Ch03_PPT

PART 2 THE PRICE MECHANISM Chapter 3 Demand, supply and equilibrium

Demand

Supply

Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser

3-1

Lecture Plan

Demand curve The law of demand The law of supply Supply curve Equilibrium Disequilibrium Conditions of demand Conditions of supply


3-2

Demand A market consists of:

Buyers (demand) Sellers (supply) Exchange

Effective demand = the quantity of a commodity

which consumers will purchase at a given price per time period


3-3

The Demand Schedule A table showing the quantity demanded of a

product at various prices Example: Demand schedule for Big Macs Price Qty demanded$1 $2 $3 $4 $5 500 400 300 200 100


3-4

The Demand Curve Graphical representation of demand schedule

Example: Demand curve for Big Macs

Price 5 $ 4 3 2 1 100 200 300 400 Quantity 500


3-5

The Law of Demand As price increases the quantity demanded

decreases Conversely: As price decreases the quantity demanded increases

(cont.)Copyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser

3-6

The Law of Demand (cont.) Reflects an inverse relationship, i.e.

as price

, quantity demanded

as price , quantity demanded The law of demand is caused by:

The income effect The substitution effect


3-7

The Income Effect As prices increase, consumers will purchase

fewer goods and services. Their purchasing power (or real income) decreases Quantity demanded decreases As prices decrease, the purchasing power of

consumers increases Quantity demanded increases


3-8

The Substitution Effect As prices increase, consumers generally purchase

more of a substitute product whose price is lower A substitute product is a product that performs a similar function and satisfies the same consumer need/want e.g.:

Tea/coffee Butter/margarine

If the price of butter increases, the quantity

demanded will fall as consumers will substitute butter with margarine


3-9

Supply Definition: the quantity of a product which

producers offer to the market at a certain price per unit of time


3-10

The Law of Supply As price increases the quantity supplied increases

conversely as price decreases the quantity supplied decreases The law of supply is a direct relationship between price and quantity supplied As price As price

, quantity supplied , quantity supplied

The logic of the law of supply: Producers will seek to maximise their profits i.e.: supplying more at higher prices and less at lower pricesCopyright 2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser

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The Supply Schedule A table showing the quantity supplied at various

prices Example: Supply schedule for Big Macs Price Qty supplied $1 200 $2 300 $3 400 $4 500 $5 600


3-12

The Supply Curve A graphic representation of the supply schedule

Example: Supply curve for Big Macs

5 Price 4 $ 3 2 1 200 300 400 500 600

Supply curve

Quantity


3-13

Market Equilibrium Supply and demand can now be brought together

to form the price mechanism

P

S

Pe

Equilibrium point (Pe) D Q Qe(cont.)3-14


Market Equilibrium (cont.)Market equilibrium (E) is where: Quantity demanded = quantity supplied

(intersection of demand and supply curves) The market is cleared (no shortages or surpluses) Price (Pe) is stable


3-15

Market Disequilibrium= where quantity demanded is NOT EQUAL to quantity supplied Types: 1. Market shortage: where quantity demanded > quantity supplied 2. Market surplus (oversupply): where quantity supplied > quantity demanded


3-16

Market Shortage Caused by setting price BELOW the equilibrium

P

S

Pe

ShortageQs Qd

D Q


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Market Surplus Caused by setting price ABOVE the equilibrium

P

S

D Qd

Surplus

Qs

Q


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Changes in Demand Certain factors (other than price changes) affect the

absolute level of demand These factors are called conditions of demand Changes to the conditions of demand cause changes in demand and this results in shifts of the demand curve


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An Increase in Demand The entire demand curve shifts to the right

PPe1 Pe

E1 E DEQ EQ1

S D1 Q


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A Decrease in Demand The entire demand curve shifts to the left Caused by a factor other than price

P E Pe Pe1 E1 D1 D

S

Q Qe1 Qe


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Conditions of Demand Change in tastes Improvements in technology Real income Change in population Change in the price of substitutes Change in the price of other goods Expectations of the future Advertising


3-22

Changes in Supply Certain factors (other than price changes) affect the

absolute level of supply These factors are called conditions of supply and

they result in shifts of the supply curve (not movements along it)


3-23

An Increase in Supply Supply curve shifts to the right

P Pe Pe1 E

S E1

S1

D Qe Qe1 Q


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A Decrease in Supply Supply curve shifts to the left

P S1 Pe 1 Pe E1 E D Q Qe1 Qe S


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Conditions of Supply Improvements in technology A change in production costs A change in the price of alternative products Weather and seasons


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Ch03_PPT