Download - Session 4 Supply and Demand
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Session 4Supply and Demand
Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.
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TEKS
(2) Economics. The student understands the interaction of supply, demand, and price. The student is expected to:
(A) understand the effect of changes in price on the quantity demanded and quantity supplied;(B) identify the non-price determinants that create changes in supply and demand, which result in a new equilibrium price; and(C) interpret a supply-and-demand graph using supply-and-demand schedules.
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Teaching the Terms
• Market• Demand• Supply• Determinants• Surplus• Shortage
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Markets
• A market facilitates the interaction of a buyer and a seller as they complete a transaction
• Buyers, as a group, determine the demand• Sellers, as a group, determine the
supply
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Characteristics of Competitive Markets
• Identical goods or services• Enough buyers and sellers so that no
participant can influence the market price – everyone is a price taker
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Demand
• Law of demand• Quantity demanded• Demand schedule• Demand curve• Determinants of demand
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The Law of Demand
As the price rises,
the quantity demand falls.
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Demand
Price Quantity
$5 10$4 20$3 30$2 40$1 50
10 20 30 40 500
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Demand for ____
QuantityPr
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Determinants of Demand
• Income• Price of related goods– Complements– Substitutes
• Tastes or preferences• Expectations• Number of buyers
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Shifting Demand
10 20 30 40 500
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Quantity
Pric
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Supply
• Law of supply• Quantity supplied• Supply schedule• Supply curve• Determinants of supply
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The Law of Supply
As the price rises,
the quantity supplied rises.
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Supply
Price Quantity
$5 50$4 40$3 30$2 20$1 10 10 20 30 40 50
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Supply of ____
Quantity
Pric
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Determinants of Supply
• Input prices• Technology• Expectations• Number of sellers
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Shifting Supply
10 20 30 40 500
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Quantity
Pric
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Market Equilibrium
Price Quantity Demanded
Quantity Supplied
$5 10 50$4 20 40$3 30 30$2 40 20$1 50 10
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Market Equilibrium
10 20 30 40 500
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Quantity
Pric
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Supply
Demand
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Market Equilibrium
•Quantity demanded is less than quantity supplied Qd < QsSurplus•Quantity demanded is equal to quantity supplied Qd = Qs
Equilibrium
•Quantity demanded is greater than quantity supplied Qd > Qs
Shortage
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Practice
• Draw the graph.• Which curve is shifting because of the
changing market conditions? Supply? Demand? Both?
• Which direction is the shift?• Draw the shift.• What is the impact on price and quantity?
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Price Controls
• Price Ceiling– If price is fixed BELOW the market clearing price– Creates a shortage because Qd > Qs
• Rent controls
• Price Floor– If price is fixed ABOVE the market clearing price– Creates a surplus because Qd < Qs
• Minimum wage
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Price Elasticity of Demand
• Measures the responsiveness of quantity demanded to a change in price
• Determinants– Availability of close substitutes– Necessities versus luxuries– Definition of the market (food vs. ice cream vs.
chocolate ice cream)– Time horizon
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Price Elasticity and Total Revenue
• If demand for a good is elastic, price increases lead to lower total revenue
• If demand for a good is inelastic, price increases lead to higher total revenue
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Price Elasticity of Supply
• Measures the responsiveness of quantity supplied to a change in price
• Determinants– Availability of inputs – Time
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Questions?