supply and demand !!!!

Climbing the Economic Mountain!Climbing the Economic Mountain!

Section 1Twelve Key Elements of

Economics

Supply and Demand• Supply and Demand: Applications and Extensions• Supply and Demand: Basics

Section 2• The Financial Crisis of 2008• Lessons from the Great Depression• The Seven Major Sources of Economic Progress

Section 3 Ten Elements of Clear Thinking About

Economic Progress and the Role of Government

Section 4Twelve Key Elements of Practical Personal

Finance

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Supply and Demand !!!!Supply and Demand !!!!

Basics, Applications, and Basics, Applications, and ExtensionsExtensions

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OverviewOverview

1. Demand1. Demand the demand curvethe demand curve consumer surplusconsumer surplus quantity demanded vs. demandquantity demanded vs. demand shifters of demandshifters of demand

2. Supply2. Supply the supply curvethe supply curve producer surplusproducer surplus quantity supplied vs. supplyquantity supplied vs. supply shifters of supplyshifters of supply

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OverviewOverview

3. Market Equilibrium:3. Market Equilibrium: EfficiencyEfficiency Single and double shifts of supply and demand Single and double shifts of supply and demand

4.4. The resource market (particularly the The resource market (particularly the labor market)labor market)

5.5. Price Controls: price floors and ceilings Price Controls: price floors and ceilings (surpluses and shortages)(surpluses and shortages)

6.6. Impact of a tax Impact of a tax 7.7. The tax systemThe tax system8.8. The Laffer curveThe Laffer curve9.9. SubsidiesSubsidies

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The Demand CurveThe Demand Curve

Law of demandLaw of demand: There is an inverse : There is an inverse (negative) relationship between the (negative) relationship between the price of a good and the quantity that price of a good and the quantity that buyers are willing to purchasebuyers are willing to purchase

Results in a downward sloping Results in a downward sloping demand curve.demand curve.

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Ex. Deriving the Demand CurveEx. Deriving the Demand Curve

*Note*: As price increases, quantity *Note*: As price increases, quantity demanded decreases.demanded decreases.

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The height of the demand curve at any The height of the demand curve at any quantity shows the maximum price quantity shows the maximum price that consumers are willing to pay for that consumers are willing to pay for an additional unit.an additional unit.

Notice that when consumers have Notice that when consumers have more of the good they value it less.more of the good they value it less.

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Consumer surplusConsumer surplus

Consumer surplusConsumer surplus: The difference : The difference between the maximum amount between the maximum amount consumers would be willing to pay and consumers would be willing to pay and the amount that they actually pay.the amount that they actually pay.

Consumer surplus is the area below the Consumer surplus is the area below the demand curve but above the price.demand curve but above the price.

ex. What happens if price falls? rises?ex. What happens if price falls? rises?

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Demand vs. Quantity DemandedDemand vs. Quantity Demanded

Change in Change in quantity demandedquantity demanded: A : A movement alongmovement along the curve the curve

Caused by: a change in the price of that Caused by: a change in the price of that goodgood

Increase in quantity demanded: Increase in quantity demanded: movement down the curve (to the movement down the curve (to the right)right)

Decrease in quantity demanded: Decrease in quantity demanded: movement up the curve (to the left)movement up the curve (to the left)

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Demand vs. Quantity DemandedDemand vs. Quantity Demanded

Change in Change in demanddemand: a : a shift ofshift of the curve the curve

Caused by: a change in anything that Caused by: a change in anything that affects demand other than the price of affects demand other than the price of the goodthe good

Increase in demand: curve shifts rightIncrease in demand: curve shifts right Decrease in demand: curve shifts leftDecrease in demand: curve shifts left

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Shifters of DemandShifters of Demand

1. Change in consumer income1. Change in consumer income

A. Normal goods (shrimp)A. Normal goods (shrimp)

B. Inferior goodsB. Inferior goods

Ramen NoodlesRamen Noodles

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2. Change in number of consumers2. Change in number of consumers

Ex. Change in class sizeEx. Change in class size

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Change in Number of ConsumersChange in Number of Consumers

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3. Change in the price of a related 3. Change in the price of a related goodgood

A. Substitutes (Beef and Chicken)A. Substitutes (Beef and Chicken)

B. Compliments (Milk and Cereal)B. Compliments (Milk and Cereal)

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4. Change in expectations4. Change in expectations

A. Expected change in priceA. Expected change in price

B. Expected change in incomeB. Expected change in income

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5. Change in consumer tastes and 5. Change in consumer tastes and preferences.preferences.

Ex. What do you think happened to Ex. What do you think happened to the demand for Michael Phelps the demand for Michael Phelps posters?posters?

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Shifting Demand: change in Shifting Demand: change in consumer tastes and preferencesconsumer tastes and preferences

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ExamplesExamples

What would happen to demand?What would happen to demand?

1.1. What would happen to the demand What would happen to the demand for Beef if the price of chicken for Beef if the price of chicken increased?increased?

2.2. What would happen to your demand What would happen to your demand for steak (a normal good) if your for steak (a normal good) if your income decreased?income decreased?

3.3. What would happen to the demand What would happen to the demand for milk if the price of milk fell?for milk if the price of milk fell?

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The Supply CurveThe Supply Curve

The law of supplyThe law of supply: There is a direct : There is a direct (positive) relationship between the (positive) relationship between the price of a good or service and the price of a good or service and the amount that suppliers are willing to amount that suppliers are willing to produceproduce

Results in an upward sloping supply Results in an upward sloping supply curvecurve

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Ex. Deriving the Supply CurveEx. Deriving the Supply Curve

*Note*: As price increases, quantity *Note*: As price increases, quantity supplied increases.supplied increases.

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The height of the supply curve The height of the supply curve indicates the minimum price indicates the minimum price necessary to induce producers to necessary to induce producers to supply that additional unitsupply that additional unit

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Producer SurplusProducer Surplus

Producer surplusProducer surplus: The difference : The difference between the minimum price suppliers between the minimum price suppliers are willing to accept and the price are willing to accept and the price they actually receive.they actually receive.

Producer surplus is the area above the Producer surplus is the area above the supply curve but below price.supply curve but below price.

ex. What happens if price falls? Rises?ex. What happens if price falls? Rises?

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Example of consumer and producer Example of consumer and producer surplussurplus

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Supply vs. Quantity SuppliedSupply vs. Quantity Supplied

Change in Change in quantity suppliedquantity supplied: a : a movement alongmovement along the curve the curve

Caused by a change in the price of that Caused by a change in the price of that good:good:

Increase in quantity supplied: Increase in quantity supplied: Movement up the curve (to the right)Movement up the curve (to the right)

Decrease in quantity supplied: Decrease in quantity supplied: Movement down the curve (to the left)Movement down the curve (to the left)

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Supply vs. Quantity SuppliedSupply vs. Quantity Supplied

Change in Change in supplysupply: A : A shiftshift ofof the curve the curve

Caused by a change in anything that Caused by a change in anything that affects supply other than the price of affects supply other than the price of the goodthe good

Increase in supply: curve shifts rightIncrease in supply: curve shifts right Decrease in supply: curve shifts leftDecrease in supply: curve shifts left

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Shifters of SupplyShifters of Supply

1. A change in resource price1. A change in resource price

ex. An increase in the price of steelex. An increase in the price of steel

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2. A change in technology2. A change in technology

ex. The printing press ex. The printing press

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3. Changes in nature and politics3. Changes in nature and politics

ex. Crop Freezeex. Crop Freeze

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4. Changes in taxes4. Changes in taxes

ex. Yacht tax ex. Yacht tax

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ElasticityElasticity

InelasticInelastic: Changes in quantity : Changes in quantity are are notnot sensitive to changes in price sensitive to changes in price (inelastic curves are steeper).(inelastic curves are steeper).

ElasticElastic: Changes in quantity : Changes in quantity are are sensitive to changes in price (elastic sensitive to changes in price (elastic curves are flatter).curves are flatter).

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Market Equilibrium!Market Equilibrium!

A state in which the conflicting forces A state in which the conflicting forces of supply and demand are in of supply and demand are in balance.balance.

Occurs where the demand curve Occurs where the demand curve intersects the supply curve.intersects the supply curve.

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In market equilibrium:In market equilibrium:

all trades that generate more benefit then all trades that generate more benefit then costs are undertakencosts are undertaken

No trades where costs exceed benefits are No trades where costs exceed benefits are undertakenundertaken

The combined area of consumer and The combined area of consumer and producer surplus is maximizedproducer surplus is maximized

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The market equilibrium is economically The market equilibrium is economically efficient.efficient.

Efficient: no excess supply or excess Efficient: no excess supply or excess demanddemand

Excess supply: quantity supplied > Excess supply: quantity supplied > quantity demandedquantity demanded

Excess demand: quantity demanded Excess demand: quantity demanded > quantity supplied> quantity supplied

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Changes in DemandChanges in Demand

Demand changes: Demand changes: Price: moves in same directionPrice: moves in same direction Quantity: moves in same directionQuantity: moves in same direction

ex. Demand increasesex. Demand increases Price increasesPrice increases Quantity increasesQuantity increases

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Changes in SupplyChanges in Supply

Supply changes:Supply changes: Price: moves in Price: moves in oppositeopposite direction direction Quantity: moves in same direction Quantity: moves in same direction

ex. Supply increasesex. Supply increases Price decreasesPrice decreases Quantity increasesQuantity increases

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Changes In Both?Changes In Both?

What happens if supply and demand What happens if supply and demand both change at the same time?both change at the same time?

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The Labor MarketThe Labor Market

Price for labor is called the wage (W)Price for labor is called the wage (W) Quantity of labor is called employment Quantity of labor is called employment

(E)(E)

*Note: works just like the market for *Note: works just like the market for goods, only with a different name for goods, only with a different name for price (wage) and quantity (employment)price (wage) and quantity (employment)

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Labor DemandLabor Demand

1. Firms demand labor1. Firms demand labor

2. Labor demand curve is downward 2. Labor demand curve is downward sloping because as wage decreases, sloping because as wage decreases, firms will want to employ more firms will want to employ more peoplepeople

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Changes in Labor DemandChanges in Labor Demand

1. An increase in labor demand (labor 1. An increase in labor demand (labor demand shifts right)demand shifts right)

2. A decrease in labor demand (labor 2. A decrease in labor demand (labor demand curve shifts left)demand curve shifts left)

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Labor SupplyLabor Supply

1. Workers supply labor1. Workers supply labor

2. Labor supply curve is upward 2. Labor supply curve is upward sloping because as wage increases, sloping because as wage increases, people will want to work more.people will want to work more.

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Changes in Labor SupplyChanges in Labor Supply

1. Increase in labor supply: (labor 1. Increase in labor supply: (labor supply curve shifts right)supply curve shifts right)

2. Decrease in labor supply: (labor 2. Decrease in labor supply: (labor supply curve shifts left)supply curve shifts left)

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Linking the MarketsLinking the Markets

There is a close relationship between There is a close relationship between the demand for products and the the demand for products and the demand for resources used to make demand for resources used to make those productsthose products

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Linking the MarketsLinking the Markets

when the demand for a product when the demand for a product changes, the demand for the changes, the demand for the resources used to produce it will resources used to produce it will change in the same directionchange in the same direction

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Price FloorPrice Floor

Price floorPrice floor: A legally established : A legally established minimum price buyers must pay for a minimum price buyers must pay for a good or resourcegood or resource

A price floor above equilibrium price A price floor above equilibrium price creates a surpluscreates a surplus

A price floor below equilibrium price A price floor below equilibrium price does nothing does nothing

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Application: Minimum WageApplication: Minimum Wage

The minimum wage is an example of a The minimum wage is an example of a price floor.price floor.

Raising minimum wage increases Raising minimum wage increases excess labor supply (unemployment).excess labor supply (unemployment).

Application: Minimum WageApplication: Minimum Wage

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Price CeilingPrice Ceiling

Price ceilingPrice ceiling: A legally established : A legally established maximum price sellers can charge maximum price sellers can charge for a good or resource for a good or resource

A price ceiling below market A price ceiling below market equilibrium price creates a shortageequilibrium price creates a shortage

A price ceiling above market A price ceiling above market equilibrium price does nothingequilibrium price does nothing

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Application: Disaster MarketsApplication: Disaster Markets

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Application: Rent ControlApplication: Rent Control

Rent controls lead to shortages as well Rent controls lead to shortages as well as:as:

1.1. A decline in the supply of future A decline in the supply of future rental housingrental housing

2.2. A decline in quality of rental housingA decline in quality of rental housing3.3. Non-price methods of rationingNon-price methods of rationing4.4. Inefficient housing match-upsInefficient housing match-ups5.5. Black MarketsBlack Markets

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Black MarketsBlack Markets

Should we legalize drugs? Should we legalize drugs?

What are the costs and benefits?What are the costs and benefits?

Should we legalize prostitution?Should we legalize prostitution?

What are the costs and benefits?What are the costs and benefits?

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Impact of a tax – Lessons from Impact of a tax – Lessons from SnookiSnooki

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Impact of a TaxImpact of a Tax

A tax on a product will cause the supply A tax on a product will cause the supply curve to shift left by the amount of the curve to shift left by the amount of the tax.tax.

1.1. Raises the price that buyers payRaises the price that buyers pay

2.2. Reduces the amount sellers receiveReduces the amount sellers receive

3.3. Reduces the quantity soldReduces the quantity sold

4.4. Increases government revenueIncreases government revenue

5.5. Creates deadweight lossCreates deadweight loss

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Deadweight lossDeadweight loss

The loss to society that results from The loss to society that results from the loss of gains to trade that does the loss of gains to trade that does not occur because a tax was not occur because a tax was imposed.imposed.

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Tax IncidenceTax Incidence

Tax Incidence: Tax Incidence: The way the burden of a The way the burden of a tax is distributed among economic unitstax is distributed among economic units

(also known as the tax burden)(also known as the tax burden)

It does not depend on whom the tax is It does not depend on whom the tax is imposed.imposed.

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Tax IncidenceTax Incidence

Tax incidence Tax incidence doesdoes depend on depend on elasticity:elasticity:

The burden of the tax will fall on those The burden of the tax will fall on those who are relatively inelastic.who are relatively inelastic.

Deadweight loss will be lower if taxes Deadweight loss will be lower if taxes are placed on goods that are relatively are placed on goods that are relatively inelastic. inelastic.

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The Tax SystemThe Tax System

Average tax rate (ATR): the Average tax rate (ATR): the percentage of income paid in taxespercentage of income paid in taxes

ATR = tax liability / taxable ATR = tax liability / taxable incomeincome

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3 possibilities:3 possibilities:

1. Progressive tax: average tax rate rises 1. Progressive tax: average tax rate rises with incomewith income

2. Regressive tax: average tax rate falls with 2. Regressive tax: average tax rate falls with incomeincome

3. Proportional tax: average tax rate is the 3. Proportional tax: average tax rate is the same at all income levelssame at all income levels

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Marginal tax rate (MTR):Marginal tax rate (MTR): The The additional tax liability a person faces additional tax liability a person faces divided by his or her additional taxable divided by his or her additional taxable income.income.

MTR = change in tax liability / MTR = change in tax liability /

change in taxable incomechange in taxable income

*Note: Marginal tax rates are what is *Note: Marginal tax rates are what is important in personal decision making.important in personal decision making.

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Fairness and EfficiencyFairness and Efficiency

1.1. Is the progressive tax system Is the progressive tax system economically efficient?economically efficient?

2.2. Is the progressive tax system fair?Is the progressive tax system fair?

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The Laffer CurveThe Laffer Curve

The Laffer CurveThe Laffer Curve: A curve illustrating : A curve illustrating the relationship between the tax rate the relationship between the tax rate and tax revenue.and tax revenue.

Higher tax rates will not always lead to more tax Higher tax rates will not always lead to more tax revenue!!revenue!!

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SubsidiesSubsidies

Subsidy: Subsidy: A payment the government A payment the government makes to either the buyer or seller makes to either the buyer or seller when a good or service is purchased when a good or service is purchased or sold.or sold.

ex. Subsidizing treadmillsex. Subsidizing treadmills

*Note: Subsidies are costly*Note: Subsidies are costly

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Farm SubsidiesFarm Subsidies

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ReviewReview

1. Know why supply curve is upward sloping 1. Know why supply curve is upward sloping

and demand curve is downward slopingand demand curve is downward sloping

2. Find producer and consumer surplus2. Find producer and consumer surplus

3. Know the shifters of demand3. Know the shifters of demand

4. Know the shifters of supply4. Know the shifters of supply

5. Know the characteristics of market 5. Know the characteristics of market equilibriumequilibrium

6. Be able to do single and double shifts of 6. Be able to do single and double shifts of

demand and supply curvesdemand and supply curves

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ReviewReview

7. Know why the labor demand curve is 7. Know why the labor demand curve is downward sloping and the labor downward sloping and the labor supply is upward slopingsupply is upward sloping

8. Know the effects of price controls8. Know the effects of price controls9. Understand the impact of a tax9. Understand the impact of a tax10. Be able to calculate average tax 10. Be able to calculate average tax

rate and marginal tax raterate and marginal tax rate11. Understand the Laffer Curve11. Understand the Laffer Curve12. Understand the impacts of a subsidy12. Understand the impacts of a subsidy

supply and demand !!!!

Documents

demand curvelaw of demand

demand supply

demand curveex

demand shifters of demand2

demand curvethe height

downward sloping demand

price of milk

maximum price