Supply & Demand. Before We Start Economic Terms: Market Competitive Market Perfectly Competitive...

Supply & DemandSupply & Demand

Before We StartBefore We Start• Economic Terms:• Market• Competitive Market• Perfectly Competitive• Normal Good• Inferior Good• Substitutes• Complements• Ceteris Paribus

• “Other things being equal”

• Economic Terms:• Market• Competitive Market• Perfectly Competitive• Normal Good• Inferior Good• Substitutes• Complements• Ceteris Paribus

• “Other things being equal”

DemandDemand

• Quantity DemandedShift along Demand Curve• Price

• Determinants of DemandShift of the Demand Curve• Price of related goods• Income• Tastes• Expectations• Number of buyers or sellers

• Quantity DemandedShift along Demand Curve• Price

• Determinants of DemandShift of the Demand Curve• Price of related goods• Income• Tastes• Expectations• Number of buyers or sellers

Demand ScheduleDemand Schedule

• Ice cream cones• Price Quantity• $0.00 12• $0.50 10• $1.00 8• $1.50 6• $2.00 4• $2.50 2• $3.00 0

• Ice cream cones• Price Quantity• $0.00 12• $0.50 10• $1.00 8• $1.50 6• $2.00 4• $2.50 2• $3.00 0

Demand CurveDemand Curve

0

0.5

1

1.5

2

2.5

3

0 2 4 6 8 10 12

Demand Curve

0

0.5

1

1.5

2

2.5

3

0 2 4 6 8 10 12

Demand Curve

P

Q

Market DemandMarket Demand

• Market = Sum of parts• 2 person Market

• Price Anne BillMarket

• $0.00 12 7 19• $1.00 8 5

13• $2.00 4 3 7• $3.00 0 1 1

• Market = Sum of parts• 2 person Market

• Price Anne BillMarket

• $0.00 12 7 19• $1.00 8 5

13• $2.00 4 3 7• $3.00 0 1 1

Shift In DemandShift In Demand

• What happens when there is a Change in Demand?

• Changes caused by factors other than price.

• Examples:• > income increases demand for luxury cars• < price in gas decreases demand for economy

cars

• What happens when there is a Change in Demand?

• Changes caused by factors other than price.

• Examples:• > income increases demand for luxury cars• < price in gas decreases demand for economy

cars

Shift In DemandShift In Demand

QuestionQuestion

• Give two economic ways (in terms of demand) that the government could use to stop teenage smoking.• Use graphs to

show your work for both answers.

• Give two economic ways (in terms of demand) that the government could use to stop teenage smoking.• Use graphs to

show your work for both answers.

SupplySupply

What Determines Supply?What Determines Supply?

• Determinants

• Price

• Input Prices

• Technology

• Expectations

• Determinants

• Price

• Input Prices

• Technology

• Expectations

• Terms

• Law of Supply

• Supply Schedule

• Supply Curve

• Terms

• Law of Supply

• Supply Schedule

• Supply Curve

SupplySupply

• Quantity SuppliedMovement along Demand Curve• Price

• Determinants of SupplyChange in the Demand Curve• Price of related goods• Input Prices• Technology• Expectations• Number of buyers or sellers

• Quantity SuppliedMovement along Demand Curve• Price

• Determinants of SupplyChange in the Demand Curve• Price of related goods• Input Prices• Technology• Expectations• Number of buyers or sellers

Supply ScheduleSupply Schedule

• Price

• $0.00• $0.50• $1.00• $1.50• $2.00• $2.50• $3.00

• Price

• $0.00• $0.50• $1.00• $1.50• $2.00• $2.50• $3.00

• Quantity

• 0• 0• 0• 0• 4• 8• 12

• Quantity

• 0• 0• 0• 0• 4• 8• 12

Supply CurveSupply Curve

0

0.5

1

1.5

2

2.5

3

0 2 4 6 8 10 12

Supply Curve

0

0.5

1

1.5

2

2.5

3

0 2 4 6 8 10 12

Supply Curve

P

Q

Shift In SupplyShift In Supply

QuestionQuestion

• Using a supply curve graph, demonstrate the effects of the following on Health Care supply.

• Universal coverage

• Elimination of Caps

• Using a supply curve graph, demonstrate the effects of the following on Health Care supply.

• Universal coverage

• Elimination of Caps

EquilibriumEquilibrium• Supply & Demand• Intersection

determines • Price• Quantity

• Terms• Surplus

• Quantity > demand

• Shortage• Demand > quantity

• Supply & Demand• Intersection

determines • Price• Quantity

• Terms• Surplus

• Quantity > demand

• Shortage• Demand > quantity

Equilibrium GraphEquilibrium Graph

0

0.5

1

1.5

2

2.5

3

0 2 4 6 8 10 12

Demand CurveSupply Curve

0

0.5

1

1.5

2

2.5

3

0 2 4 6 8 10 12

Demand CurveSupply Curve

P

Q

The Market - SurplusPrice (£)

Quantity Bought and Sold (000s)

S

D

£5

600

D1

300

Surplus

£3

450

A shift in the demand curve to the left will reduce the demand to 300 from 500 at a price of £5. Suppliers do not have the information or time to adjust supply immediately and still offer 600 for sale at £5. This results in a market surplus (S > D)

In an attempt to get rid of surplus stock, producers will accept lower prices. Lower prices in tn attract some consumers to buy. The process continues until the surplus disappears and equilibrium is once again reached.

The Market - ShortagePrice (£)

Quantity Bought and Sold (000s)

S

D

£5

600

S1

100

Shortage

£8

350

A shift in the supply curve to the left would lead to less products being available for sale at every price. Suppliers would only be able to offer 100 units for sale at a price of £5 but consumers still desire to purchase 600. This creates a market shortage. (S < D)

The shortage in the market would drive up prices as some consumers are prepared to pay more. The price will continue to rise until the shortage has been competed away and a new equilibrium position has been reached.

Increase in DemandIncrease in DemandPrice

Quantity

D1D2

Decrease in DemandDecrease in DemandPrice

Quantity

D2D1

Increase in SupplyIncrease in SupplyPrice

Quantity

S1 S2

Decrease in SupplyDecrease in SupplyPrice

Quantity

S2 S1

Demand Up & Supply Up Price Undetermined & Quantity

Up

Demand Up & Supply Up Price Undetermined & Quantity

UpPrice

Quantity

D1

S1 S2

D2

P1

Q1 Q2

Demand Down & Supply Down Price Undetermined & Quantity

Down

Demand Down & Supply Down Price Undetermined & Quantity

DownPrice

Quantity

D2

S2 S1

D1

P1

Q2 Q1

Demand Down & Supply Up Price Down & Quantity

Undetermined

Demand Down & Supply Up Price Down & Quantity

UndeterminedPrice

Quantity

D2

S1 S2

D1

P1

P2

Q1

Demand Up & Supply Down Price Up & Quantity

Undetermined

Demand Up & Supply Down Price Up & Quantity

UndeterminedPrice

Quantity

D1

S2 S1

D2

P2

P1

Q1