Supply, Demand and Market Equilibrium.pdf

Introduction to Demand •

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The forces of supply and demand work together to set prices. Demand is the desire, willingness, and ability to buy a good or service. –

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Supply can refer to one individual consumer or to the total demand of all consumers in the market (market demand).

Based on that definition, which of the following do you have a demand for?


•

The forces of supply and demand work together to set prices. Demand is the desire, willingness, and ability to buy a good or service. –

•

Supply can refer to one individual consumer or to the total demand of all consumers in the market (market demand).

Based on that definition, which of the following do you have a demand for?

Introduction to Demand 

A demand schedule is a table that lists the various quantities of a product or service that someone is willing to buy over over a range of possible possible prices.

Price per Widget ($)

Quantity Demanded of Widget per day

$5

2

$4

4

$3

6

$2

8

$1

10


A demand schedule can be shown as points on a graph. 

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The grap graphh lists lists prices prices on the the vertical axis and quantities deman demande dedd on the horizontal axis. Each point on the graph shows how many units of the product product or service ser vice an individual will buy at a particular par ticular price. The demand curve is the line that connects these points.

Demand Curve for Widgets $6

$5

$4 t e g d i W r $3 e p e c i r P

Demand Curve for Widgets

$2

$1

$0 0

2

4

6

8

10

12

Quantity Demanded of Widgets

What do you notice about the demand curve? How would you describe the slope of the demand curve? Do you think that price and quantity


The demand curve slopes downward. 

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This shows that people are normally willing to buy less of a product at a high price and more at a low price. According to the law of demand, quantity demanded and price move in opposite directions. Demand Curve for Widgets $6 t $5 e g d i $4 W r $3 e p e $2 c i r P $1


$0 0

2

4

6

8

10

Quantity Demanded of Widgets

12


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We buy products for their utility- the pleasure, usefulness, or satisfaction they give us. What is your utility for the following products? (Measure your utility by the maximum amount you would be willing to pay for this product)

Do we have the same utility for these goods?

Introduction to Demand One reason the demand curve slopes downward is due to diminish marginal utility

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The principle of diminishing marginal utility says that our additional satisfaction tends to go down as we consume more and more units.

To make a buying decision, we consider whether the satisfaction we expect to gain is worth the money we must give up.

Changes in Demand 

Change in the quantity demanded due to a price change c hange occurs ALONG the demand curve Demand Curve Cur ve for Widgets Widgets

At $3 per Widget, the Quantity demanded of widgets is 6. •

$6

An increase in the Price of Widgets from $3 to $4 will lead to a decrease in the Quantity Demanded of Widgets from 6 to 4.

•

$5

$4

t e g d i W r e $3 p e c i r P


$2

$1

$0 0

2

4

6

8

10

12

Changes in Demand •

Demand Curves can also shift in response response to the following factors: –

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–

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consumer s Buyers (# of): changes in the number of consumers Income: changes in consumers’ income Tastes: changes in preference or popularity of product/ service Expectations: changes in what consumers expect to happen in the future Related goods: compliments and substitutes

cur ve BITER: factors that shift the demand curve

Changes in Demand •

Prices of related goods goods affect on demand –

Substitute goods  a substitute is a product that can be used in the place of another a nother.. The price of the substitute good and demand for the other good are directly related For example, Coke Price Pepsi Demand Complementary Complementary goods a compliment is a good that goes well with another good. When goods are complements, there is an inverse relationship between the price of one and the demand for the other For example, Peanut Butter Jam Demand •

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Changes in Demand Demand Increase Curve in Demand for Widgets

Several factors will change the demand for the good (shift the entire demand curve) •

$6$6

As an example, suppose consumer income increases. The demand for Widgets at all prices will increase. •

$5$5

$4$4 t t e e g g d i d i W W r r$3$3 e e p p e e c c i i r r P P

Orginal Demand Curve Demand Curve for Widgets New Demand Curve

$2$2

$1$1

$0$0 00

2 2

4

4

6

6

8

8

10

10

12

12 14

Changes in Demand Demand Decrease Curve in Demand for Widgets $6$6

Demand will also decrease due to changes in factors other than price. •

As an example, suppose Widgets become less popular to own. •

$5$5

$4$4 t t e e g g d d i i W W r r $3$3 e e p p e e i c c r i r P P

Original Demand Curve Demand Curve for Widgets New Demand Curve

$2 $2

$1 $1

$0 $0 0 0

2

2

4

4

6 8 6 8 Quantity Demanded of Widgets

10 10

12 12

Changes in Demand Changes in any of the factors other than price causes the demand curve to shift either: 

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Decrease in Demand shifts to the Left (Less demanded at each price) OR Increase in Demand shifts to the Right (More demanded at each price)

Demand Practice

1. The income of the Pago-Pagans declines after a typhoon hits the island.

e c i r P

D1

D Quantity

2. Pago-Pagan is named on of the most beautiful islands in the world and tourism to the island doubles.

e c i r P

D1 D

Quantity

3. The price of Frisbees decreases. (Frisbees are a substitute good for boomerangs)

e c i r P

D1

D Quantity

4. The price of boomerang t-shirts decreases, which I assume all of you know are a complementary good.

e c i r P

D1 D Quantity

5. The Boomerang Manufactures decide to add a money back guarantee on their product, which increases the popularity for them.

e c i r P

D1 D Quantity

6. Many Pago-pagans begin to believe that they may lose their jobs in the near future. (Think expectations!)

e c i r P

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D Quantity

7. Come up with your own story about boomerangs and the Pago-Pagans. Write down the story, draw the change in demand based on the story, and explain why demand changed. e c i r P

D Quantity

Introduction to Supply •

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Supply refers to the various quantities of a good or service that producers are willing to sell at all possible market prices.

Supply can refer to the output of one producer or to the total output of all producers in the market (market supply).

Introduction to Supply 

A supply schedule is a table that shows the quantities producers are willing to supply at various prices


Quantity Supplied of Widget per day

$5

10

$4

8

$3

6

$2

4

$1

2


A supply schedule can be shown as points on a graph. 





The graph lists prices on the vertical axis and quantities supplied on the horizontal axis. Each point on the graph shows how many units of the product or service a producer (or group of producers) would willing sell at a particular price. The supply curve is the line that connects these points.

Supply Curve for Widgets $6

$5


Supply Curve

$2

$1

$0 0

2

4

6

8

10

12

Quantity Supplied of Widgets

What do you notice about the supply curve? How would you describe the slope of the supply curve? Do you think that price and quantity supplied

Introduction to Supply •

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As the price for a good rises, the quantity supplied rises and the quantity demanded falls. As the price falls, the quantity supplied falls and the quantity demanded rises. The law of supply holds that producers will normally offer more for sale at higher prices and less at lower prices. Supply Curve for Widgets $6 $5

t e g $4 d i W r $3 e p e $2 c i r P

Supply Curve

$1 $0 0

2

4 6 8 Quantity Supplied of Widgets

10

12


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The reason the supply curve slopes upward is due to costs and profit. Producers purchase resources and use them to produce output. 

Producers will incur costs as they bid resources away from their alternative uses.


Businesses provide goods and services hoping to make a profit. 

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Profit is the money a business has left over after it covers its costs. Businesses try to sell at prices high enough to cover their costs with some profit left over. The higher the price for a good, the more profit a business will make after paying the cost for resources.

Changes in Supply Change in the quantity supplied due to a price change occurs ALONG the supply curve •

At $3 per Widget, the Quantity supplied of widgets is 6. •

Supply Curve for Widgets $6

If the price of Widgets fell to $2, then the Quantity Supplied would fall to 4 Widgets. •

$5


Supply Curve

$2

$1

$0 0

2

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Changes in Supply •

Supply Curves can also shift in response to the following factors: –

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Subsidies and taxes: government subsides encourage production, while taxes discourage production Technology: improvements in production increase ability of firms to supply Other goods: businesses consider the price of goods they could be producing Number of sellers: how many firms are in the market Expectations: businesses consider future prices and economic conditions Resource costs: cost to purchase factors of production will influence business decisions

STONER: factors that shift the supply curve

Changes in Supply Several factors will change the demand for the good (shift the entire demand curve) •

Supply Increase Curveinfor Supply Widgets $6

As an example, suppose that there is an improvement in the technology used to produce widgets. •

$5


Original Supply Curve Supply Curve New Supply Curve

$2

$1

$0 0

2

2

4

4

6

6

8

810

12 10

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Changes in Supply Supply can also decrease due to factors other than a change in price. •

Supply Decrease in Curve Supplyfor Widgets $6

As an example, suppose that a large number of Widget producers go out of business, decreasing the number of suppliers. •

$5


Original Supply Curve Supply Curve New Supply Curve

$2

$1

$0 0

22

4 4

6

6

8

8

10

10

12

12

Changes in Supply Changes in any of the factors other than price causes the supply curve to shift either: 

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Decrease in Supply shifts to the Left (Less supplied at each price) OR Increase in Supply shifts to the Right (More supplied at each price)

Supply Practice

Cost to Produce

Cost of Resources Falls

Cost of Resources Rises Productivity Decreases

Productivity Increases

New Technology

Higher Taxes

Lower Taxes

Government Pays Subsidy

Amount of Supply

Supply Curve Shifts

1. The government of Pago-Paga adds a subsidy to boomerang production.

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Quantity

2. Boomerang producers also produce Frisbees. The price of Frisbees goes up.

e c i r P

S1 S

Quantity

3. The government of Pago-Paga adds a new tax to boomerang production.

e c i r P

S1 S

Quantity

4. Boomerang producers expect an increase in the popularity of boomerangs worldwide.

e c i r P

S S1

Quantity

5. The price of plastic, a major input in boomerang production, increases.

e c i r P

S1 S

Quantity

6. Pago-Pagan workers are introduced to coffee as PagoPaga become integrated into the world market and their productivity increases drastically.

e c i r P

S S1

Quantity

7. Come up with your own story about boomerangs and the Pago-Pagans. Write down the story, draw the change in supply based on the story, and explain why supply changed.

e c i r P

S

Quantity

Supply and Demand at Work  

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Markets bring buyers and sellers together. The forces of supply and demand work together in markets to establish prices. In our economy, prices form the basis of economic decisions.

Supply and Demand at Work 

Supply and Demand Schedule can be combined into one chart.


Quantity Demanded of Widget per day

Quantity Supplied of Widget per day

$5

2

10

$4

4

8

$3

6

6

$2

8

4

$1

10

2

Supply and Demand at Work Supply and Demand for Widgets $6

$5


$2

$1

$0

Demand Curve Supply Curve

Supply and Demand at Work •

A surplus is the amount by which the quantity supplied is higher than the quantity demanded. –

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A surplus signals that the price is too high. At that price, consumers will not buy all of the product that suppliers are willing to supply. In a competitive market, a surplus will not last. Sellers will lower their price to sell their goods.

Supply and Demand at Work Supply and Demand for Widgets

Suppose that the price in the Widget market is $4. •

At $4, Quantity demanded will be 4 Widgets •

$6

Surplus

At $4, Quantity supplied will be 8 Widgets. •

$5

At $4, there will be a surplus of 4 Widgets. •


$2

$1

$0


Supply and Demand at Work 

A shortage is the amount by which the quantity demanded is higher than the quantity supplied  

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A shortage signals that the price is too low. At that price, suppliers will not supply all of the product that consumers are willing to buy. In a competitive market, a shortage will not last. Sellers will raise their price.



At $2, Quantity supplied will be 4 Widgets •

At $2, Quantity demanded will be 8 Widgets. •

$5

At $2, there will be a shortage of 4 Widgets. •



$2

$1

$0

Shortage

Supply and Demand at Work •

When operating without restriction, our market economy eliminates shortages and surpluses. –

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Over time, a surplus forces the price down and a shortage forces the price up until supply and demand are balanced. The point where they achieve balance is the equilibrium price. At this price, neither a surplus nor a shortage exists.

Once the market price reaches equilibrium, it tends to stay there until either supply or demand changes. –

When that happens, a temporary surplus or shortage occurs until the price adjusts to reach a new equilibrium price.



At $3, Quantity supplied will be 6 Widgets •

At $3, Quantity demanded will be 6 Widgets. •

$5

At $3, there will be neither a surplus or a shortage. •


$2

$1

$0


Supply and Demand Practice

Supply and Demand for Boomerangs $12

Surplus $10

$8 g n a r e m o o B $6 r e p e c i r P

Demand Supply

$4

$2

$0 0

2

4

6 Quantity of Boomerangs

8

10

12


$10


Demand Supply

$4

$2

Shortage $0 0

2

4


8

10

12


Market Equilibrium $10


Demand Supply

$4

6

$2

$0 0

2

4


8

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$10


Original Demand Supply New Demand

$4

$2

$0 0

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1. The income of the Chapel Hill townies declines after an early loss during March Madness.

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2. Chapel Hill is named one of the most beautiful towns in North Carolina and tourism doubles e c i r P

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3. The price of blue ties decreases. (Blue ties are a substitute good for purple ties)

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4. The Federal government has been warning the public about the possibility of a recession and job loss in the RDU area. (Think expectations!)

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5. The price of purple striped shirts decreases (Purple striped shirts are a complement to purple ties)

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Quantity

6. The price of silk increases (ties are made with silk). S1 e c i r P

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D Q 2 Q 1

Quantity

7. The government adds a subsidy to tie production.

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8. After the release of Alan Greenspan’s first jazz flute album, purple tie producers are expecting a huge increase in demand and thus an increase in the price. e c i r P

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9. Congress enacts new tax on the production of purple ties. S1 e c i r P

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10. As the popularity of purple ties sweeps the greater Orange County area, new producers enter the purple tie market.

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11. Purple ties are named by GQ magazine as a “must have” for all young professionals. At the same time, a new textile machine decreases the cost of producing purple ties. e c i r P

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12. The price of pink ties (a related good that most purple tie producers also produce) rises as spring approaches. Tie consumers in Chapel Hill begin to expect purple ties to be put on sale since spring is coming, so they put off

purchasing.

S1 e c i r P

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D

Quantity

Disequilibrium Describes a market that is not in equilibrium: the quantity supplied is not equal to the quantity demanded at the actual price.

Elasticity A measure of the relationship between a change in the quantity demanded of a particular good and a change in its price. Price elasticity of demand is a term in economics often used when discussing price sensitivity.

If a small change in price is accompanied by a large change in quantity demanded, the product is said to be elastic (or responsive to price changes). Conversely, a product is inelastic if a large change in price is accompanied by a small amount of change in quantity demanded.

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Price of the Product

There is an inverse (negative) relationship between the price of a product and the amount of that product consumers are willing and able to buy. Consumers want to buy more of a product at a low price and less of a product at a high price. This inverse relationship between price and the amount consumers are willing and able to buy is often referred to as The Law of Demand.

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The Consumer's Income

The effect that income has on the amount of a product that consumers are willing and able to buy depends on the type of good we're talking about. For most goods, there is a positive (direct) relationship between a consumer's income and the amount of the good that one is willing and able to buy. In other words, for these goods when income rises the demand for the product will increase; when income falls, the demand for the product will decrease. We call these types of goods normal goods.

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The Price of Related Goods

As with income, the effect that this has on the amount that one is willing and able to buy depends on the type of good we're talking about. Think about two goods that are typically consumed together. For example, bagels and cream cheese. We call these types of goods compliments. If the price of a bagel goes up, the Law of Demand tells us that we will be willing/able to buy fewer bagels. But if we want fewer bagels, we will also want to use less cream cheese (since we typically use them together). Therefore, an increase in the price of bagels means we want to purchase less cream cheese. We can summarize this by saying that when two goods are complements, there is an inverse relationship between the price of one good and the demand for the other good.

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The Tastes and Preferences of Consumers

This is a less tangible item that still can have a big impact on demand. There are all kinds of things that can change one's tastes or preferences that cause people to want to buy more or less of a product. For example, if a celebrity endorses a new product, this may increase the demand for a product. On the other hand, if a new health study comes out saying something is bad for your health, this may decrease the demand for the product. Another example is that a person may have a higher demand for an umbrella on a rainy day than on a sunny day.

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The Consumer's Expectations

It doesn't just matter what is currently going on - one's expectations for the future can also affect how much of a product one is willing and able to buy. For example, if you hear that Apple will soon introduce a new iPod that has more memory and longer battery life, you (and other consumers) may decide to wait to buy an iPod until the new product comes out. When people decide to wait, they are decreasing the current demand for iPods because of what they expect to happen in the future.

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The Number of Consumers in the Market

As more or fewer consumers enter the market this has a direct effect on the amount of a product that consumers (in general) are willing and able to buy. For example, a pizza shop located near a University will have more demand and thus higher sales during the fall and spring semesters. In the summers, when less students are taking classes, the demand for their product will decrease because the number of consumers in the area has significantly decreased.

Production Cost A cost incurred by a business when manufacturing a good or producing a service. Production costs combine raw material and labor. To figure out the cost of production per unit, the cost of production is divided by the number of units produced. A company that knows how much it will cost to produce an item, or produce a service, will have a clearer picture of how to better price the item or service and what will be the total cost to the company.

Businesses that know their production costs know the total expense to the production line, or how much the entire process will cost to produce the item. If costs are too high, these can be decreased or possibly eliminated. Production costs can be used to compare the expenses of different activities within the company. In production, there are direct costs and indirect costs. For example, direct costs for manufacturing an automobile are materials such as the plastic, metal or labor incurred to produce such an item. Indirect costs include overhead such as rent, salaries or utility expense.

Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period. Normally as the market price of a commodity rises, producers will expand their supply onto the market.

Supply, Demand and Market Equilibrium.pdf

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