Topic 3 - Supply and Demand (Chapter 3).pdf

ECON2010 – Business Economics Chapter 3 Demand and Supply ECON 2010 BUSINESS ECONOMICS Topic ‐ 3 Demand and Supply After studying this chapter, you will be able to: 3.1 3.2 3.3 3.4 Explain with graphs the law of demand Explain with graphs the law of supply Explain with graphs market equilibrium Desc...

ECON2010 – Business Economics Chapter 3 Demand and Supply ECON 2010 BUSINESS ECONOMICS Topic ‐ 3 Demand and Supply After studying this chapter, you will be able to: 3.1 3.2 3.3 3.4 Explain with graphs the law of demand Explain with graphs the law of supply Explain with graphs market equilibrium Describe how markets regulate themselves efficiently © 2019 Pearson Education Ltd. The Law of Demand 1 ECON2010 – Business Economics Chapter 3 Demand and Supply Demand Defined Wants are the unlimited desires or wishes people have for goods and services Demand is the decisions about which wants to satisfy In Economics if you demand something, it means 3 things: 1. You want it 2. You can afford to buy it 3. You have made a definite plan to buy it You are ‘willing’ and ‘able’ to buy © 2019 Pearson Education Ltd. The Law of Demand Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded and, the lower the price of a good, the larger is the quantity demanded. Ceteris Paribus = other things being the same © 2019 Pearson Education Ltd. Reasons for the Law of Demand Why does a change in the price result in a change in the quantity demanded? A change in price affects demand for two reasons. Firstly, 1. Substitution Effect When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded of the good or service decreases. Example: If the price of Coca Cola increases but the price of its substitute Pepsi does not, people will buy Pepsi. © 2019 Pearson Education Ltd. 2 ECON2010 – Business Economics Chapter 3 Demand and Supply Reasons for the Law of Demand The second reason is: 2. Income Effect When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded of the good or service decreases. © 2019 Pearson Education Ltd. Graphing the Law of Demand Demand and Demand Schedule Demand refers to the entire relationship between the price of the good and the quantity demanded A demand schedule is a chart (table) with data about the quantities demanded at each price © 2019 Pearson Education Ltd. Graphing the Law of Demand Demand Curve and Demand Schedule A demand curve is a graph of the data in a demand schedule. It shows the relationship between the quantity demanded of a good and its price, all other influences remaining the same. (Other things being equal) Demand Schedule Demand Curve © 2019 Pearson Education Ltd. 3 ECON2010 – Business Economics Chapter 3 Demand and Supply Difference between Quantity Demanded & Change in Demand 1. Quantity Demanded Quantity demanded is a certain point on a demand curve showing the quantity demanded at a particular price The demand curve also shows willingness and ability to pay. The willingness to pay measures the marginal benefit of the good or service Quantity demanded shows movement on the same curve © 2019 Pearson Education Ltd. Change in Quantity Demanded vs Change in Demand If only price changes, there is a change in the quantity demanded and there is a movement along the demand curve. When something other than price changes, demand changes and the entire demand curve shifts. © 2019 Pearson Education Ltd. 4 ECON2010 – Business Economics Chapter 3 Demand and Supply 1. Quantity Demanded – ONLY Price Changes If the price rises, other things remaining the same, the quantity demanded decreases - a movement up along the demand curve If the price falls, other things remaining the same, the quantity demanded increases - a movement down along the demand curve © 2019 Pearson Education Ltd. 2. Change in Demand - Price does NOT Change When anything other than the price influences buying plans there is a change in demand for that good The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve When demand increases, the demand curve shifts rightward When demand decreases, the demand curve shifts leftward © 2019 Pearson Education Ltd. 2. Change in Demand - Price does NOT Change Six main factors that change demand are: 1. The prices of related goods 2. Expected future prices of the good 3. Income 4. Expected future income and credit 5. Population 6. Preferences © 2019 Pearson Education Ltd. 5 ECON2010 – Business Economics Chapter 3 Demand and Supply 2. Change in Demand - Price does NOT Change 1. Prices of Related Goods When the price of a substitute rises, or when the price of a complement falls, the demand for a good increases A substitute is a good that can be used in place of another good A complement is a good that is used together with another good © 2019 Pearson Education Ltd. 2. Change in Demand - Price does NOT Change 2. Expected Future Prices If the price of a good is expected to rise in the future, and the good can be stored, current demand for the good increases and the demand curve shifts rightward © 2019 Pearson Education Ltd. 2. Change in Demand - Price does NOT Change 3. Income When income increases, consumers buy more of most goods, and the demand curve shifts rightward: o A normal good is one for which demand increases as income increases o An inferior good is a good for which demand decreases as income increases © 2019 Pearson Education Ltd. 6 ECON2010 – Business Economics Chapter 3 Demand and Supply 2. Change in Demand - Price does NOT Change 4. Expected Future Income and Credit When income is expected to increase in the future or when credit is easy to obtain, the demand might increase now 5. Population The larger the population, the greater is the demand for all goods 6. Preferences People with the same income have different demands if they have different preferences © 2019 Pearson Education Ltd. Example of Change in Demand An increase in income increases the demand for energy bars and shifts the demand curve rightward. Because an energy bar is a normal good, an increase in income increases their demand. The Law of Demand and the effects of the six factors on Change in Demand 7 ECON2010 – Business Economics Chapter 3 Demand and Supply Let’s complete In your worksheet complete questions:\ Page 101 – Questions 2 & 4 Page 120 – Questions 3 & 4 The Law of Supply Supply Defined If a firm supplies a good or service, then the firm: 1. Has the resources and the technology to produce it 2. Can profit from producing it, and 3. Has made a definite plan to produce and sell it Resources and technology determine what it is possible to produce 8 ECON2010 – Business Economics Chapter 3 Demand and Supply The Law of Supply & Reasons for it Other things remaining the same, the higher the price of a good, the greater is the quantity supplied; and the lower the price of a good, the smaller is the quantity supplied. The reasons why the law applies are: The general tendency that the marginal (additional) cost of producing a good or service increases as the quantity produced increases So, producers are willing to supply a good only if the price covers at least the marginal cost of production. © 2019 Pearson Education Ltd. Graphing the Law of Supply Supply Curve and Supply Schedule The term supply refers to the entire relationship between the quantity supplied and the price of a good. It is illustrated by the Supply Schedule & Supply Curve. The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers’ planned sales remain the same. An increase in price brings an increase in the quantity supplied. Supply Curve Supply Schedule © 2019 Pearson Education Ltd. Graphing the Law of Supply Minimum Supply Price A supply curve is also a minimum-supply-price curve. As the quantity produced increases, marginal cost increases. The lowest price at which someone is willing to sell an additional unit rises. This lowest price is marginal cost. © 2019 Pearson Education Ltd. 9 ECON2010 – Business Economics Chapter 3 Demand and Supply Difference between Quantity Supplied & Change in Supply © 2019 Pearson Education Ltd. Change in the Quantity Supplied Versus a Change in Supply When only price changes, there is a change in the quantity supplied and a movement along the supply curve. The quantity increases or decreases. When something other than price changes, supply changes and the entire supply curve shifts to the right or left. Change in Supply A Change in Supply is when Price does NOT Change When anything other than the price influences selling plans there is a change in supply for that good. The quantity of the good that producers plan to sell changes at each and every price, so there is a new supply curve. When supply increases, the supply curve shifts rightward. When supply decreases, the supply curve shifts leftward. © 2019 Pearson Education Ltd. 10 ECON2010 – Business Economics Chapter 3 Demand and Supply Factors for Change in Supply - Price does NOT Change The six main factors that change supply of a good are The prices of factors of production The prices of related goods produced Expected future prices The number of suppliers Technology State of nature © 2019 Pearson Education Ltd. Factors for Change in Supply - Price does NOT Change 1. Prices of Factors of Production If the price of a factor of production used to produce a good rises, the producer’s profitability decreases therefore supply decreases A rise in the price of a factor of production decreases supply and shifts the supply curve leftward © 2019 Pearson Education Ltd. Factors for Change in Supply - Price does NOT Change 2. Prices of Related Goods Produced A substitute in production for a good is another good that can be produced using the same resources The supply of a good increases if the price of a substitute in production falls Goods are complements in production if they must be produced together The supply of a good increases if the price of a complement in production rises © 2019 Pearson Education Ltd. 11 ECON2010 – Business Economics Chapter 3 Demand and Supply Factors for Change in Supply - Price does NOT Change 3. Expected Future Prices If the price of a good is expected to rise in the future, supply of the good today decreases and the supply curve shifts leftward 4. The Number of Suppliers The larger the number of suppliers of a good, the greater is the supply of the good An increase in the number of suppliers shifts the supply curve rightward © 2019 Pearson Education Ltd. Factors for Change in Supply - Price does NOT Change 5. Technology Advances in technology create new products and lower the cost of producing existing products So advances in technology increase supply and shift the supply curve rightward 6. The State of Nature The state of nature includes all the natural forces that influence production (for example, the weather) A natural disaster decreases supply and shifts the supply curve leftward © 2019 Pearson Education Ltd. Example of Change in Supply Improved production technology increases the supply of energy bars and shifts the supply curve rightward. © 2019 Pearson Education Ltd. 12 ECON2010 – Business Economics Chapter 3 Demand and Supply The Law of Supply and the effects of the six factors on Change in Supply Let’s complete In your worksheet complete questions: Page 105 – Q 2 & 4 Page 120 – Questions 5 & 6 Equilibrium & Surplus and Shortage 13 ECON2010 – Business Economics Chapter 3 Demand and Supply Market Equilibrium Defined Equilibrium is a situation in which opposing forces balance each other. Equilibrium in a market happens when the price balances the plans of buyers and sellers. The equilibrium price is the price at which the quantity demanded equals the quantity supplied ($1.50) The equilibrium quantity is the quantity bought and sold at the equilibrium price (10 million bars) Market Equilibrium Price as a Regulator If the price is $2.00 a bar, the quantity supplied exceeds the quantity demanded. There is a surplus of 6 million energy bars and prices will fall Market Equilibrium Price as a Regulator If the price is $1.00 a bar, the quantity demanded exceeds the quantity supplied. A shortage of 9 million bars and prices will rise. © 2019 Pearson Education Ltd. 14 ECON2010 – Business Economics Chapter 3 Demand and Supply Market Equilibrium Price as a Regulator If the price is $1.50 a bar, the quantity supplied equals the quantity demanded. No shortage or surplus of bars no change in supply. © 2019 Pearson Education Ltd. Market Equilibrium Price Adjustments At prices above the equilibrium price, a surplus forces the price down. At prices below the equilibrium price, a shortage forces the price up. At the equilibrium price, buyers’ plans and sellers’ plans agree and the price doesn’t change until an event changes demand or supply. © 2019 Pearson Education Ltd. © 2019 Pearson Education Ltd. 15 ECON2010 – Business Economics Chapter 3 Demand and Supply How markets correct a shortage An Increase in Demand Figure 3.8 shows that when demand increases the demand curve shifts rightward. At the original price, there is now a shortage. The price rises, and the quantity supplied increases along the supply curve. How markets correct a surplus An Increase in Supply The Figure shows that when supply increases the supply curve shifts rightward. At the original price, there is now a surplus. The price falls, and the quantity supplied decreases along the supply curve. How markets correct when ‘D’ & ‘S” increase 16 ECON2010 – Business Economics Chapter 3 Demand and Supply How markets correct when ‘D’ & ‘S” decrease How markets correct when ‘D” decreases & ‘S’ increases How markets correct when ‘D” increases & ‘S’ decreases 17 ECON2010 – Business Economics Chapter 3 Demand and Supply Let’s review In your worksheet complete questions: Page 105 – Q 2 & 4 Page 120 – Questions 5 & 6 Problems 7 & 9 Additional Problem 18