the cornerstone of the free market economic system
TRANSCRIPT
The cornerstone of the Free Market Economic System
Demand and Supply
What is Demand?
• Demand – “the Willingness and Ability of a buyer to purchase differing quantities of particular good and/or service at different prices.”
– There is NO demand for a good or service until this requirement is met• I am Willing to buy a Hummer, but I do not have the
Ability to buy one at its current price – I do not have a demand for a Hummer.
What is the Law of Demand?
• States that:– As the price of a good or service decreases, the
quantity demanded will increase,– As the price of a good or service increases the
quantity demanded will decrease
• There is an INVERSE relationship between the price and quantity demanded
Demand Curve
Demand Schedule
Market Data – sumof all Individual quantitydemanded/price combinations
“Quantities DemandedAt different Prices”
$.50 200
$1.00 150
$2.00 50
Bill Sue John The Market
75 50 100
60 40 50
20 10 20
The Market for Gasoline
Individual Quantities Demanded at each price
Market QuantityDemanded at each price
Price OfGasoline
Quantity of Gasoline
$.50
Market for Gasoline
200
.$1.00
100
.$2.00
50
.
Demand*
150 30075
Demand Curve
Demand Schedule
Market Data – sumof all Individual quantitydemanded/price combinations
“Quantities DemandedAt different Prices”
The individual quantities demandedare added HORIZONTALLY to derive the MARKET QUANTITY At each price (at $.50 add 75+50 +75To get 200 gal. of gasoline
Price OfGasoline
Quantity of Gasoline
$.50
Market for Gasoline
200
.$1.00
100
.$2.00
50
.
Demand*
150 30075
Demand Curve
Demand Schedule
Market Data – sumof all Individual quantitydemanded/price combinations
“Quantities DemandedAt different Prices”
The individual quantities demandedare added HORIZONTALLY to derive the MARKET QUANTITY At each price (at $.50 add 75+50 +75To get 200 gal. of gasoline
The Demand Curve is comprisedof an infinite number of Price/Quantity Demanded combinations -a change in the price of gasolinecauses movement ALONG theDemand Curve
Determinants of Demand(Factors That Shift The Demand Curve)
• Change in Consumer taste/preference• Change in the number of buyers• Change in consumer incomes• Change in the prices of complementary
and substitute goods• Change in consumer expectations
Price OfGasoline
Quantity of Gasoline
$.50
Market for Gasoline
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
Changes in Income
Income INCREASES
We can afford 50% moregallons of Gasoline atevery price.
150 300
..
75
.Demand Curve
Demand1
Price OfGasoline
Quantity of Gasoline
$.50
Market for Gasoline
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
Changes in Income
Income DECREASES
We can afford 50% fewerGallons of Gasoline at every price
..
25
.Demand1
Demand Curve
Price Of
Quantity of Gasoline
$.50
Market for gasoline
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
Changes in Number of Buyers
INCREASES – because of economic opportunities morepeople move to Texas.
Texas needs 50% more Gallons of Gasoline at every price
150 300
..
75
.Demand Curve
Demand1
Price OfGasoline
Quantity of Gasoline
$.50
Market for Gasoline
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
Changes in Number of Buyers
DECREASES – because of economic opportunities morepeople move OUT OF Texas
We need 50% fewerGallons of Gasoline at every price
..
25
.Demand1
Demand Curve
Price OfOranges
Quantity of Oranges
$.50
Market for Oranges
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
1. Changes in Consumer Preferences
1. Consumers express a positive preference for a good.
“Study shows that eatingan orange a day reduces cancer risks” 150 300
..
75
.Demand Curve
Demand1
Price OfOranges
Quantity of Oranges
$.50
Market for Oranges
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
Changes in Consumer Preferences
1. Consumers express a negative
Preference for a good.
“Study shows that eating oranges
stunts your growth” (or something
Ridiculous like that…)
..
25
.Demand1
Demand Curve
Price OfApples
Quantity of Apples
$.50
Market for Apples
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
1. Availability of Substitutes – good that
can be used in place of a good
“The price of oranges INCREASES
Dramatically becauseof a poor harvest.”
150 300
..
75
.
Demand1
Price OfApples
Quantity of Apples
$.50
Market for Apples
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
1. Availability of Substitutes
“The price ofOrangesDECREASES Dramaticallybecause of a recordharvest.”
..
25
.Demand1
Price OfFlashlights
Quantity of Flashlights
$.50
Market for Flashlights
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
Changes in thePrice of aComplement – A good thatis typically used with another good
“Price ofbatteriesDECREASES” 150 300
..
75
.
Demand1
Price OfSUV’s
Quantity of flashlights
$.50
Market for Flashlights
200
.$1.00
100
.$2.00
50
.
Demand*
What shifts the Demand Curve?
Changes in the Price of a Complement -A good that is
typically used with another good
“Battery prices INCREASE”
..
25
.Demand1
Demand---The relationship of of one good to another when Income Changes IF Income INCREASES and the
Demand for a good INCREASES, then that good is called a NORMAL GOOD. Make more money and you want more
steak, luxury cars, vacations, etc. If Income DECREASES and the
Demand for a good DECREASES , then that good is called a NORMAL GOOD. Make less money and you want less steak,
fewer luxury cars, fewer vacations, etc
Demand---The relationship of of one good to another when Income Changes If Income INCREASES and the Demand
for a good DECREASES, then that good is called an INFERIOR GOOD. Make more money and you want fewer Hot
dogs, fewer Kia’s, fewer vacations to local parks, etc
If Income DECREASES and the Demand for a good INCREASES, then that good is call an INFERIOR GOOD, Make less money and you want more hot dogs,
more Kia’s, more trips to local parks, etc.
SUBSTITUTES If two goods are Substitutes: when the
Price of Good 1 INCREASES then the DEMAND for the SUBSTITUTE (Good 2) INCREASES.
If two goods are Substitutes: when the Price of Good 1 DECREASES then the DEMAND for the SUBSTITUTE (Good 2) DECREASES
There is a DIRECT relationship when the price of one good changes and the effect on the DEMAND for the
other---SUBSTITUTES!!!
COMPLEMENTS If two goods are Complements: when
the Price of Good 1 INCREASES then the DEMAND for the Complement (Good 2) DECREASES.
If two goods are Complements: when the Price of Good 1 DECREASES then the DEMAND for the Complement(Good 2) INCREASES There is an INVERSE relationship when the price of one good changes and the effect on the DEMAND for
the other---COMPLEMENTS!!!
What is Supply?
• Supply – “The Willingness and Ability of sellers to produce and offer for sale different quantities of goods and/or services at different prices”
– You must now think as a producer – you want to get the highest price possible if you are going to work harder to supply more
What is the Law of Supply
• States that:– As the price of a good or service increases the
quantity supplied will increase– As the price of a good or service decreases the
quantity supplied will decrease
There is a DIRECT relationship between price and quantity supplied
Supply Curve
Supply Schedule
Market Data – sumof all Individual quantitysupplied/price combinations
“Quantities SuppliedAt different Prices”
$.50 50
$1.00 100
$2.00 200
Gas #1 Gas #2 Gas #3 The Market
10 15 25
40 10 50
50 50 100
The Market for Gasoline
Individual Quantities Supplied at each price
Market QuantityDemanded at each price
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Quantity of Gasoline
PriceOfGasoline
Market for Gasoline
S*
Supply Curve
Quantity Supplied at each price
Supply Curve – infiniteNumber of price andquantity combinations
Supply schedule – Quantity supplied at Different prices
“THE SAME LOGIC AS THE DEMAND SCHEDULE”
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Quantity of Gasoline
PriceOfGasoline
Market for Gasoline
S*
Supply Curve
Quantity Supplied at each price
Supply Curve – infiniteNumber of price andquantity combinations
Supply schedule – Quantity supplied at Different prices
“THE SAME LOGIC AS THE DEMAND SCHEDULE”
The Supply Curve is comprisedof an infinite number of Price/Quantity Supplied combinations -a change in the price of gasolinecauses movement ALONG theSupply Curve
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Quantity of Gasoline
PriceOfGasoline
Market for Gasoline
S*
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Determinants of SupplyThings That Shift Supply Curve
• Change in Resource Prices (Input Prices)• Change in Technology• Change in Taxes or Subsidies• Change in producer expectations• Change in number of suppliers• Change in exogenous variables (bad weather, Terrorism,
etc)• BOTTOM LINE ON SUPPLY CURVE SHIFTS
– Anything that increases the cost of production decreases supply– Anything that decreases the cost of production increases supply
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Quantity of Gasoline
PriceOfGasoline
Market for Gasoline
S*
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Change in the priceof the resources used to make a good
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Market for Gasoline
Quantity of Gasoline
PriceOfGasoline
$.50
$.50
$.50
S1
S*
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Resource Price INCREASES
“Oil prices skyrocket because of a terroristattack on key oil fields in the Middle East” – The cost Of producing gasoline INCREASESBy $.50
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Market for Gasoline
Quantity of Gasoline
PriceOfGasoline
-$50
-$.50
-$.50
S*S1
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Resource Price DECREASES
“Oil prices decrease because of new discoveries of Reserves off the coast of California– The cost Of producing gasoline DECREASESBy $.50
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Market for Gasoline
Quantity of Gasoline
PriceOfGasoline
$.50
$.50
$.50
S1
S*
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Change in Taxes
Government INCREASESThe Business TaxOn gasoline production– The cost Of producing gasoline INCREASESBy $.50
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Market for Gasoline
Quantity of Gasoline
PriceOfGasoline
-$50
-$.50
-$.50
S*S1
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Change in Taxes
“Government DECREASES theBusiness Tax On gasolineproduction– The cost Of producing gasoline DECREASESBy $.50
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Market for Gasoline
Quantity of Gasoline
PriceOfGasoline
$.50
$.50
$.50
S1
S*
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Changes in Subsidies(Payment from govt. to Producer)
– SUBSIDY DECREASES -The cost of producing gasoline INCREASESby $.50
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Market for Gasoline
Quantity of Gasoline
PriceOfGasoline
-$50
-$.50
-$.50
S*S1
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Changes in Subsidies(Payment from govt. to
Producer)
– SUBSIDY INCREASES -The cost of producing gasoline DECREASES
by $.50
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Market for Gasoline
Quantity of Gasoline
PriceOfGasoline
-$50
-$.50
-$.50
S*S1
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Change in ProducerExpectations/Exogenous variable -
“Gas prices are expected to decrease in the future because of advances in alternative fuels” (producers make gas to get the higher price today”
50 100 150 200
$1.00
$.50
$1.50
$2.00
$2.50
Market for Gasoline
Quantity of Gasoline
PriceOfGasoline
$.50
$.50
$.50
S1
S*
Supply Curve
Quantity Supplied at each price
What SHIFTS the Supply Curve?
Change in ProducerExpectations/Exogenous variable -
“Gas prices are expected to increase in the future because of an impending natural disaster (producers make LESS gas today to get the higher price in the future”