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Chapter 5 Price: The Role of Supply and Demand © 2001 South-Western College Publishing
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2 Law of Demand The quantity purchased of a good or service is inversely related to the price, all other things being equal
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3 Quantity Demanded vs. Demand Quantity Demanded: The quantities of a good or service that people will purchase at a specific price over a given period of time. Demand: A schedule of the total quantities of a good or service that purchasers will buy at different prices at a given time
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4 Demand 4 Individual demand: –quantity of a good or service that an individual or firm stands ready to buy at various prices at a given time 4Market demand: –sum of the individual demands in the marketplace
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5 Demand Schedule/Demand Curve 4 Demand Schedule: –table showing the various quantities of a good or service that will be purchased at various prices 4 Demand Curve: –curve that indicates the number of units of a good or service that consumers will buy at various prices at a given time
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6 Demand Curve for Internet Time $1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity (millions of hours) Price per Hour D
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7 Changes in Demand 4 Change in Quantity Demanded: –Movement along the demand curve that occurs because the price of the product has changed 4 Change in Demand: –Change in the amounts of the product that would be purchased at the same given prices; a shift in the entire demand curve
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8 Quantity (millions of hours) Demand Curves for Internet Time $1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Price per Hour D D2D2 D1D1
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9 Supply 4 Supply: The total quantities of a good or service that sellers stand ready to sell at different prices at a given time 4 Individual Supply: Quantities offered for sale at various prices at a given time by an individual seller 4 Market Supply: Sum of the individual supply schedules in the marketplace
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10 Supply 4 Supply Schedule: Table showing the various quantities of a good or service that sellers will offer at various prices at a given time 4 Supply Curve: Line showing the number of units of a good or service that will be offered for sale at different prices at a given time
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11 Law of Supply The quantity offered by sellers of a good or service is directly related to price, all things being equal.
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12 Changes in Supply 4 Change in the Quantity Supplied: Movement along the supply curve that occurs because the price of the product has changed 4 Change in Supply: A change in the amount of the product that would be offered for sale at the same given price; a shift of the entire supply curve
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13 Quantity (millions of hours) Supply Curves for Internet Time $1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Price per Hour S S2S2 S1S1
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14 Determinants of Supply 4 Changes in the cost of resources 4 Technology 4 Expectations of future prices 4 Prices of related products
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15 Equilibrium Price The price at which the quantity demanded equals the quantity supplied
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16 Quantity (millions of hours) Demand, Supply, and Market Price for Internet Time $1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Price per Hour Supply Demand E
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17 Quantity (millions of hours) Surplus, Shortage, and Equilibrium for Internet Time $1.55 1.50 1.45 1.40 1.35 1.30 1.25 1.20 1.15 1.10 1.05 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Price per Hour Supply Demand E Surplus Shortage
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18 Alternate Supply and Demand Positions D D1D1 S P Q/t P D S S1S1 Demand Increases (D becomes D 1 ) Demand Decreases (D 1 becomes D) Supply Increases (S becomes S 1 ) Supply Decreases (S 1 becomes S)
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19 Price Ceiling Government mandated maximum price that can be charged for a good or a service
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20 Effects of a Price Ceiling on Rental Housing 700 500 0 18,000 30,000 40,000 Shortage D S E Monthly Price ($) Quantity (housing units)
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21 Price Floor Government mandated minimum price that can be charged for a good or a service
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22 Effects of a Price Floor on Wheat 3.00 2.00 0 75,000 100,000 115,000 Surplus D S Price per bushel ($) Quantity (bushels)
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23 Price Elasticity of Demand Measure of the sensitivity or responsiveness of quantity demanded to a change in price –Formula method –Total revenue method
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24 D 2 Quantity/Time Demand Curve Showing Different Elasticities $13 12 11 10 9 8 7 6 5 4 3 2 1 0 1,600 2,000 2,400 Price D D D 1
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25 Formula Method
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26 Unit Elastic Demand Demand that exists when a percentage change in price causes an equal percentage change in quantity demanded – has an elasticity coefficient equal to 1.0
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27 Elastic Demand Demand that exists when a percentage change in price causes a greater percentage change in quantity demanded –has an elastic coefficient greater than 1.0
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28 Inelastic Demand Demand that exists when a percentage change in price causes a smaller percentage change in quantity demanded –has an elasticity coefficient less than 1.0
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29 Total Revenue Method 4 If price changes and total revenue is constant, unit elasticity of demand exists 4 If price changes and total revenue moves in the opposite direction, demand is elastic 4 If price changes and total revenue moves in the same direction, demand is inelastic
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30 Characteristics Affecting Price Elasticity of Demand Trend Toward Elastic Demand 4 Luxuries 4 Large expenditures 4 Durable goods 4 Substitute goods 4 Multiple uses Trend Toward Inelastic Demand 4 Necessities 4 Small expenditures 4 Perishable goods 4 Complementary goods 4 Limited uses
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31 D1D1 Three Demand Curves Showing Different Elasticities P PP Q/t D2D2 D3D3 (a) (b)(c) Perfectly Elastic Perfectly Inelastic Perfectly Unit Elastic
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32 Quantity/Time Demand Curve Showing Different Elasticities $12 11 10 9 8 7 6 5 4 3 2 1 Price Elastic demand 0 10 20 30 40 50 60 70 80 90 100 110 120 Unit Elastic Inelastic demand
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33 Other Types of Elasticity 4 Cross elasticity of demand 4 Income elasticity of demand 4 Price elasticity of supply
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34 Cross Elasticity of Demand Measure of the responsiveness of the quantity demanded of one product as a result of a change in the price of another product
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35 Income Elasticity of Demand Measure of the responsiveness of the quantity demanded to a change in income
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36 Price Elasticity of Supply Measure of the responsiveness of the quantity supplied to a change in price
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37 Time and Elasticity of Supply - Intermediate P1P2P1P2 Q Q/t D1D1 S D P
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38 Time and Elasticity of Supply - Short Run P2PP2P Q Q 2 Q/t D1D1 S D P
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39 Time and Elasticity of Supply - Long Run P3PP3P Q Q 3 Q/t D1D1 S D P
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40 Effects of a Tax on Cigarettes D S Price per Pack ($) 40 50 D S Quantity (millions of packs) 3.25 3.00 Quantity (millions of packs) S + $1 3.75 3.00 48 50 S + $1 e e R R Price per Pack ($)
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