SUPPLY & DEMAND

Document Sample
SUPPLY & DEMAND Powered By Docstoc
					SUPPLY & DEMAND
 Three functions of price
A. Determines value
B. Communicates between
   buyers and sellers
C. Rationing device
DEMAND
Single Consumer Demand Schedule


   Average Price      Quantity
   of dvd movies     Demanded

       $25               0
       $20               2
       $15               4
       $10               6
       $5                8
MARKET DEMAND
 Market Demand
                         Quantity Purchased
  Average
   Price
  of DVD                   Ice     Morrissey   Total
                 Sting
  Movies                 Cube


    $25           0         1         0         1
    $20           2         2         1         5
    $15           4         3         2         9
    $10           6         4         3        13
     $5           8         5         4        17
DEMAND CURVE
DEMAND CONT.
 The Law of Demand implies the following
 with respect to a demand curve (all of
 these say exactly the same thing):
   The demand curve is downward
    sloping
   The demand curve has a negative
    slope
   The demand curve shows an inverse
    relationship between price and quantity
    demanded
DEMAND CONT.
 The Law of Demand simply proposes that
 as the price of a good declines the quantity
 you would be willing and able to purchase
 during some period of time increases,
 given that everything else remains
 unchanged.
Demand vs. QD
 Change in Demand Versus Change in
 Quantity Demanded
  First we said that according to the Law
   of Demand that a change in price will
   lead to a movement along a stable
   demand curve and result in a change in
   the quantity demanded. For example,
   more will be purchased but only at a
   lower price. The only thing that can
   change the quantity demanded is a
   change in the market price.
Demand vs. QD cont.
 Second we said that if one of the ceteris
  paribus assumptions is violated (e.g., a
  change in income) there will be a change
  in demand. Economists use the term
  "demand" to refer to the entire demand
  curve. Consequently when we say there
  has been an increase in demand we mean
  that the entire demand curve has shifted to
  the right. More will now be purchased at
  the same price.
Demand Shift
Shifters of demand
 Non-Price Determinants of Demand
 # of buyers
    increase =>     demand increases
    decrease =>     demand decreases
 Consumer Tastes
    increase =>     demand increases
    decrease =>     demand decreases
Shifters cont.
 Consumer income (normal good)
    Increase =>  demand increases
    Decrease =>  demand decreases
 Consumer income (inferior good)
    Increase =>  demand decreases
    Decrease =>  demand increases
Shifters cont.

 Price of Substitutes
    Increase =>   demand increases
    Decrease =>   demand decreases
 Price of Complements
    Increase =>   demand decreases
    Decrease =>   demand increases
Shifter cont.
 Belief that the future price will
    Increase =>       demand now will
                      increase
    Decrease =>       demand now will
                      decrease
 Belief that your future income will
    Increase =>       demand now will
                      increase
    Decrease =>       demand now will
                      decrease
SUPPLY
 The Law of Supply states that firms will
  produce and offer for sale greater
  quantities of a good or service the higher
  the market price, given that everything
  else remains unchanged.
SUPPLY SCHEDULE
SUPPLY CURVE
SUPPLY CONT.
 The Law of Supply implies the following
  with respect to a supply curve (all of these
  say exactly the same thing):
    The supply curve is upward sloping
    The supply curve has a positive slope
    The supply curve shows a direct
     relationship between price and quantity
     demanded
Change in Supply vs. QS
 Change in Supply versus Change in
  Quantity Supplied
     First we said that according to the Law of
      Supply that a change in price will lead to a
      movement along a stable supply curve and
      result in a change in the quantity supplied.
      For example, more will be produced for sale
      but only at a higher price.
Change (Supply vs. QS) cont.
 Second we said that if one of the ceteris
  paribus assumptions is violated (e.g., a
  change in technology) there will be a change
  in supply. Economists use the term "supply"
  to refer to the entire supply curve.
  Consequently when we say there has been
  an increase in supply we mean that the entire
  supply curve has shifted to the right. More will
  now be produced at the same price.
Change in Supply
Shifters of the Supply Curve
 Non-Price Determinants of Supply
 # of sellers
     increase => Supply increases
     decrease => Supply decreases

 Addition of technology
     Supply will always increase
Shifters cont.
 Cost of Labor
           Increase =>     supply decreases
           Decrease =>     supply increases
 Cost of Natural Resources
           Increase =>     supply decreases
           Decrease =>     supply increases
 Operating Costs (electricity)
           Increase =>     supply decreases
           Decrease =>     supply increases
Shifters Cont.
 Business Taxes
         Increase =>     supply decreases
         Decrease =>     supply increases
 Government Regulations
         Increase =>     supply decreases
         Decrease =>     supply increases
 Government subsidies
         Increase =>     supply increases
         Decrease =>     supply decreases
EQUILIBRIUM
 A market is in equilibrium when the
 quantity demanded is equal to quantity
 supplied at the market price. At the
 equilibrium market price there are exactly
 the same number of goods that suppliers
 are willing to sell as consumers are willing
 to buy.
MARKET PRICE
 Equilibrium Price - the price at which the
  quantity demanded is equal to the quantity
  supplied. Other things being unchanged,
  there is no tendency for this price to
  change.
MARKET EQUILIBRIUM
   Market Demand and Supply
   Schedules for DVD Movies

    Average
     Price  Quantity Quantity
    of DVD Demanded Supplied
    Movies

     $25        1       17
     $20        5       13
                                 <-
     $15        9       9
                                Equilibrium
     $10       13       5
      $5       17       1
MARKET EQUILIBRIUM
DISEQUILIBRIUM
 How can you tell if your market is not in
  equilibrium? The easiest way for the firm
  to tell is by monitoring its inventory. When
  the quantity supplied is not equal to the
  quantity demanded at the current market
  price we have either undesired inventory
  build or undesired inventory decline. Store
  shelves start overflowing because you are
  producing more than is being sold or the
  store shelves go bare because people are
  buying your product faster than you can
  make it.
SHORTAGE
SURPLUS
SHORTAGE &CEILINGS
 Price Ceiling - a legal requirement that
  maintains the market price below the
  equilibrium price.
 Shortage - the amount that the quantity
  demanded exceeds the quantity supplied
  when the market price is below the
  equilibrium price.
SURPLUS & FLOORS

  Price Floor - a legal requirement
  that maintains the market price
  above the equilibrium price.
  Surplus - the amount that the
  quantity supplied exceeds the
  quantity demanded when the market
  price is above the equilibrium price
Increase in Demand

 Price                      S

     P1                 b

         P         a



                                    D1

                                D

               Q       Q1

             Quantity
Decrease in Demand

Price                       S



        P          a

    P1      b



                       D1       D

            Q1 Q
Increase in Supply

  Price                       S

                                      S1

          P         a

      P1                 b



                                  D

                Q        Q1

              Quantity
Decrease in Supply

                          S1

 Price                         S

     P1       b

         P            a




                                   D

             Q1   Q

              Quantity

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:19
posted:9/14/2012
language:Unknown
pages:37