Supply and Demand

1. Supply and Demand Chapter 4

2. Laugher Curve Q. What do you get when you cross the Godfather with an economist? A. An offer you can't understand.

3. Demand Demand means the willingness and capacity to pay.

4. Demand Prices are the tools by which the market coordinates individual desires.

5. The Law of Demand Quantity demanded rises as price falls, other things constant. Quantity demanded falls as prices rise, other things constant. Thus, there is an inverse relationship between price and quantity demanded.

6. The Law of Demand What accounts for the law of demand?

7. The Demand Curve The demand curve is the graphic representation of the law of demand. The demand curve slopes downward and to the right. As the price goes up, the quantity demanded goes down.

8. The Demand Curve The slope tells us that quantity demanded varies indirectly—in the opposite direction—with price.

9. Other Things Constant Other things constant means that all other factors that affect the analysis are assumed to remain constant, whether they actually remain constant or not. These factors may include changing tastes, prices of other goods, even the weather.

10. A Sample Demand Curve

11. Shifts in Demand Versus Movements Along a Demand Curve Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant. Graphically, it refers to the entire demand curve.

12. Shifts in Demand Versus Movements Along a Demand Curve Quantity demanded refers to a specific amount that will be demand per unit of time at a specific price.

13. Shifts in Demand Versus Movements Along a Demand Curve A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded.

14. Shifts in Demand Versus Movements Along a Demand Curve A shift in demand is the graphical representation of the effect of anything other than price on demand.

15. Change in Quantity Demanded

16. Shift in Demand

17. Shift Factors of Demand Shift factors of demand are those that cause shifts in the demand curve to the right or left.

18. Shift Factors of Demand Shift factors of demand include—but are not limited—to the following:

19. Shift Factors of Demand A rise in income will increase demand for goods.

20. Shift Factors of Demand If you expect your income to rise, you may consume more now.

21. The Demand Table The demand table assumes all the following: As price rises, quantity demanded declines. Quantity demanded has a specific time dimension to it.

22. The Demand Table The demand table assumes all the following:

23. From a Demand Table to a Demand Curve You plot each point in the demand table on a graph and connect the points to derive the demand curve.

24. From a Demand Table to a Demand Curve The demand curve graphically conveys the same information that is on the demand table.

25. From a Demand Table to a Demand Curve The curve represents the maximum price that you will for various quantities of a good—you will happily pay less.

26. From a Demand Table to a Demand Curve

27. Individual and Market Demand Goods A market demand curve is the horizontal sum of all individual demand curves. This is determined by adding the individual demand curves of all the demanders.

28. Individual and Market Demand Goods Real world sellers do not add up individual demand curves.

29. Individual and Market Demand Goods They estimate total market demand for their product which becomes smooth and downward sloping curve.

30. Individual and Market Demand Goods The demand curve is downward sloping for the following reasons:

31. From Individual Demandsto a Market

32. Supply Individuals control the factors of production. Factors of production are the resources or inputs, necessary to produce goods or services.

33. Supply Individuals supply factors of production to intermediaries or firms.

34. Supply The analysis of the supply of produced goods has two parts:

35. The Law of Supply Quantity supplied rises as price rises, other things constant. Quantity supplied falls as price falls, other things constant. Thus, there is a direct relationship between price and quantity supplied.

36. The Law of Supply The law of supply is accounted for by two factors:

37. The Supply Curve The supply curve is the graphic representation of the law of supply. The supply curve slopes upward to the right. The slope tells us that the quantity supplied varies directly—in the same direction—with the price.

38. A Sample Supply Curve

39. Shifts in Supply Versus Movements Along a Supply Curve Supply refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant.

40. Shifts in Supply Versus Movements Along a Supply Curve If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.

41. Shifts in Supply Versus Movements Along a Supply Curve Quantity supplied refers to a specific amount that will be supplied at a specific price.

42. Shifts in Supply Versus Movements Along a Supply Curve Changes in price causes changes in quantity supplied represented by a movement along a supply curve.

43. Shift in Supply

44. Change in Quantity Supplied

45. Shift Factors of Supply Shift factors of supply are those factors that cause shifts in the entire supply curve to the left or right.

46. Shift Factors of Supply The following are shift factors of supply:

47. Shift Factors of Supply Changes in the prices of inputs used in the production of a good.

48. Shift Factors of Supply Technology makes costs go down, profits go up, thus the incentive to supply also goes up.

49. Shift Factors of Supply If they expect prices to rise in the future, suppliers may store today's production for an expected windfall later.

50. Shift Factors of Supply If taxes go up, costs also go up, and profits go down, leading suppliers to reduce output.

51. From a Supply Table to a Supply Curve To derive a supply curve from a supply table, you plot each point in the supply table on a graph and connect the points.

52. From a Supply Table to a Supply Curve The supply curve represents the set of minimum prices an individual seller will accept for various quantities of a good.

53. From a Supply Table to a Supply Curve Competing suppliers’ entry into the market places a limit on the price any supplier can charge.

54. Individual and Market Supply Curves The market supply curve is derived by horizontally adding the individual supply curves of each supplier.

55. From Individual Supplies to a Market Supply

56. From Individual Supplies to a Market Supply

57. The Marriage of Supply and Demand The English historian Thomas Carlyle once said: “Teach any parrot the words supply and demand and you’ve got an economist.”

58. The Dynamic Laws of Supply and Demand Supply and demand come together to determine equilibrium quantity and equilibrium price.

59. Excess Supply and Excess Demand Excess supply – prices tend to fall if quantity supplied is greater than quantity demanded. Excess demand – prices tend to rise if quantity demanded is greater than quantity supplied.

60. Price Adjusts The larger the difference between quantity demanded and quantity supplied, the greater the pressure for prices to rise (if there is excess demand) or fall (if there is excess supply.

61. Price Adjusts When quantity demanded equals quantity supplied, prices have no tendency to change.

62. The Marriage of Supply and Demand

63. Equilibrium Equilibrium is a concept in which opposing dynamic forces pushing cancel each other out.

64. Equilibrium In supply and demand analysis, equilibrium means that the upward pressure on price is exactly offset by the downward pressure on price.

65. Equilibrium Equilibrium price is the price toward which the invisible hand drives the market.

66. Equilibrium Isn't: A state of the world—it's a characteristic of the model used to look at the world. Inherently good or bad—but simply a state in which dynamic pressures offset each other.

67. Desirable Characteristics of Supply/Demand Equilibrium Consumer surplus – the distance between the demand curve and the price the demander pays is net benefit to consumers.

68. Desirable Characteristics of Supply/Demand Equilibrium Producer surplus – if a producer receives more than the price he would be willing to sell it for, he receives a net benefit.

69. Desirable Characteristics of Supply/Demand Equilibrium What's good about equilibrium is that it makes the combination of consumer and producer surplus as large as it can be.

70. Desirable Characteristics of Supply/Demand Equilibrium Markets allow trade, thereby leading to an increase in the combination of consumer and producer surplus.

71. Consumer and Producer Surplus

72. Supply and Demand End of Chapter 4