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Supply and Demand 4 Teach a parrot the terms supply and demand and youve got an economist. Thomas Carlyle CHAPTER 4 Copyright © 2010 by the McGraw-Hill.

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Presentation on theme: "Supply and Demand 4 Teach a parrot the terms supply and demand and youve got an economist. Thomas Carlyle CHAPTER 4 Copyright © 2010 by the McGraw-Hill."— Presentation transcript:

1 Supply and Demand 4 Teach a parrot the terms supply and demand and youve got an economist. Thomas Carlyle CHAPTER 4 Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2 Supply and Demand 4 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 4-2

3 Supply and Demand 4 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 4-3

4 Supply and Demand 4 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 A change in price changes quantity demanded A change in price causes a movement along the 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 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 4-4

5 Supply and Demand 4 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 4-5

6 Supply and Demand 4 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 to consumers 4-6

7 Supply and Demand 4 From a Demand Table to a Demand Curve Demand for DVDs P Q $ $ B A $2.00 $1.00 Price per DVD DVD rentals demanded per week A $0.509 B $1.008 C $2.006 D $3.004 E $ C D E 4-7

8 Supply and Demand 4 Individual and Market Demand Curves Market demand for DVDs P Q $ $ $2.00 $ Market demand curve for DVDs per week ALICEBRUCECARMEN The market demand curve is the summation of all individual demand curves 4-8

9 Supply and Demand 4 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 4-9

10 Supply and Demand 4 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 4-10

11 Supply and Demand 4 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 A change in price changes quantity supplied A change in price causes a movement along the 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 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 4-11

12 Supply and Demand 4 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 4-12

13 Supply and Demand 4 Individual and Market Demand Curves P Q $ $ $2.00 $ Market supply curve for DVDs per week The market supply curve is the summation of all individual supply curves BARRY ANN 15 Market supply for DVDs CHARLIE 4-13

14 Supply and Demand 4 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: 4-14

15 Supply and Demand 4 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* 4-15


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