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Unit 2 Supply & Demand

Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

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Page 1: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Unit 2

Supply & Demand

Page 2: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Demand Basics

• Demand Schedule and Demand Curve

Page 3: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Demand Basics

• Demand versus Quantity Demanded

• Demand- quantities consumers are willing and able to buy at various prices

• Quantity Demanded- quantity consumers are willing and able to buy at a given price

Page 4: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Demand Basics

• Demand versus Quantity Demanded

• Demand- the whole curve

• Quantity Demanded- a point on the curve

Page 5: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Demand Basics

• Demand versus Quantity Demanded

• Change in Demand- the whole curve shifts

• Change in Quantity Demanded- move from one point on the curve to another

Page 6: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Demand Basics

• Changes in Demand– Consumer Income

• Normal v. Inferior Goods

– Population– Preference/Taste– Price of Other Goods

• Compliments• Substitutes

– Expectation of Change in Price

Page 7: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Why Demand Slopes Downward?

• Income Effect

• Substitute Effect

• Diminishing Marginal Utility

Page 8: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Why Demand Slopes Downward?

• Income Effect– Higher price = Lower purchasing power– Lower price = Higher purchasing power– “ability to buy”

Page 9: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Why Demand Slopes Downward?

• Substitute Effect- think opportunity cost– Higher price = Lower relative price of substitutes– Lower price = Higher relative price of substitutes

Page 10: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Why?

• 1st pizza for full price ($11.00), get a 2nd for $5?

Page 11: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Why?

• Buy one pair at regular price and get the second pair half off?

• BOGO Days!

Page 12: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Why Demand Slopes Downward?

• Diminishing Marginal Utility

Page 13: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Why Demand Slopes Downward?

• Diminishing Marginal Utility– MU= satisfaction quantified in dollars of an

additional unit of consumption

– Marginal Utility ALWAYS* decreases with additional consumption

Page 14: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Why Demand Slopes Downward?

• Diminishing Marginal Utility/Benefit

• Cost-Benefit Analysis– How many slices will you consume?– MU=MC– MB=MC

Page 15: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Individual & Market Demand Curve

• Horizontal sum of individual demand curves

Page 16: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Supply Basics

• Supply Schedule and Supply Curve

Page 17: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Supply Basics

• Supply versus Quantity Supplied

• Supply - quantities producers are willing and able to sell at various prices

• Quantity Supplied- quantity producers are willing and able to sell at a given price

Page 18: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Supply Basics

• Supply versus Quantity Supplied

• Supply - the whole curve

• Quantity Supplied- a point on the curve

Page 19: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Supply Basics

• Change in Supply - the whole curve shifts

• Change in Quantity Supplied- move from one point on the curve to another

Page 20: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Supply Basics- Changes

• # of Producers

• Technology

• Price of Inputs

• Substitutes of Production

• Compliments of Production

• Taxes and Subsidies

• Other Regulations

Page 21: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 22: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Individual & Market Supply Curve

• Horizontal sum of individual supply curves

Page 23: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 24: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

What if they both shift?

• Equilibrium Price?

• Equilibrium Quantity?

• One change is certain

• The other is ambiguous

Page 25: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

What if they both shift?

• Coffee– New Rebecca Black Song– New Fertilizer

Page 26: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

What if they both shift?

• Same Shift- know Q

• Opposite Shift- know P

Page 27: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Equilibrium Price = Market Clearing Price

Page 28: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Let’s Review

• Shifts

• Double Shifts

• Ceilings and Floors

• Shortage and Surplus

• ------------------------------------------

• Quantifying Shortage and Surplus

• Other Effects of Ceilings and Floors

Page 29: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 30: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 31: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 32: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 33: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 34: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

PED

Page 35: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

PED

• Relationship between % change in price and % change in quantity

Page 36: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

PED

Perfectly Inelastic = 0

Unit Elastic = 1

Perfectly Elastic =

Page 37: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

PED

Perfectly Inelastic = 0

Unit Elastic = 1

Perfectly Elastic =

• Inelastic <1

• Unit Elastic = 1

• Elastic > 1

Page 38: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

If the market price is above equilibrium price…

Page 39: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

If the market price is below equilibrium price…

Page 40: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 41: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve
Page 42: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

S & D for Non-Smart Phones (inferior good)

• Decrease in unemployment

P

Q

Page 43: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

S & D for Non-Smart Phones (inferior good)• Increase in the price of Smart Phones

P

Q

P

Q

Page 44: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

S & D for Non-Smart Phones (inferior good)• Gov’t subsidy for the production of smart

phones

P

Q

P

Q

Page 45: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price ControlsEffects beyond Surpluses and

Shortages

Page 46: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price ControlsEffects beyond Surpluses and

Shortages

• BOTH reduce the quantity of a good bought and sold

Page 47: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price Ceilings

• Shortages

• Inefficiencies

• Black Markets

Page 48: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price Ceilings- Inefficiencies

• Misallocation of Resources– Need and willingness to pay

• Wasted Resources– Time and money spent overcoming the

shortage

• Inefficiently Low Quality

Page 49: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price Ceilings- Black Markets

• Illegal Markets

• Prices ABOVE equilibrium– Prices account for additional cost in the form

of risk

Page 50: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

How to stop Canal Street Sales?

Page 51: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price Ceilings Non-Binding

• Set above equilibrium

• Market prices will remain below the ceiling

Page 52: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price Floors Non-Binding

• Set below equilibrium

• Market prices will remain above the floor

Page 53: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price Floors

• Surpluses

• Inefficiencies

• Black Markets

Page 54: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price Floors- Inefficiencies

• Misallocation of Resources– Those willing to sell at the lowest price do not

always succeed

• Wasted Resources

• Inefficiently High Quality

Page 55: Unit 2 Supply & Demand. Demand Basics Demand Schedule and Demand Curve

Price Floors- Black Markets

• Illegal Markets

• Prices below equilibrium– Prices account for the relatively low number of

consumers willing to break the law