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Supply and Demand

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					   Supply and Demand
           in a
Product or Service Market

        Kevin L. Woods
      CMA, CFM, CTP, MBA
              Objectives
• Define and explain demand in a product
  or service market
• Define and explain supply in a product or
  service market
• Determine the equilibrium point in the
  market for a specific good or service,
  given data on supply and demand at
  different price levels
      Objectives Continued
• Understand shifts in demand and supply
• Understand how price ceilings cause
  shortages
• Understand how price floors cause
  surpluses
                    Demand
• The schedule of quantities of a good or
  service that people are willing and able to
  buy at different prices
  – Sometimes a schedule is also called a table
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price     QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Hypothetical Daily Demand for Coach Seats on Round-
 Trip Weekly Flights between Orlando and Chicago
Table 1                                         Figure 1
                     $500
Price      QD
                      450
$500      1,000       400
 450      3,000       350

 400      7,000       300

 350      12,000      250

 300      19,000      200

 250      30,000      150
                                                      D
                      100
 200      45,000
                       50
 150      57,000
 100      67,000            10    20 30 40 50 60 70
                                 Quantity (in thousands)
Table 1 is the Demand          Figure 1 is the Graph of the
Schedule                       Demand Schedule

Table 1                                             Figure 1
                        $500
Price      QD
                         450
$500       1,000         400
 450       3,000         350

 400       7,000         300

 350      12,000        250

 300      19,000         200

 250      30,000         150
                                                          D
                         100
 200      45,000                The line is the
                          50
 150      57,000                Demand Curve
 100      67,000                10    20 30 40 50 60 70
                                     Quantity (in thousands)
Price and Quantity Demanded        Quantity Demanded is a point
are inversely related              on the Demand Curve

  Table 1                                                Figure 1
                         $500
  Price      QD
                          450
  $500      1,000         400
   450      3,000         350

   400      7,000         300

   350      12,000        250

   300      19,000        200

   250      30,000        150
                                                               D
                          100
   200      45,000
                              50
   150      57,000
   100      67,000                   10    20 30 40 50 60 70
                                          Quantity (in thousands)
Remember, Demand is the entire   Quantity Demanded is a point
schedule or the entire curve     on the Demand Curve

 Table 1                                             Figure 1
                          $500
 Price       QD
                           450
 $500       1,000          400
  450       3,000          350

  400       7,000          300

  350       12,000         250

  300       19,000         200

  250       30,000         150
                                                           D
                           100
  200       45,000
                            50
  150       57,000
  100       67,000               10    20 30 40 50 60 70
                                      Quantity (in thousands)
                 Supply
• Is the schedule of quantities of a good or
  service that people are willing to sell at
  various prices
Supply is the entire schedule              Price and Quantity Supplied
or the entire curve                        have a positive relationship

Price          QS                                             S
                            $500
$500          62,000
                                450
$450          59,000
$400          54,000            400

$350          48,000            350

$300          40,000            300
$250          30,000        250
$200          16,000            200
$150           7,000
                                150
$100           2,000
                                100

                                 50

                                      10    20 30 40 50 60 70
                                           Quantity (in thousands)
Remember, Supply is the entire    Quantity Supplied is a point on
schedule or the entire curve      the curve

 Price        QS                                         S
                          $500
 $500        62,000
                           450
 $450        59,000
 $400        54,000        400

 $350        48,000        350

 $300        40,000        300
 $250        30,000        250
 $200        16,000        200
 $150         7,000
                           150
 $100         2,000
                           100

                            50

                                 10    20 30 40 50 60 70
                                      Quantity (in thousands)
                 Demand and Supply Curves
                                                            S
Price     QS       QD     $500

$500    62,000    1,000    450

$450    59,000    3,000    400

$400    54,000    7,000    350

                           300
$350    48,000   12,000
                          250
$300    40,000   19,000
                           200
$250    30,000   30,000
                           150
$200    16,000   45,000                                         D
                           100
$150     7,000   57,000
                            50
$100     2,000   67,000
                                 10    20 30 40 50        60    70
                                      Quantity (in thousands)




Equilibrium price          We can find equilibrium price
is the price where         and quantity by seeing where the
QD = QS                    supply and demand curves cross
                 Demand and Supply Curves
                      Surpluses and Shortages
                                                              S
Price     QS       QD       $500

$500    62,000    1,000      450   54,000-7,000 = 44,000
$450    59,000    3,000      400

$400    54,000    7,000      350

                             300
$350    48,000   12,000
                             250
$300    40,000   19,000
                             200
$250    30,000   30,000
                             150
$200    16,000   45,000                                           D
                             100
$150     7,000   57,000
                              50
$100     2,000   67,000
                                   10    20 30 40 50        60    70
                                        Quantity (in thousands)




Equilibrium price = EP       MP > EP there is a surplus
Market price = MP
                 Demand and Supply Curves
                      Surpluses and Shortages
                                                              S
Price     QS       QD       $500

$500    62,000    1,000      450   54,000-7,000 = 44,000
$450    59,000    3,000      400

$400    54,000    7,000      350

                             300
$350    48,000   12,000
                             250
$300    40,000   19,000
                             200
$250    30,000   30,000
                             150
$200    16,000   45,000                                           D
                             100
$150     7,000   57,000
                              50
$100     2,000   67,000
                                   10    20 30 40 50        60    70
                                        Quantity (in thousands)




Equilibrium price = EP       A surplus would force sellers to
Market price = MP            lower their prices. Eventually,
                             prices would fall back to the
                             equilibrium price
                 Demand and Supply Curves
                      Surpluses and Shortages
                                                              S
Price     QS       QD       $500

$500    62,000    1,000      450

$450    59,000    3,000      400

$400    54,000    7,000      350

                             300
$350    48,000   12,000
                             250
$300    40,000   19,000
                             200
$250    30,000   30,000
                             150
$200    16,000   45,000                                           D
                             100    57,000-7,000 = 44,000
$150     7,000   57,000
                              50
$100     2,000   67,000
                                   10    20 30 40 50        60    70
                                        Quantity (in thousands)




Equilibrium price = EP
Market price = MP           MP < EP here is a shortage
                 Demand and Supply Curves
                      Surpluses and Shortages
                                                              S
Price     QS       QD       $500

$500    62,000    1,000      450

$450    59,000    3,000      400

$400    54,000    7,000      350

                             300
$350    48,000   12,000
                             250
$300    40,000   19,000
                             200
$250    30,000   30,000
                             150
$200    16,000   45,000                                           D
                             100    57,000-7,000 = 44,000
$150     7,000   57,000
                              50
$100     2,000   67,000
                                   10    20 30 40 50        60    70
                                        Quantity (in thousands)


                             A shortage would allow sellers to raise
Equilibrium price = EP       their prices. As prices increased people
Market price = MP            would buy less. Eventually, prices
                             would move back to the equilibrium
                             price
                 Demand and Supply Curves
                      Surpluses and Shortages
                                                              S
Price     QS       QD       $500

$500    62,000    1,000      450

$450    59,000    3,000      400

$400    54,000    7,000      350

                             300
$350    48,000   12,000
                             250
$300    40,000   19,000
                             200
$250    30,000   30,000
                             150
$200    16,000   45,000                                           D
                             100
$150     7,000   57,000
                              50
$100     2,000   67,000
                                   10    20 30 40 50        60    70
                                        Quantity (in thousands)



             We can see that the forces of demand
             and supply work together to establish an
             equilibrium price at which there are no
             shortages or surpluses
                    Shifts in Demand
        Table 4             $500
                                                           S

Price    QD1       QD2       450

$500 1,000        12,000     400

 450 3,000        15,000     350

                             300
 400 7,000        21,000
                             250
 350 12,000       30,000
                             200
 300 19,000       40,000     150

 250    30,000    55,000                                       D1
                             100
                                                                    D2
 200 45,000       63,000      50

 150 57,000       75,000           10    20 30 40 50 60 70
                                        Quantity (in thousands)
100     67,000    88,000

The schedule changes from QD1 to QD2
The demand curve shifts to the right from D1 to D2
This is an increase in demand
                     Shifts in Demand
        Table 4             $500
                                                           S

Price    QD1       QD2       450

$500 1,000        12,000     400

 450 3,000        15,000     350

                             300
 400 7,000        21,000
                             250
 350 12,000       30,000
                             200
 300 19,000       40,000     150

 250    30,000    55,000                                       D1
                             100
                                                                    D2
 200 45,000       63,000      50

 150 57,000       75,000           10    20 30 40 50 60 70
                                        Quantity (in thousands)
100     67,000    88,000

The schedule changes from QD2 to QD1
The demand curve shifts to the left from D2 to D1
This is a decrease in demand
                             Shifts in Supply

If the Supply schedule         Price
changes the Supply curve         500                     S    S
shifts                           450

                                 400

                                 350

                                300

                                 250

                                 200
Supply decreases . . . the       150
curve shifts to the left
                                 100

                                  50
                                                              D
                                       10 20 30 40 50 60 70
                                         Quantity (in thousands)
                             Shifts in Supply

If the Supply schedule         Price
changes the Supply curve         500                     S    S
shifts                           450

                                 400

                                 350

                                300

                                 250

                                 200

                                 150
Supply increases . . . the       100
curve shifts to the right
                                  50
                                                              D
                                       10 20 30 40 50 60 70
                                         Quantity (in thousands)
                           Shifts in Supply

If the Supply curve is S1       Price
what is the equilibrium price    500                      S2   S1
and quantity?                    450

                                 400

                                 350

                                 300

                                 250
The equilibrium price is         200
approximately 262 or 263
                                 150

The equilibrium quantity is      100
approximately 35,000              50
                                                               D
                                        10 20 30 40 50 60 70
                                          Quantity (in thousands)
                            Shifts in Supply

If the Supply curve changes   Price
to S2 what is the new           500                     S2   S1
equilibrium price and           450
quantity?
                                400

                                350

                               300

                                250
The new equilibrium price       200
is approximately 325
                                150

The new equilibrium             100
quantity is approximately        50
26,000                                                       D
                                      10 20 30 40 50 60 70
                                        Quantity (in thousands)
                              Shifts in Supply

Is a shift from S1 to S2 an     Price
increase or decrease in           500                     S2   S1
Supply?                           450

                                  400

                                  350

                                 300

                                  250
A decrease                        200

                                  150

                                  100

                                   50
                                                               D
                                        10 20 30 40 50 60 70
                                          Quantity (in thousands)
                   Price Floors and Ceilings
The price can go no lower
than the floor.


The surplus is the amount
by which the quantity
supplied is greater than the
quantity demanded



A price floor creates a
permanent surplus
                   Price Floors and Ceilings
The price can go no higher
than the ceiling.


The shortage is the amount
by which the quantity
demanded is greater than
the quantity supplied



A price ceiling creates a
permanent shortage
    Applications of Supply and
             Demand
• Interest rates are set by
   – Supply and demand
• Wage rates are set by
   – Supply and demand
• Rents are determined by
   – Supply and demand
• Prices of nearly all goods are determined by
   – Supply and demand
• Prices of nearly all services are determined by
   – Supply and demand
 Hypothetical Demand for and Supply of Loanable Funds

                                                               S
                20

                18

                16

                14

                12

                10

                 8

                 6

                 4

                 2
                                                                       D

                     100 200 300 400 500 600 700 800 900 1,0        00 1,100
                       Quantity of loanable f unds (in billions of dollars)



We can see that $600 billion is lent (or borrowed) at an interest
rate of 6%
What would happen if the supply of loanable funds increased?
 Hypothetical Demand for and Supply of Loanable Funds

                                                             S1
               20                                                    S2

               18

               16

               14

               12

               10

                8

                6

                4

                2
                                                                     D

                    200      400      600        800        1,000
                    Quantity of loanable f unds (in billions of dollars)



The interest rate would decrease to 4% and the amount of money
borrowed would increase to $800 billion
 Hypothetical Demand for and Supply of Loanable Funds

                                                               S
                20

                18

                16

                14

                12

                10

                 8

                 6
                                                                        D2
                 4

                 2
                                                                        D1

                        200       400       600        800      1,000
                      Quantity of loanable f unds (in billions of dollars)



If the demand for loanable funds rises to D2 the interest rate would
rise to 9% and the amount of money borrowed would rise to $700
billion
            Price Mechanism
   (The Forces of Supply & Demand)
• Operates an automatic guidance system
  – Sometimes this is called the “invisible hand”
  – Efficiently allocates the limited means of production
    toward the satisfaction of human wants
  – Provides consumers with an endless stream of goods
    and services
                Summary
•   Demand
•   Supply
•   Equilibrium Point
•   Shifts in Demand and Supply
•   Price Ceilings
•   Price Floors
       Consider the Following
• Professional Athletes: How much is a superstar in the
  NBA or WBA (such as Shaquille o’Neal, Lebron James,
  Lisa Leslie, Chamique Holdsclaw) paid compared to an
  average player?

• Automobiles: Do you think you’d pay more for a 1962
  Corvette or a 2011 Corvette (assuming that both are in
  good condition)?

• Rocks: Which costs more, diamonds or gravel?
             Construction Nails
Long ago, when houses made of wood were first built, nails
were very expensive. It seems funny to us today, but it’s true.
Each nail had to be made by hand, pounded unto shape by a
blacksmith. Though it wasn’t difficult, it took time. Even a
good blacksmith wouldn’t be able to make more than a few
hundred nails in an entire day. On the other hand, there are
machines today that can manufacture thousands of nails an
hour. Because they are so much easier to acquire now-that is,
because there is a greater supply of nails-the price has
dropped substantially.
                Go to

http://www.kevinwoodscfo.com/LSCC.html

 to download this PowerPoint Presentation



         THANK YOU!

				
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