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Chapter 6:

Chapter 6:. Demand, Supply & Markets. What is a Market?. Any network that brings buyers and sellers together so they can exchange goods and services Doesn’t have to be a physical place, but can be done over the internet, phone or fax

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Chapter 6:

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  1. Chapter 6: Demand, Supply & Markets

  2. What is a Market? • Any network that brings buyers and sellers together so they can exchange goods and services • Doesn’t have to be a physical place, but can be done over the internet, phone or fax • Exists wherever supply and demand determine the price and quantity of goods and services sold

  3. Demand • Is the quantities of a good or service that buyers are willing and able to purchase at various prices • Demand schedule shows the various prices and quantity demanded at each price • Economists consistently will gather data and put it into a schedule and then to make it visually easier to understand put the schedule into graph form

  4. Demand • Law of Demand: An increase in price will cause a decrease in quantity demanded

  5. The Demand Curve P$ D Price 0 Q Quantity Demanded

  6. Law of Diminishing Marginal Utility • Each additional unit of a good or service that is consumed brings less satisfaction or “utils” than the previous unit consumed • This helps explain why the demand curve is downward sloping

  7. Elasticity of Demand • Shows the responsiveness of the quantity demanded to a change in price • P x Qd = TR (total revenue) • Elastic Demand - • % P < Qd (P +  TR - ) • Inelastic Demand – • P > Qd (P I  TR I) • Unitary Demand - • P = Qd (P I  TR -)

  8. # of substitutes (e.g. margarine and butter) small items in a budget (e.g. pepper, salt) essential items (e.g. water, electricity, natural gas) time (e.g. gasoline) FACTORS EFFECTING ELASTICITY OF DEMAND

  9. Applications of Elasticity of Demand • the more inelastic an item the more heavily it can successfully be used to raise tax revenue (e.g. cigarettes, gas & alcohol)

  10. Effect of an Increase in Demand P$ D1 D Price Level 0 Q Quantity

  11. An Increase In the Demand for Melons P $ D D1 $2.50 $2.00 Price $1.50 $1.00 $0.50 0 Q 5 10 15 20 25 Quantity Demanded (000’s)

  12. Effect of a Decrease in Demand P$ D D0 Price Level 0 Q Quantity Demanded

  13. A decrease In the Demand for Melons P $ D D0 $2.50 $2.00 Price $1.50 $1.00 $0.50 0 Q 5 10 15 20 25 Quantity Supplied (000’s)

  14. The Supply Curve • Supply • The quantities of a good or service that sellers are willing and able to sell at various prices • Similar to demand, supply can be shown as a schedule and then as a graph

  15. The Law of Supply Law of Supply • Increase in price (P) will increase quantity supplied (Qs) • Decrease in price (P) will decrease quantity supplied (Qs) • Direct relationship between P and Qs

  16. An Increase In the Supply of Melons P $ S S1 $2.50 $2.00 Price $1.50 $1.00 $0.50 0 Q 5 10 15 20 25 Quantity Supplied (000’s)

  17. An Increase In the Supply of Melons • An increase in supply is represented by a shift in the supply curve to the right (S1). • At each price point, producers are willing to supply more goods. For example, at $1.00, producers were supplying 10,000 units. Now producers are willing to supply 15,000 (an increase of 5,000 units)

  18. A Decrease in the Supply of Melons P $ S0 S $2.50 $2.00 Price $1.50 $1.00 $0.50 0 Q 5 10 15 20 25 Quantity Supplied (000’s)

  19. Causes For Demand Shifting 1. Market Size 2. Income (Normal / Inferior Goods) Price of Substitutes “ “ Complements 5. Tastes Consumer Expectations Causes For Supply Shifting 1. Change in Nature 2. Resource Price 3. Technology 4. Labour Productivity # of Producers Producer Expectations What causes Demand & Supply curves to shift?

  20. Market Equilibrium • The point where the supply curve and the demand curve intersect • At this point, Qd = Qs (quantity demanded = quantity supplied)

  21. Market EquilibriumSupply=Demand P$ S D Price 0 Q Quantity

  22. Equilibrium in the Market for Melons P $ D S $2.50 $2.00 Price $1.50 $1.00 $0.50 0 Q 5 10 15 20 25 Quantity Supplied (000’s)

  23. An Increase in the Demand for Computers 5 (Hundreds of dollars) D2 Shortage of 100 300 (thousands)

  24. A Decrease in the Demand for Computers Surplus of 100 (Hundreds of dollars) 3 D0 200 (thousands)

  25. An Increase in the Supply of Computers Surplus of 100 S2 (Hundreds of dollars) 3 300 (thousands)

  26. A Decrease in the Supply of Computers S0 5 (Hundreds of dollars) Shortage of 100 200 (thousands)

  27. Elasticity of Supply • Similar to Dd shows the responsiveness of the quantity supply to a change in price • The key factor effecting supply elasticity is time. Given more time a producer can supply more of a product in response to higher prices

  28. Elasticity of Supply • Goods that can be stored easily, inexpensively and for long periods of time will be more elastic than more perishable products

  29. Gov’t Involvement in the Market • At times the market system is unfair so in our mixed market system the government steps in to make the situation more fair • If the government feels the price is too high then they make the price legally lower. This is called a ceiling price, but the problem is Qd > Qs

  30. Gov’t Intervention in the Market • If the government feels the price is too low then they make the price legally higher. This is called a floor price, but the problem is Qs > Qd

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