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Introduction: Thinking Like an Economist 1 CHAPTER Supply and Demand Teach a parrot the terms supply and demand and youve got an economist. Thomas Carlyle.

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Presentation on theme: "Introduction: Thinking Like an Economist 1 CHAPTER Supply and Demand Teach a parrot the terms supply and demand and youve got an economist. Thomas Carlyle."— Presentation transcript:

1 Introduction: Thinking Like an Economist 1 CHAPTER Supply and Demand Teach a parrot the terms supply and demand and youve got an economist. Thomas Carlyle CHAPTER 4 Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2 1 Supply and Demand Demand The law of demand states that the quantity of a good demanded is inversely related to the goods price As prices change, people change how much theyre willing to buy In other words, other things equal, Quantity demanded rises as price falls Quantity demanded falls as price rises The law of demand is based on the fact that when prices for a good rise, people substitute away from that good to other goods

3 1 Supply and Demand The Demand Curve A demand curve is the graphic representation of the relationship between price and quantity demanded Demand P Q The demand curve is downward sloping As price increases, quantity demanded decreases P0P0 Q1Q1 P1P1 Q0Q0

4 1 Supply and Demand Shifts in Demand versus Movements Along a Demand Curve Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price, other things constant Refers to a specific point on the demand curve A change in price causes a change in quantity demanded A change in price causes a movement along the demand curve

5 1 Supply and Demand Shifts in Demand versus Movements Along a Demand Curve Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant Refers to the entire demand curve Demand tells us how much will be bought at various prices A change in anything other than price that affects the demand curve changes the entire demand curve A change in the entire demand curve is a shift in demand

6 1 Supply and Demand Shifts in Demand versus Movements Along a Demand Curve Demand P Q A change in price causes a movement along the demand curve $1 100 $2 200 Movement along a demand curve B A

7 1 Supply and Demand Shifts in Demand versus Movements Along a Demand Curve Demand 0 P Q A change in a shift factor causes a shift in demand $ Shift in demand BA Demand 1

8 1 Supply and Demand Shift Factors in Demand Important demand shift factors include: 1.Societys income 2.The prices of other goods 3.Tastes 4.Expectations 5.Taxes and subsidies

9 1 Supply and Demand Application: Demand Shift Demand 1 P Q Demand would shift out to the right because your income increased What happens to demand for CDs if you won $1 million in the lottery? Demand 0

10 1 Supply and Demand From a Demand Table to a Demand Curve Demand for movies P Q $ $ B A $4.00 $2.00 Price per movie Movie rentals demanded per week A $1.009 B $2.008 C $4.006 D $6.004 E $ C D E $1.00

11 1 Supply and Demand Individual and Market Demand Curves Price (per movie) Alices demand + Bruces demand + Carmens demand = Market demand $ $ $ $

12 1 Supply and Demand Individual and Market Demand Curves Market demand for movies P Q $ $ $4.00 $ Market demand curve for movies per week ALICEBRUCECARMEN The market demand curve is the summation of all individual demand curves

13 1 Supply and Demand Supply The law of supply states that the quantity of a good supplied is directly related to the goods price The law of supply occurs because: When prices rise, firms substitute production of one good for another Assuming firms costs are constant, a higher price means higher profit In other words, other things equal, Quantity supplied rises as price rises Quantity supplied falls as price falls

14 1 Supply and Demand The Supply Curve A supply curve is the graphic representation of the relationship between price and quantity supplied Supply P Q The supply curve is upward sloping As price increases, quantity supplied increases P0P0 Q1Q1 P1P1 Q0Q0

15 1 Supply and Demand Shifts in Supply versus Movements Along a Supply Curve Quantity supplied refers to a specific amount that will be supplied per unit of time at a specific price, other things constant Refers to a specific point on the supply curve A change in price changes quantity supplied A change in price causes a change in quantity supplied A change in price causes a movement along the supply curve

16 1 Supply and Demand Shifts in Supply versus Movements Along a Supply Curve Supply refers to a schedule of quantities of a good a seller is willing to sell per unit of time at various prices, other things constant Refers to the entire supply curve Supply tells us how much will be sold at various prices A change in anything other than price that affects the supply curve changes the entire supply curve A change in the entire supply curve is a shift in supply

17 1 Supply and Demand Shifts in Supply versus Movements Along a Supply Curve A change in price causes a movement along the supply curve Movement along a supply curve Supply P Q $ $ B C

18 1 Supply and Demand Shifts in Supply versus Movements Along a Supply Curve A change in a shift factor causes a shift in supply Shift in Supply S0S0 P Q S1S1

19 1 Supply and Demand Shift Factors in Supply Important supply shift factors include: 1.Price of inputs 2.Technology 3.Expectations 4.Taxes and subsidies

20 1 Supply and Demand Individual and Market Supply Curves Price (per movie) Anns Supply + Barrys supply + Charlies supply = Market supply $ $ $ $

21 1 Supply and Demand Individual and Market Demand Curves P Q $ $ $3.00 $ Market supply curve for movies per week The market supply curve is the summation of all individual supply curves BARRYANN 15 Market supply for movies CHARLIE

22 1 Supply and Demand The Interaction of Supply and Demand Equilibrium is a concept in which opposing dynamic forces cancel each other out Equilibrium quantity is the amount bought and sold at equilibrium price Equilibrium price is the price toward which the invisible hand drives the market In the free market, the forces of supply and demand interact to determine:

23 1 Supply and Demand The Interaction of Supply and Demand If there is an excess supply (a surplus), quantity supplied is greater than quantity demanded Prices adjust and tend to rise when there is excess demand and fall when there is excess supply to reach an equilibrium If there is an excess demand (a shortage), quantity demanded is greater than quantity supplied

24 1 Supply and Demand The Interaction of Supply and Demand Supply P Q P0P0 P1P1 Demand Excess demand causes upward pressure on price Excess supply Excess supply causes downward pressure on price Excess demand P*P*

25 1 Supply and Demand Political and Social Forces and Equilibrium Social pressures often offset economic pressures and prevent unemployed individuals from accepting work at lower wages than currently employed workers receive. Existing firms conspire to limit new competition by lobbying Congress to pass restrictive regulations and by devising pricing strategies to scare off new entrants. Renters often organize to pressure local government to set caps on the rental price of apartments. If social and political forces were included in the analysis, theyd provide a counter–pressure to the dynamic forces of supply and demand. For example:

26 1 Supply and Demand Shifts in Supply and Demand Shifts in either supply or demand change equilibrium price An increase in demand or a decrease in supply Creates excess demand at the original equilibrium price Excess demand increases price until a new higher equilibrium prince is reached A decrease in demand or an increase in supply Creates excess supply at the original equilibrium price Excess supply decreases price until a new lower equilibrium price is reached


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