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The Demand and Supply Curve Economic Model

This guide explores the Demand and Supply Curve economic model, focusing on the concepts of the demand curve and the supply curve. It explains what occurs when supply meets demand and the factors that can lead to increases or decreases in either. Using the example of a can of Coke, we will illustrate these principles in action, making it easier to comprehend how market dynamics function and the implications for pricing and availability.

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The Demand and Supply Curve Economic Model

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  1. The Demand and Supply Curve Economic Model Objectives: Understand the demand curve Understand the supply curve What happens when supply and demand meet and what causes an increase or decrease in one or the other?
  2. Can of Coke How much are you willing to pay for an ice cold can of Coca Cola, that I will allow you to drink in class? Let´s graph the result
  3. Can of Coke 100 soles? 20 soles? 12 soles? 8 soles? 5 soles? 50 centimos? Whatt do wehave? Gotonextslide
  4. The Demand Curve As the price increases (goes up) the quantity demanded decreases (goes down) = MOVEMENT ALONG THE CURVE However, some things can actually move the curve, examples: Changes in income (how much they people get paid) Changes in consumer preference Competitor prices
  5. Movement (increase or decrease) of the demand curve Practice: In which direction (right = increase or left = decrease) does the demand curve move in the following situations: People get a pay rise (or in our example, your parents give you more money to bring to school) A competitor decreases its prices
  6. Movement (Increase or decrease) of the demand curve You have a very successful advertisement on TV The government increases income taxes Ther product is found to be harmful to your health
  7. The Supply Curve How much you would have to be paid (in soles, by other students) to be make a Mother´s Day Card that you will make yourself (to sell to other students for their moms) For each card, 250 soles, 40 soles, 20 soles, 8 soles, 4 soles, 1 sol What do we have? Go to next slide
  8. The Supply Curve As the price increases, supply increases = MOVEMENT ALONG THE CURVE However, some things can actually move the supply curve to the right (= increase)or tothe left (= decrease) Raw materials become cheaper New machinery Labor costs go up Energy costs increase
  9. TODAY´S CLASS – 4.1 & 4.2 Objective: Solidifyourknowledge of Demand and Supply Curve Economicmodel And……teachtheabsentstudentsaboutthemodel…..Studentsabsentlastweekwillbetutoredbyclassmates, and willtake a 10 minute quiz at theend of theclass
  10. Review REVIEW
  11. PuttingtheDemand and Supply Curves Together Wedrew a demand curve Wedrew a supply curve Whenweputthemtogetherwehave a modelfor a MARKET FOR A PARTICULAR GOOD OR SERVICE, WHERE BUYERS (DEMAND) AND SELLERS (SUPPLY) MEET
  12. Demand and Supply Curves meet Thepoint of equilibrium, wherethetwo curves meet, ormarketclearingprice(point A)iswherethequantitydemandedequalsthequantitysupplied at a certainprice
  13. Now, how do thefourdifferentpossibilities look? 1. Increase in demand - DEMAND CURVE SHIFTS TO THE THE RIGHT INCREASE IN INCOME, DECREASE IN TAXES, INCREASE IN THE PRICE OF FANTA, ESPECIALLY HOT WEATHER END UP AT EQUILIBRIUM POINT B, with a higherprice and a higherquantitydemanded
  14. Decrease in Demand 2. Decrease in demand - DEMAND CURVE SHIFTS TO THE LEFT INCREASE IN TAXES, DECREASE IN INCOME, A NEW JOB THAT PAYS LESSS, DECREASE IN PRICE OF COMPETITORS PRODUCT (FANTA), COLD WEATHER ALL SUMMER END UP AT EQUILIBRIUM POINT C, with a lowerprice and lowerquantitydemanded
  15. Increase in Supply 3. Increase in supply - SUPPLY CURVE SHIFTS TO THE RIGHT RAW MATERIALS TO MAKE THE MOTHERS DAY CARD ARE CHEAPER, YOU GET SOME NEW SCISSORS OR MARKERS OR TAKE AN ART CLASS ANY OF WHICH MAKE YOU ABLE TO MAKE THE CARDS QUICKER, YOUR TEACHERS GIVE YOU EXTRA TIME TO MAKE THE CARDS IN CLASS, FOR COKE COULD BE A NEW DISCOVERY THAT MAKES THE PROCESSS TO MAKE COKE CHEAPER, OR THE TAXES THEY HAVE TO PAY TO THE GOVERNMENT DECREASE, OR THEIR WORKERS BECOME MORE EFFICIENT IN MAKING COKE END UP AT EQUILIBRIUM POINT E, with a higherprice and lowerquantitydemanded
  16. Decrease in Supply Decrease in supply – SUPPLY CURVE SHIFTS TO THE LEFT THE COST OF THE RAW MATERIALS INCREASE, YOUR SCISSORS BREAK AND YOU HAVE TO USE OLD SCISSORS OR BAD MARKERS, OR YOUR TEACHERS DONT GIVE YOU ANY TIME TO MAKE THE CARDS IN CLASS. FOR COKE, COULD BE INCREASE IN THE TAXES THEY HAVE TO PAY, OR THEIR MACHINERY BREAKS, OR THEIR EMPLOYEES SAY THEY WANT TO BE PAID MORE MONEY.. END UP AT EQUILIBRIUM POINT F, with a lowerprice and lowerquantitydemanded
  17. 4.2 Group Project Results Diego´s group - 3 GHMs, 3 extra points Carlos Siles´ group - 2 GHMs, 2 extra points Santiago´s group - 1 GHM, 1 extra point toofewgroups(onelessthanplanned) confusiononstudents´ names (hadtochangegroups) confusiononwhatwasrequired poorexamresultsforthegroupproject, etc…
  18. 4.1 and 4.2 - ANSWER KEY AND WIKISPACES Answerkeybeinghandedouttoday Powerpointisonwikispaces Please be readyforanyexamquestion, and asktheteacherifyouneedhelp Wewillhavetwoexamslaterthisterm (2 assessments)
  19. ImportantMacroeconomicLecture – 5 InterrelatedTopics Interest rates and Inflation (closely linked) Unemployment the Business Cycle Leading and Lagging Indicators
  20. ThePartyisgoing fine Level of EconomicActivity = amount of spendingbybusinesses and people, and howmanypeople are employed and spendingtheirearningsongoods and services Rate of Inflation Amount of Borrowing bybusinesses and consumers Level of InterestRates
  21. Danger! Thingsstill ok, butmaybepartyingtoomuch Level of EconomicActivity = amount of spendingbybusinesses and people, and howmanypeople are employed and spendingtheirearningsongoods and services Rate of Inflation Amount of Borrowing bybusinesses and consumers Level of InterestRates
  22. Uh oh, wepartiedtoomuch - Recession Level of EconomicActivity UNEMPLOYMENT GOES UP TOO HIGH CAUSING ECONOMIC ACTIVITY TO START TO REVERSE (RECESSION IN WORST CASE) Inflationis TOO HIGH SO THE Amount of Borrowing DECREASES InterestRates GO UP TOO MUCH
  23. InterestRates Itisthecost of money, itiswhatyoupaytothebankoranotherpersonwholendsyoumoney You are theborrower and get a loan, and youmustpaythemoney back tothelender(thebank) Theterms of your loan (howmanyyearsisthe loan for, and theinterestrate) will be put in a contractcalled a promissary note, whichsaysthatyoupromisetopaythemoney back tothelender
  24. Why do youhavetopayinterest? Anybankorcompanyorpersonthat has money can do somethingthemselfwithitand earnmoney Money is a toolthatallowsustomake more money (likebuying a businessthatthenbecomeprofitable and letsyouearn more moneythanyouhadbefore) So ifyou are goingto use theirmoneyinstead of lettingthem use theirown YOU OF COURSE HAVE TO PAY THEM FOR USING YOUR MONEY
  25. Interestrates So borrowingmoneyislike RENTING money, likeifyourent a house in Asia (Perú) forthesummer, youpayrentbecausetheowner of thehousecouldeither: A) spendthesummertherethemself B) Let a friend of familymemberstaythere B) rentitouttosomeoneelse and collectrent
  26. NextDefinition - Inflation Inflation –istherate of increase in theprices of goods and services in aneconomy (each country takes a basket of approximately 30 goodsandservices) Every country has itsowninflationrate, calculatedmonthly and annually In therare case thatprices are going DOWN, itiscalleddeflation
  27. Goods and Services included in the US inflation rate (called the Consumer Price Index) RECREATION (televisions, cable television, pets and pet products, sports equipment, admissions) EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories) OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses)
  28. Goods and Servicesincluded in the US inflationrate(calledtheConsumer Price Index) FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks) HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture); APPAREL (men's shirts and sweaters, women's dresses, jewelry) TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance) MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
  29. Inflation Question: Iftheinflationrate in 2011 was 3.2% and theinflationrate in 2012 was 2.4%, in 2012 didprices: A) godown in 2012 B) go up at a lesserrate in 2012 than in 2011 C) go up at a fasterrate in 2012 than 2011
  30. Answer B) go up at a lesser rate in 2012 than in 2011 Now rising at 2.4% instead of 3.2%
  31. What determines interestrates? 1) The amount of time you have the money The longer the amount of time, the higher the interest rate because there is more of a chance that something could go wrong and you cannot pay back the money
  32. Interestrates – Length of time Company A borrowsfor 1 year Interestratemightbe 6% Company A borrowsfor 20 years Interestratemightbe 10%
  33. What determines interestrates? 2) The general level of interestrates in aneconomy, which are determinedbytheinflationrate Ifthereishighinflation, you are losingpurchasingpower of yourmoney, so youdemandto be paid a higherinterestrate so as protectyoufromthatloss in purchasingpower
  34. LostPurchasingPower? Itmeansthatyourmoneyislosingitsvalue (calledlostpurchasingpower) Iftheinflationrateis 2%, yoursame $1.00 has toworth $1.02 tobuythesameamoung of thingsoneyearlater Thatiswhyyoursalarymustgo up by at leastthesameamount as therate of inflation, oryou are worse off
  35. And lostpurchasingpoweraffectsthelenders - Why? SO THEY DON´T GET PAID BACK WITH LESS MONEY THAN THEY LENT
  36. Example Jan 2014 - borrow $10.00 2014 inflationrate = 8% December 2014, pay back the $10 tothebank, you are onlypayingthebankabout $9.20
  37. What determines theinterestrates? 3) Theriskiness of makingthe loan (whotheborroweris) Forexample, Microsoft is a lessriskycompanytomake a loan tothan a smallVenezuelancompanythat has notbeenprofitable (has beenlosingmoney)
  38. More onInflation A highinflationrateisverybadforaneconomy (hurtsgrowth) Deflation can also be bad Leavinguswiththefactthatthereisan ideal rate of inflation, nottoohigh, nottoolow, around 2 to 3%
  39. Inflation can be causedtwoways 1) Demand pull - the economy is growing too fast (so the demand curve keeps shifting up to the right for all products), increasing prices 2) Cost Push - an event that makes the price of some important goods in the economy go up (and supply curve of many products shifts to the left)
  40. Example of CostPushInflation If there were a war in the middle east between Iraq and Iran, the price of oil would go way up, and it would affect the inflation rate of almost all countries
  41. Inflation Inflation in LEDC´sisalmostalwayshigherthaninflation in MEDC´s TheMEDC´shave more matureeconomies and thereislessgrowth and/orfluctuation in theeconomy, leadingthelower, more stableinflationrates
  42. Inflationrates LEDCs - 5.5% average MEDCs - 2.2% average http://www.tradingeconomics.com/country-list/inflation-rate
  43. Inflation – isitgoodforanyone? Itisonlygoodforpeoplethathaveinvestments, like in real estate (a home orbuilding)
  44. AND NOTE -- There are goodsthat are havelimitedsupply, and theywill be immunetoinflation The 1913 Libertynickle (5 cents in USA) isworth $3 milliondollarsbecausethere are so few of thecoinsthatexist
  45. Whyisanincrease in inflationbad? It makes interest rates go up (lenders need to charge higher rates to protect themselves from inflation)
  46. Why is an increase in interest rates bad? If interest rates rise too much, businesses stop borrowing money for projects and expanding (which is what leads to the growth in an economy), and consumers stop borrowing also That makes the economy grow at a slower rate, or, when interest rates become really high, it causes a recession
  47. It causes a recession in theworst case! A recessionis a DECLINE in economicactivityfor at leastsixmonths (twoconsecutive 3-month quarters)
  48. Recession A recession causes people to lose jobs and have hard times
  49. So why do youthinkdeflationisalsobad? Thinkabout a companythatwouldliketocharge more foritsproduct in 2014 thanitischarging in 2013 tomake more profit……..
  50. ANSWER Ifthereisdeflation, thenthecompanywillhave a hard time increasingitsprices And willmakelessmoney, and that can affectmanycompanies and thewholeeconomy
  51. ANSWER And ifmanycompanies are notmaking as muchmoneythentheycannotemply as manypeople and wehavehigherunemployment
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