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Demand, Supply and Price Determination

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An AS Level revision presentation looking at the basics of demand and supply curves. – PowerPoint PPT presentation

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Title: Demand, Supply and Price Determination


1
Determining Price Demand and Supply
2
Outline
  • What do we mean by supply and demand
  • What determines supply
  • What determines demand
  • How do demand and supply interact to determine
    price.

3
Definitions
  • Effective Demand
  • Supply
  • Shortage
  • Surplus

4
Definitions
  • Effective Demand The quantity consumers are
    willing and able to buy at any given price
  • Supply The quantity firms are willing and able
    to sell at any given price
  • Shortage An excess of demand over supply
  • Surplus An excess of supply over demand

5
Demand
Price
Quantity Demanded Quantity Demanded Quantity Demanded
Price Staff Students total
10 55 64
20 50 57
30 45 50
40 40 43
50 35 36
60 30 29
70 25 22
80 20 15
90 15 8
100 10 1
Quantity
6
Demand
Price
Quantity Demanded Quantity Demanded Quantity Demanded
Price Staff Students total
10 55 64 119
20 50 57 107
30 45 50 95
40 40 43 83
50 35 36 71
60 30 29 59
70 25 22 47
80 20 15 35
90 15 8 23
100 10 1 11
Demand
Quantity
7
Demand
Show on the diagram the quantity that would be
demanded if the price were 45
Price
Quantity Demanded Quantity Demanded Quantity Demanded
Price Staff Students total
10 55 64 119
20 50 57 107
30 45 50 95
40 40 43 83
50 35 36 71
60 30 29 59
70 25 22 47
80 20 15 35
90 15 8 23
100 10 1 11
100
80
60
40
20
Demand
120
20
40
60
80
100
Quantity
8
Demand
Price
Quantity Demanded Quantity Demanded Quantity Demanded
Price Staff Students total
10 55 64 119
20 50 57 107
30 45 50 95
40 40 43 83
50 35 36 71
60 30 29 59
70 25 22 47
80 20 15 35
90 15 8 23
100 10 1 11
100
80
60
40
20
Demand
120
20
40
60
80
100
Quantity
9
Demand
  • The law of demand states that

10
Demand
  • The law of demand states that the demand curve
    always slopes down (i.e. as price falls, demand
    rises, as long as everything else remains
    constant).

11
Why does the demand curve slope down?
  • There are 3 reasons
  • As the price rises other goods get relatively
    ________ so consumers ______________to other
    things.
  • e.g. as the price of chocolate rises people buy
    ____ chocolate and more crisps
  • As the price rises it is as though
    _____________(the total amount of things that can
    be bought _____)
  • Generally people get the most benefit from the
    ______
  • ____they consume and so they will be willing to
    pay the ____ for this and then ____ for each
    subsequent unit
  • e.g. You will pay a lot for the first ice cold
    Coke, less for the next, less for the next, etc.

12
Why does the demand curve slope down?
  • There are 3 reasons
  • As the price rises other goods get relatively
    cheaper so consumers substitute away to other
    things.
  • e.g. as the price of chocolate rises people buy
    less chocolate and more crisps
  • As the price rises it is as though income falls
    (the total amount of things that can be bought
    falls)
  • Generally people get the most benefit from the
    first unit they consume and so they will be
    willing to pay the most for this and then less
    for each subsequent unit
  • e.g. You will pay a lot for the first ice cold
    Coke, less for the next, less for the next, etc.

13
Why does the demand curve slope down?
  • There are 3 reasons
  • As the price rises other goods get relatively
    cheaper so consumers substitute away to other
    things.
  • e.g. as the price of chocolate rises people buy
    less chocolate and more crisps
  • As the price rises it is as though income falls
    (the total amount of things that can be bought
    falls)
  • Generally people get the most benefit from the
    first unit they consume and so they will be
    willing to pay the most for this and then less
    for each subsequent unit
  • e.g. You will pay a lot for the first ice cold
    Coke, less for the next, less for the next, etc.

Does the demand for all goods go down as income
falls? Can you think of any exceptions?
14
Supply
Price
Supply(000,000) Supply(000,000) Supply(000,000)
Price Microsoft Apple total
10 77 45
20 69 40
30 61 35
40 53 30
50 45 25
60 37 20
70 29 15
80 21 10
90 13 5
100 5 0
Quantity
15
Supply
Price
Supply(000,000) Supply(000,000) Supply(000,000)
Price Microsoft Apple total
10 77 45 5
20 69 40 18
30 61 35 31
40 53 30 44
50 45 25 57
60 37 20 70
70 29 15 83
80 21 10 96
90 13 5 109
100 5 0 122
Supply
Quantity
16
Supply
  • The law of supply states that the supply curve
    always slopes up (i.e. as price falls, supply
    also falls, as long as everything else remains
    constant).

Supply
17
Why does the supply curve slope up?
  • Supply is driven by costs

18
Why does the supply curve slope up?
  • Supply is driven by costs
  • The higher the profit per unit the greater then
    incentive for firms to produce more
  • Costs rise with output
  • In the short run, firms face diminishing marginal
    returns - it costs firms more to make each extra
    unit.
  • This means that to persuade firms to supply an
    extra unit they must be compensated with a higher
    price.

19
Diminishing Marginal Returns
  • The Law of Diminishing Marginal Returns states
    that if more units of a variable factor are used
    with a fixed quantity of another factor of
    production then each additional worker will add
    less to total output than the previous worker.
  • In English
  • Factors of production are not perfect substitutes
    for one another.
  • I cant solve the problem of not enough capital
    by adding more labour.
  • Think about a bin lorry, I can add more people
    and each extra person will add a little more to
    output, but less and less as they will start to
    get in each others way.
  • If workers are paid the same but produce less
    output then the marginal cost (cost of the next
    unit) rises

20
Diminishing Marginal Returns
Exercise Diminishing Marginal Returns Sheet
  • The Law of Diminishing Marginal Returns states
    that if more units of a variable factor are used
    with a fixed quantity of another factor of
    production then each additional worker will add
    less to total output than the previous worker.
  • In English
  • Factors of production are not perfect substitutes
    for one another.
  • I cant solve the problem of not enough capital
    by adding more labour.
  • Think about a bin lorry, I can add more people
    and each extra person will add a little more to
    output, but less and less as they will start to
    get in each others way.
  • If workers are paid the same but produce less
    output then the marginal cost (cost of the next
    unit) rises

21
Price
  • The market will settle at the
  • This is the price at which there is
  • This will occur where

Price
Quantity
22
Price
  • The market will settle at the market clearing (or
    equilibrium ) price.
  • This is the price at which there is neither a
    shortage or a surplus
  • This will occur where demand crosses supply

Price
Supply
P
Demand
Q
Quantity
23
Shifts
  • Everything we have done so far assumes that
  • If anything other than price changes then on of
    the curves will
  • A shift can either be
  • (away from the origin) or (towards the origin)
  • A shift means at the same price would
    be demanded/supplied.

Price
Supply
Quantity
24
Shifts
  • Everything we have done so far assumes that
    everything except price remains constant.
  • If anything other than price changes then on of
    the curves will shift.
  • A shift can either be out (away from the origin)
    or in (towards the origin)
  • A shift out means at the same price more would be
    demanded/supplied

S1
Price
Supply
Shift In
S2
Shift Out
Quantity
25
Shifts in Supply and Demand
  • When deciding what shifts, think What would
    happen if the price remained the same.
  • e.g. If there were a wet summer what would happen
    to the market for umbrellas (if price remained
    the same would people demand/supply more/less
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