Presentation on theme: "TCO 2 Given a supply schedule, a demand schedule, and a change in one or more determinants of supply and demand, graph the supply and demand curves and."— Presentation transcript:
1TCO 2Given a supply schedule, a demand schedule, and a change in one or more determinants of supply and demand, graph the supply and demand curves and illustrate the resulting change in the equilibrium price and quantity.Define supply and demand and show their relationship graphically.Explain the law of determinants of demand and supply.Differentiate between a change in quantity demanded (a movement along a fixed demand curve) and a change in demand (a movement of the entire demand curve).Explain and illustrate how market equilibrium is reached.Illustrate the movement of the supply and demand curves and the resulting new equilibrium price and quantity.Define price-elasticity of demand and supply.Identify the factors that influence price elasticity of demand.Briefly illustrate the concept of price elasticity of supply
2SUPPLY, DEMAND, MARKETS The first few slides are review of Demand. What it is, how it works.The first few slides are review of Demand.
3DemandConsumers willingness and ability to buy various quantities of a good or service at each price in a set of possible prices in a given time period.Note: This is a very specific definition. You must know it and understand what it means both verbally and graphically.
4Demand isDemand is the WHOLE curve. That’s what the definition means.
5Law of DemandThe quantity demanded of a product is negatively, or inversely, related to its price. This means that consumers will purchase more of a product at lower prices than at higher prices. That is why demand curves always slope downward and to the right.
6Determinants of Demand IncomeTaste and PreferencesExpectations Regarding Future PricePrice of Related GoodsNumber of Buyers in the MarketCeteris Paribus, if any one of these determinants of demand changes, then demand changes. That means you have a NEW DEMAND CURVE!!
7Quantity-DemandedConsumers willingness and ability to buy a quantity of a good or service at a price in a period of time. The determinant of quantity demanded is the price of the good or service itself.This is a very specific definition. You must know and understand what it means both verbally and graphically. On a graph, Quantity-demanded is JUST ONE POINT ON A DEMAND CURVE. The only thing that causes Quantity-demanded to change [to move up or down along an existing demand curve] is when the market equilibrium price of the good or service changes.
8Marginal Utility [additional satisfaction] Demand is based onMarginal Utility[additional satisfaction]Ceteris Paribus, people are rationale and want to get the same amount of satisfaction from each unit of a good or service they buy. This is called marginal utility of expenditure. What it means is that we take the amount of additional satisfaction [marginal utility] of each additional unit we buy and divide that by the price we must pay to get it. This gives us a figure showing how much additional satisfaction [marginal utility] we get per dollar spent. We compare this figure to the figures we got from earlier purchases of the good. We will eventually find that we are satisfied when the marginal utility of expenditure for each unit of the good we buy is the same.I bet some of you are astounded that your brain does all that without any conscious effort from you!
9How this works # Price MU MUE 1 $50. 100 2 $25. 50 3 $10. 20 Price As you can see, the only way we can maintain our marginal utility of expenditure at 2 is to lower the price we are willing to pay because the additional satisfaction [our marginal utility] decreases with each additional unit of the good we buy.So we have a demand curve!
10SupplySuppliers willingness and ability to offer for sale various quantities of a good or service at each price in a set of possible prices in a given period of time.Note: This is a very specific definition. You must know it and understand what it means both verbally and graphically.
11Supply isSupply is the WHOLE curve. That’s what the definition means.
12Law of SupplyThe price and quantity supplied are positively, or directly, related. Producers will supply a larger quantity at higher prices than at lower prices. Thus, the supply curve slopes upward because a higher price is necessary to call for the additional output from suppliers
13Determinants of Supply Resource Prices/Production CostNumber of Producers in the MarketTechnologyMarket ExpectationsSubsidies/TaxesCeteris Paribus, if any one of these determinants of supply changes, then supply changes. That means you have a NEW SUPPLY CURVE!!
14Quantity-SuppliedSuppliers willingness and ability to produce a quantity of a good or service at a price in a period of time.This is a very specific definition. You must know and understand what it means both verbally and graphically. On a graph, Quantity-supplied is JUST ONE POINT ON A SUPPLY CURVE. The only thing that causes Quantity-supplied to change [to move up or down along an existing supply curve] is when the market equilibrium price of the good or service changes.
15Market Where exchange among buyers and sellers takes place. You MUST have both consumers and producers to have a market.
16A market is Demand Supply $ Q ME $ ME Q The demand curve represents the demand decisions of consumers and the supply curve represents the supply decisions of sellers. The market price for the good is ME$ and the market quantity exchanged is MEQ. This market is in equilibrium. At the market price the quantity that suppliers wanted to sell will be sold to the buyers who wanted to buy at that price. Those suppliers who wanted a higher price will not sell the quantity they wanted. Those buyers who wanted to pay a lower price will not be able to buy. The market only satisfies those who are willing to exchange at the market price.
17Market EquilibriumQuantity-demanded equals quantity-supplied at this price. Supply DOES NOT equal Demand!Found where the supply curve crosses the demand curve.Markets stay in equilibrium until either Demand or Supply or both change.
18Effect of an Increase in Supply on Equilibrium Price An increase in supply will cause the equilibrium price to fall.Ceteris Paribus. An increase in Supply [caused maybe by an increase in the number of sellers] causes the supply curve to shift to the right. This means that a larger quantity of goods will be offered for sale at the same price and that suppliers will accept a lower price for the original quantity offered for sale. This forces the market equilibrium price of the good to fall. As the market equilibrium price of the good falls, consumers are willing to buy a larger quantity. Thus market equilibrium quantity increases as market equilibrium price falls as a result of the increase in supply.
19Effect of Simultaneous Increase in Demand and Supply on Equilibrium Price Demand and supply increase in equal amounts; quantity increases but price does not changeCeteris Paribus. It sometimes happens that supply and demand change simultaneously. Remember that demand changes ONLY because one of the determinants of demand changes. So if demand increases it may be due to an increase in income. If supply changes it is due ONLY to a change in one of the determinants of supply. So if supply increases it may be due to a decrease in production costs. REMEMBER: A CHANGE IN DEMAND DOES NOT CAUSE A CHANGE IN SUPPLY OR VISE VERSA. Both supply and demand are constrained by TIME. A change in demand over time will be reflected in a change in supply. But not right now, at this time.
20Price ElasticityHow responsive is quantity to changes in price?
21Perfectly Elastic Demand Quantity-demanded changes by a larger percent than price changesMany substitutesLarge percentage of budgetConsumers aren’t particularQPDThis is found in the real world in some markets where the price for the commodity is set by buyers and sellers in commodity markets. Soy bean, chocolate, coffee, gold, etc. fit into this category.
22Perfectly Inelastic Demand QDQuantity-demanded changes by a smaller percent than price changesFew substitutesSmall percentage of budgetCustomers want only thisHas your doctor ever offered to see both you and a family member on a 2 for 1 sale? We buy lettuce 2 heads for the price of 1. Why not appendectomies?
23Elasticity & Normal Demand Most demand curves are elastic at higher prices and inelastic at lower price ranges.How does this reflect the workings of marginal utility?Hint: Remember that the smaller quantity you have of anything the greater the marginal utility from that smaller quantity. The more of the item you acquire, the lower your marginal utility per item.
24Elastic SupplyQuantity-supplied changes by a larger percentage than price changesCost of production lowResources readily availableSlope of supply curve is very flatGenerally it takes a long period of time for quantity-supplied to respond to price changes than quantity-demanded. This is due to the time it takes producers to increase the quantity—production time.
25Inelastic SupplyQuantity-supplied changes by a smaller percent than price changesCost of production is highResources are not availableSlope of supply curve is very steepIn some cases, it is very difficult to increase quantity-supplied. It takes time to grow new crops, for example. A sculptor may take several years to complete a piece to sell. Of course, we all know there is only one Michael Jordan. All these influence the inelasticity of supply.
26Every now and then various parts of the US experience a gasoline shortage. What does this mean in terms of supply and demand?What impact would the price elasticity of both supply and demand have on a gasoline shortage?
27Why does a Billionaire Beanie Baby Bear sell for $1000? Which determinants of demand are working here?Is demand elastic or inelastic?What determinants of supply are working here?Is supply elastic or inelastic?
28Spiral cut ham can be purchased for $2.99 a pound at Christmas time. What determinants of demand are working here?What determinants of supply are working here?What do you think the price of spiral cut ham would be in May? Why?Use these last few questions as spring boards for your thinking and to help you find articles or cartoons that exemplify this topic.