Supply and demand, Market mechanisms and other issues

Supply and demand

1. Basics of Supply and Demand
Market Mechanism

2. Introduction
What are supply and demand?
How does a market mechanism work?
What are the effects of changes in
market equilibrium?

3. Supply and demand
The Supply curve
The relationship between the quantity of a good
that producers are willingto sell and the price of
the good.
Measures quantity on the x-axis and price on the
y-axis(P)QQ
SS


4. The Supply Curve
S
The supply curve slopes
upward demonstrating that
at higher prices firms
will increase output
The Supply
Curve Graphically
Quantity
Price
($ per unit)
P
1
Q
1
P
2
Q
2

5. The Supply Curve
Other Variables Affecting Supply
Costs of Production
Labor
Capital
Raw Materials
Lower costs of production allow a firm to
produce more at each price and vice versa

6. Change in Supply
The cost of raw
materials falls
Produced Q1 at P1
and Q0 at P2
Now produce Q2 at
P1 and Q1 at P2
Supply curve shifts
right to S’
P
S
Q
P
1
P
2
Q
1Q
0
S’
Q
2

7. The Supply Curve
Change in Quantity Supplied
Movement along the curve caused by a
change in price
Change in Supply
Shift of the curve caused by a change in
something other than price
Change in costs of production

8. Supply and Demand
The Demand Curve
The relationship between the quantity of a
good that consumers are willingto buy and
the price of the good.
Measures quantity on the x-axis and price
on the y-axis(P)QQ
DD

9. The Demand Curve
D
The demand curve slopes
downward demonstrating
that consumers are willing
to buy more at a lower price
as the product becomes
relatively cheaper.
Quantity
Price
($ per unit)
P
2
Q
1
P
1
Q
2

10. The Demand Curve
Other Variables Affecting Demand
Income
Increases in income allow consumers to
purchase more at all prices
Consumer Tastes
Price of Related Goods
Substitutes
Complements

11. D
P
Q
D’
Q
1
P
2
Q
0
P
1
Q
2
Change in Demand
Income Increases
Purchased Q0, at
P2 and Q1 at P1
Now purchased Q1
at P2 and Q2 at P1
Same for all prices
Demand Curve
shifts right

12. The Demand Curve
Changes in quantity demanded
Movements along the demand curve
caused by a change in price.
Changes in demand
A shift of the entire demand curve caused
by something other than price.
Income
Preferences

13. The Market Mechanism
The market mechanismis the tendency
in a free market for price to change
until the market clears
Markets clear when quantity demanded
equals quantity supplied at the
prevailing price
Market Clearing price–price at which
markets clear

14. The Market Mechanism
D
S
The curves intersect at
equilibrium, or market-
clearing, price.
Quantity demanded
equals quantity
supplied at P
0
P
0
Q
0
Quantity
Price
($ per unit)

15. The Market Mechanism
In equilibrium
There is no shortage or excess demand
There is no surplus or excess supply
Quantity supplied equals quantity
demanded
Anyone who wishesto buy at the current
price can and all producers who wish to
sell at that price can

16. Market Surplus
The market price is above equilibrium
There is excess supply -surplus
Downward pressure on price
Quantity demanded increases and quantity
supplied decreases
The market adjusts until new equilibrium is
reached

17. The Market Mechanism
D
S
P
0
Q
0
1.Price is above
the market
clearing price –
P
1
2.Q
s> Q
D
3.Price falls to
themarket-
clearingprice
4.Market adjusts
to equilibrium
P
1
Surplus
Quantity
Price
($ per unit)
Q
S
Q
D

18. The Market Mechanism
The market price is below equilibrium:
There is a excess demand -shortage
Upward pressure on prices
Quantity demanded decreases and quantity
supplied increases
The market adjusts until the new
equilibrium is reached.

19. The Market Mechanism
D
Q
S Q
D
P
2
Quantity
Price
($ per unit)
1.Price is below
the market
clearing price
–P2
2.Q
D> Q
S
3.Price rises to
themarket-
clearingprice
4.Market adjusts
to equilibrium
Q
3
P
3
Shortage

20. The Market Mechanism
Supply and demand interact to
determine the market-clearing price.
When not in equilibrium, the market will
adjust to alleviate a shortage or surplus
and return the market to equilibrium.
Markets must be competitive for the
mechanism to be efficient.

21. Changes In Market Equilibrium
Equilibrium prices are determined by
the relative level of supply and demand.
Changes in supply and/or demand will
change in the equilibrium price and/or
quantity in a free market.

22. S’
Changes In Market Equilibrium
Raw material
prices fall
S shifts to S’
Surplus at P1
between Q1, Q2
Price adjusts to
equilibrium at P3,
Q3
P
Q
S
D
P
3
Q
3Q
1
P
1
Q
2

23. D’
S
D
Q
3
P
3
Changes In Market Equilibrium
Income Increases
Demand increases
to D1
Shortage at P1 of
Q1, Q2
Equilibrium at P3,
Q3
P
QQ
1
P
1
Q
2

24. D’
S’
Changes In Market Equilibrium
Income Increases
& raw material
prices fall
Quantity increases
If the increase in D
is greater than the
increase in S price
also increases
P
Q
S
P
2
Q
2
D
P
1
Q
1

25. Shifts in Supply and Demand
When supply and demand change
simultaneously, the impact on the
equilibrium price and quantity is
determined by:
1.The relative size and direction of the
change
2.The shape of the supply and demand
models

26. The Price of a College
Education
The real price of a college education
rose 55 percent from 1970 to 2002.
Increases in costs of modern
classrooms and wages increased costs
of production –decrease in supply
Due to a larger percentage of high
school graduates attending college,
demand increased

27. Market for a College Education
Q (millions enrolled))
P
(annual cost
in 1970
dollars)
D
1970
S
1970
S
2002
D
2002
$3,917
13.2
New
equilibrium
was reached
at $4,573 and
a quantity of
12.3 million
students
$2,530
8.6