Supply & Demand

DemandChanges in DemandSupply Changes in SupplyEquilibriumSurpluses & ShortagesWelfare Economics

Supply & Demand

The Product Market

LAW OF DEMAND

• As Price Falls… …Quantity Demanded

Rises• As Price Rises… …Quantity Demanded

An inverse relationship exists between price and quantity demanded

LAW OF DEMAND• Demand Curve

• Market Demand• Individual Demand

• Horizontal Summation

• Diminishing Marginal Utility

DOWNWARD SLOPE

• Income Effect

DOWNWARD SLOPE

• Income Effect • Substitution Effect

GRAPHING DEMANDP

P QD$5

1020355580

Price of Corn

Quantity of Corn

CORN Plot the Points

10 20 30 40 50 60 70 80

P QD$5

1020355580

Price of Corn

Quantity of Corn

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 10

P QD$5

1020355580

Price of Corn

Quantity of Corn

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 11

P QD$5

1020355580

Price of Corn

Quantity of Corn

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 12

P QD$5

1020355580

Price of Corn

Quantity of Corn

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 13

P QD$5

1020355580

Price of Corn

Quantity of Corn

CORN Connect the Points

10 20 30 40 50 60 70 80

GRAPHING DEMAND

3 - 14

P QD$5

1020355580

Price of Corn

Quantity of Corn

10 20 30 40 50 60 70 80

What ifDemand

Increases?

GRAPHING DEMAND

3 - 15

P QD$5

Price of Corn

Quantity of Corn

10 20 30 40 50 60 70 80

D2Increase

inDemand

Increasein QuantityDemanded10

20355580

30406080 +

GRAPHING DEMAND

3 - 16

P QD$5

1020355580

Price of Corn

Quantity of Corn

10 20 30 40 50 60 70 80

What ifDemand

Decreases?

GRAPHING DEMAND

3 - 17

P QD$5

1020355580

Price of Corn

Quantity of Corn

10 20 30 40 50 60 70 80

-- 10204060

Decreasein

Demand

Decreasein QuantityDemanded

GRAPHING DEMAND

3 - 18

DETERMINANTS OF DEMAND

• Tastes (Preferences)• Prices of Related Goods

– Substitutes & Complements– Unrelated Goods

• Income– Normal (Superior) & Inferior

Goods• Number of Buyers• Expectations

3 - 19

DETERMINANTS OF DEMAND

• Tastes (Preferences)• Prices of Related Goods

– Substitutes & Complements– Unrelated Goods

• Income– Normal (Superior) & Inferior

Goods• Number of Buyers• Expectations

3 - 20

Practice Problems

• Activity 1-4 Parts A & B• Activity 1-5

3 - 21

LAW OF SUPPLY

• As Price Rises… …Quantity Supplied Rises• As Price Falls… …Quantity Supplied Falls

A direct relationship exists between price and quantity supplied

3 - 22

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

Plot the PointsGRAPHING SUPPLY

3 - 23

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

3 - 24

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

3 - 25

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

3 - 26

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

3 - 27

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

Connect the Points

GRAPHING SUPPLY

3 - 28

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

What ifSupply

Increases?

GRAPHING SUPPLY

3 - 29

10 20 30 40 50 60 70 80

Price of Corn

Quantity of Corn

$54321

60503520 5

8070604530

S2Increasein

Supply

Increasein QuantitySupplied

GRAPHING SUPPLY

3 - 30

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

What ifSupply

Decreases?

GRAPHING SUPPLY

3 - 31

10 20 30 40 50 60 70 80

$54321

60503520 5

Price of Corn

Quantity of Corn

453020 0 --

Decreasein

Supply

Decreasein QuantitySupplied

GRAPHING SUPPLY

3 - 32

DETERMINANTS OF SUPPLY

• Resource Prices• Prices of Other Goods• Technology• Taxes & Subsidies• Expectations• Number of Sellers

3 - 33

• Resource Prices• Prices of Other Goods• Technology• Taxes & Subsidies• Expectations• Number of Sellers

3 - 34

Practice Problems

• Activity 1-6 Parts A & B• Activity 1-7

3 - 35

• Resource Prices• Technology• Taxes & Subsidies• Prices of Other Goods• Price Expectations• Number of Sellers

Combiningwith

Demand

3 - 36

2 4 6 8 10 12 14 16

P QD$5

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

Price of Corn

Quantity of Corn

CORNMARKET

Market Clearing Equilibrium

MARKET DEMAND & SUPPLY

3 - 37

2 4 6 8 10 12 14 16

P QD$5

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

Price of Corn

Quantity of Corn

CORNMARKET

CORNMARKETSurplus

At a $4 price

more is being

supplied than

demanded

3 - 38

2 4 6 8 10 12 14 16

P QD$5

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

Price of Corn

Quantity of Corn

CORNMARKET

At a $2 price

more is being

demanded than

supplied

Shortage

3 - 39

2 4 6 8 10 12 14 16

P QD$5

2,0004,0007,000

11,00016,000

$54321

12,00010,000

7,0004,0001,000

Price of Corn

Quantity of Corn

CORNMARKET

Shortage

MARKET DEMAND & SUPPLY Surplus

3 - 40

MARKET EQUILIBRIUM • Equilibrium Price & Quantity• Rationing Function of Prices• Changes in Demand• Changes in Quantity

Demanded• Changes in Supply• Changes in Quantity Supplied

3 - 41

Single Shifts• Supply Increases• Supply Decreases• Demand Increases• Demand Decreases

3 - 42

Double Shifts• Supply Increases &

Demand Decreases• Supply Decreases &

Demand Increases• Supply Increases &

Demand Increases• Supply Decreases &

Demand Decreases

3 - 43

Double Shifts• Supply increase;

Demand decrease• Supply decrease;

Demand increase• Supply increase;

Demand increase• Supply decrease;

Demand decrease

Price Quantity

3 - 44

Consumers, Producers, and the Efficiency

of Markets

3 - 45

Welfare Economics• Welfare economics is the study

of how the allocation of resources affects economic well-being.

• Market equilibrium maximizes the total welfare of buyers and sellers.

3 - 46

CONSUMER SURPLUS

• Consumer surplus is the buyer’s willingness to pay for a good minus the amount the buyer actually pays for it.

3 - 47

How the Price Affects Consumer Surplus

Consumersurplus

Quantity

(a) Consumer Surplus at Price P

Demand

3 - 48

How the Price Affects Consumer Surplus

Initialconsumer

surplus

Quantity

(b) Consumer Surplus at Price P

Demand

Consumer surplusto new consumers

Additional consumersurplus to initial consumers

3 - 49

PRODUCER SURPLUS

• Producer surplus is the amount a seller is paid for a good minus the seller’s cost.

3 - 50

How the Price Affects Producer Surplus

Producersurplus

Quantity

(a) Producer Surplus at Price P

Supply

3 - 51

How the Price Affects Producer Surplus

Quantity

(b) Producer Surplus at Price P

Supply

Initialproducersurplus

Producer surplusto new producers

Additional producersurplus to initialproducers

3 - 52

MARKET EFFICIENCY Consumer Surplus + Producer Surplus

=Total Surplus

Efficiency • Free markets maximize efficiency

(total surplus) at equilibrium

3 - 53

Consumer and Producer Surplus in the Market Equilibrium

Producersurplus

Consumersurplus

0 Quantity

Equilibriumprice

Equilibriumquantity

Supply

Demand

3 - 54

Free Response Prompts• “Show” means to use a diagram to illustrate

your answer. Correct labeling is necessary to receive full credit.

• “Explain” means to take the reader through all of the steps or linkages in the line of economic reasoning. Graphs and symbols are acceptable as part of the explanation.

• “Identify” means to provide a specific answer or a label on a graph, without any explanation or elaboration.

• “Calculate” means to use mathematical operations to determine a specific numerical response, along with providing your work.

3 - 55

Free Response Strategies• Circle the verbs• Label everything• Messy work loses points• Don’t say too much• Don’t contradict yourself

Supply & Demand

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