tco 2 given a supply schedule, a demand schedule, and a change in one or more determinants of supply...

TCO 2Given a supply schedule, a demand schedule, and a change in

one or more determinants of supply and demand, graph the supply and demand curves and illustrate the resulting change in the equilibrium price and quantity.

• Define supply and demand and show their relationship graphically.

• Explain the law of determinants of demand and supply.• Differentiate between a change in quantity demanded (a

movement along a fixed demand curve) and a change in demand (a movement of the entire demand curve).

• Explain and illustrate how market equilibrium is reached. • Illustrate the movement of the supply and demand

curves and the resulting new equilibrium price and quantity.

• Define price-elasticity of demand and supply.• Identify the factors that influence price elasticity of

demand.• Briefly illustrate the concept of price elasticity of supply

SUPPLY, DEMAND, MARKETSWhat it is, how it works.

Demand

• Consumers willingness and ability to buy various quantities of a good or service at each price in a set of possible prices in a given time period.

Demand is

Law of Demand The quantity demanded of a product is negatively, or inversely, related to its price. This means that consumers will purchase more of a product at lower prices than at higher prices. That is why demand curves always slope downward and to the right.

Determinants of Demand

• Income • Taste and Preferences• Expectations Regarding Future Price• Price of Related Goods• Number of Buyers in the Market

Quantity-Demanded

Consumers willingness and ability to buy a quantity of a good or service at a price in a period of time. The determinant of quantity demanded is the price of the good or service itself.

Demand is based on

Marginal Utility [additional satisfaction]

How this works

# Price

MU MUE

1 $50. 100 2

2 $25. 50 2

3 $10. 20 2

Price

$50.

$25.

$10.

1 2 3

Supply

• Suppliers willingness and ability to offer for sale various quantities of a good or service at each price in a set of possible prices in a given period of time.

Supply is

Law of Supply

• The price and quantity supplied are positively, or directly, related. Producers will supply a larger quantity at higher prices than at lower prices. Thus, the supply curve slopes upward because a higher price is necessary to call for the additional output from suppliers

Determinants of Supply

• Resource Prices/Production Cost• Number of Producers in the Market• Technology• Market Expectations• Subsidies/Taxes

Quantity-Supplied

• Suppliers willingness and ability to produce a quantity of a good or service at a price in a period of time.

Market

Where exchange among buyers and sellers takes place.

A market isDemand

Supply

$

Q

ME $

ME Q

Market Equilibrium

• Quantity-demanded equals quantity-supplied at this price. Supply DOES NOT equal Demand!

• Found where the supply curve crosses the demand curve.

• Markets stay in equilibrium until either Demand or Supply or both change.

Effect of an Increase in Supply on Equilibrium Price

Quantity

DS1

S2

$120,000

$110,000

Price

8,000 10,000 12,000

An increase in supply will cause the equilibrium price to fall.

Effect of Simultaneous Increase in Demand and

Supply on Equilibrium Price

Price

Quantity

D1D2

S1S2

P1, P2

Q1 Q2

Demand and supply increase in equal amounts; quantity increases but price does not change

Price Elasticity

How responsive is quantity to changes in price?

Perfectly Elastic Demand

• Quantity-demanded changes by a larger percent than price changes

• Many substitutes• Large percentage of

budget• Consumers aren’t

particularQ

P

D

Perfectly Inelastic Demand

• Quantity-demanded changes by a smaller percent than price changes

• Few substitutes• Small percentage of

budget• Customers want only

this

P

Q

D

Elasticity & Normal Demand

• Most demand curves are elastic at higher prices and inelastic at lower price ranges.

• How does this reflect the workings of marginal utility?

Elastic Supply

• Quantity-supplied changes by a larger percentage than price changes

• Cost of production low• Resources readily available• Slope of supply curve is very flat

Inelastic Supply

• Quantity-supplied changes by a smaller percent than price changes

• Cost of production is high• Resources are not available• Slope of supply curve is very steep

Every now and then various parts of the US experience a gasoline shortage.

• What does this mean in terms of supply and demand?

• What impact would the price elasticity of both supply and demand have on a gasoline shortage?

Why does a Billionaire Beanie Baby Bear sell for $1000?

• Which determinants of demand are working here?

• Is demand elastic or inelastic?• What determinants of supply are

working here?• Is supply elastic or inelastic?

Spiral cut ham can be purchased for $2.99 a pound at Christmas time.

• What determinants of demand are working here?

• What determinants of supply are working here?

• What do you think the price of spiral cut ham would be in May? Why?