Economics: Supply and Demand
jayz1974
supply-demand_issues.pptSupply and Demand Issues
Supply and demand are the starting point of all economic analysis
The essence of choice is being able to balance the two
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S U P P L Y
The different quantities that a producer or producers will make available to the market at different prices over a given period of time.
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LAW OF SUPPLY
As price increases, producers are willing to produce and sell more
As price decreases, producers are willing to produce and sell less
Price and Quantity Supplied are directly related
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Supply Table
Price Quantity
$4.00 1500
$5.00 1800
$6.00 2000
$7.00 2500
$8.00 3000
Widgets Per Week
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Supply Graph
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Producer Costs
Fixed Costs:
Costs that don't change as production levels change Ex: Rent, Insurance, Loan Payments, Taxes
Variable Costs:
Costs that increase and decrease with changes in the production levels
Ex: Labor costs, Materials, Utilities
Total Costs = Fixed Costs + Variable Costs
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Changes in Supply
Production Costs Ex: Materials, Labor, Technology, Taxes
Number of Producers in the Market
Profitability of other production options
Expectation of future market price
Supply in the market will change if there is a change in:
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Increase in Supply
Q
P
P1
Q1
S1
Q2
S2
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DEMAND
The various quantities that a person or group is willing to buy at various prices
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Law of Demand
As prices increase, the quantity people are willing to buy decreases
As prices decrease, the quantity people are willing to buy increases
Indirect price/quantity relationship
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DEMAND TABLE
(Coca-Colas per week)
Price Quantity
$.25 20
$.50 10
$.75 7
$1.00 5
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Demand Graph
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REASONS FOR DEMAND
Income Effect (Price Effect)
When price rises, a consumer cannot afford to buy as much. But, when price declines, a consumer can afford to buy more. Price changes affect “purchasing power” of income
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REASONS FOR DEMAND
Substitution Effect
When prices increase on one product, consumers will buy a substitute product instead. But when prices decrease on a product, consumers will switch to that product from other substitutes.
Substitutes are products that can be used in place of each other. Complements are products that are used together
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REASONS FOR DEMAND
Law of Diminishing Marginal Utility
As we have more and more units of a product, the satisfaction we get from each additional unit decreases.
Marginal = additional, next, or last
Utility = satisfaction
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Changes in Demand
If Demand changes, then people want more or less of the product even when the price remains constant
There are several reasons why Demand might change…...
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Changes in Demand
A change in people’s income...
When people have more money, they buy more of everything, and when they have less, they buy less.
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Change in Demand
People’s tastes and preferences change…..
Advertising changes people’s attitudes, desires, etc. Styles change, fads come and go.
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Change in Demand
Situation and needs change...
Get a new job? You might need different clothes. Move? A baby on the way? A new product get invented?
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Changes in Demand
There’s a change in the number of consumers in the market...
When there are more consumers, Demand goes up, and visa-versa
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Changes in Demand
Expectations of future price...
If we expect the price to go down soon, we will have reduced Demand now, and visa-versa
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Changes in Demand
The prices of substitutes or complements change….
If apples go up in price, the Demand for pears might increase because people will substitute pears for apples.
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Increase in Demand
D1
Q
P
P1
Q1
D2
Q2
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Decrease in Demand
Q2
D2
Q
P
P1
Q1
D1
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CHANGES IN DEMAND
Demand will change if there are changes in:
- Income, Wealth, Credit
- Personal Tastes and Preferences
- Situation
- Number of Consumers in the Market
- Expectation of Future Price
- The prices of Complements or Substitutes
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Putting Demand
and Supply Together
Equilibrium
The situation when quantity supplied equals quantity demanded at a particular price
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Putting Demand
and Supply Together
Shortages
The situation when quantity demanded
is greater than quantity supplied
Exists at any price below the equilibrium price
Is not the same as scarcity
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Putting Demand
and Supply Together
Surpluses
The situation when quantity supplied
is greater than quantity demanded
Exists at any price above the equilibrium price
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Summary
The law of demand says that prices and quantity demanded are inversely related.
Relative prices must be distinguished from money, since people respond
to changes in relative prices.
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Summary
A change in quantity demanded
versus a change in demand
A change in quantity demanded
is a movement along a demand curve
A change in demand is a shift
of the demand curve
The law of supply states that price and quantity supplied are directly related.
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Summary
A change in quantity supplied
versus a change in supply
A change in quantity supplied
is a movement along a supply curve
A change in supply is a shift of the supply curve
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Summary
Determining market price
and equilibrium quantity
The demand and supply curves
intersect at the equilibrium point.
Shortages exist when the price of a good is below the market price.
Surpluses exist if the price of the good
is greater than the market price.
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Quantity
Price
$3
$4
$5
$6
$7
$8
1500
1800
2000
2500
3000
Quantity
Price
$0.00
$0.25
$0.50
$0.75
$1.00
5
7
10
20
