3. supply and demand graphs

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Demand and Supply Shifts, Movements, and Elasticity and Equilibrium

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Page 1: 3. supply and demand graphs

The Laws of Demand and

SupplyShifts, Movements, and Elasticity and

Equilibrium

Page 2: 3. supply and demand graphs

Demand represents the actions of the buyers in the market.

As such you need to thinkthink like a buyer.

If the price of gum were to double you may cut back on your gum consumption.

By the same token if the price of gum were to drop considerably you may be inclined to

buy gum rather than mints.

Price increase = demand decrease

Price decrease = demand increase

Page 3: 3. supply and demand graphs

As such demand appears on a graph as a downward sloping curve (or line)

Therefore the law of demand states:

As the price of a product changes the demand will change in an inverse direction

(that is, in the opposite direction)

Page 4: 3. supply and demand graphs

Basic Demand Curve

P

Q

D

Q = Quantity

P = price

D = Demand

Page 5: 3. supply and demand graphs

Basic Demand Curve

P

Q

D

As the price of a product increases the demand for that product will decrease. At the same

time as the price declines the demand increases. Thus an INVERSE RELATIONSHIP

Page 6: 3. supply and demand graphs

Demand for Widgets

P

Q

D

P1

Q1

•A

•BP2

Q2To move from A to B is called a MOVEMENT ALONG the demand curve. This occurs when the price of the object presented (widgets) has changed resulting in a change in DEMAND.

Page 7: 3. supply and demand graphs

Demand for Widgets

P

Q

D

P1

Q1

•A

•BP2

Q2

As the price of Widgets increased (from P1 to P2) the demand for Widgets decreased from Q1 to Q2).

Page 8: 3. supply and demand graphs

Demand for Widgets

P

Q

D1

P1

Q1

•A

D2

•B

However, sometimes something other than the price of widgets can affect its demand. This is called a change in the QUANTITY DEMANDED. At the same price the demand for widgets has increased. This is a SHIFT in the Demand Curve.

Q2

Page 9: 3. supply and demand graphs

Demand for Widgets

P

Q

D1

P1

Q1

•A

D2

•B

Q2

This may have occurred due to a increase in the price of a substitute for widgets or simply a general increase in the popularity of widgets.

Page 10: 3. supply and demand graphs

Demand for Widgets

P

Q

D1

P1

Q1

•A

D2

•B

Q2

The same would be true for a decrease in the QUANTITY DEMANDED.

Page 11: 3. supply and demand graphs

Demand for Widgets

P

Q

D1

P1

Q1

•A

D2

•B

Q2Here the price of a substitute may have

decreased causing fewer people to demand widgets at a given price. Or, the general widget

fad may have started to decline.

Page 12: 3. supply and demand graphs

WHAT FACTORS MIGHT AFFECT

DEMAND?Factors affecting demand may include but are not limited to:

price

tastes

trends

incomes

needs

Page 13: 3. supply and demand graphs

Practice exercise1. Use the following Demand Schedule

to create a fully labelled graph illustrating the demand for shoes.

PriceQuantity

Demanded

$5 50

$10 45

$15 40

$20 35

$25 30

Page 14: 3. supply and demand graphs

2. What happens when the price for a pair of shoes falls from $20 to $15?

3. What is this change called?

4. What might happen with the coming of Spring and the end of boot weather?

5. Indicate this change on your graph.

6. What is this change called?

Page 15: 3. supply and demand graphs

Ok... so now we can move on to SUPPLY and find that it is the same

but opposite (if that makes any sense)

Page 16: 3. supply and demand graphs

Supply represents the actions of the sellers in the market. As such you need to thinkthink like a seller

(manufacture.If the price of gum were to double there would be

a resulting increase in the supply of gum

By the same token if the price of gum were to drop considerably there would be a

decrease in the amount of gum supplies.

Price increase = supply increase

Price decrease = supply decrease

WHY?

WHY?

Page 17: 3. supply and demand graphs

As such supply appears on a graph as an upward sloping curve (or line)

Therefore the law of supply states:

As the price of a product changes the supply will change in the same direction

(this is called a direct relationship)

Page 18: 3. supply and demand graphs

Basic Supply Curve

P

Q

S

Q = Quantity

P = price

Page 19: 3. supply and demand graphs

Basic Supply Curve

P

Q

S

As the price of a product increases the supply of that product will also increase. At the same

time as the price of a product decreases its supply decreases. Thus a DIRECT

RELATIONSHIP

Page 20: 3. supply and demand graphs

Supply for Widgets

P

Q

S

P1

Q1

•A

•BP2

Q2To move from A to B is called a MOVEMENT ALONG the supply curve. This occurs when the price of the object presented (widgets) has changed resulting in a change in SUPPLY.

Page 21: 3. supply and demand graphs

Supply for Widgets

P

Q

S

P1

Q1

•A

•BP2

Q2

As the price of Widgets increased (from P1 to P2) the supply of Widgets increased from Q1 to Q2).

Page 22: 3. supply and demand graphs

Supply for Widgets

P

Q

S2

P1

Q1

•A •B

However, sometimes something other than the price of widgets can affect its Supply. This is called a change in the QUANTITY SUPPLIED. At the same price the supply for widgets has increased. This is a SHIFT in the Supply Curve.

S1

Q2

Page 23: 3. supply and demand graphs

Supply for Widgets

P

Q

S2

P1

Q1

•A •B

This may have occurred due to a decrease in the price of an input into the production of widgets or because of improved technology in production (can now make more goods cheaper).

S1

Q2

Page 24: 3. supply and demand graphs

Supply for Widgets

P

Q

S2

P1

Q1

•A•B

The same would be true for a DECREASE in the Quantity Supplied.

S1

Q2

Page 25: 3. supply and demand graphs

Supply for Widgets

P

Q

S2

P1

Q1

•A•B

Here the price of inputs may have increased resulting in producers suppling fewer goods at the

same price.

S1

Q2

Page 26: 3. supply and demand graphs

WHAT FACTORS MIGHT AFFECT

SUPPLY?Factors affecting supply may include but are not limited to:

price

cost of production

technological change

weather

government regulations

Referred to as

“Techniques of

Production.”

Page 27: 3. supply and demand graphs

Practice exercise1. Use the following Supply Schedule

to create a fully labelled graph illustrating the supply for shoes.

PriceQuantity Supplied

$5 30

$10 35

$15 40

$20 45

$25 50

Page 28: 3. supply and demand graphs

2. What happens when the price for a pair of shoes falls from $20 to $15?

3. What is this change called?

4. What might happen if contract negotiations resulted in increased pay for shoe manufacturers?

5. Indicate this change on your graph.

6. What is this change called?

Page 29: 3. supply and demand graphs

EQUILIBRIUMPutting Demand and Supply together

Page 30: 3. supply and demand graphs

Equilibrium - is also known as the “market clearing” price.

the point where supply and demand meet.

markets have a tendency to move toward this point - but seldom reach it.

Page 31: 3. supply and demand graphs

Equilibrium

P

Q

S

D

Q1

•eP1

At P1 both the Quantity Demanded and the Quantity Supplied is Q1.

Page 32: 3. supply and demand graphs

In actual fact both curves are always present in each graph - we just have not included them yet so that we could concentrate on just Demand or

just Supply

Page 33: 3. supply and demand graphs

As a result it is still possible to have movements and shifts occur to the

Demand or Supply curves.

Here, for example, the demand curve has shifted to the right - perhaps due to the product becoming more popular. As a result of this increased demand both equilibrium supply and price ultimately increase.

Shoes

Page 34: 3. supply and demand graphs

What has happened

here?

Shoes

Page 35: 3. supply and demand graphs

Here Supply has decreased -

perhaps due to a decreased

availability of resources and this has resulted in a price increase in

demand decrease.

Shoes

Page 36: 3. supply and demand graphs

Two important scenarios of equilibrium we will be

concentrating on involve only movements along the supply and

demand curves.

Page 37: 3. supply and demand graphs

Price Ceilings is a gov’t-

mandated maximum price that a seller can

charge for a product of service.

may be placed on such things as food or fuel

during a time of war or rents when affordable

housing is not available.

Page 38: 3. supply and demand graphs

Rent Controls most common example of Price Ceilings

used in economics

put in place on certain units to ensure affordable housing is available to people

who can’t otherwise afford to live in a community.

rental prices are artificially held at a level below market equilibrium.

Page 39: 3. supply and demand graphs

Rent Controls

P

Q

S

D

Q1

•eP1

Here Price = rent charged to tenants and Q = the amount of available rental

units

Page 40: 3. supply and demand graphs

Rent Controls

P

Q

S

D

Q1

•eP1

If the government determines this market equilibrium price is too high they will insist prices be kept below

this level.

Page 41: 3. supply and demand graphs

Rent Controls

P

Q

S

D

Q1

•eP1

This new level is seen at Prc. As a result of the new, lower price the

Supply of rental units (Qs ) will decrease while the Demand (Qd)

will increase.

Prc

QdQs

Page 42: 3. supply and demand graphs

Rent Controls

P

Q

S

D

Q1

•eP1

This will result in a shortage of apartments as new spaces are not made available. As the same time more people are looking to rent.

Prc

QdQs

Page 43: 3. supply and demand graphs

Price Floors is a gov’t-

mandated minimum price that a seller can

charge for a product of service.

The most common example of a price floor is minimum

wage legislation. The market equilibrium is too low so the

government imposed a minimum price for labour.

Page 44: 3. supply and demand graphs

Minimum Wage

P

Q

S

D

Q1

•eP1

Here Price = the amount paid for wages and Q = the labour force.

Page 45: 3. supply and demand graphs

Minimum Wage

P

Q

S

D

Q1

•eP1

Setting a minimum wage at P2 means that wages cannot go below this point -

hence a PRICE FLOOR.

Page 46: 3. supply and demand graphs

Minimum Wage

P

Q

S

D

Q1

•eP1

This new level is seen at Pmw. As a result of the new, higher price of labour

the Supply of people looking to work (Qs ) will increase while the Demand for

workers (Qd) will decrease.

Qs

Pmw

Qd

Page 47: 3. supply and demand graphs

Minimum Wage

P

Q

S

D

Q1

•eP1

This will result in a surplus as more people will be looking for work but fewer

employers will be looking to hire.

Qs

Pmw

Qd

Page 48: 3. supply and demand graphs

To sum up... a Price Ceiling results in a Shortage and a Price Floor results in a

Surplus.

Page 49: 3. supply and demand graphs

Think of the equilibrium graph as an upside down room.

The Floor is on the top (above equilibrium) and the ceiling is on the bottom (below

equilibrium).

Page 50: 3. supply and demand graphs

Elasticityof Supply and Demand

Page 51: 3. supply and demand graphs

Elasticity of Demand

The degree to which the demand for any good changes in relation to changes in price.

Page 52: 3. supply and demand graphs

A product is:

ELASTIC - if price changes cause large variations in the quantity

demanded.

INELASTIC - if price changes cause have little effect on the

quantity demanded.

UNIT-ELASTIC - if a percentage change in price causes an equal percent change in the quantity

demanded.

Page 53: 3. supply and demand graphs

Elastic DemandGoods with an elastic demand tend to be those which are:

luxury items

use a very small portion of ones incomenon-necessities

easily substituted

Page 54: 3. supply and demand graphs

Examples of Elastic goods:

ballpoint pens

one particular brand of a product (i.e. Nikes over Adidas)

chicken wings

OR...anything in the long run

Page 55: 3. supply and demand graphs

The “long run” is a period of time in which everything is changeable.

Over time goods become more and more elastic as substitutes are created.

Or...as John Maynard Keynes said... “In the long run we’re all dead.”

Page 56: 3. supply and demand graphs

Inelastic DemandGoods which are inelastic tend to be:

not easily replaced

necessary or essential

large ticket items

items difficult to replace in the short term.

Page 57: 3. supply and demand graphs

Examples of inelastic goods:

automobiles in general

public transit

gasoline - in the short run

insulin for a diabetic

staple foods

Page 58: 3. supply and demand graphs

The key is to determine the degree to which something will be elastic or inelastic.

will a given price increase still allow a companies revenues to increase?

if no - the demand is elastic

if yes - the demand is inelastic