changes • Changes in Population • Changes in the prices of related goods • Changes in Expectations

  15. Income changes: 2 possibilities: • Normal goods: as income rises, demand rises, cet. par. • Inferior goods: As income rises, demand falls, cet. par.

  16. Changes in related goods prices: 2 cases: • Substitute goods: As the price of Y increases, the demand for X increases • Complementary goods: As the price of Y increases, the demand for X decreases

  17. Changes in future price expectations The expectation of a future rise in price leads to an increase in demand now, cet. par.

  18. What is Market Demand? The sum of all individual demands in a market

  19. NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND ©1999 South-Western College Publishing

  20. Changes in demand vs. changes in quantity demanded • Changes in quantity demanded only caused by changes in the products own price, a movement along a demand curve • Changes in demand--a shift in the demand curve caused by factors other than the price of the product

  21. P P P1 P2 D1 D D Q1 Q2 Q Q A change in demand A change in quantity demanded

  22. Do you understand? Do you really understand?????

  23. Which of the following would increase the current demand for cd’s? a. A decrease in the price of cd’s • A decline in the teenage population • A lower cost for producing cd’s • An expectation of a drop in cd prices • A decrease in the price of cd players The correct answer is…….E

  24. 1. According to the "Law of Demand," as the price of a good increases a. the demand for the good increases. b. the demand for the good decreases. c. the quantity demanded increases. d. the quantity demanded decreases. 2. Tea and Coffee are ____________. Peanut butter and jelly are ____________. a. complements; substitutes b. complements; complements c. substitutes; complements d. substitutes; substitutes

  25. 3. Which of the following will increase the demand for pencils? a. a decrease in the price b. a decrease in the student population c. a decrease in the price of pens d. a decrease in the price of erasers

  26. The supply side of the market Supply refers to willingness and ability to produce something

  27. The Law of Supply As price rises, the quantity supplied rises, cet. par.

  28. Reasons for the Law of Supply? • Monetary incentives • The Law of Increasing Opportunity Costs

  29. What is a Supply Schedule? Shows the specific quantity of a good or service that suppliers are willing and able to provide at different prices ©1999 South-Western College Publishing

  30. Price Quantity Supplied $5 0 $6 1 $7 2 $8 3 $9 4 $10 5 30 ©1999 South-Western College Publishing

  31. What is a Supply Curve? Depicts the relationship between price and quantity supplied ©1999 South-Western College Publishing

  32. P2 S Supply Curve P1 Q2 Q1 32 ©1999 South-Western College Publishing

  33. What is Market -day Supply? A market situation in which the quantity of a good supplied is fixed, regardless of price ©1999 South-Western College Publishing

  34. S P2 P1 Supply Curve Q 34 ©1999 South-Western College Publishing

  35. What is a change in Supply? A change in the amount supplied of a good that is caused by factors other than a change in the price of that good ©1999 South-Western College Publishing

  36. Shift in Supply P S1 S2 Q 36 ©1999 South-Western College Publishing

  37. A rightward shift in the supply curve is an increase in supply, a leftward shift is a decrease in supply.

  38. What causes a shift in Supply • Technology changes • Changes in resource prices • Changes in the number of suppliers • Changes in other good prices • Changes in expectations

  39. Increases in supply can be caused by: Improved technology Lower resource prices Greater number of firms Expected lower future prices

  40. NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY ©1999 South-Western College Publishing

  41. Changes in supply vs. changes in quantity supplied • Changes in quantity supplied only caused by changes in the products own price, a movement along a supply curve • Changes in supply--a shift in the supply curve caused by factors other than the price of the product

  42. S P S1 S P P2 P1 Q1 Q2 Q Q A change in supply A change in quantity supplied

  43. Supply and demand together • Put supply and demand curves on the same graph • Intersection gives the equilibrium price and quantity

  44. Price S PE D QE Quantity PE and QE represent the equilibrium price and quantity

  45. What is Equilibrium Price? The price that equates the quantity demanded and the quantity supplied ©1999 South-Western College Publishing

  46. What happens if price is below equilibrium? A shortage, or excess demand, arises

  47. At P2, QD > QS, thus a shortage or excess demand exists S P2 D Shortage QS QD 47

  48. How is the shortage eliminated? The price rises, leading to a decrease in quantity demanded and an increase in quantity supplied.

  49. What happens if price is above equilibrium? A surplus, or excess supply, arises

  50. At P1, QD < QS, thus a surplus or excess supply exists Surplus S P1 D QS QD 50

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