Transcript Chapter 3 Supply and Demand - Triton College Academic Server

Principles of Economics
by Fred M Gottheil
PowerPoint Slides prepared by Ken Long
Chap. 3 SUPPLY AND DEMAND
©1999 South-Western College Publishing
1
What is Supply and
Demand?
A model of price
behavior in
competitive markets
2
Note that Demand is not
• The same as wants
• The same as needs
• necessarily the same as
the actual quantity
purchased
3
The Law of Demand
When price increases the
quantity demanded
decreases and vice versa,
ceteris paribus
©1999 South-Western College Publishing
4
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
5
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
6
Price Quantity Demanded
$10
0
$9
1
$8
2
$7
3
$6
4
$5
5
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7
7
What is a
Demand Curve?
A graph that depicts the
relationship between
price and quantity
demanded
©1999 South-Western College Publishing
8
P1
P2
Q1
Q2
©1999 South-Western College Publishing
9
9
Reasons for the Law of
Demand??
• The substitution (relative
price) effect
• The real income effect
10
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
11
P
Shift in Demand Curve
D2
D1
Q
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121
A rightward shift in the
demand curve is an
increase in demand, a
leftward shift is a
decrease in demand.
13
What causes a shift
in Demand?
•Change in tastes
•Income changes
•Changes in Population
•Changes in the prices of related goods
•Changes in Expectations
14
Income changes: 2
possibilities:
• Normal goods: as income
rises, demand rises, cet. par.
• Inferior goods: As income
rises, demand falls, cet. par.
15
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
16
Changes in future price
expectations
The expectation of a future
rise in price leads to an
increase in demand now,
cet. par.
17
What is Market Demand?
The sum of all individual
demands in a market
18
NOTE - KNOW THE
DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
DEMANDED AND A
CHANGE IN DEMAND
©1999 South-Western College Publishing
19
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
20
P
P
P1
P2
D1
D
D
Q
A change in demand
Q1
Q2
Q
A change in quantity
demanded
21
Do you understand?
Do you really
understand?????
22
Which of the following would
increase the current demand for cd’s?
a.
b.
c.
d.
e.
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
23
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
24
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
25
The supply side of the
market
Supply refers to
willingness and ability
to produce something
26
The Law of Supply
As price rises, the
quantity supplied
rises, cet. par.
27
Reasons for the Law of
Supply?
• Monetary incentives
• The Law of Increasing
Opportunity Costs
28
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
29
Price Quantity Supplied
$5
0
$6
1
$7
2
$8
3
$9
4
$10
5
©1999 South-Western College Publishing
3
30 0
What is a Supply Curve?
Depicts the relationship
between price and
quantity supplied
©1999 South-Western College Publishing
31
P2
S
P1
Q1
©1999 South-Western College Publishing
Q2
32
32
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
33
P2
S
P1
Q
©1999 South-Western College Publishing
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34
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
35
P
Shift in Supply
S1
S2
Q
©1999 South-Western College Publishing
36
3
A rightward shift in the
supply curve is an
increase in supply, a
leftward shift is a
decrease in supply.
37
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
38
Increases in supply can
be caused by:
Improved technology
Lower resource prices
Greater number of firms
Expected lower future prices
39
NOTE - KNOW THE
DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
SUPPLIED AND A
CHANGE IN SUPPLY
©1999 South-Western College Publishing
40
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
41
P
S
S1
S
P
P2
P1
Q
A change in supply
Q1
Q2
Q
A change in quantity
supplied
42
Supply and demand
together
• Put supply and demand
curves on the same graph
• Intersection gives the
equilibrium price and
quantity
43
Price
S
PE
D
QE
Quantity
PE and QE represent the equilibrium price and
quantity
44
What is
Equilibrium Price?
The price that equates the
quantity demanded and
the quantity supplied
©1999 South-Western College Publishing
45
What happens if price is
below equilibrium?
A shortage, or excess
demand, arises
46
At P2, QD > QS, thus a shortage or excess
demand exists
S
P2
D
Shortage
QS
QD
47
47
How is the shortage
eliminated?
The price rises, leading to a
decrease in quantity
demanded and an increase in
quantity supplied.
48
What happens if price is
above equilibrium?
A surplus, or excess
supply, arises
49
At P1, QD < QS, thus a surplus or excess supply exists
Surplus
P1
S
D
QD
QS
50
50
How is the surplus
eliminated?
The price falls, leading to a
decrease in quantity supplied
and an increase in quantity
demanded.
51
Summary, shortages, surpluses, and equilibrium
P1
Surplus
S
P3
P2
Shortage
Q3
©1999 South-Western College Publishing
D
52
52
How shifts in S and D
affect equilibrium price
and quantity
53
Right Shift in Demand
S
P2
P1
D2
D1
Q1
Q2
©1999 South-Western College Publishing
54
54
Left Shift in Demand
S1
P1
P2
D2
Q2
D1
Q1
©1999 South-Western College Publishing
55
55
Summary, demand
changes
Increased demand, price
and quantity both rise
Decreased demand, price
and quantity both fall
56
Right Shift in Supply
S1
P1
P2
S2
D
Q1
Q2
©1999 South-Western College Publishing
557
7
Left Shift in Supply
S2
P2
P1
S1
D
Q2
Q1
©1999 South-Western College Publishing
558
8
Summary, supply
changes
Increased supply, price
falls, quantity rises
Decreased supply, price
rises, quantity falls
59
If both curves shift, can
predict price or quantity,
but not both unless the
magnitude of the shifts
are known
60
Examples: shifts in both
S and D curves
Say both S and D increase,
what can we say about
equilibrium P and Q?
61
ANSWER
Q will increase, but P is
indeterminate
62
Examples: shifts in both
S and D curves
Say S increases but D
decreases, what can we
say about equilibrium P
and Q?
63
ANSWER:
P will decrease, but Q is
indeterminate
64
• What assumption is always made
when the price changes?
• What is a Demand Curve?
• What is a Supply Curve?
• What is equilibrium Price?
• What are shortages and surpluses?
• What happens when demand and
supply curves shift?
65
Supply and demand
problems
Suppose apples and oranges are substitutes to
consumers: Bad weather destroys many
apple orchards--what happens to
equilibrium price and quantity in the apple
market? In the Orange market?? Illustrate
graphically.
66
S1
P
S
P
S
P2
P2
P1
P1
D1
D
Q2
Q1
Q
Apple market, supply
decreases, price rises,
quantity falls
D
Q1
Q2
Q
Orange market, demand
increases, price and
quantity rise
67
Oprah Winfrey says on tv that
she will never eat another
hamburger. What might
happen to the equilibrium price
and quantity in the beef
market? Show graphically
with supply and demand
curves.
68
Decrease in demand in the beef
market, price and quantity fall
S1
P1
P2
D2
Q2
D1
Q1
69
69
The demand for computers has clearly
increased over time, due to higher incomes
and changing preferences towards
computers. Despite the increased demand,
the price of computers has continued to
fall. Show graphically with supply and
demand curves how this could happen, and
give some possible explanations.
70
S
S1
P2
P1
P3
D1
D
If supply increases more than demand, price
falls--greater supply due possibly to lower input
costs, better technology, more firms
71
An increase in the wages paid to fishermen
will have what effect on the fish market
equilibrium?
a. Price will decrease, and quantity will
decrease.
b. Price will increase, and quantity will
increase.
c. Price will decrease, and quantity will
increase.
d. Price will increase, and quantity will
decrease.
e. Price and quantity will stay the same.
72
Over the past couple of years, prices for
personal computers have fallen
dramatically, but suppliers have
offered more and more of them for
sale. Does this refute the law of
supply? Explain.
73