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Supply and Demand in a Product or Service Market

Supply and Demand in a Product or Service Market. Kevin L. Woods CMA, CFM, CTP, MBA. Objectives. Define and explain demand in a product or service market Define and explain supply in a product or service market

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Supply and Demand in a Product or Service Market

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  1. Supply and Demandin aProduct or Service Market Kevin L. Woods CMA, CFM, CTP, MBA

  2. Objectives • Define and explain demandin a product or service market • Define and explain supply in a product or service market • Determine the equilibrium point in the market for a specific good or service, given data on supply and demand at different price levels

  3. Objectives Continued • Understand shifts in demand and supply • Understand how price ceilings cause shortages • Understand how price floors cause surpluses

  4. Demand • The scheduleof quantities of a good or service that people are willing and able to buy at different prices • Sometimes a schedule is also called a table

  5. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  6. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  7. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  8. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  9. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  10. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  11. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  12. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  13. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  14. Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  15. Table 1 is the Demand Schedule Figure 1 is the Graph of the Demand Schedule Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1 The line is the Demand Curve

  16. Quantity Demanded is a point on the Demand Curve Price and Quantity Demanded are inversely related Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  17. Quantity Demanded is a point on the Demand Curve Remember, Demand is the entire schedule or the entire curve Table 1 Price QD $500 1,000 450 3,000 400 7,000 350 12,000 300 19,000 250 30,000 200 45,000 150 57,000 100 67,000 Figure 1

  18. Supply • Is the schedule of quantities of a good or service that people are willing to sell at various prices

  19. Supplyis the entire schedule or the entire curve Price and Quantity Supplied have a positive relationship Price QS $500 62,000 $450 59,000 $400 54,000 $350 48,000 $300 40,000 $250 30,000 $200 16,000 $150 7,000 $100 2,000

  20. Remember, Supply is the entire schedule or the entire curve Quantity Suppliedis a point on the curve Price QS $500 62,000 $450 59,000 $400 54,000 $350 48,000 $300 40,000 $250 30,000 $200 16,000 $150 7,000 $100 2,000

  21. Demand and Supply Curves Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000 Equilibrium price is the price where QD = QS We can find equilibrium price and quantity by seeing where the supply and demand curves cross

  22. Demand and Supply Curves Surpluses and Shortages Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000 54,000-7,000 = 44,000 Equilibrium price = EPMarket price = MP MP > EP there is a surplus

  23. Demand and Supply Curves Surpluses and Shortages Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000 54,000-7,000 = 44,000 A surplus would force sellers to lower their prices. Eventually, prices would fall back to the equilibrium price Equilibrium price = EPMarket price = MP

  24. Demand and Supply Curves Surpluses and Shortages Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000 57,000-7,000 = 44,000 Equilibrium price = EPMarket price = MP MP < EP here is a shortage

  25. Demand and Supply Curves Surpluses and Shortages Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000 57,000-7,000 = 44,000 A shortage would allow sellers to raise their prices. As prices increased people would buy less. Eventually, prices would move back to the equilibrium price Equilibrium price = EPMarket price = MP

  26. Demand and Supply Curves Surpluses and Shortages Price QS QD $500 62,000 1,000 $450 59,000 3,000 $400 54,000 7,000 $350 48,000 12,000 $300 40,000 19,000 $250 30,000 30,000 $200 16,000 45,000 $150 7,000 57,000 $100 2,000 67,000 We can see that the forces of demand and supply work together to establish an equilibrium price at which there are no shortages or surpluses

  27. Shifts in Demand Table 4 Price QD1QD2 $500 1,000 12,000 450 3,000 15,000 400 7,000 21,000 350 12,000 30,000 300 19,000 40,000 250 30,000 55,000 200 45,000 63,000 150 57,000 75,000 100 67,000 88,000 The schedule changes from QD1 to QD2 The demand curve shifts to the right from D1 to D2 This is an increase in demand

  28. Shifts in Demand Table 4 Price QD1QD2 $500 1,000 12,000 450 3,000 15,000 400 7,000 21,000 350 12,000 30,000 300 19,000 40,000 250 30,000 55,000 200 45,000 63,000 150 57,000 75,000 100 67,000 88,000 The schedule changes from QD2 to QD1 The demand curve shifts to the left from D2 to D1 This is a decrease in demand

  29. Shifts in Supply Price If the Supply schedule changes the Supply curve shifts S S 500 450 400 350 300 250 200 Supply decreases . . . the curve shifts to the left 150 100 50 D 10 20 30 40 50 60 70 Quantity (in thousands)

  30. Shifts in Supply Price If the Supply schedule changes the Supply curve shifts S S 500 450 400 350 300 250 200 150 Supply increases . . . the curve shifts to the right 100 50 D 10 20 30 40 50 60 70 Quantity (in thousands)

  31. Shifts in Supply Price If the Supply curve is S1what is the equilibrium price and quantity? S2 S1 500 450 400 350 300 250 The equilibrium price is approximately 262 or 263 200 150 100 The equilibrium quantity is approximately 35,000 50 D 10 20 30 40 50 60 70 Quantity (in thousands)

  32. Shifts in Supply Price If the Supply curve changes to S2what is the new equilibrium price and quantity? S2 S1 500 450 400 350 300 250 The new equilibrium price is approximately 325 200 150 100 The new equilibrium quantity is approximately 26,000 50 D 10 20 30 40 50 60 70 Quantity (in thousands)

  33. Shifts in Supply Price Is a shift from S1 to S2 an increase or decrease in Supply? S2 S1 500 450 400 350 300 250 A decrease 200 150 100 50 D 10 20 30 40 50 60 70 Quantity (in thousands)

  34. Price Floors and Ceilings The price can go no lower than the floor. The surplus is the amount by which the quantity supplied is greater than the quantity demanded A price floor creates a permanent surplus

  35. Price Floors and Ceilings The price can go no higher than the ceiling. The shortage is the amount by which the quantity demanded is greater than the quantity supplied A price ceiling creates a permanent shortage

  36. Applications of Supply and Demand • Interest rates are set by • Supply and demand • Wage rates are set by • Supply and demand • Rents are determined by • Supply and demand • Prices of nearly all goods are determined by • Supply and demand • Prices of nearly all services are determined by • Supply and demand

  37. Hypothetical Demand for and Supply of Loanable Funds We can see that $600 billion is lent (or borrowed) at an interest rate of 6% What would happen if the supply of loanable funds increased?

  38. Hypothetical Demand for and Supply of Loanable Funds The interest rate would decrease to 4% and the amount of money borrowed would increase to $800 billion

  39. Hypothetical Demand for and Supply of Loanable Funds If the demand for loanable funds rises to D2the interest rate would rise to 9% and the amount of money borrowed would rise to $700 billion

  40. Price Mechanism(The Forces of Supply & Demand) • Operates an automatic guidance system • Sometimes this is called the “invisible hand” • Efficiently allocates the limited means of production toward the satisfaction of human wants • Provides consumers with an endless stream of goods and services

  41. Summary • Demand • Supply • Equilibrium Point • Shifts in Demand and Supply • Price Ceilings • Price Floors

  42. Consider the Following • Professional Athletes: How much is a superstar in the NBA or WBA (such as Shaquille o’Neal, Lebron James, Lisa Leslie, Chamique Holdsclaw) paid compared to an average player? • Automobiles: Do you think you’d pay more for a 1962 Corvette or a 2011 Corvette (assuming that both are in good condition)? • Rocks: Which costs more, diamonds or gravel?

  43. Construction Nails Long ago, when houses made of wood were first built, nails were very expensive. It seems funny to us today, but it’s true. Each nail had to be made by hand, pounded unto shape by a blacksmith. Though it wasn’t difficult, it took time. Even a good blacksmith wouldn’t be able to make more than a few hundred nails in an entire day. On the other hand, there are machines today that can manufacture thousands of nails an hour. Because they are so much easier to acquire now-that is, because there is a greater supply of nails-the price has dropped substantially.

  44. Go tohttp://www.kevinwoodscfo.com/LSCC.htmlto download this PowerPoint PresentationTHANK YOU!

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