Demand Increasing and Decreasing---How and Why the Curves Shift.

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Demand Increasing and Decreasing---How and Why the Curves Shift.


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Supply AND Demand Together : Time to get slapped upside the head with “The Invisible Hand” Supply AND Demand Together NOTE: If during the power-point transitions the slides appear “Jumpy” well…they Are…My PPT skills are very average …it is the best I can do…Bear with me… 

PowerPoint Presentation : Price of ___ Quantity of _________ Demand* Supply* P e Q e Market for _______________ The Market for a Good Or Service in Equilibrium Quantity Demanded = Quantity Supplied At “ Qe ” and Price “ Pe ”

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 NOW: Something in this Market causes DEMAND To INCREASE by 50%. Increase in Consumer preference for the good Increase in Income Increase in the price of a Substitute Decrease in the price of a Complement Consumers expect the price of the good to be more expensive in the future Qd=Qs

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Supply* 100 $1.00 This means that at EVERY GIVEN PRICE the Quantity Demanded is Going to be 50% more RELATIVE to the Demand* curve. Qd=Qs Demand*

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qd=Qs This means that at EVERY GIVEN PRICE relative to Demand* the Quantity Demanded is going to be 50% more . $2.00 $.50 50 75 225 +50% +50% +50% Demand 1 Demand*

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qd=Qs Now we have a NEW Demand Curve Demand 1 The Demand Curve has shifted to the RIGHT $2.00 $.50 50 75 225 Demand 1 Demand*

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Let’s assume for the moment that the PRICE does NOT change in reaction to this INCREASE in DEMAND

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 At a price of $1.00 the Quantity Demanded is going to be 150 BUT at a price of $1.00 there is still going to be a Quantity Supplied of 100. OUR MARKET IS IN DIS-EQUILIBRIUM!!

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Notice: Quantity Demanded Is greater than Quantity Supplied At this price At this Price and Quantity Demanded There is no market---The Market Suppliers are NOT going to Supply that Quantity at that price. Quantity Demanded is GREATER than Quantity Supplied

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Notice: Quantity Demanded Is greater than Quantity Supplied At this price Why are Producers NOT going to supply 150 units at $1.00? Because to produce that additional 50 units it is going to cost them more in labor, materials, etc…To produce the additional 50 units they are going to have to get a higher price!!!

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Notice: Quantity Demanded Is greater than Quantity Supplied At this price We have a SHORTAGE in the Market! Shortage

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Notice: Quantity Demanded Is greater than Quantity Supplied At this price How do we eliminate this SHORTAGE? Adam Smith said “the Invisible Hand” Of the market will work to eliminate the Shortage . Shortage

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Notice: Quantity Demanded Is greater than Quantity Supplied At this price This is where it is crucial to understand the difference between a CHANGE in DEMAND or Supply vs a CHANGE in Quantity Demanded or Quantity Supplied

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Notice: Quantity Demanded Is greater than Quantity Supplied At this price With our change in DEMAND finished we now turn the focus to MOVEMENTS along our new DEMAND CURVE Relative to MOVEMENTS along our SUPPLY CURVE…PRICE is going to dictate our changes in Quantity Demanded AND changes in Quantity Supplied

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Because there is a SHORTAGE in this market, the pressure on the price of the good is going to be UPWARD. Let’s assume the Price INCREASES to $1.20.

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 At $1.20 the Quantity Demanded (dictated by DEMAND 1) is 135 AND the Quantity Supplied (Dictated by Supply*) in 115. $1.20 135 115

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 We are STILL not in Market Equilibrium…Quantity Demanded (135) is GREATER than Quantity Supplied (115)…A Shortage STILL exists in this market. The gap has closed some, but we are not in Market Equilibrium yet where Qd =Qs. $1.20 135 Shortage 115

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 The pressure on the price is going to continue...Can you see where we are heading???? The SHORTAGE will only be cleared when we reach the intersection of Demand and Supply!! $1.20 135 115

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Some Demanders are falling by the wayside OR they are reducing their quantity demanded at any given price because as the price increases the quantity demanded decreases (Law of Demand). $1.20 135 115

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 Current suppliers (producers) are INCREASING production (Quantity Supplied) in response to the higher price they are receiving (The Law of Supply) $1.20 135 115

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Qd=150 Qs-100 At a Price of $1.40 (roughly) Qd = Qs at 120 Units. The market is back in Equilibrium. $1.20 135 115 $1.40 120

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ D* Supply* P e D 1 This is a correctly labeled Supply and Demand graph showing an INCREASE in DEMAND…Notice I have replaced the numerical price and quantity with alphabetical designations and abbreviated the Demand and Supply Curves. This makes this is the way I would like you to draw and label your supply and demand graphs from now on. P 1 Q 1 Q e

DECREASE IN DEMAND : DECREASE IN DEMAND

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 ASSUMPTIONS: 1. The Demand and Supply Curves Are rigid (they keep the same Shape/slope) 2. The market equilibrium price is $1.00 and the equilibrium quantity ( Qd =Qs) is 100 units. Qd=Qs

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Demand* Supply* 100 $1.00 Qd=Qs NOW: Something in this Market causes DEMAND To DECREASE by 50%. Decrease in Consumer preference for the good Decrease in Income Decrease in the price of a Substitute Increase in the price of a Complement Consumers expect the price of the good to be LESS expensive in the future

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 Qd=Qs Demand* This means that at EVERY GIVEN PRICE the Quantity Demanded is Going to be 50% LESS RELATIVE to the Demand* curve.

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qd=Qs This means that at EVERY GIVEN PRICE relative to Demand* the Quantity Demanded is going to be 50% LESS . $2.00 $.50 50 75 225 -50% -50% -50% Demand 1 Demand* 25

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qd=Qs This means that at EVERY GIVEN PRICE relative to Demand* the Quantity Demanded is going to be 50% LESS . $2.00 $.50 50 75 225 -50% -50% -50% Demand 1 Demand* 25

Supply and Demand Demand INCREASES : Supply and Demand Demand INCREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 -50% -50% -50% Demand 1 Demand* 25 Now we have a NEW Demand Curve Demand 1 The Demand Curve has shifted to the LEFT

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Demand* 25 Now we have a NEW Demand Curve Demand 1 The Demand Curve has shifted to the LEFT

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Demand* 25 Let’s assume for the moment that the PRICE does NOT change in reaction to this INCREASE in DEMAND

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qd=Qs $2.00 $.50 50 75 225 Demand 1 Demand* 25 At a price of $1.00 the Quantity Demanded is going to be 50 BUT at a price of $1.00 there is still going to be a Quantity Supplied of 100. OUR MARKET IS IN DIS-EQUILIBRIUM!!

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 At this Price and Quantity Demanded There is no market---The Market Demanders are NOT going to Demand that Quantity at that price. Quantity Supplied is GREATER than Quantity Demanded Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 We have a SURPLUS in the Market! Surplus

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 This is where it is crucial to understand the difference between a CHANGE in DEMAND or Supply vs a CHANGE in Quantity Demanded or Quantity Supplied

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 With our change in DEMAND finished we now turn the focus to MOVEMENTS along our new DEMAND CURVE Relative to MOVEMENTS along our SUPPLY CURVE…PRICE is going to dictate our changes in Quantity Demanded AND changes in Quantity Supplied

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 Because there is a SURPLUS in this market, the pressure on the price of the good is going to be DOWNWARD. Let’s assume the Price DECREASES to $.85

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 At $.85 the Quantity Demanded (dictated by DEMAND 1) is 60 AND the Quantity Supplied (Dictated by Supply*) in 85. $.85 60 85

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 $.85 60 85 We are STILL not in Market Equilibrium…Quantity Demanded (60 ) is LESS than Quantity Supplied (85)…A SURPLUS STILL exists in this market. The gap has closed some, but we are not in Market Equilibrium yet where Qd =Qs. Surplus

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 $.85 60 85 The pressure on the price is going to continue...Can you see where we are heading???? The SURPLUS will only be cleared when we reach the intersection of Demand and Supply!!

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 $.85 60 85 As the price decreases Demanders are increasing their Quantity Demanded because as the price Decreases the quantity demanded Increases (Law of Demand).

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 $.85 60 85 Current suppliers (producers) are DECREASING production (Quantity Supplied) in response to the LOWER price they are receiving (The Law of Supply)

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ Supply* 100 $1.00 150 Qs=100 $2.00 $.50 50 75 225 Demand 1 Demand* 25 Notice: Quantity Demanded Is LESS than Quantity Supplied At this price Qd=50 $.85 60 85 At a Price of $.60 (roughly) Qd = Qs at 75 Units. The market is back in Equilibrium. $.60

Supply and Demand Demand DECREASES : Supply and Demand Demand DECREASES Price of ___ Quantity of _________ S* P e Q 1 D 1 D* P1 This is a correctly labeled Supply and Demand graph showing an DECREASE in DEMAND…Notice I have replaced the numerical price and quantity with alphabetical designations and abbreviated the Demand and Supply Curves. This is the way I would like you to draw and label your supply and demand graphs from now on. Qe

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