2Price and QuantityPrice – the amount of money paid for an economic good/serviceEx. A gallon of gasoline has a price of $3.35Quantity – the amount of itemsEx. If I buy four loaves of bread the quantity is four
3DemandConsumers’ willingness and ability to buy an item at a given priceWillingness means that buyers must want the itemAbility means that buyers must have the financial resources to afford the item
4The Law of DemandThe price of an item determines the quantity demandedThe lower the price the higher the quantity demandedWhen goods/services are cheap, I tend to buy moreThe higher the price the lower the quantity demandedWhen goods/services are expensive, I tend to buy lessTherefore, the price of a good/service is inversely related with the quantity demanded
52 Reasons Why the Law of Demand Exists Substitution EffectWhen apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pearsDiminishing Marginal UtilityEach additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower.
62 Reasons Why the Law of Demand Exists (cont.) Example relating to diminishing marginal utility Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the marginal utility of the third taco is more than the price of the taco I will buy the third taco
7A Third Reason why the Law of Demand Exists (cont.) Income EffectWhen things are expensive, money buys lessWhen things are cheap, money buys more
8Mr. Bharucha’s Demand for Breakfast Tacos Demand ScheduleMr. Bharucha’s Demand for Breakfast TacosPriceQuantity$2.00$1.501$1.002$0.503Notice that Mr. Bharucha is obeying the law of demand. Now that’s making a good choice!!!!
9Mr. Bharucha’s Demand for Breakfast Tacos Demand CurveMr. Bharucha’s Demand for Breakfast TacosPPriceQuantity$2.00$1.501$1.002$0.503$2.00$1.50$1.00$0.50D123Q
10Changes in DemandPrice changes QUANTITY demanded and we will see a shift ON (or along) the demand curveIncrease in DemandMore quantity demanded at all pricesDemand Curve shifts Decrease in DemandLess quantity demanded at all pricesDemand Curve shifts Know that Price does not change Demand!
13Changes in Demand T.R.I.P.E. The following cause the entire demand curve to shiftTastes and PreferencesRelated Goods (Complements & Substitutes)IncomePopulationExpectations of future price changes
14Changes in Demand T.R.I.P.E. Tastes and PreferencesPreferences and tastes are affected by advertising, trends, health considerations, etc.Ex. Demand for yogurt with probiotics has increased because many people believe there are health benefits to probiotics (increased immunity, healthier digestion)Ex. Demand for cigarettes/smokeless tobacco has decreased because they cause cancer.
15Changes in Demand T.R.I.P.E. Related GoodsComplements – goods/services used in conjunctionEx. When the price of gasoline increases the demand for its complement, Suburbans, decreases.Ex. When the price of movie tickets decreases, the demand for theatre popcorn increases.(When the price of movie tickets go down, we go to the movies more; when we go to the movies more we demand more popcorn)
16T.R.I.P.E Related Goods (cont.) Substitutes – goods/services used in lieu of other goods/servicesEx. When the price of gasoline increases, the demand for ethanol increases.Ex. When the price of movie tickets increases, the demand for DVD’s increases.
17Changes in Demand T.R.I.P.E. Income of consumersWhen consumers’ income increases:Demand for normal goods/services increasesEx. More income means more demand for steakDemand for inferior goods/services decreasesEx. More income means less demand for Ramen noodles, generic food, and used cars
18Changes in Demand T.R.I.P.E. Income of consumersWhen consumers’ income decreasesDemand for normal goods/services decreasesEx. Less income means less demand for steakDemand for inferior goods/services increasesEx. Less income means more demand for generic food, Ramen noodles, used cars
19Changes in Demand T.R.I.P.E. PopulationMore population = more demandEx. As America’s population grows so does the demand for housingLess population = less demandEx. As Japan’s population declines so does the demand for education (fewer Japanese schools)
20Changes in Demand T.R.I.P.E. Expectations of future price changesIf consumers expect prices to rise in the future, then demand increases nowEx. Prior to Hurricanes Katrina and Rita, consumers expected higher fuel prices and this caused demand for fuel to increase.If consumers expect prices to fall in the future, then demand decreases nowEx. If investors believe a companies stock price is going to decline, then demand for that stock decreases.
21SupplyProducers willingness and ability to sell a good/service
22The Law of SupplyThe price of an item determines the quantity suppliedThe lower the price the lower the quantity suppliedWhen goods/services command a low price, suppliers tend to produce less of themThe higher the price the higher the quantity suppliedWhen goods/services command a high price, suppliers tend to produce more of themTherefore, the price of a good/service is directly related with the quantity supplied
23Reason for Law of Supply The profit motive: When the market price rises (for example after an increase in consumer demand), it becomes more profitable for businesses to increase their output.Higher prices send signals to firms that they can increase their profits by satisfying demand in the market.
24Supply of Breakfast Tacos Supply ScheduleSupply of Breakfast TacosPriceQuantity$2.004$1.503$1.002$0.501
25Supply Curve Supply of Breakfast Tacos P Price Quantity $2.00 4 $1.50 3$1.002$0.501$2.00$1.50$1.00$0.50S1234Q
26Changes in Supply Increase in Supply Decrease in Supply More quantity supplied at all pricesSupply Curve shifts Decrease in SupplyLess quantity supplied at all pricesSupply Curve shifts Know that Price does not change Supply!Price changes QUANTITY supplied
29Changes in Supply Things that cause the whole supply curve to shift Input costsCompetitors (number of)Expectation of future priceGovernment action
30Changes in Supply I.C.E.G. Input Costs Prices of raw materials or other factors of production (Land, labor, capital)Changes in productivity (efficiency gains/losses)
31Changes in Supply I.C.E.G. Competition Number of producers in the marketEx. Fewer producers = less supplyMore Producers = more supply
32ICEGExpected PricesIf producers expect prices to rise in the future, then they supply less now, so that they can sell their good/service at the future higher priceEx. If ExxonMobil expects the price of oil to rise in the future, they may not release as much oil to the market and may instead wait for the price to go up before they sell the oil.
33ICEGIf producers expect prices to fall in the future then they supply more now while prices are still relatively highEx. If a corn farmer expects the price of corn to decrease in value, he would be inclined to sell it now before there is a decrease in price.
34Subsidies (money from govt) Changes in Supply I.C.E.G.Government actionBusiness taxesRegulationSubsidies (money from govt)
35Equilibrium When supply = demand, there is equilibrium in the market Equilibrium creates a single price and quantity for a good/service
37Changes in equilibrium When supply or demand changes, the equilibrium price and quantity changeIf demand increases then price increases and quantity increasesIf demand decreases then price decreases and quantity decreases
38Changes in equilibrium If supply increases then price decreases and quantity increasesIf supply decreases then price increases and quantity decreases
43DisequilibriumIf price occurs at some point where supply and demand are not equal, then disequilibrium exists.If the price is higher than the equilibrium price, then a surplus (Qs>QD) occursSuppliers will “churn out” more than “we” want to buyIf the price is lower than the equilibrium price, then a shortage occurs (Qs<QD)Suppliers will “churn out” less than “we” want to buy
46Causes of Disequilibrium Price floor – a minimum price for a good/service or resource determined outside of the market (floors are set above equilibrium)Artificially raises minimum priceEx. Minimum wage (price for labor)
47(ex. Minimum wage in competitive unskilled labor market) Effective Price Floor(ex. Minimum wage in competitive unskilled labor market)PpmwpeDSQqdqeqsIf price floor is effective, then qd < qs .: surplus labor exists
48Causes of Disequilibrium (cont.) Price ceiling – a maximum price for a good/service or resource determined outside of the marketCeilings are set BELOW equilibriumMAX price that can be chargedEx. Rent control of some apartments in NYCDoes NOT work
49Effective Price Ceiling (ex. Rent for some apartments in NYC) peptDSqsqeqdQIf price ceiling is effective then qs < qd .: apartment shortage exists
50ConclusionMarkets work best when supply and demand determine the price of goods/services or resources.When forces other than supply and demand determine the price of goods/services or resources, surpluses and shortages result.Over time, the forces of supply and demand undermine artificial price controlsEx. Underground markets to get around rent control