supply & demand
DESCRIPTION
Supply & Demand. The Product Market. LAW OF DEMAND. An inverse relationship exists between price and quantity demanded. As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls. LAW OF DEMAND. Demand Curve Market Demand Individual Demand - PowerPoint PPT PresentationTRANSCRIPT
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Supply & Demand
The Product Market
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
LAW OF DEMAND
• As Price Falls… …Quantity Demanded
Rises• As Price Rises… …Quantity Demanded
Falls
An inverse relationship exists between price and quantity demanded
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
LAW OF DEMAND• Demand Curve
• Market Demand• Individual Demand
• Horizontal Summation
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
• Diminishing Marginal Utility
DOWNWARD SLOPE
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
• Diminishing Marginal Utility
DOWNWARD SLOPE
• Income Effect
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
• Diminishing Marginal Utility
DOWNWARD SLOPE
• Income Effect • Substitution Effect
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
GRAPHING DEMANDP
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
55
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
35
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
Price of Corn
Quantity of Corn
CORN Plot the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D
Price of Corn
Quantity of Corn
CORN Connect the Points
10 20 30 40 50 60 70 80
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What ifDemand
Increases?
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
D1
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
D2Increase
inDemand
Increasein QuantityDemanded10
20355580
30406080 +
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
What ifDemand
Decreases?
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
P QD$5
4321
1020355580
D1
Price of Corn
Quantity of Corn
CORN
10 20 30 40 50 60 70 80
-- 10204060
D3
Decreasein
Demand
Decreasein QuantityDemanded
GRAPHING DEMAND
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF DEMAND
• Tastes (Preferences)• Prices of Related Goods
– Substitutes & Complements– Unrelated Goods
• Income– Normal (Superior) & Inferior
Goods• Number of Buyers• Expectations
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF DEMAND
• Tastes (Preferences)• Prices of Related Goods
– Substitutes & Complements– Unrelated Goods
• Income– Normal (Superior) & Inferior
Goods• Number of Buyers• Expectations
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Practice Problems
• Activity 1-4 Parts A & B• Activity 1-5
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
LAW OF SUPPLY
• As Price Rises… …Quantity Supplied Rises• As Price Falls… …Quantity Supplied Falls
A direct relationship exists between price and quantity supplied
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
5
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
35
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Plot the PointsGRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
Connect the Points
GRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
What ifSupply
Increases?
GRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
S1P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
Price of Corn
Quantity of Corn
$54321
60503520 5
P QS
CORN
8070604530
S2Increasein
Supply
Increasein QuantitySupplied
GRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
SP
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
What ifSupply
Decreases?
GRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
S1P
Qo
$5
4
3
2
1
10 20 30 40 50 60 70 80
$54321
60503520 5
P QS
Price of Corn
Quantity of Corn
CORN
S3
453020 0 --
Decreasein
Supply
Decreasein QuantitySupplied
GRAPHING SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF SUPPLY
• Resource Prices• Prices of Other Goods• Technology• Taxes & Subsidies• Expectations• Number of Sellers
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF SUPPLY
• Resource Prices• Prices of Other Goods• Technology• Taxes & Subsidies• Expectations• Number of Sellers
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Practice Problems
• Activity 1-6 Parts A & B• Activity 1-7
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
DETERMINANTS OF SUPPLY
• Resource Prices• Technology• Taxes & Subsidies• Prices of Other Goods• Price Expectations• Number of Sellers
Combiningwith
Demand
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
7
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD$5
4321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORNMARKET
CORNMARKET
Market Clearing Equilibrium
MARKET DEMAND & SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
7
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD$5
4321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORNMARKET
CORNMARKETSurplus
At a $4 price
more is being
supplied than
demanded
MARKET DEMAND & SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
117
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD$5
4321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORNMARKET
CORNMARKET
At a $2 price
more is being
demanded than
supplied
Shortage
MARKET DEMAND & SUPPLY
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
117
SP
Qo
$5
4
3
2
1
2 4 6 8 10 12 14 16
P QD$5
4321
2,0004,0007,000
11,00016,000
$54321
12,00010,000
7,0004,0001,000
D
P QS
Price of Corn
Quantity of Corn
CORNMARKET
CORNMARKET
Shortage
MARKET DEMAND & SUPPLY Surplus
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
MARKET EQUILIBRIUM • Equilibrium Price & Quantity• Rationing Function of Prices• Changes in Demand• Changes in Quantity
Demanded• Changes in Supply• Changes in Quantity Supplied
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Single Shifts• Supply Increases• Supply Decreases• Demand Increases• Demand Decreases
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Double Shifts• Supply Increases &
Demand Decreases• Supply Decreases &
Demand Increases• Supply Increases &
Demand Increases• Supply Decreases &
Demand Decreases
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Double Shifts• Supply increase;
Demand decrease• Supply decrease;
Demand increase• Supply increase;
Demand increase• Supply decrease;
Demand decrease
Price Quantity
?
?
?
?
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Consumers, Producers, and the Efficiency
of Markets
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Welfare Economics• Welfare economics is the study
of how the allocation of resources affects economic well-being.
• Market equilibrium maximizes the total welfare of buyers and sellers.
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
CONSUMER SURPLUS
• Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
How the Price Affects Consumer Surplus
Consumersurplus
Quantity
(a) Consumer Surplus at Price P
Price
0
Demand
P1
Q1
B
A
C
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
How the Price Affects Consumer Surplus
Initialconsumer
surplus
Quantity
(b) Consumer Surplus at Price P
Price
0
Demand
A
BC
D EF
P1
Q1
P2
Q2
Consumer surplusto new consumers
Additional consumersurplus to initial consumers
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
PRODUCER SURPLUS
• Producer surplus is the amount a seller is paid for a good minus the seller’s cost.
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
How the Price Affects Producer Surplus
Producersurplus
Quantity
(a) Producer Surplus at Price P
Price
0
Supply
B
A
C
Q1
P1
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
How the Price Affects Producer Surplus
Quantity
(b) Producer Surplus at Price P
Price
0
P1B
C
Supply
A
Initialproducersurplus
Q1
P2
Q2
Producer surplusto new producers
Additional producersurplus to initialproducers
D EF
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
MARKET EFFICIENCY Consumer Surplus + Producer Surplus
=Total Surplus
Efficiency • Free markets maximize efficiency
(total surplus) at equilibrium
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Consumer and Producer Surplus in the Market Equilibrium
Producersurplus
Consumersurplus
Price
0 Quantity
Equilibriumprice
Equilibriumquantity
Supply
Demand
A
C
B
D
E
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Free Response Prompts• “Show” means to use a diagram to illustrate
your answer. Correct labeling is necessary to receive full credit.
• “Explain” means to take the reader through all of the steps or linkages in the line of economic reasoning. Graphs and symbols are acceptable as part of the explanation.
• “Identify” means to provide a specific answer or a label on a graph, without any explanation or elaboration.
• “Calculate” means to use mathematical operations to determine a specific numerical response, along with providing your work.
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DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics
Free Response Strategies• Circle the verbs• Label everything• Messy work loses points• Don’t say too much• Don’t contradict yourself