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UNIT ONE: PART II Supply & Demand
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Key Objectives: To identify and explain the laws of demand & supply and the factors that impact demand & supply To explain and demonstrate graphically the difference between changes in quantity demand & supply and changes in demand & supply To explain and demonstrate graphically Equilibrium, Surpluses & Shortages, and how price controls create Surpluses & Shortages
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MARKETS DEFINED POTENTIAL BUYERS POTENTIAL SELLERS MARKETS
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DEMAND DEFINED DEMAND SCHEDULE …a specified time period
QD Various Amounts $5 4 3 2 1 10 20 35 55 80 A Series of Possible Prices …a specified time period …other things being equal
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LAW OF DEMAND An inverse relationship exists between price and quantity demanded As Price Falls… …Quantity Demanded Rises As Price Rises… …Quantity Demanded Falls
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GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q Quantity of Corn
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GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o 55 Q Quantity of Corn
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GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q 35 Quantity of Corn
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GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q Quantity of Corn
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GRAPHING DEMAND Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 P o Q
Price of Corn P $5 4 3 2 1 CORN Plot the Points P QD $5 4 3 2 1 10 20 35 55 80 o Q Quantity of Corn
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GRAPHING DEMAND Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 P D
Price of Corn P $5 4 3 2 1 CORN Connect the Points P QD $5 4 3 2 1 10 20 35 55 80 D o Q Quantity of Corn
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GRAPHING DEMAND What if Demand Increases? P QD $5 4 3 2 1 10 20 35 55
Price of Corn What if Demand Increases? P $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 D o Q Quantity of Corn
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GRAPHING DEMAND Increase in Quantity Demanded P QD $5 4 3 2 1 10 20 35
Price of Corn P Increase in Quantity Demanded $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 30 40 60 80 + Increase in Demand D’ D o Q Quantity of Corn
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GRAPHING DEMAND What if Demand Decreases? P QD $5 4 3 2 1 10 20 35 55
Price of Corn What if Demand Decreases? P $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 D o Q Quantity of Corn
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GRAPHING DEMAND Decrease in Quantity Demanded P QD $5 4 3 2 1 10 20 35
Price of Corn P Decrease in Quantity Demanded $5 4 3 2 1 CORN P QD $5 4 3 2 1 10 20 35 55 80 -- 10 20 40 60 Decrease in Demand D D’ o Q Quantity of Corn
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DETERMINANTS OF DEMAND
Tastes Number of Buyers Income Normal (Superior) & Inferior Goods Prices of Related Goods Substitutes & Complements Unrelated Goods Expectations
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SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts P QS $1 2 3 4 5 5 20 35
CORN P QS Various Amounts $1 2 3 4 5 5 20 35 50 60
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SUPPLY DEFINED …a specified time period …other things being equal
SUPPLY SCHEDULE CORN P QS Various Amounts $1 2 3 4 5 5 20 35 50 60 A Series of Possible Prices …a specified time period …other things being equal
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LAW OF SUPPLY A direct relationship exists between price and quantity supplied As Price Rises… …Quantity Supplied Rises As Price Falls… …Quantity Supplied Falls
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GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q 5
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 5 Q Quantity of Corn
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GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn
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GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o 35 Q Quantity of Corn
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GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn
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GRAPHING SUPPLY Plot the Points P QS $5 4 3 2 1 60 50 35 20 5 P o Q
Price of Corn P $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn
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GRAPHING SUPPLY Connect the Points P QS $5 4 3 2 1 60 50 35 20 5 P S o
Price of Corn P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 Connect the Points o Q Quantity of Corn
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GRAPHING SUPPLY What if Supply Increases? P QS $5 4 3 2 1 60 50 35 20
Price of Corn What if Supply Increases? P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn
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GRAPHING SUPPLY Increase in Supply P QS $5 4 3 2 1 60 50 35 20 5 80 70
Price of Corn P Increase in Supply S’ S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 80 70 60 45 30 Increase in Quantity Supplied o Q Quantity of Corn
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GRAPHING SUPPLY What if Supply Decreases? P QS $5 4 3 2 1 60 50 35 20
Price of Corn What if Supply Decreases? P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 o Q Quantity of Corn
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GRAPHING SUPPLY P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 -- Decrease
Price of Corn S’ P S $5 4 3 2 1 CORN P QS $5 4 3 2 1 60 50 35 20 5 45 30 20 -- Decrease in Quantity Supplied o Q Quantity of Corn
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DETERMINANTS OF SUPPLY
Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers
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DETERMINANTS OF SUPPLY
Resource Prices Technology Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers Combining with Demand
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x x MARKET DEMAND & SUPPLY EQUILIBRIUM P QD P QS $5 4 3 2 1 10 20 35
BUSHELS OF CORN P QS BUSHELS OF CORN MARKET DEMAND MARKET SUPPLY 200 B U Y E R S 200 S E L R $5 4 3 2 1 10 20 35 55 80 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 60 50 35 20 5 x x EQUILIBRIUM Graphically…
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MARKET DEMAND & SUPPLY P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000
Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 Market Clearing Equilibrium $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o Q Quantity of Corn
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MARKET DEMAND & SUPPLY Surplus P QD P QS $5 4 3 2 1 2,000 4,000 7,000
Price of Corn P CORN MARKET CORN MARKET Surplus S $5 4 3 2 1 P QD P QS At a $4 price more is being supplied than demanded $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 D 7 o Q Quantity of Corn
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MARKET DEMAND & SUPPLY Shortage P QD P QS $5 4 3 2 1 2,000 4,000 7,000
Price of Corn P CORN MARKET CORN MARKET S $5 4 3 2 1 P QD P QS At a $2 price more is being demanded than supplied $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 7 11 o Q Quantity of Corn
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MARKET DEMAND & SUPPLY Surplus Shortage P QD P QS $5 4 3 2 1 2,000
Price of Corn P CORN MARKET CORN MARKET Surplus S $5 4 3 2 1 P QD P QS $5 4 3 2 1 2,000 4,000 7,000 11,000 16,000 $5 4 3 2 1 12,000 10,000 7,000 4,000 1,000 Shortage D 7 11 o Q Quantity of Corn
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MARKET EQUILIBRIUM Equilibrium Price & Quantity
Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied
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Government Set Prices Price Ceilings Price Floors Shortages
Rationing Problem Black Markets Rent Controls Price Floors Surpluses
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