Presentation on theme: "Unit II: Demand and Supply"— Presentation transcript:
1 Unit II: Demand and Supply Booth/EconPrentice Hall
2 LAW OF DEMAND Price Demand What kind of relationship does price and demand have? Why?What kind of relationship does price and supply have?Why?
3 Law of Diminishing Marginal Utility Util = One unit of something (satisfaction gained)Def. Marginal benefit from using each additional unit of good or service during a given time period tends to decline as each is used.Example= Hot dogs at game $4…(worth the price)
4 Individual Demand Schedule Market Demand Schedule The Demand ScheduleA demand schedule is a table that lists the quantity of a good a person will buy at each different price.A market demand schedule is a table that lists the quantity of a good all consumers in a market will buy at each different price.Demand SchedulesIndividual Demand SchedulePrice of a slice of pizzaQuantity demanded per dayMarket Demand SchedulePrice of a slice of pizzaQuantity demanded per day$.50$1.00$1.50$2.00$2.50$3.0054321$.50$1.00$1.50$2.00$2.50$3.0030025020015010050What is the difference between a market and individual demand schedule?jf23Chapter 4, Section 1
5 Price per slice (in dollars) The Demand CurveMarket Demand Curve3.002.502.001.501.00.5050100150200250300350Slices of pizza per dayPrice per slice (in dollars)A demand curve is a graphical representation of a demand schedule.Three characteristics of every demand curve:Downward slopingMust assume ceteris paribusRelationship between price and quantityWhat is the one factor that causes a shift in the quantity demanded?DemandPRICE!!23Chapter 4, Section 1
6 Movement along the demand curve is a result in a consumer changing their behavior based on a change in price.Increase in quantity demanded is demonstrated by moving down the demand curveDecrease in quantity demanded is demonstrated by moving up the demand curve
7 Six Factors That Affect Demand IncomeMarket SizeConsumer TastesConsumer ExpectationsSubstitutesComplements
8 Shifting the Whole Demand Curve What else do you think could influence YOUR demand for a product?13Chapter 4, Section 2
9 Shifting the Curve (cont.) Price of Related GoodsThe demand curve for one good can be affected by a change in the demand for another good.5. Complements are two goods that are bought and used together. Example: skis and ski boots6. Substitutes (interchangeable)are goods used in place of one another. Example: skis and snowboards13
10 Shifting the Curve (cont.) An increase in demand is shown by moving the demand curve to the rightWhat would cause an increase in demand?A decrease in demand is shown by moving the demand curve to the left?What would cause a decrease in demand?~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
11 What Is Elasticity of Demand? Elasticity of demand is a measure of how consumers react to a change in price.Demand for a good that consumers will continue to buy despite a price increase is inelastic, (price has little impact on QD).Demand for a good that is very sensitive to changes in price is elastic.Price has a huge impact on QDWhy would a prescription drug, like insulin, have inelastic demand for a person with diabetes?12Chapter 4, Section 3
12 Factors Affecting Elasticity What are some other factors that you feel could impact a consumers response to a change in the price of a product?12Chapter 4, Section 3
13 Output (slices per day) Supply CurvesMarket Supply CurvePrice (in dollars)Output (slices per day)3.002.502.001.501.00.50500100015002000250030003500Characteristics of a Supply Curve1. Relationship between price and quantity supplied2. Always upward sloping3. Must have ceteris paribus (“all things held constant”) to existSupplyA market supply curve is a graph of the quantitysupplied of a good by all suppliers at different prices
14 The Law of SupplyAccording to the law of supply, as price increases, supply increases. By contrast as price decreases, supply decreases.PriceAs price increases…SupplyQuantity supplied increasesPriceAs price falls…SupplyQuantity supplied falls
15 How Does the Law of Supply Work? Economists use the term quantity supplied to describe how much of a good is offered for sale at a specific price. Just like demand, quantity supplied indicates movement along the supply curve, because ONLY price is being considered (ceteris paribus).Why do suppliers produce more as the price increases?1.The promise of increased revenues when prices are high encourages firms to produce more. The more you can make, the more you will produce!2.Rising prices draw new firms into a market and add to the quantity supplied of a good.Higher Production + Market Entry = Law of SupplyMore $$$$-- More Supply!
16 Price per slice of pizza Slices supplied per day Supply SchedulesA market supply schedule is a chart that lists how much of a good all suppliers will offer at different prices.$.501,000Price per slice of pizzaSlices supplied per dayMarket Supply Schedule$1.001,500$1.502,000$2.002,500$2.503,000$3.003,500What would an individual supply schedule list?
17 Input Costs and SupplyAny change in the cost of an input such as the raw materials, machinery, or labor used to produce a good, will affect supply.As input costs increase, the firm’s marginal costs also increase, decreasing profitability and supply.Input costs can also decrease. New technology can greatly decrease costs and increase supply.
18 Government Influences on Supply By raising or lowering the cost of producing goods, the government can encourage or discourage an entrepreneur or industry.SubsidiesA subsidy is a government payment that supports a business or market. Subsidies cause the supply of a good to increase.TaxesThe government can reduce the supply of some goods by placing an excise tax on them. An excise tax is a tax on the production or sale of a good.
19 Other Factors Influencing Supply Number of SuppliersIf more firms enter a market, the market supply of the good will rise. If firms leave the market, supply will decrease.The Global EconomyThe supply of imported goods and services has an impact on the supply of the same goods and services here.Government import restrictions will cause a decrease in the supply of restricted goods.
20 change in price for trees, Elasticity of SupplyElasticity of supply is a measure of the way quantity supplied reacts to a change in price.If supply is not very responsive to changes in price, it is considered inelastic.If supply is very sensitive to changes in price it is considered elastic.Why can’t I respond to achange in price for trees,but I can for taxi rides?Elastic
23 Price of a slice of pizza Combined Supply and Demand Schedule Balancing the MarketThe point at which quantity demanded and quantity supplied come together is known as equilibrium.Price per sliceEquilibrium PointFinding EquilibriumPrice of a slice of pizzaQuantity demandedQuantity suppliedResultCombined Supply and Demand Schedule$ .50300100$3.50$3.00$2.50$2.00$1.50$1.00$.50Slices of pizza per day50150200250350SupplyDemand$2.00$2.50$3.0015010050250300350Surplus from excess supply$1.00250150Shortage from excess demand$1.50200EquilibriumEquilibrium PriceaEquilibrium QuantitySupply + Demand = Equilibrium
24 Market Disequilibrium If the market price or quantity supplied is anywhere but at the equilibrium price, the market is in a state called disequilibrium. There are two causes for disequilibrium:Excess DemandExcess demand occurs when quantity demanded is more than quantity supplied.ShortageExcess SupplyExcess supply occurs when quantity supplied exceeds quantity demanded.SurplusInteractions between buyers and sellers will always push the market back towards equilibrium.
25 Price CeilingsA price ceiling is a maximum price that can be legally charged for a good.An example of a price ceiling is rent control, a situation where a government sets a maximum amount that can be charged for rent in an area.
26 Price FloorsA price floor is a minimum price, set by the government, that must be paid for a good or service.One well-known price floor is the minimum wage, which sets a minimum price that an employer can pay a worker for an hour of labor.
27 Prices provide a language for buyers and sellers. Advantages of PricesPrices provide a language for buyers and sellers.1. Prices as an IncentivePrices communicate to both buyers and sellers whether goods or services are scarce or easily available. Prices can encourage or discourage production.2. SignalsThink of prices as a traffic light. A relatively high price is a green light telling producers to make more. A relatively low price is a red light telling producers to make less.3. FlexibilityIn many markets, prices are much more flexible than production levels. They can be easily increased or decreased to solve problems of excess supply or excess demand.4. Price System is "Free"Unlike central planning, a distribution system based on prices costs nothing to administer.