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Supply and Demand: An Introduction

Supply and Demand: An Introduction. Supply and Demand: An Introduction. How do consumers get the goods and services they want in the right quantities and qualities? Some goods and services are allocated by the market forces of supply and demand. Supply and Demand: An Introduction.

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Supply and Demand: An Introduction

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  1. Supply and Demand: An Introduction

  2. Supply and Demand: An Introduction • How do consumers get the goods and services they want in the right quantities and qualities? • Some goods and services are allocated by the market forces of supply and demand Chapter 3 - Supply and Demand: An Introduction

  3. Supply and Demand: An Introduction • Why do some goods and services have shortages or surpluses and others do not? • Some good and supplies services are regulated by government Chapter 3 - Supply and Demand: An Introduction

  4. What, How, and For Whom? Central Planning Versus the Market • Three Problems All Economic Systems Must Address • What should be produced? • How should it be produced? • For whom will it be produced? Chapter 3 - Supply and Demand: An Introduction

  5. What, How, and For Whom? Central Planning Versus the Market • Centralized Economic Organizations • Agrarian society • Former Soviet Union • Cuba • North Korea • China • Bureaucracy Chapter 3 - Supply and Demand: An Introduction

  6. What, How, and For Whom? Central Planning Versus the Market • A small number of individuals address: • What • Establish production targets for factories and farms • How • Plan how to achieve the goals • For Whom • Distribute the goods and services produced Chapter 3 - Supply and Demand: An Introduction

  7. What, How, and For Whom? Central Planning Versus the Market • Free-Market or Capitalist Economic System • Individual choices determine: • Which careers to pursue • Which products to produce or buy • When to start and shut-down a business • Who gets what is decided by individual preferences and purchasing power Chapter 3 - Supply and Demand: An Introduction

  8. Buyers and Sellers In Markets • Market • Consists of all buyers and sellers of a good or service • What do you think? • What determines the price of pizza, gasoline, a car wash, or other goods and services? Chapter 3 - Supply and Demand: An Introduction

  9. Buyers and Sellers In Markets • The Demand Curve • A schedule or graph that tells us the quantity of a good that buyers wish to buy at each price Chapter 3 - Supply and Demand: An Introduction

  10. Buyers and Sellers In Markets • A Property of Demand • As price of a good or service goes down the quantity consumers wish to buy will increase • Therefore, the demand curve is downward-sloping Chapter 3 - Supply and Demand: An Introduction

  11. 4 3 2 Demand 8 12 16 The Daily DemandCurve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) Chapter 3 - Supply and Demand: An Introduction

  12. Buyers and Sellers In Markets • The Demand Curve • Why do buyers purchase a greater quantity at lower prices and vice-versa? • The substitution effect • The income effect Chapter 3 - Supply and Demand: An Introduction

  13. Buyers and Sellers In Markets • The Substitution Effect • The change in the quantity demanded of a good that results because buyers switch to substitutes when the price of the good changes Chapter 3 - Supply and Demand: An Introduction

  14. Buyers and Sellers In Markets • The Income Effect • The change in the quantity demanded of a good that results because a change in the price of a good changes the buyer’s purchasing power Chapter 3 - Supply and Demand: An Introduction

  15. Buyers and Sellers In Markets • The Cost-Benefit Principle • The reservation price is the benefit the buyer receives from the good • The cost of the good is its market price • If the reservation price (benefit) exceeds the market price (cost) the consumer will purchase the good • At higher prices, benefit will exceed cost for a smaller quantity than at lower prices Chapter 3 - Supply and Demand: An Introduction

  16. The buyers reservation price:The largest dollar amount the buyer would be willing to pay for a good 4 3 2 Demand 8 12 16 Buyers and Sellers In Markets Price ($ per slice) Quantity (1000s of slices per day) Chapter 3 - Supply and Demand: An Introduction

  17. Buyers and Sellers In Markets Horizontal Interpretation Price ($ per slice) Price determines quantity demanded 4 3 2 Demand 8 12 16 Chapter 3 - Supply and Demand: An Introduction

  18. Buyers and Sellers In Markets Vertical Interpretation Price ($ per slice) Quantity measures the marginal buyer’s reservation price 4 3 2 Demand 8 12 16 Chapter 3 - Supply and Demand: An Introduction

  19. Buyers and Sellers In Markets • The Supply Curve • A curve or schedule showing the quantity of a good that sellers wish to sell at each price Chapter 3 - Supply and Demand: An Introduction

  20. Buyers and Sellers In Markets • Question • Will the opportunity cost of producing additional units of pizza increase or decrease? • Hint:Low-hanging-fruit principle Chapter 3 - Supply and Demand: An Introduction

  21. Buyers and Sellers In Markets • The Supply Curve • Sellers must receive a higher price to produce additional units of product to cover the higher opportunity costs of each additional unit Chapter 3 - Supply and Demand: An Introduction

  22. Supply 4 3 2 8 12 16 The Daily SupplyCurve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) Chapter 3 - Supply and Demand: An Introduction

  23. The Daily SupplyCurve for Pizza in Chicago Horizontal Interpretation Price ($ per slice) Supply 4 Shows the quantity produced for each price 3 2 Quantity (1000s of slices per day) 8 12 16 Chapter 3 - Supply and Demand: An Introduction

  24. The Daily SupplyCurve for Pizza in Chicago Vertical Interpretation Price ($ per slice) Supply 4 Shows the marginal cost (reservation price) for producing each additional unit 3 2 Quantity (1000s of slices per day) 8 12 16 Chapter 3 - Supply and Demand: An Introduction

  25. The Daily SupplyCurve for Pizza in Chicago • Seller’s Reservation Price • The smallest dollar amount for which a seller would be willing to sell an additional unit, generally equal to marginal cost Chapter 3 - Supply and Demand: An Introduction

  26. Market Equilibrium • Equilibrium • A system is in equilibrium when there is no tendency for it to change • Market Equilibrium • Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price Chapter 3 - Supply and Demand: An Introduction

  27. Supply Equilibrium at $3 Quantity Demanded = Quantity Supplied Demand The Equilibrium Price and Quantity of Pizza In Chicago Price ($ per slice) 4 3 2 Quantity (1000s of slices per day) 8 12 16 Chapter 3 - Supply and Demand: An Introduction

  28. Market Equilibrium • Equilibrium Price and Equilibrium Quantity • The values of price and quantity for which quantity supplied and quantity demanded are equal Chapter 3 - Supply and Demand: An Introduction

  29. Market Equilibrium • What Do You Think? • Would buyers prefer a lower price than the equilibrium price? • Would sellers prefer a higher price than the equilibrium price? Chapter 3 - Supply and Demand: An Introduction

  30. Excess supply = 8,000 slices per day Supply Demand Excess Supply Price ($ per slice) 4 3 2 Quantity (1000s of slices per day) 8 12 16 Chapter 3 - Supply and Demand: An Introduction

  31. Excess Demand Price ($ per slice) Supply 4 Excess demand = 8,000 slices per day 3 2 Demand Quantity (1000s of slices per day) 8 16 Chapter 3 - Supply and Demand: An Introduction

  32. Points Along the Demand and Supply Curves of a Pizza Market Chapter 3 - Supply and Demand: An Introduction

  33. Graphing Supply and Demand and Finding the Equilibrium Price and Quantity Price ($per slice) Supply 5 4 The Equilibrium Price = $2.50 The Equilibrium Quantity = 5 3 2.50 2 1 Demand Quantity (1000s of slices per day) 0 2 4 6 8 10 5 Chapter 3 - Supply and Demand: An Introduction

  34. Market Equilibrium • What Do You Think? • Is the market equilibrium always an ideal outcome for all market participants? Chapter 3 - Supply and Demand: An Introduction

  35. An Unregulated Housing Market Monthly Rent ($/apartment) Supply What Do You Think? Is $1600 more than some people can afford? 1,600 Demand Quantity (Millions of apartments/day) 2 Chapter 3 - Supply and Demand: An Introduction

  36. Rent Controls Monthly Rent ($/apartment) Supply 2,400 Excess demand = 2 million apartments per month 1,600 Controlled = 800 Demand Quantity (Millions of apartments/day) 0 1 2 3 Chapter 3 - Supply and Demand: An Introduction

  37. Market Equilibrium • Rent Controls Reconsidered • Other consequences of rent controls • Maintenance will decline and housing quality will fall • Illegal payments • Creation of co-ops and conversion to condominiums • Reduction in household mobility • Discrimination Chapter 3 - Supply and Demand: An Introduction

  38. Market Equilibrium • What do you think? • How can we make housing affordable for poor people without using rent ceilings? Chapter 3 - Supply and Demand: An Introduction

  39. Rent Controls Monthly Rent ($/apartment) Supply 1,200 What is the impact of a rent control set at $1,200/month? 800 Demand Quantity (Millions of apartments/day) 0 1 2 3 Chapter 3 - Supply and Demand: An Introduction

  40. Price Controls In The Pizza Market Price ($ per slice) Supply 4 Excess demand = 8,000 slices per day 3 Price ceiling = 2 Demand Quantity (1000s of slices per day) 8 12 16 Chapter 3 - Supply and Demand: An Introduction

  41. Market Equilibrium • Pizza Price Controls? • Market responses to a pizza price ceiling • Long lines • Preferential treatment to selected customers • Alternative pricing strategies • Poorer quality ingredients • Black-market pizzas Chapter 3 - Supply and Demand: An Introduction

  42. Predicting and Explaining Changes In Prices and Quantities • Distinguishing Between: • A change in the quantity demanded • A movement along the demand curve that occurs in response to a change in price • A change in demand • A shift of the entire demand curve Chapter 3 - Supply and Demand: An Introduction

  43. Increase in quantity demanded D An Increase In Quantity Demanded vs. An Increase In Demand Price ($/can) 6 5 4 3 2 1 Quantity (1000s of cans/day) 0 2 4 6 8 10 12 Chapter 3 - Supply and Demand: An Introduction

  44. An Increase In Quantity Demanded vs. An Increase In Demand Price ($/can) D’ D 6 5 4 Increase in demand 3 2 D’ 1 D Quantity (1000s of cans/day) 0 12 Chapter 3 - Supply and Demand: An Introduction

  45. Predicting and Explaining Changes In Prices and Quantities • Change in the quantity supplied • A movement along the supply curve that occurs in response to a change in price • Change in supply • A shift of the entire supply curve Chapter 3 - Supply and Demand: An Introduction

  46. S Increase in quantity supplied S An Increase In Quantity Supplied vs. An Increase In Supplied Price ($/can) 6 5 4 3 2 1 Quantity (1000s of cans/day) 0 2 4 6 8 10 Chapter 3 - Supply and Demand: An Introduction

  47. An Increase In Quantity Supplied vs. An Increase In Supplied Price ($/can) 6 S S’ 5 4 3 Increase in supply 2 1 S S’ Quantity (1000s of cans/day) 0 2 4 6 8 10 Chapter 3 - Supply and Demand: An Introduction

  48. S 1.40 1.00 D’ D 40 58 The Effect on the Market for TennisBalls of a Decline in Court-Rental Fees Price ($/ball) Quantity (letters/month) Chapter 3 - Supply and Demand: An Introduction

  49. Predicting and Explaining Changes In Prices and Quantities • Shifts in Demand • Complements • Two goods are complements in consumption if an increase (decrease) in the price of one cause a decrease (increase) in the demand for the other Chapter 3 - Supply and Demand: An Introduction

  50. S P P’ D D’ Q’ Q The Effect on the Market for Overnight LetterDelivery of a Decline in the Price of Internet Access Price ($/letter) Quantity (letters/month) Chapter 3 - Supply and Demand: An Introduction

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