unit ii markets and prices. law of demand consumers buy more of a good when its price decreases and...
DESCRIPTION
Inverse or Indirect Relationship As Price goes Down…...……….Quantity Demanded goes Up As Price goes Up……..... …Quantity Demanded goes DownTRANSCRIPT
UNIT IIMarkets and
Prices
Law of Demand• Consumers buy more of a good
when its price decreases and less when its price increases
Inverse or IndirectRelationship
• As Price goes Down…...……….Quantity Demanded goes Up• As Price goes Up…….....
…Quantity Demanded goes Down
Elasticity of Demand“Measure of how consumers
react to a price change”• Elastic Demand–Demand that is very sensitive to a change in
price• Inelastic Demand–Demand that is not very sensitive to a
change in price
Factors Affecting Elasticity of Demand
• Availability of Substitutes– More substitutes = Elastic Demand
• Relative Importance– Large % of budget = Elastic Demand
• Necessities vs. Luxuries– Necessities = Inelastic; Luxuries = Elastic
• Change over Time– More time to adjust = Elastic
Law of Supply• Sellers sell more of a good when
its price increases and less when its price decreases
Direct Relationship
• As Price goes Down…...……….Quantity Supplied goes Down• As Price goes Up…….....
…Quantity Supplied goes Up
Elasticity of Supply“Measure of the way Quantity Supplied
reacts to a change in price”
• Elastic Supply–Supply that is very sensitive to a change in price
• Inelastic Supply–Supply that is not very sensitive to a change in
price
Factors Affecting Elasticity of Supply
• Cost of Producing Additional Units–High Cost = Inelastic Supply
• Time–More Time = Elastic Supply
S
D
P
Q
Supply and Demand Graph
S
D
P
Q
Market Equilibrium
S
D
P
Q
Shortages
P1
Q1 Q2
S
D
P
Q
Surpluses
P1
Q1 Q2
S
D
P
Q
Increase in DemandSupply Constant
D1
P1
Q1
S
D
P
Q
Decrease in DemandSupply Constant
D1
P1
Q1
Factors that Shift Demand
• Substitute Goods– Price of substitute good increases; Demand for other
good increases– Price of substitute good decreases; Demand for other
good decreases• Population– Increase in population; Demand for goods desired by
population increases– Decrease in population; Demand for goods desired by
population decreases
• Advertising– Successful advertising campaign; Demand increase for
that good– Unsuccessful advertising campaign; Demand decreases
for that good• Complementary Goods– Price of complementary good increases; Demand for
other good decreases– Price of complementary good decreases; Demand for
other good increases
• Expectations– Consumer expectation of a price decrease in the
future for a good; Demand for that good “NOW” decreases
– Consumer expectation of a price increase in the future for a good; Demand for that good “NOW” increases
• Income– Normal Goods
• Income rises; Demand for normal goods increases• Income falls; Demand for normal goods decreases
– Inferior Goods• Income rises; Demand for inferior goods decreases• Income falls; Demand for normal goods increase
• Tastes– Increased preference for a good; Demand increases– Decreased preference for a good; Demand decreases
S
D
P
Q
Increase in SupplyDemand Constant
Q1
S1
P1
S
D
P
Q
Decrease in SupplyDemand Constant
S1
Q1
P1
Factors That Shift Supply
• Technology– Advances in technology for a good; Supply increases– Decreases in technology for a good; Supply
decreases• Regulations– Increases in Gov’t regulations on production of a
good; Supply decreases– Decreases in Gov’t regulations on the production of
a good; Supply increases
• Input Costs– Increase in input costs for a good; Decrease in Supply– Decrease in input costs for a good; Increase in Supply
• Subsidies– Increase in the subsidies for the production of a
good; Supply increases– Decrease in the subsidies for the production of a
good; Supply decreases
• Taxes– Increase in the taxes on the production of a good;
Supply decreases– Decrease in the taxes on the production of a good;
Supply increases• Expectations– Sellers expect a higher price in the future for their
good; Supply “NOW” decreases– Sellers expect a lower price in the future for their
good; Supply “NOW” increases
• Number of Suppliers– Increase in the number of suppliers for a good;
Supply increases– Decrease in the number of suppliers for a good;
Supply decreases