# TCO 2 Given a supply schedule, a demand schedule, and a change in one or more determinants of supply and demand, graph the supply and demand curves and.

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TCO 2 Given a supply schedule, a demand schedule, and a change in one or more determinants of supply and demand, graph the supply and demand curves and illustrate the resulting change in the equilibrium price and quantity. Define supply and demand and show their relationship graphically. Explain the law of determinants of demand and supply. Differentiate between a change in quantity demanded (a movement along a fixed demand curve) and a change in demand (a movement of the entire demand curve). Explain and illustrate how market equilibrium is reached. Illustrate the movement of the supply and demand curves and the resulting new equilibrium price and quantity. Define price-elasticity of demand and supply. Identify the factors that influence price elasticity of demand. Briefly illustrate the concept of price elasticity of supply

SUPPLY, DEMAND, MARKETS The first few slides are review of Demand.
What it is, how it works. The first few slides are review of Demand.

Demand Consumers willingness and ability to buy various quantities of a good or service at each price in a set of possible prices in a given time period. Note: This is a very specific definition. You must know it and understand what it means both verbally and graphically.

Demand is Demand is the WHOLE curve. That’s what the definition means.

Law of Demand The quantity demanded of a product is negatively, or inversely, related to its price. This means that consumers will purchase more of a product at lower prices than at higher prices. That is why demand curves always slope downward and to the right.

Determinants of Demand
Income Taste and Preferences Expectations Regarding Future Price Price of Related Goods Number of Buyers in the Market Ceteris Paribus, if any one of these determinants of demand changes, then demand changes. That means you have a NEW DEMAND CURVE!!

Quantity-Demanded Consumers willingness and ability to buy a quantity of a good or service at a price in a period of time. The determinant of quantity demanded is the price of the good or service itself. This is a very specific definition. You must know and understand what it means both verbally and graphically. On a graph, Quantity-demanded is JUST ONE POINT ON A DEMAND CURVE. The only thing that causes Quantity-demanded to change [to move up or down along an existing demand curve] is when the market equilibrium price of the good or service changes.

Marginal Utility [additional satisfaction]
Demand is based on Marginal Utility [additional satisfaction] Ceteris Paribus, people are rationale and want to get the same amount of satisfaction from each unit of a good or service they buy. This is called marginal utility of expenditure. What it means is that we take the amount of additional satisfaction [marginal utility] of each additional unit we buy and divide that by the price we must pay to get it. This gives us a figure showing how much additional satisfaction [marginal utility] we get per dollar spent. We compare this figure to the figures we got from earlier purchases of the good. We will eventually find that we are satisfied when the marginal utility of expenditure for each unit of the good we buy is the same. I bet some of you are astounded that your brain does all that without any conscious effort from you!

How this works # Price MU MUE 1 \$50. 100 2 \$25. 50 3 \$10. 20 Price
As you can see, the only way we can maintain our marginal utility of expenditure at 2 is to lower the price we are willing to pay because the additional satisfaction [our marginal utility] decreases with each additional unit of the good we buy. So we have a demand curve!

Supply Suppliers willingness and ability to offer for sale various quantities of a good or service at each price in a set of possible prices in a given period of time. Note: This is a very specific definition. You must know it and understand what it means both verbally and graphically.

Supply is Supply is the WHOLE curve. That’s what the definition means.

Law of Supply The price and quantity supplied are positively, or directly, related. Producers will supply a larger quantity at higher prices than at lower prices. Thus, the supply curve slopes upward because a higher price is necessary to call for the additional output from suppliers

Determinants of Supply
Resource Prices/Production Cost Number of Producers in the Market Technology Market Expectations Subsidies/Taxes Ceteris Paribus, if any one of these determinants of supply changes, then supply changes. That means you have a NEW SUPPLY CURVE!!

Quantity-Supplied Suppliers willingness and ability to produce a quantity of a good or service at a price in a period of time. This is a very specific definition. You must know and understand what it means both verbally and graphically. On a graph, Quantity-supplied is JUST ONE POINT ON A SUPPLY CURVE. The only thing that causes Quantity-supplied to change [to move up or down along an existing supply curve] is when the market equilibrium price of the good or service changes.

Market Where exchange among buyers and sellers takes place.
You MUST have both consumers and producers to have a market.

A market is Demand Supply \$ Q ME \$ ME Q
The demand curve represents the demand decisions of consumers and the supply curve represents the supply decisions of sellers. The market price for the good is ME\$ and the market quantity exchanged is MEQ. This market is in equilibrium. At the market price the quantity that suppliers wanted to sell will be sold to the buyers who wanted to buy at that price. Those suppliers who wanted a higher price will not sell the quantity they wanted. Those buyers who wanted to pay a lower price will not be able to buy. The market only satisfies those who are willing to exchange at the market price.

Market Equilibrium Quantity-demanded equals quantity-supplied at this price. Supply DOES NOT equal Demand! Found where the supply curve crosses the demand curve. Markets stay in equilibrium until either Demand or Supply or both change.

Effect of an Increase in Supply on Equilibrium Price
An increase in supply will cause the equilibrium price to fall. Ceteris Paribus. An increase in Supply [caused maybe by an increase in the number of sellers] causes the supply curve to shift to the right. This means that a larger quantity of goods will be offered for sale at the same price and that suppliers will accept a lower price for the original quantity offered for sale. This forces the market equilibrium price of the good to fall. As the market equilibrium price of the good falls, consumers are willing to buy a larger quantity. Thus market equilibrium quantity increases as market equilibrium price falls as a result of the increase in supply.

Effect of Simultaneous Increase in Demand and Supply on Equilibrium Price
Demand and supply increase in equal amounts; quantity increases but price does not change Ceteris Paribus. It sometimes happens that supply and demand change simultaneously. Remember that demand changes ONLY because one of the determinants of demand changes. So if demand increases it may be due to an increase in income. If supply changes it is due ONLY to a change in one of the determinants of supply. So if supply increases it may be due to a decrease in production costs. REMEMBER: A CHANGE IN DEMAND DOES NOT CAUSE A CHANGE IN SUPPLY OR VISE VERSA. Both supply and demand are constrained by TIME. A change in demand over time will be reflected in a change in supply. But not right now, at this time.

Price Elasticity How responsive is quantity to changes in price?

Perfectly Elastic Demand
Quantity-demanded changes by a larger percent than price changes Many substitutes Large percentage of budget Consumers aren’t particular Q P D This is found in the real world in some markets where the price for the commodity is set by buyers and sellers in commodity markets. Soy bean, chocolate, coffee, gold, etc. fit into this category.

Perfectly Inelastic Demand
Q D Quantity-demanded changes by a smaller percent than price changes Few substitutes Small percentage of budget Customers want only this Has your doctor ever offered to see both you and a family member on a 2 for 1 sale? We buy lettuce 2 heads for the price of 1. Why not appendectomies?

Elasticity & Normal Demand
Most demand curves are elastic at higher prices and inelastic at lower price ranges. How does this reflect the workings of marginal utility? Hint: Remember that the smaller quantity you have of anything the greater the marginal utility from that smaller quantity. The more of the item you acquire, the lower your marginal utility per item.

Elastic Supply Quantity-supplied changes by a larger percentage than price changes Cost of production low Resources readily available Slope of supply curve is very flat Generally it takes a long period of time for quantity-supplied to respond to price changes than quantity-demanded. This is due to the time it takes producers to increase the quantity—production time.

Inelastic Supply Quantity-supplied changes by a smaller percent than price changes Cost of production is high Resources are not available Slope of supply curve is very steep In some cases, it is very difficult to increase quantity-supplied. It takes time to grow new crops, for example. A sculptor may take several years to complete a piece to sell. Of course, we all know there is only one Michael Jordan. All these influence the inelasticity of supply.

Every now and then various parts of the US experience a gasoline shortage.
What does this mean in terms of supply and demand? What impact would the price elasticity of both supply and demand have on a gasoline shortage?

Why does a Billionaire Beanie Baby Bear sell for \$1000?
Which determinants of demand are working here? Is demand elastic or inelastic? What determinants of supply are working here? Is supply elastic or inelastic?

Spiral cut ham can be purchased for \$2.99 a pound at Christmas time.
What determinants of demand are working here? What determinants of supply are working here? What do you think the price of spiral cut ham would be in May? Why? Use these last few questions as spring boards for your thinking and to help you find articles or cartoons that exemplify this topic.

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