unit 2. the law of demand states that as price decreases, quantity demanded increases. an inverse...
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Unit 2
Demand, Supply, & Equilibrium
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Section 1: Demand
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• The law of demand states that as price decreases, quantity demanded increases. • An inverse relationship exists.
• The law of demand is dependent on ceteris paribus- all other factors remaining unchanged.
Law of Demand
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• A change in quantity demanded caused ONLY by a change in the PRICE of the product. On a graph it is represented by a movement ALONG a SINGLE demand curve.
A Change in Quantity Demanded
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• Sometimes, factors other than price affect people’s desire to purchase a good or service.
• When something other than the price of a good affects people’s willingness to buy, there is a CHANGE IN DEMAND
Changes in demand
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Increase in Demand Decrease in Demand
• Quantity Demanded decreases at every price
• Entire curve moves left.
• Quantity Demanded increases at every price
• Entire curve moves right
Changes in Demand
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• These factors will cause a CHANGE IN DEMAND• QUANTITY
DEMANDED will change (increase or decrease) at every possible price
• The curve will shift to the left or right
Determinants
Changes in Consumer
Tastes
Change in the # of Buyers
Change in Consumer incomes
Change in consumer
expectations
Changes in the price of Complemen
ts and Substitutes
Determinants of Demand (Cause Shifts)
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Changes in Customer tastes• If an item is currently “popular”
demand will increase
• Celebrity endorsements can also effect demand
Determinants of Demand
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Changes in Consumer Income • An increase in income shifts the demand curve of normal
goods to the right. Inferior goods to the left.
• A decrease in income shifts the demand curve for normal goods to the left. Inferior goods to the right.
Determinants of Demand
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Inferior goods
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Prices of related goods• Complements - an increase in the price of a complement reduces
demand, shifting the demand curve to the left.
• Substitutes - an increase in the price of a substitute product increases demand, shifting the demand curve to the right.
Determinants of Demand
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Number of potential buyers• an increase in population or market size shifts the demand curve to
the right.
Determinants of Demand
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Changes in Consumer Expectations (of a price change) • a news report predicting higher prices in the future can increase
the current demand as customers increase the quantity they purchase in anticipation of the price change.
Determinants of Demand
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Section 2: Supply
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• The law of Supply states that as price decreases, quantity supplied decreases. • A DIRECT relationship exists.
• The law of supply is also dependent on ceteris paribus- all other factors remaining unchanged.
Law of Supply
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• Direct relationship between price and quantity
• Curve ALWAYS has a positive slope
Supply Schedule and Curve
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• A change in quantity Supplied is caused ONLY by a change in the PRICE of the product. On a graph it is represented by a movement ALONG a SINGLE Supply curve.
A Change in Quantity Supplied
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• Sometimes, factors other than price affect a businesses desire to produce a good or service.
• When something other than the price of a good affects businesses willingness to produce, there is a CHANGE IN SUPPLY
Changes in Supply
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Increase in Supply Decrease in Supply
• Quantity Supplied decreases at every price
• Suppliers will offer goods at higher prices
• Entire curve moves left.
• Quantity Supplied increases at every price
• Suppliers will offer goods at lower price
• Entire curve moves right
Changes in Supply
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• These factors will cause a CHANGE IN SUPPLY• QUANTITY SUPPLIED
will change (increase or decrease) at every possible price
• The curve will shift to the left or right
Determinants
Changes in
Technology
Change in the # of Sellers
Change in input costs
Change in Supplier
expectations
Determinants of Supply (Cause Shifts)
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Determinants of SupplyPrices of inputs• If the price of resources used to make goods increases, sellers will be less
inclined to make the same quantity at a given price, and the supply curve will shift left
• Inputs include• Raw materials• Cost of labor• Rent
Government can Influence
• Subsidies (payments made for production)• Increases supply
• Regulation (increase cost of production)• Decrease supply
• Taxes• Increase = suppliers produce less• Decrease = suppliers produce more
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Determinants of SupplyTechnology• If technology increases efficiency, it will cost producers less to make an
item, and they will provide more
• (shift right)
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Determinants of SupplyNumber of Sellers• More sellers = More supply (shift right)
• Less sellers = Less supply (shift left)
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Determinants of SupplyProducer Expectations• If sellers expect prices to increase they will decrease supply now so
that they can increase supply after prices change.
• (shift left)
• For example, if farmers expect the future of the price of corn to decline, they will increase their present supply of corn, in the hopes of making more money now.
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EquilibriumSection 3
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Equilibrium• Equilibrium price refers to the price that makes the
quantity demanded equal to the quantity supplied. • Equilibrium in a market occurs when the price balances the plans of
buyers and sellers. It sets the value of the product.
• On a supply and demand curve, equilibrium price is represented by the point where the demand and supply curves intersect.
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equilibrium
equilibriumprice
equilibriumquantity
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• A surplus is a situation where there is an excess at some price of quantity supplied over quantity demanded.
• On a supply and demand curve a surplus is represented by points above the equilibrium price.
• When a surplus exists buyers have an oversupply of product to choose from and will probably pay less for goods and services.
• For sellers, they will be forced to lower prices, but will sell more.
Surplus
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• A shortage is a situation where there is an excess at some price of quantity demanded over quantity supplied.
• On a supply and demand curve a shortage is represented by points below the equilibrium price.
• When a shortage exists buyers are competing with one another for limited quantities of goods.
• For sellers, it is an opportunity to raise prices and increase sales.
Shortage
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Price FloorA price floor set above the market equilibrium price
Consumers find they must now pay a higher price for the same product.
• As a result, they reduce their purchases or drop out of the market entirely.
Suppliers find they are guaranteed a new, higher price than they were charging before.
• As a result, they increase production.
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Example
Minimum Wage•Sets lowest wage that can be paid for an hour of work.•Allows people to maintain a standard of living, but creates a surplus of workers (unemployment) if set too high
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Price Ceiling
A price ceiling is a government-imposed limit on the price charged for a product.
Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable. • However, a price ceiling
can cause problems if imposed for a long period without controlled rationing.
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Example
Rent Control•When soldiers returned from World War II and started families (which increased demand for apartments), but stopped receiving military pay, many could not deal with the jumping rent. • The government put in price controls, so soldiers and their families could pay the rent and keep their homes. • This increased the quantity demanded for apartments and lowered the quantity supplied, meaning that available apartments were rapidly taken until none left were for late-comers.
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• When there is a change in Supply or Demand, equilibrium price and equilibrium quantity are affected.
Shifts
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Shifts in Demand and Supply
AP Microeconomics Visual Visual 2.6National Council on Economic Education http://apeconomics.ncee.net
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Simultaneous Shifts of Supply and Demand
• When demand increases and supply decreases the equilibrium price definitely increases, but quantity is ambiguous
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Simultaneous Shifts of Supply and Demand
• When demand decreases and supply increases the equilibrium price definitely decreases, but quantity is ambiguous
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Simultaneous Shifts of Supply and Demand
• When demand and supply increase, the change in equilibrium price is ambiguous, but equilibrium quantity definitely increases
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Simultaneous Shifts of Supply and Demand
• When demand and supply decrease, the change in equilibrium price is ambiguous, but equilibrium quantity definitely decreases