Chapter 3 - An Introduction to Demand and Supply.ppt
- 1. An Introduction to Demand and Supply
- 2. Market – is a means of interaction between buyers and sellers for trading or exchange. Consumer – buys. Seller – sells. TYPES OF MARKET Goods Market – most common type of market. Wet Market – where people buy pork, chicken, or fish. Dry Market – where people buy shoes or clothes. Labor Market – where workers offer their services and employers look for workers to hire. Stock Market – where commodities traded consist of securities corporations.
- 3. Introduction to Demand • Demand is the desire, willingness, and ability to buy a good or service. – Supply can refer to one individual consumer or to the total demand of all consumers in the market (market demand). Demand Function shows how the quantity demanded of a good is dependent on its determinants. Demand Curve is the graphical presentation of the demand schedule.
- 4. Real Income – refers to the buyers’ purchasing power obtained from his money income. Substitution Effect – when the price of a commodity changes while other prices remain constant, the consumer would tend to substitute a lower priced commodity for the more expensive one. Ceteris Paribus – “all other things are held constant, or else equal.
- 5. Introduction to Demand A demand schedule is a table that lists the various quantities of a product or service that someone is willing to buy over a range of possible prices. Price per Widget ($) Quantity Demanded of Widget per day $5 2 $4 4 $3 6 $2 8 $1 10
- 6. Introduction to Demand A demand schedule can be shown as points on a graph. The graph lists prices on the vertical axis and quantities demanded on the horizontal axis. Each point on the graph shows how many units of the product or service an individual will buy at a particular price. The demand curve is the line that connects these points.
- 7. $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Demanded of Widgets Demand Curve for Widgets Demand Curve for Widgets
- 8. Introduction to Demand The demand curve slopes downward. This shows that people are normally willing to buy less of a product at a high price and more at a low price. According to the law of demand, quantity demanded and price move in opposite directions. $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Demanded of Widgets Demand Curve for Widgets Demand Curve for Widgets
- 9. Changes in Demand Change in the quantity demanded due to a price change occurs ALONG the demand curve $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Demanded of Widgets Demand Curve for Widgets Demand Curve for Widgets •At $3 per Widget, the Quantity demanded of widgets is 6. •An increase in the Price of Widgets from $3 to $4 will lead to a decrease in the Quantity Demanded of Widgets from 6 to 4.
- 10. Changes in Demand • Demand Curves can also shift in response to the following factors: – Buyers (# of): changes in the number of consumers – Income: changes in consumers’ income – Tastes: changes in preference or popularity of product/ service – Expectations: changes in what consumers expect to happen in the future – Related goods: compliments and substitutes • BITER: factors that shift the demand curve
- 11. Changes in Demand • Prices of related goods affect on demand – Substitute goods a substitute is a product that can be used in the place of another. • The price of the substitute good and demand for the other good are directly related • For example, Coke Price Pepsi Demand – Complementary goods a compliment is a good that goes well with another good. • When goods are complements, there is an inverse relationship between the price of one and the demand for the other • For example, Peanut Butter Jam Demand
- 12. Changes in Demand $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Demanded of Widgets Demand Curve for Widgets Demand Curve for Widgets $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 14 Price per Widget Quantity Demanded of Widets Increase in Demand Orginal Demand Curve New Demand Curve •Several factors will change the demand for the good (shift the entire demand curve) •As an example, suppose consumer income increases. The demand for Widgets at all prices will increase.
- 13. Changes in Demand $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Demanded of Widgets Demand Curve for Widgets Demand Curve for Widgets $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Demanded of Widgets Decrease in Demand Original Demand Curve New Demand Curve •As an example, suppose Widgets become less popular to own. •Demand will also decrease due to changes in factors other than price.
- 14. Changes in Demand Changes in any of the factors other than price causes the demand curve to shift either: Decrease in Demand shifts to the Left (Less demanded at each price) OR Increase in Demand shifts to the Right (More demanded at each price)
- 15. Introduction to Supply • Supply refers to the various quantities of a good or service that producers are willing to sell at all possible market prices. • Supply can refer to the output of one producer or to the total output of all producers in the market (market supply). • Supply Function shows how the quantity offered for sale of a good is dependent on its determinants.
- 16. Introduction to Supply A supply schedule is a table that shows the quantities producers are willing to supply at various prices Price per Widget ($) Quantity Supplied of Widget per day $5 10 $4 8 $3 6 $2 4 $1 2
- 17. Introduction to Supply A supply schedule can be shown as points on a graph. The graph lists prices on the vertical axis and quantities supplied on the horizontal axis. Each point on the graph shows how many units of the product or service a producer (or group of producers) would willing sell at a particular price. The supply curve is the line that connects these points.
- 18. $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Supplied of Widgets Supply Curve for Widgets Supply Curve
- 19. Introduction to Supply • As the price for a good rises, the quantity supplied rises and the quantity demanded falls. As the price falls, the quantity supplied falls and the quantity demanded rises. • The law of supply holds that producers will normally offer more for sale at higher prices and less at lower prices. $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Supplied of Widgets Supply Curve for Widgets Supply Curve
- 20. Introduction to Supply The reason the supply curve slopes upward is due to costs and profit. Producers purchase resources and use them to produce output. Producers will incur costs as they bid resources away from their alternative uses.
- 21. Introduction to Supply Businesses provide goods and services hoping to make a profit. Profit is the money a business has left over after it covers its costs. Businesses try to sell at prices high enough to cover their costs with some profit left over. The higher the price for a good, the more profit a business will make after paying the cost for resources.
- 22. Changes in Supply $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Supplied of Widgets Supply Curve for Widgets Supply Curve •At $3 per Widget, the Quantity supplied of widgets is 6. •If the price of Widgets fell to $2, then the Quantity Supplied would fall to 4 Widgets. •Change in the quantity supplied due to a price change occurs ALONG the supply curve
- 23. Changes in Supply • Supply Curves can also shift in response to the following factors: – Subsidies and taxes: government subsides encourage production, while taxes discourage production – Technology: improvements in production increase ability of firms to supply – Other goods: businesses consider the price of goods they could be producing – Number of sellers: how many firms are in the market – Expectations: businesses consider future prices and economic conditions – Resource costs: cost to purchase factors of production will influence business decisions • STONER: factors that shift the supply curve
- 24. Changes in Supply $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Supplied of Widgets Supply Curve for Widgets Supply Curve $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 14 Price per Widget Quantities Supplied of Widgets Increase in Supply Original Supply Curve New Supply Curve •Several factors will change the demand for the good (shift the entire demand curve) •As an example, suppose that there is an improvement in the technology used to produce widgets.
- 25. Changes in Supply $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Supplied of Widgets Supply Curve for Widgets Supply Curve $0 $1 $2 $3 $4 $5 $6 0 2 4 6 8 10 12 Price per Widget Quantity Supplied of Widgets Decrease in Supply Original Supply Curve New Supply Curve •Supply can also decrease due to factors other than a change in price. •As an example, suppose that a large number of Widget producers go out of business, decreasing the number of suppliers.
- 26. Changes in Supply Changes in any of the factors other than price causes the supply curve to shift either: Decrease in Supply shifts to the Left (Less supplied at each price) OR Increase in Supply shifts to the Right (More supplied at each price)
- 27. Elasticity of Demand and Supply
- 28. Elasticity Elasticity: the responsiveness of quantity to a change in another variable Price Elasticity of Demand: the responsiveness of quantity demanded to a change in price Price Elasticity of Supply: the responsiveness of quantity supplied to a change in price Income Elasticity of Demand: the responsiveness of quantity demanded to a change in income Cross Price Elasticity of Demand: the responsiveness of quantity demanded of one good to a change in the price of another good
- 29. The Mathematical Representation of Elasticity Elasticity = %ΔQ %ΔP = ΔQ ΔP Q P Because the demand curve is downward sloping and the supply curve is upward sloping the elasticity of demand is negative and the elasticity of supply is positive. Often these signs are implicit and ignored.
- 30. Elasticity Labels Elastic : the condition of demand when the percentage change in quantity is larger than the percentage change in price Inelastic: the condition of demand when the percentage change in quantity is smaller than the percentage change in price Unitary Elastic: the condition of demand when the percentage change in quantity is equal to the percentage change in price
- 31. The Relationship Between Slope and Elasticity Elasticity and the slope of the demand curve are not the same but they are related. At a given price level, elasticity is greater with a flatter demand curve. With a linear demand curve (meaning a demand curve that has a single value for the slope) elasticity is greater at higher prices
- 32. Figure 1 Flatter Demand Means Greater Elasticity D1 D2 Q/t P Q* P* P1 P2 Q1=Q2
- 33. Figure 2 Higher Prices Means Greater Elasticity Q/t P D P1 1 Q1 4 P4 Q4 3 P3 Q3 2 P2 Q2
- 34. Elasticity A good for which there are no good substitutes is likely to be one for which you must pay whatever price is charged. It is also likely to be one for which a lower price will not induce substantially greater consumption. Thus, as price changes there is very little change in consumption, i.e. demand is inelastic and the demand curve is steep. Inexpensive goods that take up little of your income can change in price and your consumption will not change dramatically. Thus, at low prices, demand is inelastic.
- 35. Seeing Elasticity Through Total Expenditures Total Expenditure Rule: if the price and the amount you spend both go in the same direction then demand is inelastic while if they go in opposite directions demand is elastic.
- 36. Determinants of Elasticity Number of and Closeness of Substitutes The more alternatives you have the less likely you are to pay high prices for a good and the more likely you are to settle for something that will do. Time The longer you have to come up with alternatives to paying high prices the more likely it is you will shift to those alternatives.
- 37. Extremes of Elasticity Perfectly Inelastic: the condition of demand when price changes have no effect on quantity Perfectly Elastic: the condition of demand when price cannot change
- 38. How the Elasticity of Demand Affects Reactions to Price Changes Elasticity and the Demand Curve
- 41. Inelastic Demand (at moderate prices) P Q/t D S1 P1 Q1 Q2 S2 P2
- 42. Elastic Demand (at moderate prices) Q/t P Q1 D S1 P1 S2 P2 Q2
- 43. Consumer and Producer Surplus Consumer Surplus: the value you get that is in excess of what you pay to get it On a graph, consumer surplus is the area below the demand curve and above the price line. Producer Surplus: the money the firm gets that is in excess of its marginal costs On a graph, producer surplus is the area below the price line and above the supply curve.
- 44. Consumer and Producer Surplus on a Graph Q/t P Demand Supply A P* B C 0 Q* • Value to the Consumer: • 0ACQ* • Consumers Pay Producers: • OP*CQ* • The Variable Cost to Producers: • OBCQ* • Consumer Surplus: • P*AC • Producer Surplus: • BP*C