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Copy of Copy of Unit II: Section A: Supply and Demand
Transcript of Copy of Copy of Unit II: Section A: Supply and Demand
Section A: Supply and Demand
Introduction to Demand:
Law of Demand:
Ceteris Paribis, when the price of a good rises, consumers decrease their quantity demanded for that good."
The Demand Schedule:
How much of a good or service consumers will buy at different prices
The Demand Curve:
It shows the relationship between quantity demanded and price for a product
the # of a good or service consumers will buy at a specific price. Points
Changes in QD:
Changes in QD are caused by
Changes in Demand:
Shifts of the curve:
Tastes and preferences of consumers
Prices of related goods
Income of buyers
Number of buyers
Expectations for the future
Changes in Taste:
Why do people want what they want?
changes in beliefs
Changes in Related Goods:
Specifically, changes in the PRICE of related goods. But what are related goods? There are 2 kinds:
Two goods are substitutes if a rise in the price of one leads to an increase in the demand for the other
Two goods are compliments if a rise in the price of one of the goods leads to a decrease in the demand of the other good
Changes in Income:
More income generally means more spending for most goods. There are two kinds of goods:
When a rise in income increases the demand for a good, then it is considered normal.
When a rise in income decreases the demand for a good, it is considered an inferior good
Changes in Expectations:
Expectations over a product's future price can effect consumers' demand for that product.
Supply is :the amount that producers are willing and
produce at various prices
Law of Supply:
The price and quantity supplied of a good are positively related. As the price of a good rises suppliers are
to produce more.
The Supply Schedule:
A table showing how much of a good or service
will supply at different prices
The Supply Curve:
Graphical representation of the supply schedule. Shows the relationship between quantity supplied and price
Change in Quantity Supply
a change in the amount of a good or service producers are willing to sell as a result of a price change. Shown by movement along the supply curve. As prices rise the QS increases and vice versa.
Changes in Supply:
Factors that cause changes in supply (supply shifters) include:
Cost of Inputs
Expectations of future
Number of Sellers
Government Intervention: Subsidies, taxes, regulations
Sometimes called a change in
Costs of Inputs
A rise in input prices makes a product more expensive to produce so producers must produce less
Changes in Related Goods:
Specifically, changes in the PRICE of other goods:
Increase the cost of producing, thus shifting the curve to the left.
Decrease the cost of producing, thus shifting the curve to the right
Makes the cost of changing resources into products cheaper, shifting the curve to the right.
Price of Related Goods
Substitute in Production:
A substitute-in-production is one of two alternative goods that can be produced using
the same inputs.. An increase in the price of these substitutable goods causes a decrease in supply for the other.
if the price of cheese falls, less cheese will be produced, increasing the supply of milk!
if the price of cheese rises, more cheese will be produced, decreasing the supply of milk!
Future Price Increase:
Producers hold on to their supply for a better future price (leftward shift).
They are allowing
to be sold right now.
Future Price Decrease:
Producers sell their supply for the best current price (rightward shift).
They are allowing
to be sold right now.
Number of Producers:
Increase in Producers:
Increases the supply for the entire market of the good (rightward shift)
Decrease in Producers:
Decreases the supply for the entire market of the good (leftward shift)
In this scenario, we are referring to the MARKET supply. That is, the entire market of the good being produced.
when price is at a level at which the quantity demanded equals the quantity supplied of that good
There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above equilibrium
There is a shortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below equilibrium
Increase in Demand:
Decrease in Demand:
Increase in Supply:
Decrease in Supply:
Demand Increases/Supply Decreases:
Demand Decreases/Supply Increases:
an upper limit on the quantity of some good that can be bought or sold
legal restrictions on how high or low a market price may go.
A minimum price buyers are required to pay for a good or service (minimum wage)
A maximum price sellers are allowed to charge for a good or service (rent control)
markets always tend to move toward equilibrium.
amount of surplus
How a Price Floor Causes Inefficiency:
1. A persistent surplus of the good
2. inefficiency arising from the persistent surplus in the form of low quantity demanded, wasted resources, and an unwanted high level or quality offered by suppliers
3. temptation to engage in illegal activity, particularly bribery and corruption
How a Price Ceiling Causes Inefficiency:
1. A persistent shortage of the good
2. inefficiency arising from the persistent surplus in the form of low quantity supplied, wasted resources, and an unwanted high level or quality offered by suppliers
3. temptation to engage in illegal activity, black markets.
How a Quota Causes Inefficiency:
1. inefficiency due to missed opportunities
2. incentives to evade or break the law
Increase the cost of producing, thus shifting the curve to the left
Change In Supply
Change in the amount being produced at every price. The change results in a new supply schedule and a new supply curve.
Complement in Production:
Price of Beef Increases
Supply of Leather Increases
If an increase in the production of one good causes an increase in the production of a second good they are complements-in-production. An increase in the price
of one good leads to an increase in the supply of the other.