Unit #2 student notes
- 1. Unit #2 SUPPLY & DEMAND
- 2. Markets What is a market? It is any place where people come together to buy and sell goods or services market has two sides 1. Buying side = demand 2. Selling side = supply TODAY we focus on DEMAND!
- 3. What is demand? Demand is the amount of a good/service that consumers are willing and able to buy at all prices To analyze demand, we use a… Demand schedule : a table that lists the quantities of a good that consumers will buy at various prices Demand Curve : a graph of the demand schedule
- 5. Demand Curve for Movie Tickets $10 8 0 Number of Movie Tickets per Month Price of Movie Tickets 1 1 2 3 4 5 6 7 8 9 2 3 4 5 6 7 A B
- 6. Law of Demand Two scenarios: High prices = low quantities demanded Low prices = high quantities demanded Law represents an inverse relationship between price and quantity demanded Quantity Demanded Amount of a good or service that consumers are willing and able to buy at a specific price
- 7. What can cause demand to change? Week 1: I buy 1 bag of peanuts at $2.00. Week 2: I buy 2 bags of peanuts at $1.00 each. The PRICE decrease of peanuts caused my demand to change. This is called a CHANGE IN QUANTITY DEMANDED!
- 8. Change in Quantity Demanded Quantity Price D $10 $5 20 10
- 9. Change in Quantity Demanded Quantity Price D $10 $5 20 10
- 10. Change in Quantity Demanded Quantity Price D $10 $5 20 10
- 11. Change in Quantity Demanded Shown by movement along the demand curve PRICE changes always cause changes in Qd!!
- 12. What can cause demand to change? Week 1: I buy 1 bag of peanuts at $2.00. Week 2: I buy 5 bags of peanuts at $2.00 each. This time PRICE did NOT change. Task! Provide a reason for my demand change. Any of these reasons cause a CHANGE IN DEMAND (not the Qd at one specific price). In this case the Qd at all prices will change!
- 13. Increase in Demand Quantity Demanded Price
- 14. Increase in Demand Quantity Demanded Price D 1
- 15. Increase in Demand Quantity Demanded Price D 1
- 16. Increase in Demand –Curve Shift to the Right Quantity Demanded Price D 1 D 2
- 17. Decrease in Demand Quantity Demanded Price
- 18. Decrease in Demand Quantity Demanded Price D 1
- 19. Decrease in Demand Quantity Demanded Price D 1
- 20. Decrease in Demand - Curve Shift to Left Quantity Demanded Price D 2 D 1
- 21. Demand Shifters– reasons why the demand curve shifts Consumer Income as income rises consumers can buy more at each & every price Number of Consumers More consumers = more demand Consumer Expectations News reports or expected price changes Consumer Tastes/Preferences Advertising, celebrity endorsements, trends can cause these shifts Prices of Related Products Substitutes – products that can be used in place of other products Increase in price of one increases demand for other Example – Butter & margarine Complements - related goods used together Use of one increases the use of the other Example – film & camera
- 22. Reminders PRICE is NOT a demand shifter. When price changes, there is movement along the curve. A change in demand, caused by factors other than the price of a particular good, is when the curve shifts. Shift to right = increase in demand Shift to left = decrease in demand
- 23. Elasticity of Demand Elasticity of Demand – the degree to which the quantity demanded changes in response to a change in price Consumers care about changes in price Demand is: Elastic when a small change in price = large change in quantity demanded Inelastic when change in price causes only small change in quantity demanded
- 25. Determinants of Elasticity 1. Needs vs. Wants The more necessary a good/service is, the more inelastic it becomes Examples: insulin, gasoline, & tobacco (all inelastic) Things that are wants are usually elastic 2. Availability of Substitutes Consumers regularly switch back & forth to get best price of similar products If product has more substitutes = elastic demand 3. Amount of Income Required to Purchase When products are high priced (luxury items) = elastic demand Example: buying a car When products are lower priced = inelastic demand Example: buying salt
- 26. What is supply? Supply is the amount of a product that producers are willing and able to offer for sale at all prices To analyze supply, we use a… Supply Schedule – a table that lists the quantities supplied at different prices in a market Supply Curve – a graph of the supply schedule
- 27. Supply Schedule for Painting Services
- 28. Supply Curve for Painting Services $200 5 0 Rooms Painted per Week Price per Room 1 20 40 60 80 100 120 140 160 180 2 3 4
- 29. Law of Supply Law says If prices are high = quantity supplied increases If prices are low = quantity supplied decreases Price and quantity supplied have a direct relationship Quantity Supplied amount of a good or service that producers are willing and able to offer for sale at a specific price
- 30. What can cause supply to change? Week 1: I try to sell 10 pretzels at $0.75. Week 2: I try to sell 20 pretzels at $1.00 each. The PRICE increase of pretzels caused my supply to change. This is called a CHANGE IN QUANTITY SUPPLIED!
- 31. Change in Quantity Supplied $200 5 0 Rooms Painted per Week Price per Room 1 20 40 60 80 100 120 140 160 180 2 3 4 A B Shown by movement along the supply curve PRICE changes always cause changes in Qs!!
- 32. What can cause supply to change? Week 1: I try to sell 10 pretzels at $0.75. Week 2: I try to sell 30 pretzels at $0.75. This time PRICE did NOT change. Task! Provide a reason for my supply change. Any of these reasons cause a CHANGE IN SUPPLY (not the Qs at one specific price). In this case the Qs at all prices will change!
- 33. Increase in Supply Quantity Supplied Price S 1
- 34. Increase in Supply – Curve Shift to the Right Quantity Supplied Price S 1 S 2
- 35. Decrease in Supply Quantity Supplied Price S 1
- 36. Decrease in Supply – Curve Shift to the Left Quantity Supplied Price S 1 S 1
- 37. Supply Shifters Cost of Inputs Input costs refer to costs of production Increasing or decreasing costs will impact supply Productivity The more productive workers are or the more efficiently businesses use resources then supply increases! Number of Producers/Sellers When more businesses enter the market = supply increases or vice-versa Technology New technology usually shifts curve to the right Natural Disasters or International Events Hurricanes, floods, wildfires decrease supply Wars and revolutions can have similar effects
- 38. Supply shifters continued… Government Policy Increased regulations restrict supply Relaxed regulations increase supply Tax on the manufacture or sale of a good = decreases supply Subsidy (cash payment to producers) = increases supply Producer Expectations Anticipation of future events can affect supply curve 1. Producers think prices will go up = decrease supply NOW 2. Producers think prices will go down = increase supply NOW
- 39. Reminders PRICE is NOT a supply shifter. When price changes, there is movement along the curve. A change in price, caused by factors other than the price of a particular good, is when the curve shifts. Shift to right = increase in supply Shift to left = decrease in supply
- 40. Elasticity of Supply Supply elasticity measures the sensitivity of producers to a change in price Small increase in price leads to larger increase in output = elastic Small increase in price leads to little change in quantity supplied = inelastic Examples of elastic & inelastic Candy Bananas Oil Yogurt
- 41. Supply & Demand Interaction In a perfectly competitive market, supply & demand work together to determine prices. The interaction usually creates 3 scenarios: Equilibrium Shortage Surplus
- 42. Market Equilibrium Equilibrium – point at which quantity supplied = quantity demanded IN OTHER WORDS: Qd = Qs Price in equilibrium is the equilibrium price and the quantity in equilibrium is the equilibrium quantity
- 43. Market Equilibrium Price equilibrium can be found where the supply curve intersects the demand curve
- 44. Market Equilibrium Price 0 Quantity
- 45. Market Equilibrium Price S D 0 Quantity
- 46. Market Equilibrium Price S D A Q 1 0 P 1 Quantity
- 47. Market Equilibrium Price S D A Equilibrium Q 1 0 P 1 Quantity
- 48. Market Equilibrium Price S D A Equilibrium Q 1 0 P 1 Equilibrium Price Quantity
- 49. Market Equilibrium Equilibrium Quantity Price S D A Equilibrium Q 1 0 P 1 Quantity Equilibrium Price The equilibrium price is also known as the “market-clearing” price. At this price, both consumers and producers are satisfied.
- 50. Equilibrium Changes If demand increases… P _______ & Q _______ If demand decreases… P _______ & Q _______
- 51. An Increase in Demand Quantity Price 0 P 1 Q 1 A S 1 D 1
- 52. An Increase in Demand Quantity Price 0 P 1 Q 1 A ( Original Market Equilibrium ) S 1 D 2 D 1
- 53. An Increase in Demand Quantity Price B 0 P 1 Q 1 A S 1 D 2 D 1
- 54. An Increase in Demand Quantity Price B Q 2 0 P 2 P 1 Q 1 A S 1 D 2 D 1
- 55. An Increase in Demand Quantity Price B( New Market Equilibrium ) Q 2 0 P 2 P 1 Q 1 A S 1 D 2 D 1
- 56. Equilibrium Changes If supply increases… P _______ & Q _______ If supply decreases… P _______ & Q _______
- 57. An Increase in Supply Quantity Price A (original market equilibrium) Q 1 0 P 1 D 1 S 1
- 58. An Increase in Supply Quantity Price A Q 1 0 P 1 D 1 S 1 S 2
- 59. An Increase in Supply Quantity Price A Q 1 0 P 1 P 2 Q 2 B (New Market Equilibrium) D 1 S 1 S 2
- 60. What happens when the price isn’t “right”? When prices are set above or below the equilibrium price, disequilibrium occurs and results in… shortages surpluses
- 61. Shortage Shortage – is a situation in which the quantity demanded is greater than the quantity supplied at a given price IN OTHER WORDS: Qd > Qs Shortage can also be called “Excess Demand” When price is below the equilibrium price, there is a shortage and the price tends to rise towards equilibrium
- 62. Excess Demand Quantity Price S D 0 P 1 Equilibrium Price Equilibrium
- 63. Excess Demand Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price below Equilibrium Price
- 64. Excess Demand Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price below Equilibrium Price Q s 0
- 65. Excess Demand Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price below Equilibrium Price Q s 0 Q d 0
- 66. Surplus explained by Michael Scott
- 67. Surplus Surplus– is a situation in which the quantity supplied is greater than the quantity demanded at a given price IN OTHER WORDS: Qd < Qs Surplus can also be called “Excess Supply” When price is above the equilibrium price, there is a surplus and the price tends to fall towards equilibrium
- 68. Excess Supply Quantity Price D Equilibrium 0 P 1 Equilibrium Price S
- 69. Excess Supply Quantity Price D Equilibrium 0 P 2 Price above Equilibrium Price P 1 Equilibrium Price S
- 70. Excess Supply Quantity Price D Equilibrium 0 P 2 Price above Equilibrium Price P 1 Equilibrium Price S Q d 2
- 71. Excess Supply Quantity Price D 0 P 2 Price above Equilibrium Price P 1 Equilibrium Price S Equilibrium Q s 2 Q d 2
- 72. What Roles Do Prices Play in a Modern Mixed Economy? Purpose Prices help consumers understand the costs of their decisions and help producers make production decisions. Prices provide an incentive for firms and workers to produce. Prices give markets flexibility to respond to changing conditions. Prices guide scarce resources to their most efficient uses.
- 73. Prices Up until now, we have assumed that the market is competitive and that prices, along with quantities offered for sale, are allowed to fluctuate Is this a good thing? Why? Would there ever be a time when prices would need to be controlled? Why?
- 74. Price Controls Governments implement price controls when prices are considered unfairly high for consumers or unfairly low for producers Price Floor – minimum legal price Prevents prices from going too low Usually results in an excess of supply = surplus Ex: Minimum Wage Price Ceiling – maximum legal price Prevents prices from going too high Usually results in an excess of demand = shortage Ex. Rent Control
- 75. Shortage Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price Below Equilibrium Price (Price Ceiling)
- 76. Shortage Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price below Equilibrium Price Q s 0
- 77. Shortage Quantity Price S D A Equilibrium 0 P 1 Equilibrium Price P 0 Price below Equilibrium Price Q s 0 Q d 0
- 78. Surplus Quantity Price D Equilibrium 0 P 2 Price Above Equilibrium Price (Price Floor) P 1 Equilibrium Price S
- 79. Surplus Quantity Price D Equilibrium 0 P 2 Price above Equilibrium Price P 1 Equilibrium Price S Q d 2
- 80. Surplus Quantity Price D 0 P 2 Price above Equilibrium Price P 1 Equilibrium Price S Equilibrium Q s 2 Q d 2
Editor's Notes
- #4: Most of time we are looking for Market Demand, or the sum of all the individuals quantities demanded in a market Example: Suppose you want to start a TV repair service -set up shop in neighborhood with many TVs & no repair shops -want to set up business in area where demand is greatest willingness means person’s want or desire to purchase & ability is having enough money to pay for the good (need both for demand!) example: Jack doesn’t have $34,000 to buy a specific car, has the willingness but not the money so there is NO demand
- #22: Prices of Related goods – substitutes (apples & oranges, chicken & beef) complements (cars & gas) Preferences: people are beginning to favor small gas-efficient cars so D shifts right while people are favoring other laptops other than Dell recently so their D curve shifts left Complements-Tennis rackets & tennis balls (demand moves in the opposite direction of the price) # of buyers - the more buyers the higher the D, the fewer the buyers the lower the D (higher birthrate, immigration, migration, death rate, or migration)
- #24: Elastic ex. – T-Bone steaks are elastic b/c $6 a pound compared to $3.50 a pound is going to cause a huge change in QtD (designer clothing / luxury items) Elastic curves – more horizontal Inelastic curves – more vertical Inelastic – higher or lower price on salt will not change Qtd greatly (ex. Toothpaste) Elastic - when quantity demanded is greater than percentage change in price Inelastic-when quantity demanded is less than percentage than price Unit elastic- when Qd changes by the same % as price
- #26: 1. Tobacco is inelastic b/c addictive & insulin needed for diabetic no matter what
- #27: Once again, dealing with Market Supply, or sum of all the individual quantities supplied Supply example: supply of TVs is the number of sets manufacturers are likely to produce at $700, $500, $300, or any other price Supply: economists think about people’s ability & willingness to offer products for sale over a wide range of prices Supplier-offer economic product for sale
- #30: Based on idea of trying to maximize revenues, or profits as a business
- #38: Cost of inputs – in T-shirt, supply may have increased because of a decline in the cost of such inputs as cotton or ink = if price of inputs goes down, producer can produce more T-shirts at each and every price Prod. – more T-shirts can be produced in a production period = supply increases, if workers are unhappy/unmotivated, untrained supply decreases Technology- introduce new machine, chemical/industrial process can lower cost of production, so when costs are down producers are willing to produce more at each & every price in the market (supply down if technology breaks down) Subsidies – government payments to individuals, businesses, or other groups to encourage or protect a certain type of economic activity have opposite effect & supply increases (ex. Farmers historically receive subsidies to offset costs of production)
- #39: Government Regulations ex. Government mandates safety features to automobiles like emission controls, stronger bumpers, & air bags which increases production cost of car Natural Disaster/Crisis – somolian pirates slowing African shipping
- #41: Elastic – kites & candy because not much needed to increase production (therefore if prices rise they can increase output quickly) Inelastic – oil (need lots of machinery, capital, labor to increase production so it is inelastic), banana plantations Elasticity is influenced by availability of inputs, mobility of inputs, storage capacity, & time needed to adjust to price change
- #43: E price is also market-clearing price – market is cleared of all surpluses & shortages E is like the point reached on a balance scale when each side holds an object of equal mass When supply matches demand, both consumers & producers come away satisfied (even though producers would like higher prices & consumers lower prices)
- #44: At farmer’s market, no farmer goes home with leftover melons, and no consumer leaves empty handed at $5.00 a melonn
- #62: New video game or movie release = too many consumers! Shortage in real world – have a playoff high school football game that stadium seats 2,000 people but 2,500 people want to come to game (shortage) Price rises b/c buyers will offer to buy products at higher prices so they get the products, higher pices will also motivate sellers to produce more output
- #68: Surplus = clearance rack in any store Surplus in real world – high school football playoff has stadium for 2,000 seats but only 500 people attend (surplus of seats) Price falls because suppliers cannot sell all of their products & want to get rid of inventories (storing extra goods is costly) & produce less output
- #73: Neutral-do not favor the producer nor the consumer (result of competition between buyers & sellers) Flexible – can absorb unexpected shocks & then stabilize Freedom of choice – endless choices if one price is too high or if good not exactly what desired No administrative cost – prices need little help to stabilize, adjust normally Efficient-easily understood & people can make decisions quickly & efficiently
- #74: Usually time when government steps in to control / regulate the market
- #75: On a whole prices do a great job of allocating scarce resources to their best uses by flucuating however the gov’t does intervene at times to influence prices Price ceiling meant to allow consumers to buy essentials that they otherwise wouldn’t be able to afford at the E price (sometimes in response to crises such as war, natural disaster, or crop failure Price floor is meant to push prices up, helping producers benefit PC – NYC rent controls (introduced during WWII to protect poor families): no fixed price market creates rent price at $700 a month & demand is 2 million then with fixed price at $500 a month demand rises to 2.5 million then landlords might be unhappy and convert some apartments to other uses for higher returns = only 1.5 million apartments offered for $500 a month = Shortage of 1 million apartments (more likely better appts converted to condos/offices & leaves worse conditioned appts, people are unhappy without apartments, landlords need to cut costs so upkeep of appts gets worse & no incentive to make more appts & shifted out of market) PF – minimum wage is lowest legal wage that can be paid to most workers (gov’t argues that in some low-skill markets, where workers outnumber jobs, s & d would drive the E wage so low that people could afford to live) many argue mw increases number of people unemployed b/c employers hire less workers -12 million workers would work at EP of $4 an hour but employers only hire 10 million at $5.15