Macro Presentation 3 Top 5 Revised

8/6/2019 Macro Presentation 3 Top 5 Revised

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Macroeconomics

Unit 3

Supply and Demand

The Top 52007, 2005 by E.H. McKay III

Some images 2004, 2003 www.clipart.com


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Markets

There are two types of markets where factors of production(land, labor ,capital, entrepreneurship) and products are boughtand sold.

Factor Market A factor market is any place where the factors

of production are bought and sold.

Examples of factor markets include the labor market, the realestate market or the market for machinery used to producemanufactured goods.

Consumers provide labor and land to businesses in the factormarket. Capital goods are also purchased in factor markets bybusinesses.


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Markets

The second type of market is called a product market. Aproduct market is any place where finished goods and

services are bought and sold. Examples of product markets

include department stores, grocery stores, accounting

services, and new car dealers.

In product markets consumers purchase goods and services

from businesses.


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Concept 1: The Circular Flow

The circular flow model is an economic model designed torepresent the relationship between product markets and factor

markets.

It illustrates the interaction between consumers, business firms,

government entities, and international participants.


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The Circular Flow Model

Product

Markets

Factor

Markets

Goods and services

supplied

Factors of

production supplied

Goods and servicesdemanded

Factors ofproduction demanded

BusinessesConsumers Governments

International

Participants

International

Participants


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Within the circular flow model, consumers supply the factors of

production to the factor markets, which produce the goods and

services demanded in the product markets by consumers.

International participants also supply factors of production to

the factor markets and demand products and services in the

product markets.


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The role of government entities within the circular flow is to

obtain resources in the factor markets (similar to a business),

and supply services to both consumers and businesses.

Governmental entities also provide the operating framework by

establishing standards, regulations, and oversight in both the

factor and product markets.


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Concept 2: Demand

Demand is the ability and willingness to buy specific quantitiesof a good at alternative prices in a given time period, ceterisparibus.

Wh

en we discuss demand, we are specifically examiningconsumer demand for goods and services in the productmarkets.

Our demand for a good or service is affected by its opportunitycost what do we have to give up in order to obtain a particular

good/service. It is also affected by the cost of the product andother factors known as determinants of demand.


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Concept 2: Demand

The demand for products and services can be examined on an

individual basis.

Demand can also be examined by looking at the total demand

for a product or service. This is known as the market demand.

Market demand can be defined by geographic location (for

example the demand for gasoline in the state of Michigan), by

group (senior citizens, etc.) or as th

e total demand for a good orservice.


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Concept 2: Demand

Frequently when we examine individual demand, an individual

demand schedule is developed.

A demand schedule illustrates the quantities of a good orservice a consumer is willing and able to buy at alternative

prices in a given time period, ceteris paribus.

The next page illustrates a demand sc

hedule.


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Freds Demand Schedule forCDs

Price perCD Quantity of CDs Demanded

$25 1

$20 2

$15 3

$10 5

$7.50 8


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Demand Schedule

Freds demand schedule reflects his interest in music and hisdesire to add to his CD music collection compared with otherneeds and desires Fred has.

It also reflects Freds interest in purchasing more CDs when

the price drops or fewer CDs when the price rises.

A demand schedule does not tell us why Fred will buydifferent quantities of CDs it just tells us what Fred is willingand able to purchase at different price levels.


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Demand Curve

We can take the information from a demand schedule and draw

a simple graph.

The graph of the demand schedule indicates the quantitydemanded at each price level.

Demand curves are usually drawn with the price on the y

axis, and th

e quantity demanded on th

e x axis.


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Dema C rve r CDs

$0.00

$5.00

$10.00

$15.00$20.00

$25.00

$30.00

1 2 3 5 8

Q a

r

ce


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Demand Curve

The demand curve illustrates Freds current demand schedule

for CDs.

When a price change occurs, there is movement along theexisting curve. For example if the price of CDs falls, there is

movement down along the demand curve in response to the

price change.

If the previous price was $20 and the new price is $15, the

quantity demanded changes from 2 to 3.


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Demand Curves and Demand

Demand curves and schedules represent consumer buying

intentions, not actual purchases.

Demand curves have a downward slope indicating that as theprice falls, more quantities will be purchased.

The Law of Demand states that the quantity of a good

demanded in a given time period increases as its price falls,ceteris paribus. This means that as the price falls or increases,

the quantity demanded will increase or fall (an inverse

relationship).


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Concept 2: Determinants of Demand

The demand curve can also shift in response to a change in

tastes (desire), income, the availability of other goods, or a

change in expectations associated with income, prices, and

tastes.

The factors which cause the demand curve to shift are known

as determinants of market demand.

Lets examine each determinant and look at the definitions and

examples for each one.


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Taste is the desire for a particular productcompared to other products. Our desire for

a particular product can change over time.

For example, if you are thirsty your desire for

a soft drink may be high, but after you have

consumed the soft drink, you may no longer

be thirsty and so your desire for a soft drink

is much lower.


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The next determinant of demand is income. Income refers tothe amount of income the consumerhas.

Changes in consumer income can affect the amount and typeof consumer purchases.

For example if a consumer receives an increase in his/her

salary, th

e consumerh

as more money to spend on goods andservices thereby affecting the demand for goods and services

by this consumer.


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Another determinant of demand is called Other Goods. Thisdeterminant is defined as the availability and price of substitute

and complementary goods.

A substitute good is a good that can substitute for anothergood.

A complementary good is a good th

at is frequently consumedwith another good.


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If you prefer one particular brand of soda pop and it is not

available but another brand is, you may consume that brand

instead.

This is an example of a substitute good. Substitute goods are

goods that can substitute for each other.

The relationship between substitute goods in terms of price is

that if the price of your favorite soda pop rises above other

drink choices you may have, you will start purchasing the less

expensive soda pop.


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Another type of good is called a

complementary good. A complementary

good is a good that is frequently consumed

in combination with

anoth

er good.

An example of two complementary goods

is milk and cereal. They are frequently

consumed together. If the price of cereal

rises, the demand for milk will fall, ceterisparibus.


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The next determinant of demand is called Expectations. Thisis defined as the consumers expectation for income, prices,

and any changes in taste.

Income expectation refers to a consumers expectation for

changes in income. If a consumer expects to receive a salary

increase, spending may increase immediately.

If a consumer expects to be laid off from his/her job, spending

may immediately decline.


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Expectations for prices refers to anticipated changes in theprices of goods and services.

If prices are expected to fall, consumers will delay purch

asingmany goods and services in the hope that prices will decline.

If prices are expected to rise, consumers may purchase goodsand services immediately rather than wait for an actual need for

th

ose items.


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Finally the last determinant is Number of Buyers. Number ofbuyers refers to the number of consumers seeking to purchase

a good or service, and the availability of the product.

Goods or services in high demand by buyers may result in

inventory depletion which will leave many potential buyers

without an opportunity to purchase the product.


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Concept 2: Changes in Demand

The determinants of demand can change over time.

Any change in tastes, income, other goods, expectations, and

th

e number of buyers will affect th

e demand sch

edule andcurve.

A shift in demand occurs when there is a change in thequantity demanded at every price level a change has

occurred in one or more of th

e determinants of demand.

A shift in demand produces a new demand curve.


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If the price of a good or service changes, and there has been

no change in the determinants of demand, then we will have

movement along the existing demand curve.

Movement along the curve indicates that if the price has

decreased, consumption will increase; or if the price has

increased, consumption will decrease.


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When the demand curve shifts to the right, there is an increase

in the demand for a good or service. A determinant of demand

has changed perhaps consumers prefer a product more than

before or th

ere mayh

ave been an increase in income.

When the demand curve shifts to the left, there is a decrease in

the demand for a good or service. A determinant of demand

has changed perhaps consumers expect to lose their jobs or

consumers may believe that prices will fall for a good in thefuture.


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Movements vs Shifts

Price

15.00

10.00

7.50

5.00

4.00

3.00

2.001.00

0

$20.00

2 4 6 8 10 12 14 16 18 20 22 Quantity

initial demand

A

Movementalong curve

B

Shift indemand

increased

demand

C


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Movements vs Shifts

If we have a change in the quantity demanded, it means wehave movement along a given demand curve, in response toa price change (from point A to point B on the graph).

If we have a change in demand, it means the demand curvehas shifted due to changes in the determinants of demand:tastes, income, other goods, expectations, number of buyers(from point A to point C on the graph).


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Concept 2: Market Demand

Market demand is the total quantity of a good or servicepeople are willing and able to buy at alternative prices in a

given time period.

Takes each consumers individual demand for a good or

service and combines it into an overall demand schedule and

curve.

Market demand is affected by the number of buyers and their

tastes, incomes, other goods, and expectations.


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Concept 2: Market Demand

To construct a market demand schedule or curve, you combine

each consumer demand schedule into one schedule.

Using the new market demand schedule, you plot the curve.

The procedure for constructing the market demand schedule

and curve is similar to the individual demand schedule and

curve, except you are adding each consumers demand at

various price points together for a total.


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Market Demand Schedule forCDs

Price Fred Jane Sam Kim Market

Demand

$25 1 0 1 1 3

$20 2 1 1 2 6

$15 3 2 2 4 11

$10 5 3 4 6 18

$7.50 8 4 6 8 26


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Marke Dema C rve r CDs

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

3 6 11 18 26

Q a

r

ce


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Concept 3: Supply

Supply is defined as the abilityand willingness to sell specific

quantities of a good or service at

alternative prices in a given timeperiod, ceteris paribus.

When we discuss supply we are

examining the behavior of

businesses and their willingnessto sell their products and services

at different price levels.


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Concept 3: Supply

Market Supply is the total quantities of a good or service thatall sellers are willing and able to sell at alternative prices in a

given time period, ceteris paribus.

Similar to demand, there are determinants of market supply.

The determinants of market supply are Technology, Factor

Costs, Other Goods, Taxes and Subsidies, Expectations,

Number of Sellers.


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Concept 3: Determinants of Supply

The first determinant, Technology, refers to the availability anduse of technology. Technology when properly installed andimplemented can lower the cost of producing a good or service.This may make a business more competitive and perhapslower the cost of the product to the consumer.

The second determinant, FactorCosts, refers to the cost oflabor, capital and land. As the prices change for these factorcosts, the ability of a business to produce and sell a product orservice for a profit changes too.


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The third determinant of supply, Other Goods, refers to theprices and profits available for producing other products or

services. The business will evaluate the sales and profits of the

current product against alternative pursuits,

The fourth determinant is called Taxes and Subsidies. Itrefers to the level of taxation on corporate profits and the

availability of government subsidies for producing specific

goods or services. Items produced that are subject toadditional taxation may not be as attractive as other items that

are eligible for government subsidies.


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The fifth determinant of supply is Expectations. Expectationsrefers to future predictions for sales, profits, and economic

conditions. If future sales are expected to decline, the product

line may be discontinued.

The final determinant of supply is Number of Sellers. Thisdeterminant is concerned with the level of competition and the

potential for profit. Higher levels of competition can produce

lower profits per unit and discourage some sellers fromremaining in the market.


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Concept 3: Law of Supply

The Law of Supply states that the quantity of a good or servicesupplied in a given time period increases as its price increases,ceteris paribus.

The market supply schedule and curve reflects the sellersintentions and not actual sales.

Supply curves are upward sloping indicating that as priceincreases, the quantity available for sale will increase.

In most situations there are more than one seller so ourdiscussion revolves around market supply not individual supply.


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Market Supply Schedule forCDs

Price The CDHut

CDWorld

CDPalace

CheapCDs

MarketSupply

$25 100 150 150 200 600

$20 75 100 125 190 490

$15 50 75 100 175 400

$10 25 50 75 150 300

$7.50 5 15 50 125 195


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Market Supply Curve forCDs

9 4 49


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Market Supply Schedule and Curve

The market supply curve and schedule reflects sellersintentions, not actual sales.

As the price rises, sellers become more interested inselling more products/services

This is the opposite of a demand schedule and curvewhich indicates that as price falls demand increases

Buyers and sellers react to price changes differently.


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Concept 3: Supply - Movements vs Shifts

If only the price changes, then we have movement alongthe existing supply curve, but no shifts. This causes achange in the quantity supplied.

If there is a change in supply, then we have a change in one ormore of the determinants of supply (technology, factor costs,

other goods, taxes and subsidies, expectations, number of

sellers). Changes in supply produce shifts of the supply curve.


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Concept 3: Supply Shifts

When the supply curve shifts to the left, this indicates a

reduction in supply due to a change in one or more

determinants. For example, an increase in factor costs may

cause the supply curve to shift to the left.

When the supply curve shifts to the right, there is an increase in

supply due to a change in one or more determinants. For

example, improvements in technology which result in lower

costs per unit may cause an increase in the willingness ofsellers to sell more units at the existing price.


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Shift of Supply urve

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

0 100 200 300 400 500 600 700 800 900

Quantity

Pric

Supplyincreaseswhenit shifts to the

right


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Concept : Equilibrium

At some point buyers and sellers will agree on a price and

quantity demanded. This location is known as the marketequilibrium price and quantity.

The market equilibrium price is the price at which the quantity

of a good or service demanded in a given time period equals

the supply.

The market equilibrium price changes when the determinants ofdemand or supply change, or when the price changes.


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Market Equilibrium

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

0 10 20 30 40 50 60

Quantity

Pric

Equilibrium occurs at a price

of$10 and a quantity of18


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Concept : Equilibrium

At equilibrium if the demand curve shifts to the right, demand

increases but price also rises. When the demand curve shifts

to the left, demand and price declines.

At equilibrium if the supply curve shifts to the right, supply

increases and price falls. If the supply curve shifts to the left,

supply declines and prices rise.


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Concept 5: Surpluses and Shortages

A market surplus can occur when the quantity suppliedexceeds the quantity demanded. The surplus amount is the

difference between the quantity supplied and the quantity

demanded.

In surplus situations, business owners will need to get rid of

excess inventory by usually reducing the price or slowing down

production.


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Concept 5: Surpluses and Shortages

A market shortage can occur when the quantity of a good orservice demanded exceeds the quantity supplied.

If supply is not increased to meet demand, then the price willincrease and the market equilibrium will occur at a higher price.

The next graph depicts market shortages and surpluses.


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Market Shortages and Surpluses

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

0 10 20 30 40 50 60

Quantity

Price

A BSurplus

C DShortage


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Concept 5: Market Shortages and Surpluses

At point A on the preceding graph, the demand for CDs equals

10 units at $15.00. However the supply at this price level is

equal to 25 (point B). In this situation, a market surplus exists.

If sellers wish to sell more CDs they must reduce the price.

At point C on the graph, the supply of CDs equals 10 units at a

price of$7.50. However the demand for CDs at this price

equals 26 units. In this situation, a market shortage exists. If

sellers do not increase supply, the price will rise.


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Supply and Demand Issues

The equilibrium price and quantity will change whenever supply

or demand shifts or there is a change in price (movement along

the demand or supply curve).

Price ceilings imposed by the government will usually cause ashortage of supply if they are imposed at a price level lower

than the market equilibrium price. Effective price ceilings are

implemented at output levels where the market equilibrium can

be maintained.


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Summary

The major concepts from this unit are:

Circular flow

Demand and its determinants

Supply and its determinants Equilibrium

Shortages and Surpluses

Macro Presentation 3 Top 5 Revised

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Transcript of Macro Presentation 3 Top 5 Revised