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Supply & Demand The Product Market.

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Presentation on theme: "Supply & Demand The Product Market."— Presentation transcript:

1 Supply & Demand The Product Market

2 LAW OF DEMAND An inverse relationship exists between price and quantity demanded As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls

3

4 LAW OF DEMAND Demand Curve Market Demand Individual Demand
Horizontal Summation

5 DOWNWARD SLOPE Diminishing Marginal Utility

6 DOWNWARD SLOPE Diminishing Marginal Utility Income Effect

7 DOWNWARD SLOPE Diminishing Marginal Utility Income Effect
Substitution Effect

8 GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q Quantity of Corn

9 GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 55 Q Quantity of Corn

10 GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q 35 Quantity of Corn

11 GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q Quantity of Corn

12 GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q Quantity of Corn

13 GRAPHING DEMAND Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 P D
Price of Corn P $5 4 3 2 1 CORN Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 D o Q Quantity of Corn

14 GRAPHING DEMAND What if Demand Increases? P QD $5 4 3 2 1 10 20 35 55
Price of Corn What if Demand Increases? P $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 D o Q Quantity of Corn

15 GRAPHING DEMAND Increase in Quantity Demanded P QD $5 4 3 2 1 10 20 35
Price of Corn P Increase in Quantity Demanded $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 30 40 60 80 + Increase in Demand D2 D1 o Q Quantity of Corn

16 GRAPHING DEMAND What if Demand Decreases? P QD $5 4 3 2 1 10 20 35 55
Price of Corn What if Demand Decreases? P $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 D o Q Quantity of Corn

17 GRAPHING DEMAND Decrease in Quantity Demanded P QD $5 4 3 2 1 10 20 35
Price of Corn P Decrease in Quantity Demanded $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 -- 10 20 40 60 Decrease in Demand D1 D3 o Q Quantity of Corn

18 DETERMINANTS OF DEMAND
Tastes (Preferences) Prices of Related Goods Substitutes & Complements Unrelated Goods Income Normal (Superior) & Inferior Goods Number of Buyers Expectations

19 DETERMINANTS OF DEMAND
Tastes (Preferences) Prices of Related Goods Substitutes & Complements Unrelated Goods Income Normal (Superior) & Inferior Goods Number of Buyers Expectations

20 Practice Problems Activity 1-4 Parts A & B Activity 1-5

21 LAW OF SUPPLY A direct relationship exists between price and quantity supplied As Price Rises… …Quantity Supplied Rises As Price Falls… …Quantity Supplied Falls

22 GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q 5
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 5 Q Quantity of Corn

23 GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn

24 GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 35 Q Quantity of Corn

25 GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn

26 GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn

27 GRAPHING SUPPLY Connect the Points P QS $5 4 3 2 1 60 50 35 20 5 P S o
Price of Corn P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 Connect the Points o Q Quantity of Corn

28 GRAPHING SUPPLY What if Supply Increases? P QS $5 4 3 2 1 60 50 35 20
Price of Corn What if Supply Increases? P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn

29 GRAPHING SUPPLY Increase in Supply P QS $5 4 3 2 1 60 50 35 20 5 80 70
Price of Corn P Increase in Supply S2 S1 $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 80 70 60 45 30 Increase in Quantity Supplied o Q Quantity of Corn

30 GRAPHING SUPPLY What if Supply Decreases? P QS $5 4 3 2 1 60 50 35 20
Price of Corn What if Supply Decreases? P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn

31 GRAPHING SUPPLY P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 -- Decrease
Price of Corn S3 P S1 $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 -- Decrease in Quantity Supplied o Q Quantity of Corn

32 DETERMINANTS OF SUPPLY
Resource Prices Prices of Other Goods Technology Taxes & Subsidies Expectations Number of Sellers

33 DETERMINANTS OF SUPPLY
Resource Prices Prices of Other Goods Technology Taxes & Subsidies Expectations Number of Sellers

34 Practice Problems Activity 1-6 Parts A & B Activity 1-7

35 DETERMINANTS OF SUPPLY
Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers Combining with Demand

36 MARKET DEMAND & SUPPLY P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000
Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 Market Clearing Equilibrium $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o Q Quantity of Corn

37 MARKET DEMAND & SUPPLY Surplus P QD P QS $5 4 3 2 1 2,000 4,000 7,000
Price of Corn P CORN MARKET CORN MARKET Surplus S $5 4 3 2 1 P QD P QS At a $4 price more is being supplied than demanded $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o Q Quantity of Corn

38 MARKET DEMAND & SUPPLY Shortage P QD P QS $5 4 3 2 1 2,000 4,000 7,000
Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS At a $2 price more is being demanded than supplied $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 7 11 o Q Quantity of Corn

39 MARKET DEMAND & SUPPLY Surplus Shortage P QD P QS $5 4 3 2 1 2,000
Price of Corn P CORN MARKET CORN MARKET Surplus S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 7 11 o Q Quantity of Corn

40 MARKET EQUILIBRIUM Equilibrium Price & Quantity
Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied

41 Single Shifts Supply Increases Supply Decreases Demand Increases
Demand Decreases

42 Double Shifts Supply Increases & Demand Decreases
Supply Decreases & Demand Increases Supply Increases & Demand Increases Supply Decreases & Demand Decreases

43 ? ? ? ? Double Shifts Supply increase; Demand decrease
Price Quantity Supply increase; Demand decrease Supply decrease; Demand increase Supply increase; Demand increase Supply decrease; Demand decrease ? ? ? ?

44 Consumers, Producers, and the Efficiency of Markets

45 Welfare Economics Welfare economics is the study of how the allocation of resources affects economic well-being. Market equilibrium maximizes the total welfare of buyers and sellers.

46 CONSUMER SURPLUS Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.

47 How the Price Affects Consumer Surplus
(a) Consumer Surplus at Price P Price A Demand Consumer surplus P1 Q1 B C Quantity

48 How the Price Affects Consumer Surplus
(b) Consumer Surplus at Price P Price A B C Initial consumer surplus Demand Consumer surplus to new consumers P1 Q1 D E F P2 Q2 Additional consumer surplus to initial consumers Quantity

49 PRODUCER SURPLUS Producer surplus is the amount a seller is paid for a good minus the seller’s cost.

50 How the Price Affects Producer Surplus
(a) Producer Surplus at Price P Price Supply B A C Q1 P1 Producer surplus Quantity

51 How the Price Affects Producer Surplus
(b) Producer Surplus at Price P Price Additional producer surplus to initial producers Supply D E F P2 Q2 Producer surplus to new producers B P1 C Initial producer surplus A Q1 Quantity

52 MARKET EFFICIENCY + Producer Surplus = Total Surplus Consumer Surplus
Free markets maximize efficiency (total surplus) at equilibrium

53 Consumer and Producer Surplus in the Market Equilibrium
Price A C B D E Consumer surplus Demand Supply Equilibrium price quantity Producer surplus Quantity

54 Free Response Prompts “Show” means to use a diagram to illustrate your answer. Correct labeling is necessary to receive full credit. “Explain” means to take the reader through all of the steps or linkages in the line of economic reasoning. Graphs and symbols are acceptable as part of the explanation. “Identify” means to provide a specific answer or a label on a graph, without any explanation or elaboration. “Calculate” means to use mathematical operations to determine a specific numerical response, along with providing your work.

55 Free Response Strategies
Circle the verbs Label everything Messy work loses points Don’t say too much Don’t contradict yourself

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