Quantity Demanded Quantity Supplied

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Introduction to Demand and Supply


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Demand and Supply : Demand and Supply The cornerstone of the Free Market Economic System

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PowerPoint Presentation : Adam Smith’s “Invisible Hand” is the guiding principle in a Market Economy

What is Demand? : 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 SUV, but I do not have the Ability to buy one at its current price – I do not have a demand for a Hummer. I am able to buy a SmartCar , I would look funny driving around town in it. I am willing and able to buy a Toyota Camry or a Dodge pick up truck

What is the Law of Demand? : 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

PowerPoint Presentation : Demand Curve Demand Schedule Market Data – sum of all Individual quantity demanded/price combinations “Quantities Demanded At different Prices” $.50 200 $1.00 100 $2.00 50 Bill Sue John The Market 75 50 75 30 40 30 20 10 20 The Market for Gasoline Individual Quantities Demanded at each price Each person individual Preference Market Quantity Demanded at each price

PowerPoint Presentation : Price Of Gasoline Quantity of Gasoline $.50 Market for Gasoline 200 . $1.00 100 . $2.00 50 . Demand* 150 300 75 Demand Curve Demand Schedule Market Data – sum of all Individual quantity demanded/price combinations “Quantities Demanded At different Prices” The individual quantities demanded are added HORIZONTALLY to derive the MARKET QUANTITY At each price (at $.50 add 75+50 +75 To get 200 gal. of gasoline

PowerPoint Presentation : Price Of Gasoline Quantity of Gasoline $.50 Market for Gasoline 200 . $1.00 100 . $2.00 50 . Demand* 150 300 75 Demand Curve Demand Schedule Market Data – sum of all Individual quantity demanded/price combinations “Quantities Demanded At different Prices” The individual quantities demanded are added HORIZONTALLY to derive the MARKET QUANTITY At each price (at $.50 add 75+50 +75 To get 200 gal. of gasoline The Demand Curve is comprised of a significant number of Price/ Quantity Demanded combinations -a change in the price of gasoline causes movement ALONG the Demand Curve

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for ____________________ $1.00 10 Demand* “A” Income Effect Assume I have $10.00 to spend on this good. At a Price of $1.00 my Quantity Demanded is 10—Point “A”

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for ____________________ $1.00 10 Demand* 5 $2.00 “A” “B” Income Effect Assume I have $10.00 to spend on this good . If the PRICE of the good INCREASES to $2.00 then given my income constraint of $10.00 , Quantity Demanded is now 5. I have moved to Point “B” ALONG the DEMAND CURVE.

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for ____________________ $1.00 10 Demand* 5 $2.00 “A” “B” Income Effect Assume I have $10.00 to spend on this good . Why is this true? Because while my INCOME to buy this good has not changed, The PURCHASING POWER of that income has DECREASED.

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for ____________________ $1.00 10 Demand* 20 $.50 “A” “C” Income Effect Assume I have $10.00 to spend on this good . If the PRICE of the good DECREASES to $.50 then given my income constraint of $10.00 , Quantity Demanded is now 20. I have moved to Point “C” ALONG the DEMAND CURVE.

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for ____________________ $1.00 10 Demand* 20 $.50 “A” “C” Income Effect Assume I have $10.00 to spend on this good . Why is this true? Because while my INCOME to buy this good has not changed, The PURCHASING POWER of that income has INCREASED.

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for ____________________ $1.00 10 Demand* 5 20 $.50 $2.00 “A” “B” “C” Income Effect KEY POINT Given a FIXED amount of INCOME, when the PRICE of the Good changes The QUANTITY DEMANDED changes. There is movement ALONG the Demand Curve. If INCOME CHANGES (Increases or Decreases) then the Demand Curve will SHIFT from its fixed position either to the RIGHT or LEFT.

PowerPoint Presentation : Price Of Gasoline 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 more gallons of Gasoline at every price . 150 300 . . 75 . Demand Curve Demand1

PowerPoint Presentation : Price Of Gasoline 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 fewer Gallons of Gasoline at every price . . 25 . Demand1 Demand Curve

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for Oranges $1.00 Demand* “A” Substitution Effect vs Presence of Substitutes On the Market for APPLES 10 PRICE OF _____ QUANTITY OF _________ 10 Demand* $1.00 Market for Apples “A”

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for Oranges $1.00 Demand* “A” Substitution Effect On the Market for APPLES Assume the price of Apples DECREASES to $.50 10 PRICE OF _____ QUANTITY OF _________ 10 Demand* $1.00 Market for Apples “A”

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for Oranges $1.00 Demand* “A” Substitution Effect on the Market for APPLES We move ALONG the Demand curve for APPLES Downward and to the RIGHT to a Quantity Demanded of 15. Where did those 5 additional quantity demanded of Apples come from? 10 PRICE OF _____ QUANTITY OF _________ 10 Demand* $1.00 Market for Apples “A” $.50 15 “B”

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for Oranges $1.00 Demand* “A” Substitution Effect on the Market for APPLES They are going to come from our DEMAND for ORANGES. At $1.00 our Quantity Demanded For Oranges is going to 5 INSTEAD of 10 . 10 PRICE OF _____ QUANTITY OF _________ 10 Demand* $1.00 Market for Apples “A” $.50 15 “B” 5

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for Oranges $1.00 Demand* “A” Substitution Effect on the Market for APPLES Notice what happened to the DEMAND CUVE in the Market for Oranges It shifted to the LEFT (“D1”) from Demand* 10 PRICE OF _____ QUANTITY OF _________ 10 Demand* $1.00 Market for Apples “A” $.50 15 “B” 5 D 1

PowerPoint Presentation : PRICE OF _____ QUANTITY OF _________ Market for Oranges $1.00 Demand* “A” Substitution Effect on the Market for APPLES In the Market for Apples there was a “Substitution Effect”—we moved ALONG the Demand Curve. In the Market for Oranges because of the presence of a Substitute Good We had a shift in the Market Demand Curve 10 PRICE OF _____ QUANTITY OF _________ 10 Demand* $1.00 Market for Apples “A” $.50 15 “B” 5 D 1

PowerPoint Presentation : Price Of Apples Quantity of Apples $.50 Market for Apples 200 . $1.00 100 . $2.00 50 . Demand* What shifts the Demand Curve? Availability of Substitutes – good that can be used in place of a good “The price of oranges INCREASES Dramatically because of a poor harvest.” (There is a SUBSTITION EFFEC T in the Market for Oranges) 150 300 . . 75 . Demand1

PowerPoint Presentation : Price Of Apples 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 of Oranges DECREASES Dramatically because of a record harvest.” (There is a SUBSTITUTION EFFECT In the Market for Oranges) . . 25 . Demand1

Determinants of Demand (Factors That Shift The Demand Curve) : Determinants of Demand (Factors That Shift The Demand Curve) Change in consumer incomes Change in prices of Substitute Goods Change in Consumer taste/preference Change in the number of buyers Change in consumer incomes Change in the prices of complementary Change in consumer expectations

PowerPoint Presentation : 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 more people move to Texas. Texas needs more Gallons of Gasoline at every price 150 300 . . 75 . Demand Curve Demand1

PowerPoint Presentation : Price Of Gasoline 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 more people move OUT OF Texas We need fewer Gallons of Gasoline at every price . . 25 . Demand1 Demand Curve

PowerPoint Presentation : Price Of Oranges Quantity of Oranges $.50 Market for Oranges 200 . $1.00 100 . $2.00 50 . Demand* What shifts the Demand Curve? Changes in Consumer Preferences Consumers express a positive preference for a good. “Study shows that eating an orange a day reduces cancer risks” 150 300 . . 75 . Demand Curve Demand1

PowerPoint Presentation : Price Of Oranges 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

PowerPoint Presentation : Price Of Flashlights 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 “Price of batteries DECREASES” 150 300 . . 75 . Demand1

PowerPoint Presentation : Price Of SUV’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 : 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 : 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 : 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 : 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? : 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 : 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

PowerPoint Presentation : Supply Curve Supply Schedule Market Data – sum of all Individual quantity supplied/price combinations “Quantities Supplied At 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 Quantity Demanded at each price

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Quantity of Gasoline Price Of Gasoline Market for Gasoline S* Supply Curve Quantity Supplied at each price Supply Curve – infinite Number of price and quantity combinations Supply schedule – Quantity supplied at Different prices “THE SAME LOGIC AS THE DEMAND SCHEDULE”

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Quantity of Gasoline Price Of Gasoline Market for Gasoline S* Supply Curve Quantity Supplied at each price Supply Curve – infinite Number of price and quantity combinations Supply schedule – Quantity supplied at Different prices “THE SAME LOGIC AS THE DEMAND SCHEDULE” The Supply Curve is comprised of an infinite number of Price/ Quantity Supplied combinations -a change in the price of gasoline causes movement ALONG the Supply Curve

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Quantity of Gasoline Price Of Gasoline Market for Gasoline S* Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve?

Determinants of Supply Things That Shift Supply Curve : Determinants of Supply Things 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

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Quantity of Gasoline Price Of Gasoline Market for Gasoline S* Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in the price of the resources used to make a good

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Market for Gasoline Quantity of Gasoline Price Of Gasoline $.50 $.50 $.50 S 1 S* Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Resource Price INCREASES “Oil prices skyrocket because of a terrorist attack on key oil fields in the Middle East” – The cost Of producing gasoline INCREASES By $.50

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Market for Gasoline Quantity of Gasoline Price Of Gasoline -$50 -$.50 -$.50 S* S 1 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 DE CREASES By $.50

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Market for Gasoline Quantity of Gasoline Price Of Gasoline $.50 $.50 $.50 S 1 S* Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in Taxes Government INCREASES The Business Tax On gasoline production– The cost Of producing gasoline INCREASES By $.50

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Market for Gasoline Quantity of Gasoline Price Of Gasoline -$50 -$.50 -$.50 S* S 1 Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in Taxes “ Government DECREASES the Business Tax On gasoline production– The cost Of producing gasoline DECREASES By $.50

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Market for Gasoline Quantity of Gasoline Price Of Gasoline $.50 $.50 $.50 S 1 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 INCREASES by $.50

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Market for Gasoline Quantity of Gasoline Price Of Gasoline -$50 -$.50 -$.50 S* S 1 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

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Market for Gasoline Quantity of Gasoline Price Of Gasoline -$50 -$.50 -$.50 S* S 1 Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in Producer Expectations/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”

PowerPoint Presentation : 50 100 150 200 $1.00 $.50 $1.50 $2.00 $2.50 Market for Gasoline Quantity of Gasoline Price Of Gasoline $.50 $.50 $.50 S 1 S* Supply Curve Quantity Supplied at each price What SHIFTS the Supply Curve? Change in Producer Expectations/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”

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