supply & demand
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3 - 1
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Supply & Demand
The Product Market
3 - 2
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
LAW OF DEMAND
• As Price Falls… …Quantity Demanded
Rises• As Price Rises… …Quantity Demanded
Falls
An inverse relationship exists between price and quantity demanded
3 - 3
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
3 - 4
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
LAW OF DEMAND• Demand Curve
• Market Demand• Individual Demand
• Horizontal Summation
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
• Diminishing Marginal Utility
DOWNWARD SLOPE
3 - 6
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
• Diminishing Marginal Utility
DOWNWARD SLOPE
• Income Effect
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
• Diminishing Marginal Utility
DOWNWARD SLOPE
• Income Effect • Substitution Effect
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
GRAPHING DEMANDP
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
3 - 9
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
55
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
3 - 10
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
35
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
3 - 11
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
3 - 12
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
3 - 13
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D
Price of Corn
Quantity of Corn
CORN Connect the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
3 - 14
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What ifDemand
Increases?
GRAPHING DEMAND
3 - 15
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
D1
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
D2Increase
inDemand
Increasein QuantityDemanded10
20355580
30406080 +
GRAPHING DEMAND
3 - 16
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What ifDemand
Decreases?
GRAPHING DEMAND
3 - 17
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D1
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
-- 10204060
D3
Decreasein
Demand
Decreasein QuantityDemanded
GRAPHING DEMAND
3 - 18
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF DEMAND
• Tastes (Preferences)• Prices of Related Goods
– Substitutes & Complements– Unrelated Goods
• Income– Normal (Superior) & Inferior
Goods• Number of Buyers• Expectations
3 - 19
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF DEMAND
• Tastes (Preferences)• Prices of Related Goods
– Substitutes & Complements– Unrelated Goods
• Income– Normal (Superior) & Inferior
Goods• Number of Buyers• Expectations
3 - 20
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Practice Problems
• Activity 1-4 Parts A & B• Activity 1-5
3 - 21
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
LAW OF SUPPLY
• As Price Rises… …Quantity Supplied Rises• As Price Falls… …Quantity Supplied Falls
A direct relationship exists between price and quantity supplied
3 - 22
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
5
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
3 - 23
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
3 - 24
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
35
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
3 - 25
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
3 - 26
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
3 - 27
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Connect the Points
GRAPHING SUPPLY
3 - 28
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
What ifSupply
Increases?
GRAPHING SUPPLY
3 - 29
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
S1P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
Price of Corn
Quantity of Corn
$54321
60503520 5
P QS
CORN
8070604530
S2Increasein
Supply
Increasein QuantitySupplied
GRAPHING SUPPLY
3 - 30
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
What ifSupply
Decreases?
GRAPHING SUPPLY
3 - 31
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
S1P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
S3
453020 0 --
Decreasein
Supply
Decreasein QuantitySupplied
GRAPHING SUPPLY
3 - 32
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF SUPPLY
• Resource Prices• Prices of Other Goods• Technology• Taxes & Subsidies• Expectations• Number of Sellers
3 - 33
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF SUPPLY
• Resource Prices• Prices of Other Goods• Technology• Taxes & Subsidies• Expectations• Number of Sellers
3 - 34
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Practice Problems
• Activity 1-6 Parts A & B• Activity 1-7
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF SUPPLY
• Resource Prices• Technology• Taxes & Subsidies• Prices of Other Goods• Price Expectations• Number of Sellers
Combiningwith
Demand
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
7
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD$5
4321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORNMARKET
CORNMARKET
Market Clearing Equilibrium
MARKET DEMAND & SUPPLY
3 - 37
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
7
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD$5
4321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORNMARKET
CORNMARKETSurplus
At a $4 price
more is being
supplied than
demanded
MARKET DEMAND & SUPPLY
3 - 38
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
117
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD$5
4321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORNMARKET
CORNMARKET
At a $2 price
more is being
demanded than
supplied
Shortage
MARKET DEMAND & SUPPLY
3 - 39
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
117
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD$5
4321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORNMARKET
CORNMARKET
Shortage
MARKET DEMAND & SUPPLY Surplus
3 - 40
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
MARKET EQUILIBRIUM • Equilibrium Price & Quantity• Rationing Function of Prices• Changes in Demand• Changes in Quantity
Demanded• Changes in Supply• Changes in Quantity Supplied
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Single Shifts• Supply Increases• Supply Decreases• Demand Increases• Demand Decreases
3 - 42
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Double Shifts• Supply Increases &
Demand Decreases• Supply Decreases &
Demand Increases• Supply Increases &
Demand Increases• Supply Decreases &
Demand Decreases
3 - 43
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Double Shifts• Supply increase;
Demand decrease• Supply decrease;
Demand increase• Supply increase;
Demand increase• Supply decrease;
Demand decrease
Price Quantity
?
?
?
?
3 - 44
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Consumers, Producers, and the Efficiency
of Markets
3 - 45
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Welfare Economics• Welfare economics is the study
of how the allocation of resources affects economic well-being.
• Market equilibrium maximizes the total welfare of buyers and sellers.
3 - 46
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
CONSUMER SURPLUS
• Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.
3 - 47
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
How the Price Affects Consumer Surplus
Consumersurplus
Quantity
(a) Consumer Surplus at Price P
Price
0
Demand
P1
Q1
B
A
C
3 - 48
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
How the Price Affects Consumer Surplus
Initialconsumer
surplus
Quantity
(b) Consumer Surplus at Price P
Price
0
Demand
A
BC
D EF
P1
Q1
P2
Q2
Consumer surplusto new consumers
Additional consumersurplus to initial consumers
3 - 49
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
PRODUCER SURPLUS
• Producer surplus is the amount a seller is paid for a good minus the seller’s cost.
3 - 50
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
How the Price Affects Producer Surplus
Producersurplus
Quantity
(a) Producer Surplus at Price P
Price
0
Supply
B
A
C
Q1
P1
3 - 51
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
How the Price Affects Producer Surplus
Quantity
(b) Producer Surplus at Price P
Price
0
P1B
C
Supply
A
Initialproducersurplus
Q1
P2
Q2
Producer surplusto new producers
Additional producersurplus to initialproducers
D EF
3 - 52
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
MARKET EFFICIENCY Consumer Surplus + Producer Surplus
=Total Surplus
Efficiency • Free markets maximize efficiency
(total surplus) at equilibrium
3 - 53
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Consumer and Producer Surplus in the Market Equilibrium
Producersurplus
Consumersurplus
Price
0 Quantity
Equilibriumprice
Equilibriumquantity
Supply
Demand
A
C
B
D
E
3 - 54
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Free Response Prompts• “Show” means to use a diagram to illustrate
your answer. Correct labeling is necessary to receive full credit.
• “Explain” means to take the reader through all of the steps or linkages in the line of economic reasoning. Graphs and symbols are acceptable as part of the explanation.
• “Identify” means to provide a specific answer or a label on a graph, without any explanation or elaboration.
• “Calculate” means to use mathematical operations to determine a specific numerical response, along with providing your work.
3 - 55
DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Free Response Strategies• Circle the verbs• Label everything• Messy work loses points• Don’t say too much• Don’t contradict yourself
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