Embed Size (px)
Citation preview
Supply, Demand, and the Market Process
Chapter 3
1
Opportunity cost of production – Total economic cost of producing a good or service; The value of the production of other goods sacrificed as the result of producing the good
Economic costs are different from accounting costs
2
Supply
Profit – When revenue is greater than the opportunity cost of production◦ The producer has increased the value of the
resources
Loss – When revenue is less than the opportunity cost of production◦ The producer has reduced the value of the
resources
3
Supply
In a pure market economy, ◦ profitable activities will continue and ◦ wasteful (loss) activities will stop, freeing up
resources for more productive uses
4
Supply
There is a direct (positive) relationship between the price of a good and the quantity of it producers are willing to supply◦ When the price rises, quantity supplied rises◦ When the price falls, quantity supplied falls◦ Ceteris paribus!
5
The Law of Supply
The Market Supply Schedule
Pizza Supply Schedule
Price Quantity Supplied
$20 230
16 170
12 110
8 70
4 50
Quantity supplied – the number that people willing to sell at each price
6
The Market Supply CurvePizza Supply
Schedule Pizza Supply Curve
Price Quantity Supplied
$20 230
16 170
12 110
8 70
4 50
50 70 110 170 2300
5
10
15
20
25
Supply
Quantity Pizza
Pri
ce P
izza
7
How much are producers willing to produce and sell at a give price?
What is the minimum price to induce producers to sell?
Represents the opportunity cost of production
8
The Supply Curve: A Tell All Story about Producers
Producer Surplus – the difference between price suppliers actually receive and the minimum price they would be willing to accept.
Represents the net benefit (to all involved in production) of producing the good.
Example: Old Navy makes a shirt for $5. They sell it for $8. Their producer surplus is $8 - $5 = $3
9
Producer Surplus
10
Producer Surplus
Quantity
Pri
ce
Supply
P1
Q1
On a graph, producer surplus is the area above the supply curve and below the price
Elastic and Inelastic Supply Elastic supply
◦ Quantity supplied is quite responsive to a change in price
◦ The supply curve is relatively flat (but still upward sloping)
◦ When it is cheap/easy to expand output, the supply curve will be elastic
11
Quantity
Pri
ceSupply
Pop
Elastic and Inelastic Supply Inelastic supply
◦ Quantity supplied is not very responsive to a change in price
◦ The supply curve is relatively steep (but still upward sloping)
◦ When expanding output is difficult, supply will be inelastic: doctor visits, land, Picasso painting
12
Quantity
Pri
ce
Supply
Used Textbooks (at the end of the semester)
Change in Quantity Supplied vs. Change in Supply
Increase in Quantity Supplied
Increase in Supply
13
Pri
ce
Quantity
Pri
ce
Quantity
S1 S2
Q2Q1
Change in Quantity Supplied vs. Change in Supply
Decrease in Quantity Supplied
Decrease in Supply
14
Pri
ce
Quantity
Pri
ce
Quantity
S2 S1
Q1Q2
Change in Quantity Supplied: caused by a change in the price of the good.
Change in Supply: caused by changes in factors other than a good’s price that influence seller decisions◦ Changes in resource prices◦ Changes in technology◦ Elements of nature and political disruptions◦ Change in taxes
15
Change in Quantity Supplied vs. Change in Supply
When resources prices◦ Fall, supply increases◦ Rise, supply decreases
Supply Shifter #1Change in Resource Prices
When technology improves, supply increases
Supply Shifter # 2 Changes in Technology
Change in weather conditions War, political unrest
Supply Shifter # 3 Elements of Nature and Political Disruptions
When taxes increase, supply falls
Supply Shifter #4 Changes in Taxes
Market – a concept encompassing the forces of supply and demand
Equilibrium – when quantity supplied equals quantity demanded
20
Market Equilibrium
Excess demand – puts upward pressure on the price
Excess supply – puts downward pressure on the price
When Qs and Qd are not in balance, the price will change
21
Market Equilibrium
A situation in which all the gains from trade have been realized.
With well-defined property rights and competition, market equilibrium is efficient!
22
Economic Efficiency
23
Economic Efficiency
Quantity
Pri
ceS
P1
Q1
P.S.
C.S.
D
Market Equilibrium and Changes in Supply and Demand
Increase in Demand◦ Higher Price◦ Higher Quantity
Increase in Quantity Supplied
Example: Natural gas, which is used to heat homes, during the snowpocalypse of 2014
24
Price Natural Gas
Quantity Natural Gas
D1
D2
S1
Q2Q1
P1
P2
Market Equilibrium and Changes in Supply and Demand
Decrease in Demand◦ Lower Price◦ Lower Quantity
Decrease in Quantity Supplied
Example: Bathing suits, during the polar vortex of 2014
25
Price Bathing Suits
Quantity Bathing Suits
D2
D1
S1
Q1Q2
P2
P1
Market Equilibrium and Changes in Supply and Demand
Increase in Supply◦ Lower Price◦ Higher Quantity
Increase in Quantity Demanded
Example: an early winter freeze and ice wine
26
Price Ice Wine
Quantity Ice Wine
D1
S1
Q2Q1
P1
P2
S2
Market Equilibrium and Changes in Supply and Demand
Decrease in Supply◦ Higher Price◦ Lower Quantity
Decrease in Quantity Demanded
Example: Livestock need extra feed and shelter to cope w cold
27
Price Beef
Quantity Beef
D1
S2
Q1Q2
P2
P1
S1
Market prices communicate information to decision makers
Prices coordinate actions of market participants
Prices motivate economic players
28
The Miracle of Markets
Describe consumer behavior. Separate the difference between a change
in demand and a change in quantity demanded.
Describe firm behavior. Separate the difference between a change
in supply and a change in quantity supplied. Investigate how a market establishes an
equilibrium price.
29
Chapter 3 Objectives
