Presentation on theme: "The model that illustrates how a competitive markets works"— Presentation transcript:
1 The model that illustrates how a competitive markets works Supply and DemandThe model that illustrates how a competitive markets works
2 Basic ConceptsQuantity demanded- the amount of a good or service consumer are willing and able to buy at different prices.Demand Curve- Shows the relationship between quantity demanded and price.Quantity Supplied- The actual amount of a good or service producers are willing to sell at some specific price.Supply Curve- Shows the relationship between quantity supplied and price.
3 Key ConceptsA shift of the demand curve..Is not the same as a movement along the demand curveA shift of the demand or supply curve is different from a movement ALONG the demand or supply curve.PriceQuantityAs Price DecreasesQuantity Demanded IncreasesA change in quantity demanded or supplied is due to a change in price.Depending on the price, the quantity demanded or quantity supplied will be different.P1P2Q1Q2
4 Changes in Demand and Supply An increase in demand or supply is shown by a rightward shift of the curve. While a decrease in demand or supply is shown by a leftward shift of the curve.When either demand or supply increases (either curve shifts) the price remains the same but quantity demanded or supplied changes.Decrease in demandIncrease in demandDecrease in supplyIncrease in supplyQ3Q2Q1Q3Q2Q1
5 Factors that Shift the Demand Curve Factors that Shift the Supply CurveFive Principle FactorsChanges in the price of related goods or services.Changes in income.Changes in taste.Changes in expectations.Changes in the number of consumers.Five factorsChanges in input pricesChanges in technologyChanges in the number of producersChanges in the price of related goods or servicesChanges in expectationsDemand*NEGATIVE SLOPE*#$Supply*POSITIVE SLOPE*#$
6 Substitutes vs. Compliments There are substitute and complimentary goods.Two goods are substitutes if a rise in the price of one of the goods leads to an increase in the demand for the other good.Two goods are compliments if a rise in the price of one good leads to a decrease in the demand for the other good or service.Penut butter and Jelly
7 Normal Goods and Inferior Goods Income changeNormal goods and Inferior goodsWhen individuals have more income they are normally more likely to purchase a good at any given priceThe demand for Normal Goods increases as income increases. (a Rightward shift of the demand curve)Goods for which demand decreased when income rises are know as Inferior goods.orNormal Good
8 Taste and PreferencesPeople have certain preferences and tastes that determine what they want to consume.When taste change in favor of a good, more people want to buy it at any given price, so the demand curve shifts to the right.In the other case when taste change against a good, fewer people want to buy something at a given price, so the demand curve shifts to the left
9 Changes in Expectations and in Number of Consumers Expectations of a future drop in price will lead to a decrease in demand today. On the other hand, expectations of a future rise in price are likely to cause an increase in demand todayExpected changes in income can also lead to changes in demandIf an individual expects his income to rise in the future, he will most likely borrow money today and increase his demand for certain goods.If an individual expects his income to fall in the future, he will instead save today and reduce your demand for goods.The change in Number of Consumers is quite simple.If the number of consumers of a certain good rises then the demand for that good or service increasesIf the number of consumers of a certain good falls then the demand for that good or service decreases
10 Factors that Shift the Supply Curve Five factorsChanges in input pricesChanges in technologyChanges in the number of producersChanges in the price of related goods or servicesChanges in expectationsSupply*POSITIVE SLOPE*#$
11 $ $ # # S2 S1 S1 S2 SUPPLY DECREASES IF… If the price to of an input to produce a good raisesIf the price of a substitute used to produce a good raisesIf the price of a compliment in production decreasesIf the price of an good supplied is expected to raise in the futureIf the number of producers fallsSUPPLY INCREASES IF…If the price of an input to produce a good decreasesIf the price of a substitute in production fallsIf the price of a compliment in production raisesIf the technology used to produce a good improvesIf the price of a good supplied is expected to fall in the futureIf the number of produces rises
12 Supply and Demand at Equilibrium PriceQuantitySupplyAt equilibrium no individual isbetter off doing somethingdifferent.EquilibriumPriceEquilibriumThe price at whichthe quantity demandedof a good equals the quantitysupplied of that goodDemandEquilibriumQuantityThe quantity of that good bought and sold at Eprice
13 Question Correct answer is: choice D Which of the following could most likely cause the leftward shift of an industry's supply curve?One of the industry's firms discovers a new technology that aids inProduction.B) The price of a necessary input declines for some firms in the industry.C) Consumer purchasing power rises considerably.E) The government levies a new tax on consumersD) Several of the industry's firms shut down operationsCorrect answer is: choice DThis answer is correct because after the industry’s firms shut down, supply will decreaseWhich is represented by a leftward shift of the supply curve
14 QuestionWhich of the following would most likely shift the demand curve for a good to the right?The government grants a subsidy to producers of the product.New technology makes production quicker and easier.The wage rate for the producer’s manufactures increases.The company selling the product cuts the price by 25%E) Consumers expect the price of the good to raise soon.Correct answer: Choice EThis is the correct answer because it’s the only choice that guaranties a shift of the demand curve. All the other choices would cause a shift in the supply curve.
15 QuestionIn general, technological improvements and industrial innovation will causeThe productivity of workers to decreaseThe supply curve for the industry to shiftThe demand curve for the industry to shiftA movement along the industry supply curveA movement along the industry demand curveCorrect answer is: choice BThis is correct because a change in technology is one of the non price factors thatshift a firm’s supply curve.
16 Other Concepts The supply and demand curves are seen everywhere. It’s also a common concept that determines the optimal point of where markets should produce a good. And also inefficiencies within a market.MSCPriceQuantityPriceQuantitySupplySupplyConsumerSurplusPMSCOPOPTPMKTProducerSurplusQOPTQMKTEfficiency of MarketsNegative Externalities
17 Videos and Links http://www.youtube.com/watch?v=XNtjkN-FYBw Drug ShortagesConsumer Demand for iPhone 4SAP Central Question