Session 4 Supply and Demand Disclaimer: The views expressed are those of the presenters and do not...
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Transcript of Session 4 Supply and Demand Disclaimer: The views expressed are those of the presenters and do not...
Session 4Supply and Demand
Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.
TEKS
(2) Economics. The student understands the interaction of supply, demand, and price. The student is expected to:
(A) understand the effect of changes in price on the quantity demanded and quantity supplied;(B) identify the non-price determinants that create changes in supply and demand, which result in a new equilibrium price; and(C) interpret a supply-and-demand graph using supply-and-demand schedules.
Teaching the Terms
• Market• Demand• Supply• Determinants• Surplus• Shortage
Markets
• A market facilitates the interaction of a buyer and a seller as they complete a transaction
• Buyers, as a group, determine the demand• Sellers, as a group, determine the
supply
Characteristics of Competitive Markets
• Identical goods or services• Enough buyers and sellers so that no
participant can influence the market price – everyone is a price taker
Demand
• Law of demand• Quantity demanded• Demand schedule• Demand curve• Determinants of demand
The Law of Demand
As the price rises,
the quantity demand falls.
Demand
Price Quantity
$5 10$4 20$3 30$2 40$1 50
10 20 30 40 500
1
2
3
4
5
6
Demand for ____
QuantityPr
ice
Determinants of Demand
• Income• Price of related goods– Complements– Substitutes
• Tastes or preferences• Expectations• Number of buyers
Shifting Demand
10 20 30 40 500
1
2
3
4
5
6
7
8
Quantity
Pric
e
Supply
• Law of supply• Quantity supplied• Supply schedule• Supply curve• Determinants of supply
The Law of Supply
As the price rises,
the quantity supplied rises.
Supply
Price Quantity
$5 50$4 40$3 30$2 20$1 10 10 20 30 40 50
0
1
2
3
4
5
6
Supply of ____
Quantity
Pric
e
Determinants of Supply
• Input prices• Technology• Expectations• Number of sellers
Shifting Supply
10 20 30 40 500
1
2
3
4
5
6
7
8
Quantity
Pric
e
Market Equilibrium
Price Quantity Demanded
Quantity Supplied
$5 10 50$4 20 40$3 30 30$2 40 20$1 50 10
Market Equilibrium
10 20 30 40 500
1
2
3
4
5
6
Quantity
Pric
e
Supply
Demand
Market Equilibrium
•Quantity demanded is less than quantity supplied Qd < QsSurplus•Quantity demanded is equal to quantity supplied Qd = Qs
Equilibrium
•Quantity demanded is greater than quantity supplied Qd > Qs
Shortage
Practice
• Draw the graph.• Which curve is shifting because of the
changing market conditions? Supply? Demand? Both?
• Which direction is the shift?• Draw the shift.• What is the impact on price and quantity?
Price Controls
• Price Ceiling– If price is fixed BELOW the market clearing price– Creates a shortage because Qd > Qs
• Rent controls
• Price Floor– If price is fixed ABOVE the market clearing price– Creates a surplus because Qd < Qs
• Minimum wage
Price Elasticity of Demand
• Measures the responsiveness of quantity demanded to a change in price
• Determinants– Availability of close substitutes– Necessities versus luxuries– Definition of the market (food vs. ice cream vs.
chocolate ice cream)– Time horizon
Price Elasticity and Total Revenue
• If demand for a good is elastic, price increases lead to lower total revenue
• If demand for a good is inelastic, price increases lead to higher total revenue
Price Elasticity of Supply
• Measures the responsiveness of quantity supplied to a change in price
• Determinants– Availability of inputs – Time
Questions?