chapter 2 demand and supply: the basics of the market economy mcgraw-hill/irwin copyright © 2012 by...
TRANSCRIPT
![Page 1: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/1.jpg)
Chapter 2Chapter 2
Demand and Supply: The Basics of the Market Economy
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
![Page 2: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/2.jpg)
Learning ObjectivesLearning Objectives
• Describe key elements of a market.
• Explain how the price in a market affects the quantity demanded.
• Explain how the price in a market affects the quantity supplied.
• Discuss why the number of markets can increase.
2-2
![Page 3: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/3.jpg)
Key Elements of a Market Key Elements of a Market
• Markets consist of buyers and sellers.
• Voluntary exchange of a product for money– Product is a good or service.
• Price is the rate at which exchange takes place.
• Starbucks is an example of a market.– Seller of coffee; but also buyer of coffee
beans and employee hours.
2-3
![Page 4: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/4.jpg)
Local, National, and Local, National, and Global MarketsGlobal Markets
• Markets differ geographically.• Local markets - buyers and sellers
are close to each other– Personal services are an example of a
local market (e.g., dry cleaning).
• National market - transactions conducted across the country– Stock transactions are an example of a
national market.
2-4
![Page 5: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/5.jpg)
Local, National, and Local, National, and Global MarketsGlobal Markets
• Global market - goods and services are sold anywhere in the world– Oil is a product sold in the global market.
• Price of oil is determined by global supply and demand
• The internet has transformed local markets into national and global ones. – As a result, more goods and services are traded
in the national market.– The online auction market created by eBay has
played a major role.
2-5
![Page 6: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/6.jpg)
Prices DefinedPrices Defined
• The market price is defined as the typical price at which goods and services are exchanged in a market.
• Identifying the price is not always easy.– Sale price: seller lowers typical price– Negotiated price:
• Set by bargaining between buyers and sellers• Differs from sticker price• Common in markets for big-ticket items such as
automobiles
2-6
![Page 7: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/7.jpg)
Prices DefinedPrices Defined
• Often, prices are lowered for large, bulk purchases (volume discount).– Purchases at warehouse stores such as
Costco and Sam’s Club are examples.
• Purchases made ahead of their use result in lower prices (advance purchase discounts).– Purchasing an airline ticket is an
example.
2-7
![Page 8: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/8.jpg)
Demand DefinedDemand Defined
• Quantity demanded is the amount of a good or service the buyer is willing to purchase.
• The quantity demanded for a good or service varies with the price.
• A demand schedule is the relation between the quantity demanded and the selling price.
2-8
![Page 9: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/9.jpg)
Demand DefinedDemand Defined
• Demand schedule is based on ceteris paribus – all other things equal.
• Ceteris paribus assumes that the factors (other than price) that affect demand do not change.
• These factors include consumer incomes and taste, price of related goods, etc.
2-9
![Page 10: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/10.jpg)
Law of DemandLaw of Demand
• The law of demand states that there is an inverse relationship between quantity demanded and price.– As prices go up, people buy less, so quantity
demanded goes down.– As prices go down, people buy more, so quantity
demanded goes up.– A good example of the law of demand: the iPhone.
• Many goods allow unlimited consumption after paying an initial fee.– Examples include cell phones, cable plans, and
broadband access.
2-10
![Page 11: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/11.jpg)
Demand CurveDemand Curve
• The demand curve is the graphic representation of the demand schedule.– All the possible different prices are shown
on the vertical axis (y-axis).– All the possible different quantity demands
are shown on the horizontal axis (x-axis).
• The demand curve is downward-sloping due to the law of demand.
2-11
![Page 12: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/12.jpg)
Demand Schedule for CoffeeDemand Schedule for Coffee
Price per Cup
(Dollars)
Quantity Demanded
(Cups per Week)
$1.00 18
$2.00 15
$3.00 12
$4.00 9
$5.00 6
$6.00 3
2-12
![Page 13: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/13.jpg)
Demand Curve for CoffeeDemand Curve for Coffee
$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
$7.00
3 6 9 12 15 18
Quantity demanded (cups per week)
Pri
ce
pe
r c
up
Demad
A
2-13
![Page 14: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/14.jpg)
Supply DefinedSupply Defined
• Quantity supplied is the amount of a good or service that the seller is willing to produce at various prices.– Quantity supplied for a good or service varies
with price.
• A supply schedule is the relationship between quantity supplied and the selling price.
• Supply schedule is again based on ceteris paribus conditions.
2-14
![Page 15: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/15.jpg)
Law of SupplyLaw of Supply
• The law of supply states that there is a direct relationship between quantity supplied and price.– As prices go up, businesses have an incentive to
produce more, so quantity supplied goes up.– If prices go down, businesses produce less, so
quantity supplied goes down.
• The labor market is a good example of the law of supply.– Price of labor is the wage rate.
2-15
![Page 16: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/16.jpg)
Supply CurveSupply Curve
• The supply curve is the graphic representation of the supply schedule.– All the possible different prices are shown
on the vertical axis (y-axis).– All the possible different quantity supplies
are shown on the horizontal axis (x-axis).
• The supply curve is upward-sloping due to the law of supply.
2-16
![Page 17: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/17.jpg)
Supply Schedule for Lawn Supply Schedule for Lawn MowingMowing
Market Price per Lawn Mowed (Dollars)
Quantity Supplied
(Lawns Mowed per Week)
$5.00 5
$10.00 15
$15.00 25
$20.00 35
2-17
![Page 18: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/18.jpg)
Supply Curve for Lawn MowingSupply Curve for Lawn Mowing
$-
$5.00
$10.00
$15.00
$20.00
$25.00
0 5 10 15 20 25 30 35 40
Quantity supplied (lawns mowed per week)
Pri
ce p
er l
awn
mo
wed
Supply curve
A
2-18
![Page 19: Chapter 2 Demand and Supply: The Basics of the Market Economy McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved](https://reader036.vdocument.in/reader036/viewer/2022062515/56649cf65503460f949c6617/html5/thumbnails/19.jpg)
New MarketsNew Markets
• Demand and supply schedules describe behavior in existing markets.
• New markets - created due to technology and to meet changing needs of consumers.
• New products - include iPad, the iPhone, etc.
• One major advantage of the market-based economy is the ability to adjust to changes in consumer demand and technological advances.
2-19