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3 CHAPTER D YNAMIC P OWER P OINT S LIDES BY S OLINA L INDAHL 1 Supply and Demand C OPYRIGHT 2012 W ORTH P UBLISHERS.

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Presentation on theme: "3 CHAPTER D YNAMIC P OWER P OINT S LIDES BY S OLINA L INDAHL 1 Supply and Demand C OPYRIGHT 2012 W ORTH P UBLISHERS."— Presentation transcript:

1 3 CHAPTER D YNAMIC P OWER P OINT S LIDES BY S OLINA L INDAHL 1 Supply and Demand C OPYRIGHT 2012 W ORTH P UBLISHERS

2 CHAPTER OUTLINE 2 Demand curve Quantity demanded Consumer surplus Total consumer surplus Normal good Inferior good Substitutes Complements Supply curve Quantity supplied Producer surplus Total producer surplus For applications, click here here

3 Some good blogs and other sites to get the juices flowing: Food for Thought…. 3

4 B ACK TO Demand What made him buy it? 4

5 B ACK TO Demand Demand represents the behavior of buyers. A Demand Curve A Demand Curve shows the quantity demanded at different prices. Quantity Demanded : the The Quantity Demanded : the quantity that buyers are willing (and able) to purchase at a particular price. 5

6 B ACK TO Law of Demand Price and Quantity Demanded are negatively related 6

7 B ACK TO The Demand Curve 7 The Demand Curve for Oil Price of Oil per Barrel Quantity of Oil (MBD) $55 5 $5 50 $20 25 Demand Price Quantity Demanded $55 5 $2025 $550

8 B ACK TO Reading Demand Curves Demand curves can be read in two ways: Horizontally: How much buyers are willing and able to purchase at a certain price. Vertically: The highest price buyers are willing to pay for a certain quantity. 8

9 B ACK TO Intuition of the Demand Curve 9 When the price is high, oil will only be used in the high value products. If the price falls, oil will also be used in lower value products. $ $ Demand Higher Valued Uses of Oil Lower Valued Uses of Oil Price of Oil per Barrel Quantity of Oil (MBD)

10 B ACK TO Consumer Surplus Consumer Surplus Consumer Surplus is the consumers gain from exchange, the difference between the highest price a consumer will pay at a given quantity and the actual market price. Total consumer surplus Total consumer surplus is the sum of consumer surplus of all buyers. 10

11 Your roommate just bought an iPad for $600. She would have been willing to pay $1,000 for a machine that could make her life so much more worthwhile. How much consumer surplus does your roommate enjoy from the iPad? a)$600 b)$400 c)$1600 d)$1400

12 B ACK TO Consumer Surplus 12 Total Consumer Surplus at a Price of $20 ½(80-20)x90 = $2,700 Area of Triangle Height Base ½(Base x Height) Joes Consumer Surplus The Presidents Consumer Surplus Demand Price of Oil per Barrel Quantity of Oil (MBD) Consumer Surplus is the Area beneath the Demand Curve and above the Price

13 If the price is $2010, what is the consumer surplus? a)$3,588,000 b)$1,794,000 c)$6,000,000 d)$3,000,000

14 B ACK TO What Shifts the Demand Curve? 14 An increase in demand An increase in demand means that consumers buy more at every price level, (or consumers are willing to pay more for each quantity.) On the graph: the demand curve shifts outwards, up, and to the right.

15 B ACK TO What Shifts the Demand Curve? decrease in demand A decrease in demand means that consumers buy less at every price level, (or they reduce the price theyre willing to pay for a given quantity.) On the graph: the demand curve shifts inwards, down, and to the left. 15

16 B ACK TO A Decrease in Demand 16 $50 80 Old Demand Curve $25 70 Less Quantity Demanded at the Same Price Lower Willingness to Pay for the Same Quantity Price per Unit Quantity New Demand Curve

17 B ACK TO An Increase in Demand 17 $50 80 Old Demand Curve $25 70 Price per Unit Quantity New Demand Curve Greater Quantity Demanded at the Same Price Greater Willingness to Pay for the Same Quantity

18 B ACK TO Demand Shifters Important Demand Shifters: 1.Income 2.Population 3.Price of Substitutes 4.Price of Complements 5.Expectations 6.Tastes 18

19 B ACK TO Important Demand Shifters: Income 1.The effect of changes in income on demand depends on the nature of the good in question. Normal Good : A Normal Good : demand increases when income increases (and vice versa). Inferior Good : An Inferior Good : demand decreases when income increases (and vice versa) 19

20 When the price of petroleum goes up, the demand for natural gas ______, the demand for coal ______, and the demand for solar power ______. a)increases; increases; increases b)increases; increases; decreases c)decreases; decreases; increases d)decreases; decreases; decreases

21 B ACK TO Important Demand Shifters: Population 2.As the population of an economy changes, the # of buyers of a particular good also changes, (thereby changing its demand.) What happens to the demand for diapers in Russia as birth rates drop? 21

22 B ACK TO Important Demand Shifters: Price of Substitutes Substitutes 3.Two goods are Substitutes if a decrease in the price of one leads to a decrease in demand for the other (or vice versa). - What happens to the demand for travel in Hawaii if the (perceived) safety cost of traveling to Mexico increases? 22

23 B ACK TO Important Demand Shifters: Price of Complements Complements 4.Two goods are Complements if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa). What happens to the demand for Sport Utility Vehicles when gasoline gets more expensive? 23

24 B ACK TO Price of Complements Consumers often have to buy goods together. An increase in price of gasoline will decrease the demand for SUVs 24

25 B ACK TO Important Demand Shifters: Expectations 5.The expectation of a higher (lower) price for a good in the future increases (decreases) current demand for the good. Consumers will adjust their current spending in anticipation of the direction of future prices in order to obtain the lowest possible price. If prices for Xbox 360 consoles are expected to drop right before Christmas, what will happen to sales during November? 25

26 B ACK TO Important Demand Shifters: Tastes 6.Tastes and preferences are subjective and will vary among consumers. Seasonal changes or fads have predictable effects on demand. What happens to demand for boots in October? To carbohydrates during the Atkins diet fad? Or to Acai berries after newly perceived health benefits? 26

27 B ACK TO What Shifts the Demand Curve? A change in quantity demanded is NOT the same as a change in demand. Quantity demanded changes only when the price of a good changes. It is a movement along a fixed demand curve. Demand changes only when a non-price factor (demand shifter) changes. It is a shift in the entire demand curve. A change in Quantity Demanded A change in Demand 27

28 When the price of a good increases the quantity demanded ______. When the price of a good decreases the quantity demanded ______. a)rises; rises b)rises; falls c)falls; rises d)falls; falls

29 B ACK TO Supply What made this oil field happen? 29

30 B ACK TO Supply Supply represents the behavior of sellers. Supply Curve A Supply Curve shows the quantity supplied at different prices. Quantity Supplied The Quantity Supplied is the quantity that producers are willing and able to sell at a particular price. 30

31 B ACK TO Law of Supply What do you think happens to the quantity of human organs donated in Israel when the government issues a point system that rewards donors? Law of Supply : The Law of Supply : there is a direct relationship between price and quantity supplied. When price rises, all else equal, quantity supplied rises and vice versa 31

32 B ACK TO The Supply Curve 32 Quantity of Oil (MBD) Price of Oil per Barrel Supply Curve for Oil $5 $20 $55 Price Quantity Supplied $5550 $2030 $510 The Supply Curve for Oil

33 B ACK TO Reading Supply Curves Supply curves can be read in two ways: Horizontally: How much suppliers are willing and able to sell at a certain price. Vertically: The minimum price for which suppliers are willing to sell a certain quantity. 33

34 B ACK TO Supply Curves Why is the supply curve upward sloping ? The cost of producing a good is not equal across all suppliers. At a low price, a good is produced and sold only by the lowest cost suppliers. At a high price, a good is also produced and sold by higher cost suppliers. 34

35 B ACK TO The Supply Curve for Oil 35 Supply Quantity of Oil (MBD) Price of Oil per Barrel $60 $40 $ Oil Shale Profitable Here Low Cost Oil Higher Cost Oil The Supply Curve for Oil

36 B ACK TO Furthermore… 36 this this Does sex have a price? See this blog post for a discussion about changes in supply and demand for sex.this

37 B ACK TO Producer Surplus Producer Surplus Producer Surplus is the producers gain from exchange the difference between the market price and the minimum price at which producers would be willing to sell a certain quantity. Total producer surplus Total producer surplus is the sum of the producer surplus of each seller. Graphically, total producer surplus is measured by the area above the supply curve and below the price. 37

38 B ACK TO Producer Surplus 38 $40 $20 $ Supply Curve 2080 Total Producer Surplus at a Price of $40 Quantity of Oil (MBD) Price of Oil per Barrel Producer Surplus is the Area Above the Supply Curve and Below the Price

39 Using the following diagram, calculate total producer surplus if the price of oil is $50 per barrel. a)0 b)$45 c)$1,350 d)$2,700

40 B ACK TO Change in Supply 40 Old Supply $50 20 Lower Costs Increase Supply Quantity of Oil (MBD) Price of Oil per Barrel New Supply $10 80 Greater Quantity Supplied at the Same Price Willing to Sell Same Quantity at Lower Prices

41 B ACK TO Change in Supply 41 Old Supply 20 Higher Costs Decrease Supply Quantity of Oil (MBD) Price of Oil per Barrel New Supply $10 80 Smaller Quantity Supplied at the Same Price Higher Price Needed to Sell Same Quantity

42 B ACK TO Supply Shifters Important Supply Shifters 1.Technological Innovations 2.Input Prices 3.Taxes and Subsidies 4.Expectations 5.Entry or Exit of Producers 6.Changes in Opportunity Costs 42

43 B ACK TO Important Supply Shifters: Technological Innovations 1.A technological innovation makes sellers willing to offer more at a given price, or sell a their quantity at a lower price. A technological innovation lowers costs and increases supply. 43

44 B ACK TO Production Technology Supply will increase for products when technology improves Examples: Computers, gaming systems, laser hair removal, flat screen TVs. 44

45 B ACK TO Important Supply Shifters: Input Prices 2.A decrease in the price of an input (all else equal) increases profits and encourages more supply (and vice versa) What will happen to the amount of new businesses if the government reduces the fees and red tape associated with new business licenses? What happens if the fees rise? 45

46 B ACK TO Important Supply Shifters: Taxes and Subsidies 3.A tax on output reduces profit and makes sellers less willing to supply at a given price, unless they can effectively raise the price without losing any sales. (for now, assume they cannot) A tax on output raises costs and decreases supply. Graph the effect on supply of a new cigarette tax in your notes. 46

47 B ACK TO Important Supply Shifters: Taxes and Subsidies A subsidy on production makes sellers willing to supply a greater quantity at a given price, or the subsidy allows producers to sell a given quantity at a lower price. A subsidy on production lowers costs and increases supply. Graph the effect on supply of a new subsidy to fast food producers aimed at helping them market and sell overseas. 47

48 B ACK TO Taxes and Subsidies Taxes and subsidies affect profits and therefore supply. A 10% yacht tax reduced the supply of yachts 53% in the early 1990s. 48

49 B ACK TO Cotton Supply When the U.S. decreases its cotton subsidies, U.S. cotton supply decreases 49

50 B ACK TO Important Supply Shifters: Taxes and Subsidies 50 $10 Supply With $10 Tax $10 $50 Supply Without Tax $40 60 Quantity of Oil (MBD) Price of Oil per Barrel With a $10 Tax Suppliers Require a $10 Higher Price to Sell the Same Quantity

51 B ACK TO Important Supply Shifters: Expectations 4.The expectation of a higher price for a good in the future decreases current supply of the good – if they can store the good- (and vice versa). Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price. 51

52 B ACK TO Future Expectations A change in producers expectations about profitability will affect supply curves Windmill production increases as producers expect sales and profitability to increase. 52

53 B ACK TO Important Supply Shifters: Expectations 53 Expectations Can Shift the Supply Curve Quantity Price per Unit Supply Today Supply Today with Expectation of Future Price Increase Into Storage

54 B ACK TO Important Supply Shifters: Entry or Exit of Producers 5.As producers enter and exit the market, the overall supply changes. Entry implies more sellers in the market increasing supply. Exit implies fewer sellers in the market decreasing supply. What will happen to the supply for Marijuana in California if the drug is legalized for general use? 54

55 B ACK TO Number of Producers As more producers enter a market, supply increases (and vice versa) As more firms enter the solar installation market, the number of solar installations available for sale increases 55

56 B ACK TO Important Supply Shifters: Entry or Exit of Producers 56 Domestic Supply Domestic Supply Plus Canadian Imports Price Quantity Entry Increases Supply Greater Quantity Supplied at the Same Price Lower Price for the Same Quantity Supplied

57 B ACK TO Important Supply Shifters: Changes in Opportunity Costs 6.Inputs used in production have opportunity costs. Sellers will choose to use those inputs where the profit is the highest Sellers will supply less of a good if the price of an alternate good using the same inputs rises (and vice versa). Sellers always chase the highest profit goods. 57

58 B ACK TO Changes in Opportunity Costs Producers have the ability to produce other goods An increase in the profitability of small cars will decrease the supply of SUVs 3-58

59 B ACK TO Important Supply Shifters: Changes in Opportunity Costs 59 $5 Supply with Low Opportunity Costs 2,800 Higher (Opportunity) Costs Reduce Supply- Rising Wheat Prices Reduce Soybean Supply Quantity of Soybeans (Millions of Bushels) Price per Unit 2,000 $7 Supply with High Opportunity Costs Smaller Quantity Supplied at the Same Price Higher Price Required to Sell the Same Quantity

60 B ACK TO What Shifts the Supply Curve? A change in quantity supplied is NOT the same as a change in supply. Quantity supplied changes only when the price of a good changes. It is a movement along a fixed supply curve. Supply changes only when a non-price factor changes. It is a shift in the entire supply curve. A change in Quantity Supplied A change in Supply 60

61 Explain using the concepts of supply, demand, and transport costs (including in this case smuggling costs) the pattern of prices you see here Market Price of Marijuana

62 The market price of the product is $20 per unit. Calculate the dollar amount of consumer surplus being earned in this market. a) $120,000 b) $60,000 c) $100,000 d) $80,000 B ACK TO


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