Supply & Demand 4 Markets STUDY this power point CAREFULLY! # 13-#18 #19 ©2012, TESCCC

OR Law of Demand When price increases . . . When price decreases . . . quantity demanded decreases. OR When price decreases . . . quantity demanded increases. ©2012, TESCCC

This is called the law of demand!!! It shows the inverse relationship between price & quantity demanded. P↑ QD↓ P↓ QD↑ ©2012, TESCCC

Change in Quantity Demanded A change in quantity demanded is caused by a change in price. This is the only reason for a change in quantity demanded. ©2012, TESCCC

P P2 P1 D Q2 Q1 Q  QD ©2012, TESCCC

Law of Supply As the price of an item goes up, the quantity supplied will increase; as the price of an item goes down, the quantity supplied will decrease. P QS or P QS Direct relationship between price and quantity supplied (QS) Given production costs, a higher price means greater profits and an incentive for producers to increase quantity supplied. ©2012, TESCCC

Change in QS Caused by a change in the price of the item. This is shown by a movement along the curve. ©2012, TESCCC

Change in QS P S1 P1 P2 Q2 Q1 Q ©2012, TESCCC

Sometimes there are non-price determinants that cause a shift in the demand or supply curve. The original demand or supply curve is no longer valid. We must have a new curve. This is called a shift of the demand or supply curve ©2012, TESCCC

The entire demand curve shifts. Increase in Demand Decrease in Demand P P D1 D2 D2 D1 Q Q Shift Right Shift Left ©2012, TESCCC

SIX Reasons for a Change in Demand (shifts the whole demand curve) NOT about price Change in consumer Taste Change in consumer Income Change in Market Size or buyers Change in consumer Expectations Substitutes Compliments ©2012, TESCCC

Examples! Demand curve shift ** John gets a raise. This causes a shift in the demand curve. What direction does the curve shift? ** Mariah sees that the price of Tostito chips has gone up, so she buys Doritos instead. This is an example of a ______. **A news report says that the spinach in Texas has poison. This causes a change in consumer _______. The curve shifts to the ________ ©2012, TESCCC

Demand curve shift ** John gets a raise. This causes a shift in the demand curve. What direction does the curve shift? RIGHT (increase) ** Mariah sees that the price of Tostito chips has gone up, so she buys Doritos instead. This is an example of a SUBSTITUTE__. ** A news report says that the spinach in Texas has poison. This causes a change in consumer TASTE_. The curve shifts to the LEFT (decrease) ©2012, TESCCC

Profit is what motivates producers so the higher the profit, the greater amount they will produce. Consumers want the BEST product at the LOWEST cost. Consumers want to save money! ©2012, TESCCC

Buyers and sellers have opposite goals. Buyers want the lowest price Buyers and sellers have opposite goals. Buyers want the lowest price. Sellers want the highest price. Buyers relate to DEMAND Sellers relate to SUPPLY ©2012, TESCCC

Change in Supply Change in cost of inputs (resources) Productivity Change in technology Change in taxes or subsidies Change in government regulations Change in # of sellers Change in producer expectations ©2012, TESCCC

Decrease in Supply - Shift Left Increase in Supply - Shift Right $ S1 $ S2 Q Q Decrease in Supply - Shift Left Increase in Supply - Shift Right ©2012, TESCCC

Markets Schedule –LIST of Price and QS Demand Schedule $ QD 10.00 60 20.00 40 30.00 20 Supply Schedule $ QS 10.00 20 20.00 40 30.00 60 ©2012, TESCCC

Market – Supply & Demand curve 13. What is the equilibrium price below? $ 30 S 20 10 D Q 20 40 EQ 60 ©2012, TESCCC

13. The answer is $20. Look back at the graph if you missed this 13. The answer is $20. Look back at the graph if you missed this! Market equilibrium – where quantity demanded and quantity supplied are equal ©2012, TESCCC

Surplus A price above equilibrium creates a surplus. A surplus is when QS is greater than QD. ©2012, TESCCC

Shortage A price below equilibrium created a shortage. Shortage is when QD is greater than QS. ©2012, TESCCC

Sample Test Questions ©2012, TESCCC

Sample Test Questions – notice that these 2 questions ask the same thing in a different way. ©2012, TESCCC

4 MARKETS 1-Pure Competition Model does not exist Infinite number of sellers Consumers have access to all information. Sellers have no control over prices. Identical products Buyer does not prefer one item over the other. Most competitive ©2012, TESCCC

Monopolistic Competition Most common Some product differentiation Non-price competition Most competitive of imperfect competition- many sellers Most companies operate here Because it’s easy to start. ©2012, TESCCC

Oligopoly Few, large firms dominate the market (70-80% of the market concentration). Not as much competition- Firms have some control over prices. Price leadership Collusion Price fixing ©2012, TESCCC

Monopoly One seller No competition- barriers to market entry No product differentiation Legal types Natural Technological- Patent or copyright Governmental ©2012, TESCCC