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Module Supply and Demand: Introduction and Demand KRUGMAN'S MACROECONOMICS for AP* 5 Margaret Ray and David Anderson.

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Presentation on theme: "Module Supply and Demand: Introduction and Demand KRUGMAN'S MACROECONOMICS for AP* 5 Margaret Ray and David Anderson."— Presentation transcript:

1 Module Supply and Demand: Introduction and Demand KRUGMAN'S MACROECONOMICS for AP* 5 Margaret Ray and David Anderson

2 What you will learn in this Module : What a competitive market is and how it is described by the supply and demand model What the demand curve is The difference between movements along the demand curve and changes in demand The factors that shift the demand curve

3 i A. Competitive Market- A market is an institution or mechanism which brings together buyers (demanders) and sellers (suppliers) of particular goods and services. B. Supply and Demand Model I. Supply and Demand: A Model of a Competitive Market

4 A.Demand schedule- shows how much of a product consumers are willing and able to buy at each of a series of possible prices during a specified time period. B. Law of Demand- 1. Other things being equal, as the price increases, the corresponding quantity demanded falls. 2. Restated, there is an inverse relationship between price and quantity demanded. C. Demand curve- The demand schedule graphed D. Quantity demanded- a point on the line II. The Demand Curve

5 Demand Schedule and Demand Curve PriceQuantity $ 8 3 $ 7 5 $ 6 7 $ 5 10 $ 4 12 $ 3 16 $ 2 22 Price Quantity

6 III. Understanding Shifts of the Demand Curve A.Increase = right- At any price, consumers wish to buy more. B.Decrease = left- At any price, consumers wish to buy less. B. M.E.R.I.T. shifts demand 1. market size (number of consumers) 2. expectations 3. related prices (complements, substitutes) 4. income (normal, inferior) 5. tastes

7 Module Supply and Demand: Supply and Equilibrium KRUGMAN'S MACROECONOMICS for AP* 6 Margaret Ray and David Anderson

8 What you will learn in this Module : What the supply curve is The difference between movements along the supply curve and changes in supply The factors that shift the supply curve How supply and demand curves determine a market's equilibrium price and equilibrium quantity In the case of a shortage or surplus, how price moves the market back to equilibrium

9 I.The Supply Schedule and the Supply Curve A.Supply schedule- shows amounts of a product a producer is willing and able to produce and sell at each of a series of possible prices during a specified time period. B.Supply Curve- a graphical representation of the supply schedule C.Quantity supplied- a point on the supply curve D. Law of Supply 1. All else equal, as the price rises, quantity supplied rises. 2. Restated: There is a direct relationship between price and quantity supplied.

10 Supply Schedule and Supply Curve PriceQuantity $ 822 $ 714 $ 68 $ 56 $ 45 $ 34 $ 23 Quantity Price

11 II.Understanding Shifts of the Supply Curve A.Increase = right, At any price, firms wish to produce more. B.decrease = left, At any price, firms with to produce less. C.T.R.I.C.E. shifts supply 1. Technology 2. Related prices (complements in production, substitutes in production) 3. Input prices 4. Competition (number of producers) 5. Expectations

12 A.Equilibrium- No individual would be better off doing something different B.Equilibrium price- price where supply meets demand C.Equilibrium quantity- quantity where supply meets demand D.Market-clearing price- Equilibrium price. It clears the market. All sellers have buyers, all buyers have sellers III. Supply, Demand, and Equilibrium

13 Finding the Equilibrium Price and Quantity equilibrium E price equilibrium quantity

14 IV. Why Does the Market Price Fall If It Is Above the Equilibrium Price? A. Surplus- When supply is greater than demand B. Producer's Incentive is to lower the price and clear the market

15 V. Why Does the Market Price Rise If It is Below the Equilibrium Price? A. Shortage- When quantity demanded exceeds quantity supplied B. Consumer's Incentive- pay more and get it first, raising the price to the market clearing price

16 Module Supply and Demand: Changes in Equilibrium KRUGMAN'S MACROECONOMICS for AP* 7 Margaret Ray and David Anderson

17 What you will learn in this Module : How equilibrium price and quantity are affected when there is a change in either supply or demand How equilibrium price and quantity are affected when there is a simultaneous change in both supply and demand

18 I. Shifting Demand A. When demand increases, the equilibrium price and quantity both increase

19 Shifting Demand Continued B. When demand decreases, the equilibrium price and quantity both decrease

20 II. Shifting Supply A. When supply decreases, the equilibrium price increases and the equilibrium quantity decreases

21 Shifting Supply Cont. B. When supply increases, the equilibrium price decreases and the equilibrium quantity increases

22 III. Simultaneous Shifts of Supply and Demand A. When demand increases and supply decreases the equilibrium price definitely increases, but quantity is ambiguous

23 Simultaneous Shifts of Supply and Demand B. When demand decreases and supply increases the equilibrium price definitely decreases, but quantity is ambiguous

24 Simultaneous Shifts of Supply and Demand C. When demand and supply increase, the change in equilibrium price is ambiguous, but equilibrium quantity definitely increases

25 Simultaneous Shifts of Supply and Demand D. When demand and supply decrease, the change in equilibrium price is ambiguous, but equilibrium quantity definitely decreases

26 KRUGMAN'S MACROECONOMICS for AP* 8 Margaret Ray and David Anderson Module Supply and Demand: Price Controls (Ceilings and Floors)

27 What you will learn in this Module : The meaning of price controls, one way government intervenes in markets How price controls can create problems and make a market inefficient Why economists are often deeply skeptical of attempts to intervene in markets Who benefits and who loses from price controls, and why they are used despite their well-known problems

28 A.Sometimes the efficient outcome in the market is judged as unfair to some groups, usually those that are disadvantaged (poor) and struggling to begin with. B.How will we deal with this? 1.A price control is a legal restriction on how high or low a market price may go. 2.Price controls are enacted by governments in response to political pressures from buyers and sellers. I. Why Governments Control Prices

29 A.Legal maximum price B.If Pe is considered too high, then a price ceiling must be set below the equilibrium price. C.A price ceiling set above the equilibrium price has no effect or non binding. D.Examples Oil Prices in1970s California electricity New York City apartments II. Price Ceilings

30 Modeling a Price Ceiling

31 III. How a Price Ceiling Causes Inefficiency A.Inefficient Allocation to Consumers B.Wasted Resources C.Inefficiently Low Quality D.Black Markets-goods and services bought and sold illegally

32 So Why Are There Price Ceilings? Benefit some- consumers may have political clout and persuade government officials that equilibrium is too high. (normative) Uncertainty- weve always had them Lack of understanding

33 A.Legal minimum price B.If Pe is considered too low, a price floor is set above the equilibrium price. C.A price floor set below the equilibrium price has no effect or non-binding D.Examples Agricultural products Minimum wage IV. Price Floors

34 Modeling a Price Floor

35 V. How a Price Floor Causes Inefficiency A.Inefficiently Low Quantity B.Inefficient Allocation of Sales Among Sellers C.Wasted Resources D.Inefficiently High Quality E.Illegal Activity- Black market for labor

36 So Why Are There Price Floors? Benefit some Producers may have the political clout to persuade government that the equilibrium price is unfairly low. This is a normative argument.- Disregard Lack of understanding

37 Module Supply and Demand: Quantity Controls KRUGMAN'S MACROECONOMICS for AP* 9 Margaret Ray and David Anderson

38 What you will learn in this Module : The meaning of quantity controls, another way government intervenes in markets How quantity controls create problems and can make a market inefficient Who benefits and who loses from quantity controls, and why they are used despite their well-known problems

39 A.Quantity Control or Quota-an upper limit on the quantity of some good that can be bought or sold. B.Licenses/Permits Examples: Fishing, Pollution I. Controlling Quantities

40 The Anatomy of Quantity Controls

41 II. The Anatomy of Quantity Controls A.Demand Price-Price consumers will pay for that quantity B.Supply Price- Price suppliers will charge for that quantity C.Wedge or Quota Rent- 1.The difference between Demand Price and Supply Price. 2.Earnings that accrue to the license-holder for ownership of the right to sell the good. 3.It is equal to the market price of the license when the licenses are traded. 4.We can also think of the quota rent as the opportunity cost the holder of the license bears for not renting out his license to another producer.

42 III. The Cost of Quantity Controls A.Inefficiency B.Deadweight Loss C.Illegal Activity


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