Session 4 Supply and Demand Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank.

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Presentation transcript:

Session 4 Supply and Demand Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System.

TEKS (2) Economics. The student understands the interaction of supply, demand, and price. The student is expected to: (A) understand the effect of changes in price on the quantity demanded and quantity supplied; (B) identify the non-price determinants that create changes in supply and demand, which result in a new equilibrium price; and (C) interpret a supply-and-demand graph using supply-and-demand schedules.

Teaching the Terms Market Demand Supply Determinants Surplus Shortage

Markets A market facilitates the interaction of a buyer and a seller as they complete a transaction Buyers, as a group, determine the demand Sellers, as a group, determine the supply

Characteristics of Competitive Markets Identical goods or services Enough buyers and sellers so that no participant can influence the market price – everyone is a price taker

Demand Law of demand Quantity demanded Demand schedule Demand curve Determinants of demand

The Law of Demand As the price rises, the quantity demand falls.

Demand PriceQuantity $510 $420 $330 $240 $150

Determinants of Demand Income Price of related goods – Complements – Substitutes Tastes or preferences Expectations Number of buyers

Shifting Demand

Supply Law of supply Quantity supplied Supply schedule Supply curve Determinants of supply

The Law of Supply As the price rises, the quantity supplied rises.

Supply PriceQuantity $550 $440 $330 $220 $110

Determinants of Supply Input prices Technology Expectations Number of sellers

Shifting Supply

Market Equilibrium Price Quantity Demanded Quantity Supplied $51050 $42040 $330 $24020 $15010

Market Equilibrium

Quantity demanded is less than quantity suppliedQd < Qs Surplus Quantity demanded is equal to quantity suppliedQd = Qs Equilibrium Quantity demanded is greater than quantity suppliedQd > Qs Shortage

Practice Draw the graph. Which curve is shifting because of the changing market conditions? Supply? Demand? Both? Which direction is the shift? Draw the shift. What is the impact on price and quantity?

Price Controls Price Ceiling – If price is fixed BELOW the market clearing price – Creates a shortage because Q d > Q s Rent controls Price Floor – If price is fixed ABOVE the market clearing price – Creates a surplus because Q d < Q s Minimum wage

Price Elasticity of Demand Measures the responsiveness of quantity demanded to a change in price Determinants – Availability of close substitutes – Necessities versus luxuries – Definition of the market (food vs. ice cream vs. chocolate ice cream) – Time horizon

Price Elasticity and Total Revenue If demand for a good is elastic, price increases lead to lower total revenue If demand for a good is inelastic, price increases lead to higher total revenue

Price Elasticity of Supply Measures the responsiveness of quantity supplied to a change in price Determinants – Availability of inputs – Time

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