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Copy of Copy of Unit II: Section A: Supply and Demand

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Betty Lowry

on 30 September 2015

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Transcript of Copy of Copy of Unit II: Section A: Supply and Demand

Unit II: Nature and Function of Product Markets
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
Quantity Demanded:
the # of a good or service consumers will buy at a specific price. Points
ALONG
the curve
Changes in QD:
Changes in QD are caused by
PRICE
and
PRICE ONLY!!!
Changes in Demand:
Shifts of the curve:
1.
2.
3.
4.
5.
Tastes and preferences of consumers
Prices of related goods
Income of buyers
Number of buyers
Expectations for the future
T.
R.
I.
B.
E.
Changes in Taste:
Why do people want what they want?
changes in beliefs
Let's Practice:
Changes in Related Goods:
Specifically, changes in the PRICE of related goods. But what are related goods? There are 2 kinds:
Let's Practice:
Substitutes:
Two goods are substitutes if a rise in the price of one leads to an increase in the demand for the other
Compliments:
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:
Let's Practice:
Normal Goods:
When a rise in income increases the demand for a good, then it is considered normal.
Inferior Goods:
When a rise in income decreases the demand for a good, it is considered an inferior good
Changes in Expectations:
Let's Practice:
Price Quantity
Price Quantity
Demand Simplified:
Expectations over a product's future price can effect consumers' demand for that product.
Supply is :the amount that producers are willing and
able to
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
more able
and
willing
to produce more.
The Supply Schedule:
A table showing how much of a good or service
producers
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:
1.
2.
3.
4.
5.
Cost of Inputs
Technology
Expectations of future
prices
Number of Sellers
Government Intervention: Subsidies, taxes, regulations


Resource Cost:
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:
Government Intervention:
Taxes:
Increase the cost of producing, thus shifting the curve to the left.
Subsidies:
Decrease the cost of producing, thus shifting the curve to the right
Technology:
Price Quantity
Price Quantity
Supply Simplified:
Makes the cost of changing resources into products cheaper, shifting the curve to the right.
P
Q
6.
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.
Example:
Milk Producer
can make...
or
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!
Expectations:
Future Price Increase:
Producers hold on to their supply for a better future price (leftward shift).
They are allowing
LESS
to be sold right now.
Future Price Decrease:
Producers sell their supply for the best current price (rightward shift).
They are allowing
MORE
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.
Market Equilibrium:
Equilibrium:
when price is at a level at which the quantity demanded equals the quantity supplied of that good
Surplus:
P
Q
equilibrium price
equilibrium qty
P
Q
Price
surplus
qty demanded
qty supplied
There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above equilibrium
Shortage:
There is a shortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below equilibrium
P
Q
Price
shortage
qty supplied
qty demanded
Demand Shifts:
Increase in Demand:
equilibrium price
equilibrium qty
Decrease in Demand:
equilibrium price
equilibrium qty
Supply Shifts:
Increase in Supply:
equilibrium price
equilibrium qty
Decrease in Supply:
equilibrium price
equilibrium qty
Simultaneous Shifts:
Both Increase:
equilibrium price
equilibrium qty
Both Decrease:
equilibrium price
equilibrium qty
Demand Increases/Supply Decreases:
equilibrium price
equilibrium qty
Demand Decreases/Supply Increases:
equilibrium price
equilibrium qty
Quantity Control/Quota:
an upper limit on the quantity of some good that can be bought or sold
P
Q
Price Controls:
Price Control:
legal restrictions on how high or low a market price may go.
Price Floor:
P
Q
Price Floor
surplus
qty demanded
qty supplied
A minimum price buyers are required to pay for a good or service (minimum wage)
Price Ceiling:
A maximum price sellers are allowed to charge for a good or service (rent control)
P
Q
Price ceiling
shortage
qty supplied
qty demanded
Market Reactions:
markets always tend to move toward equilibrium.
P
Q
equilibrium price
equilibrium qty
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.
Deadweight Loss
How a Quota Causes Inefficiency:
1. inefficiency due to missed opportunities
2. incentives to evade or break the law
fads
cultural shifts
Regulations:
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:
Example
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.
Full transcript