Supply and Demand Explained as Basic of Economics

Supply and demand explained

1. 1
Chapter 2
Market Supply and Demand
©2000 South-Western College Publishing
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises

2. 2
In this chapter, you will learn to solve these
economic puzzles:
What is the difference between a change in
quantity demanded” and a “change in
demand”?
Can Congress repeal the law of supply in order to control oil
prices?
Does the price system eliminate scarcity?

3. What is the Market?
•Market is place where group of buyers and
sellers meet for specific goods.
•Types of market
•Organized
•Non organized
3

4. What is the Competition?
A Market in which there are many buyers and
sellers so that each has NO negligible impact
to market price.
•Same goods offered ,
•No single buyer and seller influence over the
market price
4

5. What is the Demand?
•The quantity demanded of a good or
service
• is the quantity buyers are willing and able
to buy at a particular price during a
particular period, all other things
unchanged.
5

6. What is the demand schedule
•A demand schedule is a table that shows
the quantities of a good or service
demanded at different prices during a
particular period, all other things
unchanged.
6

7. 7
What is the
Law of Demand?
The principle that there is an inverse
relationship between the price of a good
and the quantity buyers are willing to
purchase in a defined time period, ceteris
paribus
* Return to previous slide while in slide show

8. 8
What does “Ceteris
Paribus” mean?
All else remains the same

9. 9
What is a Demand Curve?
Depicts the relationship
between price and
quantity demanded

10. 10
$20
$15
$10
$5
481216
A
B
C
D
Individual’s Demand Curve for Compact Discs
Demand Curve
P
Q
7
A $20 4
B $15 6
C $10 8
D $5 16
Point Price Quantity demanded
per compact disk (per year)
Individuals Buyer’s Demand Schedule for Compact Discs

11. 11
Why do Demand Curves
have a Negative Slope?
At a higher price consumers
will buy fewer units, and at
a lower price they will buy
more units

12. 12
What is a
Demand Schedule?
Shows the specific quantity
of a good or service that
people are willing and able
to buy at different prices

13. Quiz 2
•Coffe Price list of 0 .5,1,2,2.5, create
dement schedule and demand curve?
13

14. Quiz 2
•Create demand schedual and deman curve
for price list of personal consumption of
1kg pasta
14
year Price
2021 .5
2022 .8
2023 1
2024 2

15. Quiz 2
•Define the flowing
•Competitive market
•Monopoly market
•Quantity demanded
•Individual Demand curve
•Demand schedual
15

16. 16
IMPORTANT –
KNOW THE DIFFERENCE
BETWEEN A CHANGE IN THE
QUANTITY DEMANDED AND
A CHANGE IN DEMAND

17. 17
When price changes,
what happens?
The curve does not shift -
there is a change in the
quantity demanded

18. 18
Decrease in
Price
Increase in
Quantity
Demanded

19. 19
What is Market Demand?
The summation of
the individual
demand schedules

20. 20
$20
$15
$10
$5
1234
P
Q56789
Fred’s Demand Curve
D
1

21. 21
$20
$15
$10
$5
1234
P
Q56789
Mary’s Demand Curve
D
2

22. 22
$20
$15
$10
$5
3456
P
Q
7891011
Market Demand Curve
D
3
12

23. 23
12
$20
$15
$10
$5
1234
P
Q56789
Fred’s Demand Curve
D
1
13
$20
$15
$10
$5
1234
P
Q56789
Mary’s Demand Curve
D
2
14
$20
$15
$10
$5
3456
P
Q
7891011
Market Demand Curve
D
3
12

24. 24
$25 1 + 0 = 1
$20 2 1 3
$15 3 3 6
$10 4 5 9
$5 5 7 12
Price Fred Mary Total Demanded
Market Demand Schedule for Compact Discs

25. 25
$20
$15
$10
$5
10203040
A
B
A change in price causes a change
in the quantity demanded
D
P
Q
50

26. 26
When something
changes other than
price, what happens?
The whole curve shifts -
there is a change in demand

27. 27
$20
$15
$10
$5
10203040
D
1
D2
P
50
A
When the ceteris paribus assumption is
relaxed, the whole curve can shift
Q
B

28. 28
Change in
nonprice
determinant
Increase or
Decrease in
demand

29. 29
What can cause a shift
in a Demand Curve?
1. Number of buyers in the market
2. Tastes, preferences and fashion
3. Income
4. Expectations of consumers
5. Prices of related goods

30. 30
Price
increases
Upward
movement
along the
demand curve
Decrease in
quantity
demanded

31. 31
Price
decreases
Downward
movement
along the
demand curve
Increase in
quantity
demanded

32. 32
Nonprice
determinant
Leftward or
rightward shift in
the demand curve
Decrease or
increase in
demand

33. 33
What is a Normal Good?
Any good for which there is a
direct relationship between
changes in income and its
demand curve

34. 34
What is an
Inferior Good?
Any good for which there is
an inverse relationship
between changes in income
and its demand curve

35. 35
What are
Substitute Goods?
Goods that compete
with one another for
consumer purchases

36. 36
What happens when the
price increases for a good
that has a substitute?
The demand curve for the
substitute good increases

37. 37
What happens when the
price decreases for a good
that has a substitute?
The demand curve for the
substitute good decreases

38. 38
What does a Direct
Relationship between
price and quantity mean?
It means that the two move
in the same direction

39. 39
What are
Complementary Goods?
Goods that are jointly
consumed with
another good

40. 40
What happens when the
price increases for a good
that has a complement?
The demand curve for the
complement good
decreases

41. 41
What happens when the
price decreases for a good
that has a complement?
The demand curve for the
complement good
increases

42. 42
What does an Inverse
Relationship between
price and quantity mean?
It means that the two move
in opposite directions

43. 43
What is the
Law of Supply?
The principle that there is a
direct relationship between
the price of a good and the
quantity sellers are willing
to offer for sale in a defined
time period, ceteris paribus

44. 44
Why do Supply Curves
have a Positive Slope?
Only at a higher price will it
be profitable for sellers to
incur the higher opportunity
cost associated with
supplying a larger quantity

45. 45
$20
$15
$10
$5
10203040
A
B
C
Supply Curve
A company’s
Supply Curve for
Compact Discs
P
Q

46. 46
A $20 40
B 10 30
C 6 20
Point Price Quantity
An Individual Seller’s Supply for Compact Discs

47. 47
$25
$20
$15
$10
10
P
Q1520
Super Sound Supply Curve
S
1
25

48. 48
$25
$20
$15
$10
20
P
Q2530
High Vibes Supply Curve
S
2
35

49. 49
What is a Market?
Any arrangement in which
buyers and sellers interact
to determine the price and
quantity of goods and
services exchanged

50. 50
What is Market Supply?
The horizontal summation of
all the quantities supplied at
various prices that might
prevail in the market

51. 51
$25
$20
$15
$10
40
P
Q4555
Market Supply Curve
60
S
total

52. 52
$25 25 + 35 = 60
$20 20 30 50
$15 15 25 40
$10 10 20 30
$5 5 15 20
Price Super Sound High Vibes Total Supplied
Market Supply Schedule for Compact Discs

53. 53
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
SUPPLIED AND A
CHANGE IN SUPPLY

54. 54
When price changes,
what happens?
The curve does not shift -
there is a change in the
quantity supplied

55. 55
$20
$15
$10
$5
10203040
A
B
C
Supply Curve
A change in price
causes a change in
the quantity
supplied
P
Q

56. 56
Increase in
Price
Increase in
Quantity
Supplied

57. 57
When something
changes other than
price, what happens?
The whole curve shifts -
there is a change in supply

58. 58
$20
$15
$10
$5
10203040
S
1
S
2
When the ceteris
paribus assumption is
relaxed, the whole
curve can shift
P
Q

59. 59
Change in
nonprice
determinant
Change in
supply

60. 60
What can cause a shift
in a Supply Curve?
1. Number of sellers in the market
2. Technology
3. Resource prices
4. Taxes and subsidies
5. Expectations of producers
6. Prices of other goods the firm
could produce

61. 61
$120
$90
$60
$30
1,0002,0003,0004,000
D
S
The Supply & Demand
for Tennis ShoesP
Q
Surplus
Shortage

62. 62
What is an Equilibrium?
A market condition that
occurs at any price for
which the quantity
demanded and the quantity
supplied are equal

63. 63
What is the Price System?
A mechanism that uses the
forces of supply and
demand to create an
equilibrium through rising
and falling prices

64. 64
Key Concepts

65. 65
Key Concepts
•What is the Law of Demand?
•What is a Demand Curve?
•Why do Demand Curves have a Negative
Slope?
•When price changes, what happens?
•When something changes other than price,
what happens?
•What can cause a shift in a Demand Curve?

66. 66
Key Concepts cont.
•What is the Law of Supply?
•Why do Supply Curves have a Positive
Slope?
•When price changes, what happens?
•When something changes other than price,
what happens?
•What can cause a shift in a Supply Curve?
•What is a Market?
•What is an Equilibrium?

67. 67
Summary

68. 68
The law of demand states there
is an inverse relationship between the
price and the quantity demanded,
ceteris paribus. A market demand
curve is the horizontal summation of
individual demand curves.

69. 69
$20
$15
$10
$5
481216
A
B
C
D
Individual’s Demand Curve for Compact Discs
Demand Curve
P
Q
7
A $20 4
B $15 6
C $10 10
D $5 16
Point Price Quantity demanded
per compact disk (per year)
Individuals Buyer’s Demand Schedule for Compact Discs

70. 70
A change in quantity demanded is
a movement along a stationary demand
curve caused by a change in price.
When any of the nonprice determinants
of demand changes, the demand curve
responds by shifting. An increase in
demand (rightward shift) or a decrease
in demand (leftward shift) is caused by
a change in one of the nonprice
determinants.

71. 71
$20
$15
$10
$5
10203040
D
1
D2
P
50
A
When the ceteris paribus assumption is
relaxed, the whole curve can shift
Q
B

72. 72
Nonprice determinants of
demand are
a. the number of buyers,
b. tastes and preferences.
c. income (normal and inferior).
d. expectations of future p;rice and
income changes, and
e. prices of related goods
(substitutes and complements).

73. 73
2. supply
In
 economics, 
supply 
is the amount
of something that
 firms,producers, 
labourers, providers of
 financial
assets, or other
 economic agents are
willing and able to provide to
the
 marketplace.

74. 74
The law of supply states there is a
direst relationship between the price
and the quantity supplied, ceteris
paribus. The market supply curve is
the horizontal summation of
individual supply curves.

75. 75
A change in quantity supplied is a
movement along a stationary supply curve
caused by a change in price. When any of
the nonprice determinants of supply
changes, the supply curve responds by
shifting. An increase in supply (rightward
shift) or a decrease in supply (leftward
shift) is caused by a change in one of the
nonprice determinants.

76. 76
$20
$15
$10
$5
10203040
A
B
C
Supply Curve
A company’s
Supply Curve for
Compact Discs
P
Q

77. 77
$20
$15
$10
$5
10203040
S
1
S
2
When the ceteris
paribus assumption is
relaxed, the whole
curve can shift
P
Q

78. 78
Nonprice determinants of supply
a. the number of sellers.
b. technology
c. resource prices.
d. taxes and subsidies.
e. expectations of future price changes,
f. prices of other goods.

79. 79
A surplus or shortage exists at
any price where the quantity
demanded and the quantity supplied
are not equal. When the price of a
good is greater than the equilibrium
price, there is an excess quantity
supplied called a surplus. When the
price is less than the equilibrium
price, there is an excess quantity
demanded called a shortage.

80. 80
Equilibrium is the unique price
and quantity established at the
intersection of the supply and the
demand curves. Only at equilibrium
does quantity demanded equal
quantity supplied.

81. 81
$120
$90
$60
$30
1,0002,0003,0004,000
D
S
The Supply & Demand
for Tennis ShoesP
Q
Surplus
Shortage

82. 82
The price system is the supply and
demand mechanism that establishes
equilibrium through the ability of prices
to rise or fall.

83. 83
END