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What is a Market?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
DemandDemand
• 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
• Chocolate Bar Auction
DemandDemand
• 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
• Law of Demand: An increase in price will cause a decrease in quantity demanded
Application QuestionsApplication Questions
• # 1 – 3 pg. 119
• Work in pairs
• Check answers with others at your table
Law of Diminishing Marginal UtilityLaw 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
Elasticity of DemandElasticity of Demand
• Shows the responsiveness of the quantity demanded to a change in price
• P x Qd = TR (Total Revenue) • Elastic Demand
– %Δ P < %Δ Qd (P TR )
• Inelastic Demand – %ΔP > %ΔQd (P TR )
• Unitary Demand - – %ΔP = %ΔQd (P - TR -)
FACTORS EFFECTING FACTORS EFFECTING ELASTICITY OF DEMANDELASTICITY OF DEMAND
– # 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)
Applications of Elasticity of DemandApplications 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)
• Applications #4, 6 pgs. 119 – 120
• Work in pairs
• Check answers with others at your table
An Increase In the Demand for MelonsAn Increase In the Demand for MelonsP
rice
Quantity Demanded (000’s)0
$1.00
$0.50
15
$1.50
$2.00
$2.50
20 25105
P $
Q
DD DD11
Effect of a Decrease in DemandEffect of a Decrease in Demand P
rice
Lev
el
Quantity Demanded
DD
Q0
DD00
P$
A decrease In the Demand for MelonsA decrease In the Demand for MelonsP
rice
Quantity Supplied (000’s)0
$1.00
$0.50
15
$1.50
$2.00
$2.50
20 25105
P $
Q
DDDD00
Demand ShiftsDemand Shifts
1. Market Size2. Income (Normal / Inferior Goods)3. Price of Substitutes 4. “ “ Complements5. Tastes6. Consumer Expectations
Application QuestionsApplication Questions
• # 5 pg. 119
• Work in pairs
• Check answers with others at your table
The Supply CurveThe 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
The Law of SupplyThe 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
An Increase In the Supply of MelonsAn Increase In the Supply of MelonsP
rice
Quantity Supplied (000’s)
S
0
$1.00
$0.50
15
$1.50
$2.00
$2.50
20 25105
P $
Q
S1
An Increase In the Supply of MelonsAn 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)
A Decrease in the Supply of MelonsA Decrease in the Supply of MelonsP
rice
Quantity Supplied (000’s)
S
0
$1.00
$0.50
15
$1.50
$2.00
$2.50
20 25105
P $
Q
S0
Supply ShiftsSupply Shifts
1. Change in Nature2. Resource Price3. Technology4. Labour Productivity5. # of Producers6. Producer Expectations
Application QuestionsApplication Questions
• #3 pgs. 134 – 135
• Work in pairs
• Check answers with others at your table
• Supply – Demand Game
Demand & Supply Curve ShiftsDemand & Supply Curve Shifts
Demand Causes
1. Market Size2. Income (Normal / Inferior Goods)
3. Price of Substitutes 4. “ “ Complements5. Tastes
6. Consumer Expectations
Supply Causes
1. Change in Nature2. Resource Price3. Technology4. Labour Productivity5. # of Producers6. Producer Expectations
Market EquilibriumMarket Equilibrium
• The point where the supply curve and the demand curve intersect
• At this point, Qd = Qs– (Quantity Demanded = Quantity Supplied)
Equilibrium in the Market for MelonsEquilibrium in the Market for MelonsP
rice
Quantity Supplied (000’s)0
$1.00
$0.50
15
$1.50
$2.00
$2.50
20 25105
P $
Q
DD S
D2
An Increase in the Demand for ComputersAn Increase in the Demand for Computers
Shortage of 100
5
300
(thousands)(thousands)
(Hun
dred
s of
dol
lars
)
D0
A Decrease in the Demand for ComputersA Decrease in the Demand for Computers
Surplus of 100
3
200(thousands)(thousands)
(Hun
dred
s of
dol
lars
)
S2
An Increase in the Supply of ComputersAn Increase in the Supply of Computers
Surplus of 100
3
300
(thousands)(thousands)
(Hun
dred
s of
dol
lars
)
S0
A Decrease in the Supply of ComputersA Decrease in the Supply of Computers
Shortage of 100
5
200(thousands)(thousands)
(Hun
dred
s of
dol
lars
)
Elasticity of SupplyElasticity of Supply
• similar to Demand
• shows the responsiveness of the quantity supply to a change in price
• key factor effecting supply elasticity is time. – Given more time a producer can supply more
of a product in response to higher prices
Elasticity of SupplyElasticity of Supply
• Elastic Goods stored easily, inexpensively & for long periods of time
• Inelastic Goods more perishable
Gov’t Involvement in the MarketGov’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 government feels the price is too high make
the price legally lower. • called a ceiling price problem is Qd > Qs
– Excess Demand / Shortage
Gov’t Intervention in the MarketGov’t Intervention in the Market
• If the government feels the price is too low then they make the price legally higher
• called a floor price problem is Qs > Qd– Excess Supply / Surplus
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