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Chapter 2 Demand and Supply.notebook
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Unit 2:Microeconomic Concepts
unıt
outcomes: Analyze factors and interactions that are significant to demand and supply.
Evaluate how saving, investing, and credit decisions impact the financial planning process.
Compare the characteristics of firms that operate under various markets created by competition.
Demonstrate and understanding of the labour market. Demonstrate an understanding of organized labour.
Demand the relationship between the various possible prices of a product and the quantities of that product consumers are willing and able to purchase.
It is the household that must be kept in mind when discussing demand.
Quantity Demanded the amount of a product consumers are willing to purchase at each price.
Chapter 2: Demand and Supply
Role of Demand:
Law of Demand states that there is an inverse relationship between a product's price and quantity demanded.
Demand Schedule a table that shows the possible combinations of prices and quantities demanded of a product.
Demand Curve a graph that shows the possible combinations of prices and quantities demanded of a product.
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Page 34
*** Change in quantity demanded the effect of a price change on quantity demanded.
Results in movement along the curve.
Market Demand the sum of all consumer purchases, or quantity demanded, at each price.
Page 36
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Demand Factors factors that cause the entire market demand curve to shift.
All other factors remain constant.
Price remains constant!!
Increase in Demand an increase in the quantity demanded of a product
at all prices.
Shown by a shift of the entire demand curve to the right.
Decrease in Demand a decrease in the quantity demanded of a product
at all prices.
Shown by a shift of the entire demand curve to the left.
Page 37demand factors:
1) Number of Buyers as the number of buyers increase, the demand for that product increases and vice versa.
2) Income change in demand is based upon the type of product in question.
normal product a product whose demand changes directly with income.
Ex:
inferior product a product whose demand changes indirectly with income.
Ex:
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3) Prices of Other Products change in demand is based on the type of related product in question.
substitute products products that can be consumed in place of another.
Ex: brand name and no name
Adidas and Reebok
butter and margarine
Consumers told that the price of butter rises.
P
Q
p1
p2
q1q2
butter market
Quantity demanded falls.
P
Q
D1D2
margarine market
Demand rises since consumers switch
to cheaper alternative
complementary products products that are consumed together.
Ex: coffee and cream
cars and gasoline
flashlights and batteries
Consumers told that the price of flashlights rises.
P
Q
p1
p2
q1q2
flashlight market
Quantity demanded falls
P
Q
D2D1
battery market
Demand falls since consumers will
have less need to buy batteries
4) Consumer Preferences the demand curve can be affected by consumers likes and dislikes.
Ex:
#1 Consumers are told that broccoli fights Alzheimer's disease.
#2 Consumers are told that cigarettes cause cancer.
P
Q
D1D2
Broccoli market
P
Q
D1D2
5) Expectations the effect that future price and income changes have on current purchases.
Ex:
#1 Consumers expect the price of gas will rise after midnight.
#2 Consumers expect the price of laptops to decrease.
P
Q
D1D2
Gasoline market
P
Q
D1D2
laptop market
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IMPORTANT NOTES!!
change in quantity demanded results from a change in the
product's price.
graphically shown by movement up/down
the curve .
Page 39
IMPORTANT NOTES!!
change in demand results from a change in a demand factor.
graphically shown by a shift in the entire demand curve.
Page 39
Role of Supply:
supply the relationship between the various possible prices of a product and the quantities of the product businesses are willing and able to put on the market.
It is the business that must be kept in mind when discussing supply.
quantity supplied the amount of the product that businesses are willing to supply at each price
Law of Supply states that there is a direct relationship between a product's price and quantity supplied.
Supply Schedule a table that shows the possible combinations of prices and quantities supplied of a product.
Supply Curve a graph that shows the possible combinations of prices and quantities supplied of a product.
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Market Supply the sum of all producers' quantities supplied at each price.
Page 41
Increase in Supply an increase in the quantity supplied of a product
at all prices.
Shown by a shift of the entire supply curve to the right.
Decrease in Supply a decrease in the quantity supplied of a product
at all prices.
Shown by a shift of the entire supply curve to the left.
Page 42supply factors:
1) Number of Producers As the number of suppliers increases, the supply increases and vice versa.
2) Resource Prices as the price of inputs increase, fewer products can be produced resulting in a decrease in supply and vice versa.
Ex: Increase in wages in the strawberry industry results in a decrease in the supply of strawberries.
3) State of Technology advancements in technology allows businesses to use more efficient production methods, therefore, increasing supply.
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4) Changes in Nature favorable changes in nature can increase supply; unfavorable changes in nature (Ex: flooding) decrease supply.
5) Prices of Related Products if the price of a good with substitutes rises (Ex: potatoes), then producers will shift from the current product (Ex: soya beans) causing the supply for that product to decrease. The reverse is true if the good in question has complements.
6) Producer Expectations if the price of a product is expected to fall, more of that good will be supplied, increasing that supply and vice versa.
Ex: If wheat prices are expected to fall, farmers will harvest as much of their crop as possible to take advantage of the current price.
IMPORTANT NOTES!!
change in quantity supplied results from a change in the
product's price.
graphically shown by movement up/down the curve.
Page 44
IMPORTANT NOTES!!
change in supply results from a change in a supply factor.
graphically shown by a shift in the entire supply
curve.Page 44
How Competitive Markets Operate:
market equilibrium the stable point where at which the demand and supply curves intersect.
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The Effects of a Surplus >
surplus an excess of quantity supplied over quantity demanded.
Page 46
Producers are holding unwanted inventories.
Prices fall to reduce inventories.
As prices fall, quantity demanded rises and quantity supplied falls until equilibrium is reestablished.
The Effects of a Shortage >
shortage an excess of quantity demanded over quantity supplied.
Page 46
Producers do not have enough inventory.
Prices rise to reduce pressure on inventories.
As prices rise, quantity demanded falls and quantity supplied rises until equilibrium is reached.
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Effects of Changes in Demand >
Page 47
An increase in demand creates a shortage.
To eliminate the shortage, prices rise.
As price rises, quantity supplied rises and quantity demanded falls.
A new equilibrium is reached in which the values of both price and quantity are higher.
The reverse is true for a decrease in demand.
Effects of Changes in Supply >
Page 48 An increase in supply creates a surplus.
To eliminate the surplus, prices fall.
As price falls, quantity supplied falls and quantity demanded rises.
A new equilibrium is reached in which price is lower and quantity is higher.
The reverse is true for a decrease in supply.
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Effects of Changes in Both Demand and Supply >
An increase in both demand and supply causes an increase in quantity, but an indeterminate change in price.
Price could be higher or lower depernding upon the extent to which demand and supply change
Page 50
If demand increases and supply decreases, there is an increase in price but an indeterminate change in quantity.
Quantity could be higher or lower depending upon the extent to which demand and supply changes.
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