Presentation is loading. Please wait.

Presentation is loading. Please wait.

Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply and Demand.

Similar presentations


Presentation on theme: "Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply and Demand."— Presentation transcript:

1 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply and Demand

2 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Trading Opportunities: The Price-Taking Model n Each buyer is a price taker. He can buy as much (or as little) of the good as he wants at some price. He cannot affect the price.

3 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Trading Opportunities: The Price-Taking Model n Each seller is a price taker. She can sell as much (or as little) of the good as he wants at some price. She cannot affect the price.

4 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Introduction to Demand n How many movies you see this month depends on many conditions. The priceHow much do movie tickets cost? Your tastesHow much do you like movies? Your incomeDo you have enough money to pay for tickets? Prices of other goodsHow much would you have to spend to rent videos or attend concerts?

5 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Schedule for Tickets

6 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

7 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

8 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

9 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

10 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

11 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

12 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

13 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

14 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets

15 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand Curve for Movie Tickets $10 80 Number of Movie Tickets per Month Price of Movie Tickets A B

16 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand n A persons quantity demanded of a good at some price is the amount she would buy at that price.

17 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Demand n A demand curve graphs the relation between the price of a good and the quantity demanded.

18 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Demand n The market quantity demanded of a good at some price is the total amount that all buyers in the market would buy at that price.

19 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Demand n A market demand curve graphs the relation between the price of a good and the market quantity demanded.

20 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Individual Demands and Market Demand

21 Market Demand for Sodas 0 Sodas per Month Price per Soda $

22 Market Demand for Sodas 0 Sodas per Month Price per Soda $ Archies Demand )(

23 Market Demand for Sodas 0 Sodas per Month Price per Soda $ Archies Demand )( + Veronicas Demand )(

24 Market Demand for Sodas 0 Sodas per Month Price per Soda $ Archies Demand )( + Veronicas Demand = Market Demand )(()

25 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Conditions Affecting the Quantity Demanded n Personal taste n Usefulness n Income and wealth n Prices of related goods

26 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. The Law of Demand n An increase in the price of a good, with no change in other conditions, generally reduces the quantity demanded. n Demand curves have negative (downward) slopes.

27 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Why Demand Curves Slope Downward n Buyers can replace a good with another, cheaper substitute. n People cannot afford to buy as much after a price increase requiring them to turn to cheaper substitutes or less of the higher priced good.

28 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Demand n A change in demand means a change in the numbers in the demand schedule and a shift in the demand curve.

29 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Demand n An increase (or rise ) in demand means an increase in the quantity demanded at a given priceshifts the demand curve to the right.

30 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase in Demand Quantity Demanded Price

31 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase in Demand Quantity Demanded Price D1D1

32 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase in Demand Quantity Demanded Price D1D1

33 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase in Demand Quantity Demanded Price D1D1 D2D2

34 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Demand n An decrease (or fall ) in demand means an decrease in the quantity demanded at a given priceshifts the demand curve to the left.

35 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Decrease in Demand Quantity Demanded Price

36 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Decrease in Demand Quantity Demanded Price D1D1

37 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Decrease in Demand Quantity Demanded Price D1D1

38 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Decrease in Demand Quantity Demanded Price D2D2 D1D1

39 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Quantity Demanded Versus Changes in Demand n A change in the quantity demanded means a movement along a demand curve due to a change in price. n The demand curve does not move when the quantity demanded changes.

40 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Quantity Demanded Versus Changes in Demand n A change in price changes the quantity demanded but not demand. A change in demand is caused by a change in conditions other than the price of the good.

41 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Change in Quantity Demanded Quantity Price $10 $5 2010

42 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Change in Quantity Demanded Quantity Price D $10 $

43 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Change in Quantity Demanded Quantity Price D $10 $

44 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Change in Quantity Demanded Quantity Price D $10 $

45 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Change in Quantity Demanded

46 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Conditions That Cause Changes in Demand n Tastes n Usefulness n Income and Wealth n Prices of Related Goods n Number of Potential Buyers

47 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Tastes n Tastes (or preferences) are peoples underlying likes and dislikes.

48 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Usefulness n A goods usefulness is its benefit in creating the products people ultimately want.

49 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Income and Wealth n Income is the amount of money received each year from working, interest on savings, and other sources such as gifts. A normal good is a good whose demand increases if income rises. An inferior good is a good whose demand decreases if income rises.

50 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Income and Wealth n Wealth is the value of accumulated past savings, including human wealth.

51 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Prices of Related Goods n Substitutes can be used in place of each other. An increase in the price of one raises demand for the other. n Complements tend to be used together. An increase in the price of one reduces demand for the other.

52 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Number of Potential Buyers n Market demand curves shift when the number of potential buyers changes. n Changes in demographics also cause demand changes.

53 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Introduction to Supply n How many rooms you will paint this week depends on many conditions. Cost of paint Your painting skills How much you dislike painting The alternative use of your time

54 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply Schedule for Painting Services

55 Supply Curve for Painting Services $ Rooms Painted per Week Price per Room

56 Supply Curve for Painting Services $ Rooms Painted per Week Price per Room

57 Supply Curve for Painting Services $ Rooms Painted per Week Price per Room

58 Supply Curve for Painting Services $ Rooms Painted per Week Price per Room

59 Supply Curve for Painting Services $ Rooms Painted per Week Price per Room

60 Supply Curve for Painting Services $ Rooms Painted per Week Price per Room

61 Supply Curve for Painting Services $ Rooms Painted per Week Price per Room

62 Supply Curve for Painting Services $ Rooms Painted per Week Price per Room A B 234

63 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply n A sellers quantity supplied of a good at some price is the amount she would sell at that price.

64 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply n The quantity supplied describes the behavior of sellers. n It is unrelated to the behavior of buyers.

65 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply n A supply schedule lists the various possible prices and quantities supplied. n A supply curve graphs the relation between the price of a good and the quantity supplied.

66 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Supply n The market quantity supplied of a good at some price is the total amount that all sellers in the market would sell at that price.

67 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Supply n A market supply curve graphs the relation between the price of a good and the market quantity supplied. n A market supply schedule shows the various possible prices of a good and the market quantity supplied at each price.

68 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Individual and Market Supplies

69 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Individual and Market Supplies Price Pizzas per Day $

70 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Individual and Market Supplies Price Pizzas per Day Papas Supply of Pizza $ S

71 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Individual and Market Supplies Price Pizzas per Day Papas Supply of Pizza $ S S Mamas Supply of Pizza

72 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Individual and Market Supplies Price Pizzas per Day Papas Supply of Pizza $ S S Mamas Supply of Pizza

73 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Individual and Market Supplies Price Pizzas per Day Papas Supply of Pizza $ S S Mamas Supply of Pizza

74 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Individual and Market Supplies Price Pizzas per Day Papas Supply of Pizza $ S S Mamas Supply of Pizza Market Supply of Pizza S

75 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Law of Supply n When the price of a good rises, holding constant other conditions, generally the quantity supplied rises. n Supply curves usually have positive slopes.

76 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Supply n A change in supply means a change in the numbers in the supply schedule and a shift in the supply curve.

77 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Supply n An increase (or rise) in supply shifts the supply curve to the right. n A decrease (or fall) in supply shifts the supply curve to the left.

78 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase in Supply Quantity Supplied Price

79 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase in Supply Quantity Supplied Price S1S1

80 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase in Supply Quantity Supplied Price S1S1 S2S2

81 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Decrease in Supply Quantity Supplied Price S1S1

82 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Decrease in Supply Quantity Supplied Price S1S1 S1S1

83 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Quantity Supplied Versus Changes in Supply n A change in the quantity supplied means a movement along a supply curve due to a change in price. The supply curve does not move and the numbers in the supply schedule do not change.

84 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Quantity Supplied Versus Changes in Supply n Price changes affect the quantity supplied, but do not change supply.

85 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Quantity Supplied Versus Changes in Supply n A change in supply occurs when there is a change in conditions other than price.

86 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Changes in Conditions Causing Changes in Supply n Prices of Inputs n Technology n Number of Potential Sellers

87 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Prices of Inputs n Increases in the prices of inputs materials, energy, natural resources, etc.can decrease supply by reducing the incentive to produce and sell the good.

88 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Technology n Technology advances lower the costs of producing a good and raise the incentive to produce and sell it.

89 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Number of Potential Sellers n Market supply increases when the number of potential sellers rises.

90 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Equilibrium of Supply and Demand n An equilibrium occurs when quantity supplied equals quantity demanded. n The price in an equilibrium is the equilibrium price and the quantity is the equilibrium quantity.

91 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Equilibrium Price 0Quantity

92 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Equilibrium Price S D 0Quantity

93 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Equilibrium Price S D A Q1Q1 0 P1P1 Quantity

94 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Equilibrium Price S D A Equilibrium Q1Q1 0 P1P1 Quantity

95 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Equilibrium Price S D A Equilibrium Q1Q1 0 P1P1 Equilibrium Price Quantity

96 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Equilibrium Equilibrium Quantity Price S D A Equilibrium Q1Q1 0 P1P1 Quantity Equilibrium Price

97 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Equilibrium Equilibrium Quantity Price S D A Equilibrium Q1Q1 0 P1P1 Quantity This area shows total spending on the good ( Q 1 X P 1 ). Equilibrium Price

98 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Why the Intersection of the Curves Shows Equilibrium n The quantity demanded equals the quantity supplied.

99 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Why the Intersection of the Curves Shows Equilibrium n Disequilibrium is the opposite of equilibrium. It occurs when the quantity demanded does not equal the quantity supplied at the current price.

100 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand (Shortage) n A situation in which the quantity demanded exceeds the quantity supplied.

101 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand (Shortage) n If the price is below the equilibrium price, there is a shortage and the price tends to rise toward the equilibrium.

102 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price 0

103 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price S D 0

104 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price S D Equilibrium 0

105 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price S D 0 P1P1 Equilibrium Price Equilibrium

106 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price S D A Equilibrium 0 P1P1 Equilibrium Price P0P0 Price below Equilibrium Price

107 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price S D A Equilibrium 0 P1P1 Equilibrium Price P0P0 Price below Equilibrium Price Qs0Qs0

108 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price S D A Equilibrium 0 P1P1 Equilibrium Price P0P0 Price below Equilibrium Price Qs0Qs0 Qd0Qd0

109 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price S D A Equilibrium 0 Quantity Demanded at the Price P 0 P1P1 Equilibrium Price P0P0 Quantity Supplied at the Price P 0 Price below Equilibrium Price Qs0Qs0 Qd0Qd0

110 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Demand Quantity Price S D A Equilibrium 0 Quantity Demanded at the Price P 0 P1P1 Equilibrium Price P0P0 Quantity Supplied at the Price P 0 Excess Demand (shortage) Price below Equilibrium Price Qs0Qs0 Qd0Qd0

111 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply (Surplus) n A situation in which the quantity supplied exceeds the quantity demanded.

112 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply (Surplus) n If the price is above the equilibrium price, there is a surplus and the price tends to fall toward the equilibrium.

113 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price 0

114 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price 0 D S

115 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price D 0 S Equilibrium

116 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price D Equilibrium 0 P1P1 Equilibrium Price S

117 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price D Equilibrium 0 P2P2 Price above Equilibrium Price P1P1 Equilibrium Price S

118 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price D Equilibrium 0 P2P2 Price above Equilibrium Price P1P1 Equilibrium Price S Qd2Qd2

119 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price D 0 P2P2 Price above Equilibrium Price P1P1 Equilibrium Price S Equilibrium Qs2Qs2 Qd2Qd2

120 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price S D 0 P2P2 Price above Equilibrium Price P1P1 Quantity Demanded at the Price P 2 Equilibrium Price Qs2Qs2 Quantity Supplied at the Price P 2 Qd2Qd2 Equilibrium

121 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Excess Supply Quantity Price S D 0 P2P2 Price above Equilibrium Price P1P1 Quantity Demanded at the Price P 2 Excess Supply (surplus) Equilibrium Price Qs2Qs2 Quantity Supplied at the Price P 2 Qd2Qd2 Equilibrium

122 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Summary of Equilibrium n At the equilibrium price, there is neither a shortage or a surplus. n The price shows no tendency to change unless demand or supply changes.

123 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Effects of Changes in Demand or Supply n Changes in demand and supply cause changes in the equilibrium.

124 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase or Decrease in Demand n An increase in demand raises the equilibrium price and quantity. n A decrease in demand lowers the equilibrium price and quantity.

125 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Demand Quantity Price 0

126 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Demand Quantity Price 0 S1S1 D1D1

127 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Demand Quantity Price 0 P1P1 Q1Q1 A S1S1 D1D1

128 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Demand Quantity Price 0 P1P1 Q1Q1 A S1S1 D2D2 D1D1

129 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Demand Quantity Price B 0 P1P1 Q1Q1 A S1S1 D2D2 D1D1

130 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Demand Quantity Price B Q2Q2 0 P2P2 P1P1 Q1Q1 A S1S1 D2D2 D1D1

131 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Demand Quantity Price B Q2Q2 0 P2P2 P1P1 Q1Q1 A S1S1 D2D2 D1D1

132 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Demand Quantity Price A Q1Q1 0 P1P1 S1S1 D1D1

133 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Demand Quantity Price A Q1Q1 0 P1P1 S1S1 D1D1 D2D2

134 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Demand Quantity Price A Q1Q1 0 P1P1 S1S1 D1D1 D2D2 B

135 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Demand Quantity Price A Q1Q1 0 P1P1 S1S1 D1D1 D2D2 B P2P2 Q2Q2

136 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Demand Quantity Price A Q1Q1 0 P1P1 S1S1 D1D1 D2D2 B P2P2 Q2Q2

137 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Increase or Decrease in Supply n An increase in supply lowers the equilibrium price and raises the equilibrium quantity. n A decrease in supply raises the equilibrium price and lowers the equilibrium quantity.

138 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Supply Quantity Price 0

139 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Supply Quantity Price 0 S1S1 D1D1

140 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Supply Quantity Price A Q1Q1 0 P1P1 S1S1 D1D1

141 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Supply Quantity Price A Q1Q1 0 P1P1 S1S1 D1D1 S2S2

142 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Supply Quantity Price A Q1Q1 0 P1P1 S1S1 D1D1 S2S2

143 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Supply Quantity Price A Q1Q1 0 P1P1 P2P2 Q2Q2 B S1S1 D1D1 S2S2

144 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. An Increase in Supply Quantity Price A Q1Q1 0 P1P1 P2P2 Q2Q2 B S1S1 D1D1 S2S2

145 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Supply Quantity Price 0 D1D1 S1S1

146 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Supply Quantity Price A 0 P1P1 Q1Q1 D1D1 S1S1

147 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Supply Quantity Price 0 P1P1 Q1Q1 S2S2 D1D1 S1S1 A

148 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Supply Quantity Price 0 P1P1 Q1Q1 S2S2 D1D1 S1S1 A

149 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Supply Quantity Price B Q2Q2 0 P2P2 P1P1 Q1Q1 S2S2 D1D1 S1S1 A

150 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. A Decrease in Supply Quantity Price Q2Q2 0 P2P2 P1P1 Q1Q1 S2S2 D1D1 S1S1 B A

151 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Market Process and Economic Coordination n The market coordinates billions of individual decisions to buy and sell goods and services. n Prices influence all these decisions.

152 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Relative and Nominal Prices n It is important to distinguish between nominal and real prices. The nominal price of a good is its money price. The relative price of a good in terms of another good is its opportunity cost measured in units of that other good.

153 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Relative and Nominal Prices n Which price is on the graph? The price on a graph of demand or supply is the good's relative price.

154 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Appendix Algebra of Equilibrium

155 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Algebra of Equilibrium n Demand Curve If the demand curve is a straight line, it can be expressed as: Q d = a - bP where Q d is the quantity demanded P is the price of the good a and b are positive numbers that depend on buyers' tastes, incomes, the prices of complements and substitutes and the other conditions that affect demand

156 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Algebra of Equilibrium n Supply Curve If the supply curve is a straight line, it can be written as: Q s = c + dP where Q s is the quantity supplied P is the price c and d are numbers that depend on technology, input costs, and the other conditions that affect supply

157 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Algebra of Equilibrium n Equilibrium At the equilibrium price P, the quantity demanded equals the quantity supplied. In algebraic terms, that means: Q d = Q s

158 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Algebra of Equilibrium n Equilibrium Substitute the two equations for Q d and Q s : a-bP = c+dP Solving for equilibrium price: P = (a-c)/(b+d) Solving for equilibrium quantity: Q = a - b(a-c)/(b+d)

159 Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply and Demand End of Chapter 4

160


Download ppt "Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply and Demand."

Similar presentations


Ads by Google