chapter 3 demand and supply the basics
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Chapter 3 Demand and Supply The Basics. Demand and Supply. Markets are the institutions that bring together buyers and sellers. Examples include: farmer ’ s markets, eBay, Amazon.com, and retail outlets. Demand vs. Quantity Demanded. - PowerPoint PPT PresentationTRANSCRIPT
Chapter 3Demand and Supply The Basics
Markets are the institutions that bring together buyers and sellers.
◦ Examples include: farmer’s markets, eBay, Amazon.com, and retail outlets.
Demand and Supply
Demand is the amount of a product that consumers are willing and able to purchase at each possible price during a given period of time, everything else (but price) held constant. (ceteris paribus)
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Demand vs. Quantity Demanded
◦It is a relationship between prices and quantities.
Law of Demand: There is an inverse relationship between the price of a good and the quantity consumers are willing and able to purchase during a particular period of time.◦ As price of a good rises, consumers buy less.◦ Demand depicts the quantity-price relationship
ceteris paribus.
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Law of Demand
The quantity demanded is the amount of a product that people are willing and able to purchase at one, specific price.
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Demand vs. Quantity Demanded
• It is a specific quantity tied to a specific price.
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Demand Curve
A graphical representation of Demand
Change in Quantity Demanded - movement along the same demand curve in response to a price change.◦ Results from a price change◦ A movement along a curve
Change in Demand - shift in entire demand curve.◦ Results from a change in a determinant of
demand (a ceteris paribus variable)◦ A whole new curve
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Changes in Demand and Quantity Demanded
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Change in Demand vs. Change in the Quantity Demanded
Δ delta
Δ stands for CHANGE
Important mathematical/scientific symbol
The Demand Shifters are factors other than price that influence demand: income, tastes, prices of related goods, expectations, and numbers of buyers.
Δ Demand Shifters leads to Δ DEMAND itself – ie a whole new demand curve
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Law of Demand
Changes in Consumer Income◦ Normal goods: goods for which demand
increases as income increases.◦ Inferior goods: goods for which demand
decreases as income increases.
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Demand Shifters
Δ the Number of Buyers
Δ Demographic Characteristics
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Demand Shifters
Δ Price of Related Goods◦ Substitute goods: goods that can be used in
place of each other.◦ Complementary goods: goods that are used
together.
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Demand Shifters
Δ Consumer Expectations
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Demand Shifters
New!Faster!
Cheaper!
Should I
Buy Now???
Δ Consumer Tastes and Preferences
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Demand Shifters
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Supply and Quantity Supplied Supply is the amount of a good or service that
producers are willing and able to offer for sale at each possible price during a period of time, ceteris paribus.◦ It is a price-quantity relationship.
The quantity supplied is the amount sellers are willing and able to offer for sale during a period of time at a specific price, ceteris paribus.◦ It is a specific quantity tied to a specific price
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Law of Supply Law of Supply - there is a positive
relationship between the price of a product and the amount of it that will be supplied.◦ As the price of a product rises, producers will be
willing to supply more. ◦ The height of the supply curve at any quantity
also shows the opportunity cost of producing the next unit of the good.
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Supply Curve
A graphical representation of Demand
The Supply Curve and the PPF The production possibility frontier provides one
explanation of why the supply curve has a positive slope As the quantity of chicken produced increases, the
opportunity cost of producing it increases, as shown by the increasing slope of the PPF
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Changes in Supply Δ Quantity Supplied - movement along the
same supply curve in response to a price change.◦ Results from Δ price◦ Movement along a curve
Δ Supply - shift in entire supply curve.◦ Results from Δ some other variables besides
price. (Δ a ceteris paribus variable)◦ Whole new curve
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Change in Supply vs. a Change in the Quantity Supplied
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Supply Shifters Δ Resource Prices
Oil Prices
Falling Wages
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Δ Technology and Productivity
Supply Shifters
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Δ Expectations of Producers
Supply Shifters
The TIMES
Mideast War Likely
Future oil supplies uncertain
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Δ Number of Producers Δ Prices of Related Goods
or Services◦ the opportunity cost of
producing any good is the lost production of some other good
Supply Shifters
Wheat
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Supply NEVER goes UP or DOWN!!! Supply Increases or Decreases
Supply shifts right or left
Supply NEVER, NEVER, NEVER goes UP or DOWN!! – not ever.
Note: The textbook uses the Up/Down language in an example in CH 3. It may be “technically” OK, but it WILL confuse you if you use it!!!
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Decrease in Supply
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Increase in Supply
Equilibrium When the plans of buyers
and sellers mesh when tested in the market place, the market is in equilibrium
If the price is too high, there will be a surplus
If the price is too low, there will be a shortage
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Equilibrium The just right Price where qD = qS
◦ Markets tend towards equilibrium unless something prevents price adjustments
Clicker Which diagram best represents the effect on the market for beef
of an increase in the cost of corn used as feed for beef cattle?A: A B: B C: Can’t tell
A B
Clicker Which of the charts represents what might happen if a report that eating beef
will increase the likelihood of a fatal heart attacks was newly released.A: A B: B C: Can’t tell
A B
ClickerThe Graph labeled A would be described asA. A decrease in DemandB. A decrease in quantity demandedC. A decrease in supply D. A decrease in quantity supplied
A B
ClickerThe Graph labeled B would be described asA. A decrease in DemandB. A decrease in quantity demandedC. A decrease in supply D. A decrease in quantity supplied
A B
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Disequilibrium A surplus occurs whenever qS>qD. A shortage occurs whenever qD>qS. Surpluses and shortages can be resolved
with price changes.
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The Effects of a Shift of the Demand Curve
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The Effects of a Shift of the Supply Curve
Simultaneous Decreases in Demand and Supply:
countervailing pressures
SimultaneousShifts
Group Project
1. Price of Passenger cars goes up dramatically:2. A public campaign encouraging conservation of fuel by using public
transportation and small cars whenever possible creates a change in preferences:
3. The price of tires quadruples:4. A huge strike hits truck manufacturers, shutting down many plants:5. Gasoline prices plummet to $0.02 per gallon:6. The price of steel is cut in half:7. A major recession strikes and income levels drop:8. The price of camp trailers drops by 90%:
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The Market for Pickup Trucks is in equilibrium. What happens in this market with each of the following changes? Draw a graphical representation and identify what happens in the market for Pickup Trucks to (A) Supply, (B) Demand, (C) Price in the market for pickup trucks, ceteris paribus, (D) Equilibrium Quantity Demanded and Quantity Supplied?
A B C DMarket for Pick up trucks