Unit 2Chapter 3 Notes - Lake Central High School by yantingting

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									      Unit 2

Chapters 3, 18, and 19
  3
Demand, Supply,
and Market
Equilibrium
Chapter Objectives
• Demand Defined and What Affects It
• Supply Defined and What Affects It
• How Supply & Demand Together
  Determine Market Equilibrium
• How Changes in Supply and Demand
  Affect Equilibrium Prices and
  Quantities
• Government-Set Prices and their
  Implications for Surpluses &
  Shortages
      Demand
• Demand Defined
                                 3.1

• Demand Schedule
• Law of Demand
                                 3.2
 –Diminishing Marginal Utility
 –Income Effect
 –Substitution Effect
                                 3.3




• Demand Curve                   3.4



• Market Demand
          4.1: What is demand?
• Demand – the desire to have a good or service
  and the ability to pay for it.
• The 2 factors of desire and ability are both
  necessary

• Ex. I have the desire to go on a European
  vacation, but I can not afford it. Therefore, I
  do not possess demand for it.
            Demand Defined
• Expressed on a schedule or curve that shows
  the various amounts of a product that
  consumers are willing and able to purchase at
  each of a series of possible prices during a
  specified period of time
• Show quantities of a product that will be
  purchased at various psb prices, other things
  equal
          Demand Schedule
• Table showing how much of a product an
  individual is willing & able to buy @ each price
  in the market.

• Market demand schedule – table showing
  how much all consumers are willing to buy @
  each price

• See p.45 Figure 3.1
              Law of Demand
• Inverse relationship between price and quantity
  demanded
• States that when price increases, quantity
  demanded decreases

• When P. dec., QD. inc.

• Ppl buy less at higher prices, more at lower prices
Explanations of the Law of Demand
• Why the inverse relationship b/w P and QD?

• 1. Common sense—think about it!
• 2. Diminishing marginal utility – marginal
  benefit from using each additional unit of a
  product during a given period will decline.
• Ex. You get more satisfaction from the first
  glass of lemonade than the second, third,
  fourth…and are therefore not willing to pay as
  much for each additional unit
Explanations of the Law of Demand
• 3. Income and substitution effects
• income effect – change in the amount that
  consumers will buy b/c the purchasing power
  of their income changes, although income
  itself doesn’t change.

• Ex. You go to the store to buy ground beef, it is
  on sale, you feel wealthier and buy more.
Explanations of the Law of Demand
• 2. substitution effect – change in the amount
  that people will buy b.c they substitute goods
  instead.

• Ex. You go to the store to buy ground beef but
  you see ground turkey is on sale for ½ the
  price so you buy that instead.
              Demand Curve
• Graph showing how much of a product an
  individual will buy @ each price
• Graphic representation of demand schedule and
  law of demand
• Slopes downward from left to right
• Market demand curve – graph showing data from
  market demand schedule
• Price on Y-axis, Quantity on X-axis

• See p.45 Figure 3.1
Individual Demand
                          P
                                  6

Individual
                                  5
 Demand
  P   Qd
             Price (per bushel)
                                  4
 $5   10
                                  3
  4   20

  3   35                          2


  2   55                          1
                                                                               D
  1   80
                                  0                                                Q
                                       10   20   30   40   50   60   70   80
                                      Quantity Demanded (bushels per week)
   Change in Quantity Demanded
• -change in the amt. of a product consumers
  will buy b/c of a change in price

• Shown by a movement along the demand
  curve
Individual Demand
 Determinants of Demand
• Tastes
• Number of Buyers
• Income
  – Normal Goods
  – Inferior Goods
• Price of Related Goods
  – Substitute Good
  – Complementary Good
  – Unrelated Goods
• Consumer Expectations
           Change in Demand
• Something prompts consumers to buy
  different amounts @ every price

• Represented by shifts of the demand curve
• Inc. in demand – curve shifts right
• Dec. in demand – curve shifts left

• Influenced by 6 factors
             Factor 1: Income
• If consumer income inc., demand inc.
• If income dec., demand dec.

Ex. a factory closes, ppl lose jobs, income falls
  and demand dec.
• 2 types of goods:

• Normal goods – goods for which demand inc.
  as income inc.
• Ex. most goods such as TVs, steaks, IPODS,
  etc…

• Inferior goods - goods for which demand dec.
  as income inc.
• Ex. Generics, Ramen noodles, etc…
          Factor 2: Market Size
• # of consumers, population changes, seasonal
  tourist trends

• If market size inc., demand inc.
      Factor 3: Consumer tastes
• Advertising, trends, styles, popularity,
  celebrity endorsements

• If consumer tastes inc., demand inc.
 Factor 4: Consumer Expectations
• Refers to expectations of future prices

• If consumers expect a future price inc., current
  demand inc.
      Factor 5: Substitute Goods
• g/s that can be used in place of each other

• Ex. Coke and Pepsi, wireless phones and
  traditional phones

• If demand for substitute inc., demand for
  original item dec.
        Factor 6: Complements
• Goods used together so a rise in the demand
  for one inc. as the demand for another inc.

• Ex. digital cameras and photo printers, cars
  and gas
Individual Demand
Demand Can Increase or Decrease
                          P
                                  6

Individual
                                  5
 Demand
  P   Qd                                                Increase in Demand

             Price (per bushel)
                                  4
 $5   10
                                  3
  4   20

  3   35                          2
                                                                                  D2

  2   55                          1
                                                                             D1
                                      Decrease in Demand
                                                                   D3
  1   80
                                  0                                                    Q
                                       2   4    6   8   10 12   14 16 18
                                      Quantity Demanded (bushels per week)
Individual Demand
Demand Can Increase or Decrease
                                               An Increase in Demand
                          P                    Means a Movement
                                  6

Individual                                     of the Line
 Demand                           5                           A Movement Between
                                                               Any Two Points on a
  P   Qd
             Price (per bushel)
                                  4                          Demand Curve is Called a
 $5   10                                                       Change in Quantity
                                  3
                                                                   Demanded
  4   20

  3   35                          2
                                                                                  D2

  2   55                          1
                                                                             D1
                                      Decrease in Demand
                                                                   D3
  1   80
                                  0                                                    Q
                                       2   4    6   8   10 12   14 16 18
                                      Quantity Demanded (bushels per week)
      Supply
• Supply Defined
• Supply Schedule
• Law of Supply
 –Revenue Implications
 –Marginal Cost
• Supply Curve
• Market Supply
             5.1: What is supply?
• Willingness and ability of producers to offer a g/s for sale
• Expressed as a schedule or curve showing the various
  amounts of a product that producers are willing and able to
  sell at each of a series of psb prices during a specified
  period

• Producer = anyone who is willing to provide a g/s

• Ex. worker, company, farmers, etc…

• Profit motivates producers to inc. supply
              Law of Supply
• Direct (positive) relationship between P and
  QSS
• When P. inc., QS inc.

• When P. dec., QS dec.
             Supply Schedule
• Table showing how much of a g/s an individual
  producer is willing and able to sell @ each P.

• Market supply schedule – lists how much of a
  g/s all producers will sell @ each P.

• See p.51 Figure 3.4
               Supply Curve
• Supply schedule data in graphic form
• Shows law of supply in graph form
• Slopes upward from left to right

• Market supply curve – market supply schedule
  in graph form

• See p.102 Figure 3.4
 Individual Supply
                          P
                                  6

Individual                                                              S1
                                  5
  Supply
  P   Qs
             Price (per bushel)
                                  4
 $5   60
                                  3
  4   50

  3   35                          2


  2   20                          1

  1    5
                                  0
                                      10   20    30   40    50    60   70     Q
                                       Quantity Supplied (bushels per week)
  5.3: What Factors Affect Supply?
• Changes in quantity supplied – inc. or dec. in
  the amount of a g/s that producers are willing
  to sell b/c of a change in P.
• -shown by movement to different points along
  the S. curve
           Changes in Supply
• Occur when a change in the marketplace
  causes producers to sell different amounts @
  every price.
• Inc. in S, curve shifts right
• Dec. in S, curve shifts left

• 6 Factors influence supply
 Individual Supply
Determinants of Supply
• Resource Prices
• Technology
• Taxes and Subsidies
• Prices of Other Goods
• Producer Expectations
• Number of Sellers
          Factor 1: Input Costs
• Price of resources used to make products
• Ex. Cost of nuts used to make candy bars

• Input costs inc., Supply dec.
            Labor Productivity
• Amt of a g/s a person can produce in a given
  time

• Ex. More skilled & educated workers, labor
  strike

• Inc. productivity, Supply inc.
  Factor 2: Government Action

• Excise tax – taxes production/sale of certain
  goods
• Tax inc., Supply dec.

• Subsidy – gov. payment for part of production
  cost
• Subsidy inc., supply inc.

• Regulation – rules/laws controlling business beh.
  (Ex. Pollution, worker safety)
• New regulation, Supply dec.
          Factor 3: Technology
• Applying science & innovation to production
• Ex. Robots on assembly line, computers, etc…

• Inc. in technology, Supply inc.
  Factor 4: Prices of Other Goods
• Substitution in production that may occur
  when higher prices of other goods a seller
  produces entice the producer to switch
  production to those other goods in order to
  increase profits.

• See example on page 52.
  Factor 5: Producer Expectations
• If producers expect a future P. inc, they will
  withhold current supply.
       Factor 6: # of Producers
• More producers of a product, Supply inc.

• Ex. Fast food restaurants, auto manufacturers
 Individual Supply
Supply Can Increase or Decrease
                          P
                                  6
                                                                  S3
Individual                                                              S1
                                  5
  Supply                                                                     S2
  P   Qs
             Price (per bushel)
                                  4
 $5   60
                                  3
  4   50

  3   35                          2


  2   20                          1

  1    5
                                  0
                                      2    4    6     8    10   12     14         Q
                                      Quantity Supplied (bushels per week)
 Individual Supply
Supply Can Increase or Decrease
                          P            A Movement Between
                                  6
                                        Any Two Points on a            S3
Individual                            Supply Curve is Called a               S1
                                  5     Change in Quantity
  Supply                                                                          S2
                                             Supplied
  P   Qs
             Price (per bushel)
                                  4
 $5   60
                                  3
  4   50

  3   35                          2

                                                        An Increase in Supply
  2   20                          1
                                                        Means a Movement
  1    5                                                of the Line
                                  0
                                          2    4    6     8      10   12    14         Q
                                          Quantity Supplied (bushels per week)
     Market Equilibrium
                                 3.1

• Equilibrium Price
• Equilibrium Quantity
• Surplus
• Shortage
• Rationing Function of Prices
6.1: Seeking Equilibrium: Demand and
               Supply
• Market equilibrium – situation in which the
  quantity demanded for a service is equal to
  the quantity supplied
• Two curves intersect at point of market
  equilibrium.
• Equilibrium price(market-clearing price) –
  price at which QS = QD; equilibrium quantity
  can also be determined
   Reaching the Equilibrium Price
• Trial and error may be necessary for the
  market to arrive at equilibrium.

• Market may have a surplus: QS>QD
• Market may have a shortage: QD>QS
       Surpluses and Shortages
• Surpluses happen when prices are too high
  relative to demand (excess supply)
• With surplus, prices tend to fall; producers cut
  back production

• Shortages happen when prices are too low
  relative to demand (excess demand)
• With shortage, prices rise; producers increase
  quantity supplied
Market Equilibrium
        200 Buyers & 200 Sellers
 Market                                                                             Market
 Demand                            6                                                 Supply
200 Buyers                                                                         200 Sellers
                                                6,000 Bushel       S
P    Qd                            5                                                P    Qs
                                                   Surplus
$5    2,000   Price (per bushel)                                $4 Price Floor     $5   12,000
                                   4
 4    4,000                                                                         4   10,000

 3    7,000                        3
                                   3                                                3    7,000

 2   11,000                                                     $2 Price Ceiling    2    4,000
                                   2
 1   16,000                                                                         1    1,000
                                                 7,000 Bushel
                                   1
                                                   Shortage                   D

                                   0
                                        2   4    6    7 10 12 14 16 18
                                                       8
                                       Bushels of Corn (thousands per week)
     Rationing Function of Prices
• Ability of the forces of S and D to establish a P
  at which selling and buying decisions are
  consistent
• At equilibrium, there is no shortage and no
  surplus
            Efficient Allocation
• Competitive market also allocate societies’
• resources efficiently
• Results in productive efficiency – production of
  any particular good in the least costly way
• Also results in allocative efficiency – the
  particular mix of G&S most highly valued by
  society, assuming minimum-cost production.
• Demand essentially reflects the MB of a good,
  while supply reflects MC of producing a good. At
  the intersection of the S and D curves, MB=MC,
  resulting in allocative efficiency!
     Market Equilibrium
• Changes in S and D affect
  Equilibrium
• Changes in Equilibrium
• Efficient Allocation
 –Productive Efficiency
 –Allocative Efficiency
Market Equilibrium   Price Quantity
• Supply Increase;
  Demand Decrease            ?
• Supply Decrease;
  Demand Increase            ?
• Supply Increase;
  Demand Increase     ?
• Supply Decrease;
  Demand Decrease     ?
Government-Set Prices
• Price Ceilings on Gasoline
• Rationing Problem
• Black Markets
• Rent Controls
• Price Floors on Wheat
• Optimal Allocation of
  Resources
                               3.2
 6.3: Intervention in the Price System:
• At times the government or other entity will
  interfere in the price system to keep prices from
  going too high.
• Price Ceiling – legal max. price a seller may
  charge for a product
• -set below equilibrium price, so a shortage results
• Ex. Rent control – legal price ceilings on rent,
  leads to housing shortages
• Ex. gasoline –See p.58
 Rationing Resources and Products
• In periods of national emergency, the gov. may
  distribute products or resources
• Rationing – way of allocating products using
  factors other than price
• -occurred in U.S. during WWII

• May lead to black market – illegal buying and
  selling of products
                Price Floors
• Gov. decides to intervene in the price system
  in order to increase income to certain
  producers
• Price Floor –legal minimum price buyers may
  pay for a product
• Ex. Minimum wage or price floor on wheat –
  See p.59
A Legal Market for Human Organs

•   Waiting List for Transplants
•   Demand for Organs
•   Vertical Supply of Organs
•   Incentive Role of Market and Up-Sloping
    Supply
•   Increases Quantity
•   Decreases Price
•   Moral Objections
•   Increase the Cost of Health Care
•   Better to Legalize and Regulate?
A Legal Market for Human Organs
                           S1        Supply With Price Incentive
      P                                       S2
                                             Supply of Organs
                                           Demand for Organs
                                          Shortage at Zero Price
                                                 Q1 – Q3

      P1

At Price P1 the
Shortage is Reduced
By Q1 – Q2


                                                  D1
      P0
                      Q1        Q2               Q3          Q

								
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