MAKING A DIFFERENCE An old man walked up a shore littered with Thousands of starfish, beached and dying after a storm. A young man was picking them up and flinging them back into the ocean. “Why do you bother?” the old man scoffed. “You’re not saving enough to make a difference.” The young man picked up another starfish And sent it spinning back to the water. “Made a difference to that one,” he said.
AP Macroeconomics Demand and Supply 1-10-13
Price and Quantity • Price – the amount of money paid for an economic good/service • Ex. A gallon of gasoline has a price of $3.15 • Quantity – the amount of items • Ex. If I buy four loaves of bread the quantity is four
Demand • Consumers’ willingness and ability to buy an item at a given price • Willingness means that buyers must want the item • Ability means that buyers must have the financial resources to afford the item
The Law of Demand • The price of an item determines the quantity demanded • The lower the price the higher the quantity demanded • When goods/services are cheap, I tend to buy more • The higher the price the lower the quantity demanded • When goods/services are expensive, I tend to buy less • Therefore, the price of a good/service is inversely related with the quantity demanded
2 Reasons Why the Law of Demand Exists Substitution Effect • When apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears Diminishing Marginal Utility • Each additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower.
2 Reasons Why the Law of Demand Exists (cont.) Example relating to diminishing marginal utility Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the marginal utility of the third taco is more than the price of the taco I will buy the third taco
A Third Reason why the Law of Demand Exists (cont.) Income Effect • When things are expensive, money buys less • When things are cheap, money buys more
Demand Schedule Mr. Bharucha’s Demand for Breakfast Tacos Notice that Mr. Bharucha is obeying the law of demand. Now that’s making a good choice!!!!
Demand Curve Mr. Bharucha’s Demand for Breakfast Tacos P $2.00 $1.50 $1.00 $0.50 D Q 0 1 2 3
Changes in Demand • Price changes QUANTITYdemanded and we will see a shift ON (or along) the demand curve • Increase in Demand • More quantity demanded at all prices • Demand Curve shifts • Decrease in Demand • Less quantity demanded at all prices • Demand Curve shifts • Know that Price does not change Demand!
Increase in Demand P D1 D Q
Decrease in Demand P D D1 Q
Changes in DemandT.R.I.P.E. • The following cause the entire demand curve to shift • Tastes and Preferences • Related Goods (Complements & Substitutes) • Income • Population • Expectations of future price changes
Please have your homework on your desk and ready for me to come by and check it.
Changes in DemandT.R.I.P.E. • Tastes and Preferences • Preferences and tastes are affected by advertising, trends, health considerations, etc. • Ex. Demand for yogurt with probiotics has increased because many people believe there are health benefits to probiotics (increased immunity, healthier digestion) • Ex. Demand for cigarettes/smokeless tobacco has decreased because they cause cancer.
Changes in DemandT.R.I.P.E. • Related Goods • Complements – goods/services used in conjunction • Ex. When the price of gasoline increases the demand for its complement, Suburbans, decreases. • Ex. When the price of movie tickets decreases, the demand for theatre popcorn increases. • (When the price of movie tickets go down, we go to the movies more; when we go to the movies more we demand more popcorn)
T.R.I.P.E Related Goods (cont.) Related Goods • Substitutes – goods/services used in lieu of other goods/services • Ex. When the price of gasoline increases, the demand for ethanol increases. • Ex. When the price of movie tickets increases, the demand for DVD’s increases.
Changes in Demand T.R.I.P.E. • Income of consumers • When consumers’ income increases: • Demand for normal goods/services increases • Ex. More income means more demand for steak • Demand for inferior goods/services decreases • Ex. More income means less demand for Ramen noodles, generic food, and used cars
Changes in Demand T.R.I.P.E. Income of consumers • When consumers’ income decreases • Demand for normal goods/services decreases • Ex. Less income means less demand for steak • Demand for inferior goods/services increases • Ex. Less income means more demand for generic food, Ramen noodles, used cars
Changes in DemandT.R.I.P.E. • Population • More population = more demand • Ex. As America’s population grows so does the demand for housing • Less population = less demand • Ex. As Japan’s population declines so does the demand for education (fewer Japanese schools)
Changes in DemandT.R.I.P.E. • Expectations of future price changes • If consumers expect prices to rise in the future, then demand increases now • Ex. Prior to Hurricanes Katrina and Rita, consumers expected higher fuel prices and this caused demand for fuel to increase. • If consumers expect prices to fall in the future, then demand decreases now • Ex. If investors believe a companies stock prices are going to decline, then demand for that stock decreases.
Supply • Producers willingness and ability to sell a good/service
The Law of Supply • The price of an item determines the quantity supplied • The lower the price the lower the quantity supplied • When goods/services command a low price, suppliers tend to produce less of them • The higher the price the higher the quantity supplied • When goods/services command a high price, suppliers tend to produce more of them • Therefore, the price of a good/service is directly related with the quantity supplied
Reason for Law of Supply • The profit motive: When the market price rises (for example after an increase in consumer demand), it becomes more profitable for businesses to increase their output. • Higher prices send signals to firms that they can increase their profits by satisfying demand in the market.
Supply Schedule Supply of Breakfast Tacos
Supply Curve Supply of Breakfast Tacos P $2.00 $1.50 $1.00 $0.50 S 1 2 3 4 Q
Changes in Supply • Increase in Supply • More quantity supplied at all prices • Supply Curve shifts • Decrease in Supply • Less quantity supplied at all prices • Supply Curve shifts • Know that Price does not change Supply! • Price changes QUANTITY supplied
Increase in Supply P S S1 Q
Decrease in Supply P S1 S Q
Changes in Supply • Things that cause the whole supply curve to shift • Input costs • Competitors (number of) • Expectation of future price • Government action
Changes in SupplyI.C.E.G. • Input Costs • Prices of raw materials or other factors of production (Land, labor, capital) • Changes in productivity (efficiency gains/losses)
Changes in SupplyI.C.E.G. • Competition • Number of producers in the market • Ex. Fewer producers = less supply More Producers = more supply
ICEG • Expected Prices • If producers expect prices to rise in the future, then they supply less now, so that they can sell their good/service at the future higher price • Ex. If ExxonMobil expects the price of oil to rise in the future, they may not release as much oil to the market and may instead wait for the price to go up before they sell the oil.
ICEG • If producers expect prices to fall in the future then they supply more now while prices are still relatively high • Ex. If a corn farmer expects the price of corn to decrease in value, he would be inclined to sell it now before there is a decrease in price.
Changes in SupplyI.C.E.G. • Government action • Business taxes • Regulation • Subsidies (money from govt)
Equilibrium • When supply = demand, there is equilibrium in the market • Equilibrium creates a single price and quantity for a good/service
Market Equilibrium P p D S Q q
Changes in equilibrium • When supply or demand changes, the equilibrium price and quantity change • If demand increases then price increases and quantity increases • If demand decreases then price decreases and quantity decreases
Changes in equilibrium • If supply increases then price decreases and quantity increases • If supply decreases then price increases and quantity decreases
Increase in Demand P p1 p D1 D S Q q q1 D .: P ↑ & Q ↑
Decrease in Demand P p p1 D D1 S Q q1 q D .: P↓ & Q↓
Increase in Supply P p p1 D S S1 Q q q1 S .: P ↓ & Q ↑
Decrease in Supply P p1 p S1 D S Q q q1 S .: P↑ & Q↓
Disequilibrium • If price occurs at some point where supply and demand are not equal, then disequilibrium exists. • If the price is higher than the equilibrium price, then a surplus (Qs>QD) occurs • Suppliers will “churn out” more than “we” want to buy • If the price is lower than the equilibrium price, then a shortage occurs (Qs<QD) • Suppliers will “churn out” less than “we” want to buy
Market Disequilibrium (Price, px, above Equilibrium Price, pe) P px pe D S Q qe qd qs If price is px, then qd< qs .: surplus exists (surplus = qs – qd)
Market Disequilibrium (Price, px, below Equilibrium Price, pe) P pe px D S Q qs qe qd If price is px, then qs < qd .: shortage exists (shortage = qd – qs)
Each year, Junior Achievement partners with the Toyota Center to put on the Rockets Job Shadow, a job shadow aimed at giving students a behind-the-scenes look at the sports industry. We can only accommodate 500 students for this event, and the invitation is sent to all of our JA teachers across Houston. Therefore, spots fill up extremely quickly and are given away on a first-come-first served basis. Also, each teacher would only be able to bring approximately one class, or 35 students. Keep in mind, the spots will go quickly. Please send in the RSVP form directly to Necole Gibson, email@example.com to reserve a spot. Thank you!
Causes of Disequilibrium • Price floor – a minimum price for a good/service or resource determined outside of the market (floors are set above equilibrium) • Artificially raises minimum price • Ex. Minimum wage (price for labor)
Effective Price Floor (ex. Minimum wage in competitive unskilled labor market) P pmw pe D S Q qe qd qs If price floor is effective, then qd < qs .: surplus labor exists