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Demand, Supply, and Equilibrium Microeconomics – Unit 2: Nature and Function of Product Markets
DEMAND
The Relationship Between Demand and Total/Marginal Utility What is “Total Utility” What is “Marginal Utility” What is the “The Law of Diminishing
Marginal Utility”
Demand
Quantities of a product consumers are willing and able to buy at specific prices
Law of Demand = inverse or negative relationship between price and quantity demanded
Pric
e
Quantity
D
D
Discussion Question
With a partner discuss the following:
How are the Law of Diminishing Marginal Utility and the Law of Demand related?
Law of Demand
Why is the Demand Curve downward sloping? ◦ Price is an obstacle to buying ◦ Diminishing marginal utility Consumers need incentives to consume
more What is the incentive in the case of the
demand curve?
Discussion Question With a partner discuss the following
question: What do you think is the difference in the meanings/definitions of: Quantity Demanded And Demand
Demand vs. Quantity Demanded
Quantity Demanded = the quantity of product consumers are willing and able to buy at a specific price
Demand = every combination of prices
and quantities consumers are willing and able to buy (I.E. THE DEMAND CURVE)
Demand Curve
DEMAND
QUANTITY DEMANDED
Price
Quantity
Changes to Quantity Demanded
The ONLY thing that causes changes to Quantity Demanded is PRICE
With a partner discuss the following question:
What are the causes of changes to DEMAND? Or, what causes the Demand Curve to shift?
Determinants of Demand
Consumer tastes/preferences ◦ EX: Demand for bananas would increase if bananas were found to treat headaches
# of buyers in the market ◦ EX: Demand for US made cars would increase if a natural disaster destroyed car factories in Japan
Determinants of Demand
Prices of related goods ◦ Substitute goods EX: Demand for Coke would increase
if the price of Pepsi went up
◦Complementary goods EX: Demand for jelly would decrease if
the price of peanut butter went up
Determinants of Demand
Consumers’ incomes ◦ EX: Demand for luxury cars would
increase if the average income of an American worker went up significantly
Consumer expectations ◦ EX: Demand for iPhone 5C’s would
increase if consumers expected the price of 5C’s was going to go up next month
Changes to Demand (Shift of the Demand Curve)
Determinants of Demand
With your partner, redraw the demand curves on your note pages based on your understanding of “Changes to Demand”
SUPPLY
Supply
Quantity of a product that producers are willing and able to make available for sale at a specific price
Law of Supply = positive relationship between price and quantity supplied
Pric
e
Quantity
S
S
Law of Supply
Why is the Supply Curve upward sloping? ◦ Price is an incentive to sell more product ◦ Increase in Quantity = Increases in marginal
cost (cost of supplying ONE more product)
Discussion Question With a partner discuss the following
question: What do you think is the difference in the meanings/definitions of: Quantity Supplied And Supply
Supply vs. Quantity Supplied
Quantity Supplied = the quantity of product suppliers are willing and able to sell at a specific price
Supply = every combination of prices and
quantities suppliers are willing and able to sell (I.E. THE SUPPLY CURVE)
Supply Curve
SUPPLY
QUANTITY SUPPLIED
Price
Quantity
Changes to Quantity Supplied
The ONLY thing that causes changes to Quantity Supplied is PRICE
With a partner discuss the following question:
What are the causes of changes to SUPPLY? Or, what causes the Supply Curve to shift?
Determinants of Supply Resource prices ◦ Prices of inputs (factors of production!) ???, ???, and ??? ◦ EX: The minimum wage increases which
decreases supply (increase in labor costs = less resources to produce)
Technology ◦ Technology which improves efficiency will
increase supply EX: Installing robots in factories increases the
number of cars produced
Determinants of Supply Taxes and subsidies ◦ Taxes – decrease supply ◦ Subsidies – increase supply
Producer expectations ◦ EX: If Apple thinks the price of cell phones will go
down next year, they will produce/supply more now
# of sellers in the market ◦ EX: If bananas are found to cure headaches, apple
growers will switch to growing bananas, thus increasing supply
Changes in Supply
Determinants of Supply
With your partner, redraw the supply curves on your note pages based on your understanding of “Changes to Supply”
MARKET EQUILIBRIUM
Market Equilibrium
Equilibrium price = “market clearing price” ◦Or the price at which buyers and sellers
agree
Equilibrium quantity = “market clearing quantity” ◦Or the quantity at which buyers and
sellers agree
Market Equilibrium
Market equilibrium ensures ◦MB ≥ MC for each consumer or supplier willing and able to buy or sell at the market price
Discussion Question
What happens to the market equilibrium price and/or quantity if there is a change in the demand or supply curve?
Equilibrium and Changes to Supply and/or Demand When there are changes to either
the demand curve or supply curve or both: ◦ Changes in the market equilibrium price
can occur ◦ Changes in the market equilibrium
quantity can occur ◦ Changes to BOTH market equilibrium
price AND quantity can occur
Discussion Question
Draw a market graph which includes a demand and a supply curve.
Indicate market equilibrium price and quantity
Show a change to demand Show a change in supply Indicate the new market equilibrium price
and quantity
Equilibrium and Changes to Supply and/or Demand
Equilibrium and Changes to Supply and/or Demand
Graph Shift
Market Prices
Market Prices Ensure: ◦ Information is shared among all
consumers and suppliers Key aspect of decision making ◦ Resources are allocated/distributed
efficiently To those consumers who value them the
most To those goods and services valued the
most
Market Prices
Market Prices Ensure: ◦There are incentives to work and produce Higher prices are an incentive for
producers to produce more Higher wages (a price of labor) are an
incentive for workers to seek work or to seek higher paying jobs
Discussion Question
What if the market price is too high? Or too low? What do you think will occur in these instances?
Market Price Failures Prices are too low, shortages result ◦ Higher quantity demanded (“excess demand”)
due to lower price ◦ Less quantity supplied due to lower price
Prices are too high, surpluses result ◦ Higher quantity supplied (“excess supply”) due to
higher price ◦ Less quantity demanded due to higher price
Market price failures occur only in the short term as the market will correct to the proper equilibrium price over time
When do governments intervene in the markets? Price controls ◦ Gov’ts believe or are convinced that
allowing markets to coordinate trade will result in unfairly high prices for consumers or unfairly low prices for producers ◦ Two types of price controls: Price ceilings Price floors
Discussion Question
Can you come up with an example of a price ceiling? A price floor?
Price Ceilings
Gov’t sets a maximum price sellers may charge consumers
EX: rent controls, usury laws
Pric
e
Quantity
S
S D
D
Po
Pc
Qo Qs Qd
SHORTAGE = EXCESS DEMAND
Price Floors
Gov’t sets a minimum price buyers may pay sellers
EX: crop price supports, minimum wages
Pric
e
Quantity
S
S D
D
Po
Pf
Qo Qd Qs
SURPLUS = EXCESS SUPPLY
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