Graphing using Demand & Supply Analysis Ch. 4,5,6 Economics

4.1 Objective: Interpret a demand schedule and a demand curve.

OVERVIEW: Market primary building blocks: –Demand and supply Consumers –Demand goods and services that maximize their utility. Producers –Supply goods and services that maximize their profit. Prices increase – buy less Prices decrease – buy more

Demand – A willingness to buy a product at a certain price Demand Schedule – A list of the quantity of a product that people are willing to buy at various prices. Price Quantity Demanded $ Demand Concepts

Law of Demand – Other things being equal, people will buy more of a product at a lower price than a higher price Demand Curve – A downward sloping line from left to right. The reason for the downward slope is that as one of the variables (Price) goes down, the other variable (Quantity Demanded) goes up.

Demand Concepts Price Quantity Demanded $

4.3 Objective: Identify the determinants of demand and explain how a change in each will affect the demand curve.

Overview Movement along a demand curve is limited to the relationship between price and quantity. The determinants of demand are isolated (remain constant) when looking at movement along a demand curve. The determinants of demand affect the demand curve by shifting the demand at every price.

Determinants of Demand: 1. Consumer tastes and preferences 2. Potential customers (number & composition) 3. Money income of consumers 4. Complimentary and substitute goods 5. Price expectations Increases in demand shift the Demand Curve to the right. Decreases in demand shift the Demand Curve to the left. Change in Demand – Curve Shifts to either the left or to the right. Change in Quantity Demanded – Curve does not shift. A price change simply moves you to a new point on the same curve.

Millions of pizzas per week $ Price per pizza D An Increase in the Market Demand D'D' fb

b D A Decrease in the Market Demand Millions of pizzas per week $ Price per pizza j D'D'

5.1 The Supply Curve Objectives: –1. Understand the Law of supply. –2. Describe elasticity of supply, and explain how it is measured.

Overview Just as consumer behavior shapes the demand curve, producer behavior shapes the supply curve. You think like a consumer. You have producers all around you: –Wal-Mart, Sony, McDonald’s, Ford, Sears, Home Depot, Gap, ARCO.

SUPPLY CONCEPTS Supply – A willingness to sell a product at a certain price. Supply Schedule – A list of the quantity of a product that people are willing to sell at various prices. Price Quantity Supplied $

Law of Supply – Other things being equal, people will sell more of a product at a higher price than a lower price. Supply Curve – An upward sloping line from left to right. The reason for the upward slope is that both variables (Price & Quantity Supplied) are going up at the same time.

5.2 Determinants of Supply Objectives: 1. Identify the determinants of supply, and explain how a change in each will affect the supply curve. 2. Contrast a movement along a supply curve with a shift of the supply curve.

Overview Determinants of supply are assumed constant in a supply curve that illustrates the relation between the price of a good and the quantity supplied. In contrast with the change in price of a good, a change in one of the determinants causes a shift in the supply curve.

Determinants of Supply: 1. Resource prices (costs, inputs) 2. Production technology 3. Labor productivity 4. Taxes, subsidies, and regulations Increase in supply shift the Supply Curve to the right. Decreases in supply shift the Supply Curve to the left. Change in Supply – Curve shifts either to the left or to the right Changes in Quantity Supplied – Curve does not shift. A price change simply moves to a new point on the same curve.

An Increase in the Market Supply for Pizza Millions of pizzas per week $ Price per pizza SS'S' g h

An Decrease in the Market Supply for Pizza Millions of pizzas per week $ Price per pizza SS'' g i

Elasticity of Supply The elasticity of supply measures how responsive producers are to a price change.

Measurement Elasticity of supply equals percentage change in quantity supplied divided by percentage change in price. Elasticity of supply = Percentage change in quantity supplied Percentage change in price

Categories of Supply Elasticity Supply is elastic if supply elasticity exceeds 1.0. Supply is unit elastic if supply elasticity equals 1.0. Supply is inelastic if supply elasticity is less than 1.0.

Determinants of Supply Elasticity One important determinant of supply elasticity is the length of the adjustment period under consideration. The elasticity of supply is typically greater the longer the period of adjustment.

Market Supply Becomes More Elastic Over Time Millions of gallons per day 0 $ Price per gallon 300 S w S m S y

6.1 Price, Quantity, and Market Equilibrium Objectives: Understand how markets reach equilibrium. Explain how markets reduce transaction costs.

Overview As a buyer, or demander, you have a different view of the price than a seller. As the price rises, –Consumers reduce their quantity demanded along the supply curve. –Producers increase their quantity supplied along their supply curve. Market forces resolve the differences. –(the invisible hand)

Equilibrium – The quantity consumers are willing and able to buy equals the quantity producers are willing and able to sell. surplus – At a given price, the amount by which quantity supplied exceeds quantity demanded; a surplus usually forces the price down. Shortage – At a given price, the amount by which quantity demanded forces the price up. Transaction cost – The cost of time and information needed to carry out market exchange. Key Terms:

Equilibrium Price Quantity

Equilibrium – The point at which the Demand Curve and Supply Curve intersect. At this point, Demand = Supply. In the graph, equilibrium would be at point C. At this point there is no pressure to change price and quantity at equilibrium because plans of buyers and sellers exactly match. Equilibrium Price Quantity

Surplus – Demand < Supply. Usually caused by the selling price being above equilibrium. –At a selling price of $25, quantity demanded is 10 while quantity supplied is 50. –At a selling price of $20, quantity demanded is 20 while quantity supplied is 40. –Prices are forced down when quantity supplied exceeds quantity demanded. Equilibrium Price Quantity

Shortage – Demand > Supply. Usually caused by the selling price being below equilibrium. –At a selling price of $10, quantity demanded is 40 while Quantity supplied is 20. –At a selling price of $5, quantity demanded is 50 while Quantity supplied is 10. Equilibrium Price Quantity

Equilibrium A surplus puts a downward pressure on the price, and a shortage puts upward pressure.

“the invisible hand” –Market competition promotes the general welfare, not because of any central plan but because of individual self-interests. Market prices transmit information (signals) about scarcity and provide incentives for the most productive uses of Resources. – Response: A higher price encourages consumers to economize by finding substitutes.

Higher prices help people recognize market opportunities and encourage producers to allocate more resources to the production of one good and fewer resources to the production of another good.

Markets reduce transaction costs by decreasing the amount of time and information to carry out an exchange. –Example: The use of elements of the job market: Newspapers and the internet.

6.2 Shifts of Demand and Supply Curves Objectives:

Overview

Change in Supply Decrease Increases Decreases Change in Demand Equilibrium price change is indeterminate. Equilibrium quantity increases. Equilibrium price falls. Equilibrium quantity change is indeterminate. Equilibrium price rises. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases.

6.3 Market Efficiency and gains from Exchange Objectives:

Overview

Competition and Efficiency Productive efficiency –Making stuff right Allocative efficiency –Making the right stuff

Price Floor

Price Ceiling