Supply and Demand PDF

DYNAMIC POWERPOINT™ SLIDES CHAPTER 3 BY SOLINA LINDAHL Supply and Demand FOOD FOR THOUGHT…. SOME GOOD BLOGS AND OTHER SITES TO GET THE JUICES FLOWING: C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S What you will learn in this chapter § What is a competitive market ? How is it described by t...

DYNAMIC POWERPOINT™ SLIDES CHAPTER 3 BY SOLINA LINDAHL Supply and Demand FOOD FOR THOUGHT…. SOME GOOD BLOGS AND OTHER SITES TO GET THE JUICES FLOWING: C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S What you will learn in this chapter § What is a competitive market ? How is it described by the supply and demand model? § What is a demand curve? What is a supply curve? § What’s the difference between movements along a curve and shifts of a curve? § How do supply and demand curves determine a market’s equilibrium price and equilibrium quantity? § If there’s a shortage or surplus, how does price moves the market back to equilibrium? To Video To First Active Learning C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S COMPETITIVE MARKETS A competitive market has many buyers and sellers of the same good or service, none of whom can influence the price. The supply and demand model is a model of how a competitive market behaves. C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents DEMAND What made him buy it? Demand represents the behavior of buyers. A demand curve shows the quantity demanded at various prices. The quantity demanded: the quantity that buyers are willing (and able) to purchase at a particular price. C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents THE DEMAND SCHEDULE AND THE DEMAND CURVE Price of cotton (per pound) $2.00 1.75 1.50 1.25 1.00 As price falls, the quantity demanded rises 0.75 0.50 0 7 9 Demand curve, D 11 13 15 17 Quantity of cotton (per pound) C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents Don’t be sloppy in terminology: a “change in quantity demanded” a “change in demand” C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Back to Table of Table of contents contents CHANGES IN DEMAND VS. CHANGES IN QUANTITY DEMANDED Change in quantity demanded Price Price Change in demand $1.00 $1.00 D2.50 D1 D1 10 10 15 14.2 Quantity C O P Y R I G H T 2 0 1 5 W Quantity O R T H P U B L I S H E R S Back to Back to Table of Table of contents contents THE DEMAND SCHEDULE AND THE DEMAND CURVE The Law of demand: a higher price for a good or service leads people to demand a smaller quantity. C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents SHIFTS OF THE DEMAND CURVE A decrease in demand is a leftward shift. Price per unit Lower willingness to pay for the same quantity $2 Less quantity demanded at the same price $1 D1 D2 7 C O P Y R I G H T Quantity 8 2 0 1 5 W O R T H P U B L I S H E R S Back Back toto Table of Table of contents content s SHIFTS OF THE DEMAND CURVE An increase in demand is a rightward shift. Price per unit $2 Greater willingness to pay for the same quantity Greater quantity demanded at the same price $1 D2 D1 10 C O P Y R I G H Quantity 15 T 2 0 1 5 W O R T H P U B L I S H E R S Back to Back to Table of Table of contents contents UNDERSTANDING SHIFTS OF THE DEMAND CURVE Important demand shifters: 1. Changes in the prices of related goods or services (substitutes – a decrease in Pa leads to a decrease in demand of b - and complements – a decrease in Pa leads to an increase in demand of b). 2. Changes in income and nature of goods (normal – an increase in income leads to an increase in demand-, and increase in income leads to a decrease in demand). inferior – an 3. Changes in tastes. Tastes and preferences are subjective and vary among consumers. 4. Changes in expectations. Buyers adjust current spending in anticipation of the direction of future prices in order to obtain the lowest possible price. 5. Changes in the number of consumers. The number of buyers of a particular good also changes its demand. C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents LEARN BY DOING: PRACTICE QUESTION When the price of petroleum goes up, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______. (Assume these goods are substitutes for petroleum.) a) increases; increases; increases b) increases; increases; decreases c) decreases; decreases; increases d) decreases; decreases; decreases To Next Active Learning C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents LEARN BY DOING: PRACTICE QUESTION Which of the following will cause an increase in the demand for autos? a) Price of car tires increases because of a Malaysian rubber shortage. b) Concrete steel reinforcing rods are replaced by aluminum along the Atlantic coast to prevent rusting. c) Gasoline prices drop by 50% when OPEC nations increase production. d) McDonald’s increases its hamburger production in response to consumer trends. To Next Active Learning C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents INDIVIDUAL DEMAND CURVES AND THE MARKET DEMAND CURVE (a) Darla’s individual demand curve Price of blue jeans (per pair) Price of blue jeans (per pair) $2 (c) Market demand curve (b) Dino’s individual demand curve Price of blue jeans (per pair) $2 + 1 $2 = DMarket 1 1 DDarla 0 20 DDino 30 0 10 20 0 Quantity of blue jeans (per pair) C O P Y R I G H T 30 Quantity of blue jeans (per pair) 2 0 1 5 W O R T H P U B 40 50 Quantity of blue jeans (per pair) L I S H E R S Back to Table of contents LEARN BY DOING: APPLICATION VIDEO Take a look at how the market (legal AND illegal) for kidneys works by clicking here or on the picture below. (Law and Order SVU) (6:18 minutes) C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents SUPPLY Supply represents the behavior of sellers. A supply curve shows the quantity supplied at various prices. The quantity supplied is the quantity that producers are willing and able to sell at a particular price. C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents THE SUPPLY SCHEDULE AND THE SUPPLY CURVE Price of cotton (per pound) Supply curve, S $2.00 1.75 As price rises, the quantity supplied rises. 1.50 1.25 1.00 0.75 0.50 0 7 9 11 13 15 17 Quantity of cotton (per pound) C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents AN INCREASE IN SUPPLY Price of coffee beans (per pound) S $2.00 S 1 2 A movement along the supply curve… 1.75 1.50 1.25 1.00 … is not the same thing as a shift of the supply curve. 0.75 0.50 0 7 9 11 13 15 17 Quantity of coffee beans (billions of pounds) C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents SHIFTS OF THE SUPPLY CURVE An increase in supply means a rightward shift of the supply curve. A decrease in supply means a leftward shift of the supply curve. Price S S 3 S 1 2 Increase in supply Decrease in supply Quantity C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents UNDERSTANDING SHIFTS OF THE SUPPLY CURVE Important supply shifters include changes in: 1. input prices. A decrease in the price of an input (all else equal) increases profits and encourages more supply 2. the prices of related goods or services. Sellers will supply less of a good if its profitability falls 3. technology. A technological innovation lowers costs and increases supply 4. expectations. Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price 5. the number of producers. As producers enter and exit the market, the overall supply changes C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents THE INDIVIDUAL SUPPLY CURVE AND THE MARKET SUPPLY CURVE Price of cotton (per pound) SSilva $2 + 1 2 O P Y R I 0 G H $2 = 1 1 2 0 1 2 Quantity of coffee beans (pounds) Quantity of coffee beans (pounds) C SMarket SLiu 1 3 (c) Market supply curve Price of cotton (per pound) (b) Mr. Liu’s individual supply curve $2 1 0 Price of cotton (per pound) (a) Mr. Silva’s individual supply curve T 2 0 1 5 W O R T H P 3 4 5 Quantity of coffee beans (pounds) U B L I S H E R S Back to Table of contents SUPPLY, DEMAND AND MARKET EQUILIBRIUM When Qs = Qd at a certain price, the market is in equilibrium. That is, the amount consumers would purchase at this price is matched exactly by the amount producers wish to sell. C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents Because there are middlemen who bring goods to market (and get paid for their efforts), the price that wholesale cotton farmers (sellers) receive will actually be less than the price paid by retail cotton buyers. But have no fear: the final price paid to retail sellers will match that paid by retail buyers at equilibrium. Back to Table of contents COPYRIGHT 2015 WORTH PUBLISHERS FINDING THE EQUILIBRIUM PRICE AND QUANTITY Price of cotton (per pound) Market equilibrium occurs at point E, where the supply curve and the demand curve intersect. Supply $2.00 1.75 1.50 1.25 Equilibrium price E 1.00 Equilibrium 0.75 0.50 Demand 0 7 10 13 Equilibrium quantity C O P Y R I G H T 2 0 1 5 W O R 15 17 Quantity of cotton (billions of pounds) T H P U B L I S H E R S Back to Table of contents WHY DO ALL SALES AND PURCHASES IN A MARKET TAKE PLACE AT THE SAME PRICE? Where consumers don’t have time to compare prices (like a tourist trap), different stores have different prices. In well-established markets, there is a uniform price. C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents WHY DOES THE MARKET PRICE FALL IF IT IS ABOVE THE EQUILIBRIUM PRICE? There is a surplus of a good when the quantity supplied Supply exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level. Price of cotton (per pound) $2.00 1.75 Surplus 1.50 Surpluses do not last: sellers will reduce price so they can move goods off the shelves. 1.25 E 1.00 0.75 0.50 Demand 0 7 8.1 10 Quantity demanded C O P Y R I G H T 2 0 1 11.2 13 W O R 17 Quantity of cotton (billions of pounds) Quantity supplied 5 15 T H P U B L I S H E R S Back to Table of contents WHY DOES THE MARKET PRICE RISE IF IT IS BELOW THE EQUILIBRIUM PRICE? Price of cotton (per pound) There is a shortage when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level. Supply $2.00 1.75 1.50 Shortages do not last: sellers will increase price to increase revenue. 1.25 E 1.00 0.75 Shortage 0.50 0 7 9.1 10 Quantity supplied C O P Y R I G H T 2 0 1 5 Demand 11.5 13 Quantity demanded W O R T H 15 17 Quantity of cotton (billions of pounds) P U B L I S H E R S Back to Table of contents LEARN BY DOING: PRACTICE QUESTION Price At $5, quantity supplied is ______ and quantity demanded is ______, leading to a _______. a) 13; 6; surplus of 3 units b) 13; 6; surplus of 4 units c) 13; 6; surplus of 7 units d) 13; 6; shortage of 4 units Supply $7.00 6.00 5.00 4.00 E 3.00 2.00 1.00 Demand 0 4 6 10 13 18 22 27 Quantity To Next Active Learning C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Back to Table of Table of contents contents WHAT HAPPENS WHEN THE DEMAND CURVE SHIFTS Price of cotton An increase in demand… E P Price rises … leads to a movement along the supply curve due to a higher equilibrium price and higher equilibrium quantity. 2 2 E P Supply 1 1 D D Q Q 1 2 1 2 Quantity of cotton Quantity rises C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents WHAT HAPPENS WHEN THE SUPPLY CURVE SHIFTS Price of cotton S P S 2 A decrease in supply… 1 E 2 2 … leads to a movement along the demand curve due to a higher equilibrium price and lower equilibrium quantity. Price rises P E1 1 Demand Q Q Quantity of cotton 1 2 Quantity falls C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents CONSUMER VS PRODUCER SURPLUS Consumer surplus: consumers willing to pay more than $30 will benefit from an equilibrium price of $30. Producer surplus: producers willing to sell at a price lower than $30 will benefit from an equilibrium price of $30. C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back to Table of contents LEARN BY DOING: PRACTICE QUESTION If garden gnomes regain popularity, what will happen? a) Equilibrium price both fall. b) Equilibrium price both rise. c) Equilibrium price quantity rises. d) Equilibrium price quantity falls. and quantity and quantity falls and rises and To Next Active Learning C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents LEARN BY DOING: PRACTICE QUESTION If the cost of wood falls, what will happen to equilibrium price and quantity in the violin market? a) b) c) d) Both fall. Both rise. Price falls and quantity rises. Price rises and quantity falls. To Next Active Learning C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S Back Back to to Table of of Table contents contents ECONOMICS IN ACTION Does the equilibrium model work? https://mru.org/courses/principles-economicsmicroeconomics/does-equilibrium-model-work C O P Y R I G H T 2 0 1 5 W O R T H P U B L I S H E R S