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Supply and Demand

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Econ 101: Microeconomics Chapter 3: Supply and Demand Part 2 Equilibrium: Putting Supply and Demand Together When a market is in equilibrium Both price of good and ... – PowerPoint PPT presentation

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Title: Supply and Demand


1
Econ 101 Microeconomics
  • Chapter 3
  • Supply and Demand
  • Part 2

2
Equilibrium Putting Supply and Demand Together
  • When a market is in equilibrium
  • Both price of good and quantity bought and sold
    have settled into a state of rest
  • Equilibrium price, p, is a Market clearing
    price
  • Price at which quantity supplied ________________
    quantity demanded. This quantity is called the
    Equilibrium quantity, Q.
  • The equilibrium price and equilibrium quantity
    can be found on the _________ and _________ axes,
    respectively
  • At point where supply and demand curves cross

3
Market Equilibrium
Supply
E
P
Demand
Q
4
Excess Demand
S
E
p
J
H
p1
D
Excess Demand
Q1
Q2
Q
5
Excess Demand
  • Excess demand
  • At a given price, the excess of quantity demanded
    over quantity supplied
  • Price of the good will rise as buyers compete
    with each other to get more of the good than is
    available

6
Excess Supply
S
Excess Supply
p1
L
K
E
p
D
Q
Q1
Q2
7
Excess Supply
  • Excess Supply
  • At a given price, the excess of quantity supplied
    over quantity demanded
  • Price of the good will fall as sellers compete
    with each other to sell more of the good than
    buyers want

8
Income Rises What Happens When Things Change
  • Income rises, causing ___________ in demand
  • __________ shift in the demand curve causes
    _________ movement along the supply curve
  • Equilibrium price and equilibrium quantity both
    _________
  • Shift of one curve causes a movement along the
    other curve to new equilibrium point

9
Increase in Income
S
F'
4.00
E
3.00
D2
D1
50,000
60,000
10
An Ice Storm Hits What Happens When Things Change
  • An ice storm causes _________ in _______
  • Weather is _________ variable for _______ curve
  • Any change that shifts the supply curve leftward
    in a market will increase the equilibrium price
  • And decrease the equilibrium quantity in that
    market

11
A Shift of Supply and A New Equilibrium
S2
S1
E'
5.00
E
3.00
D
50,000
35,000
12
Changes in the Market for Handheld PCs
S2002
S2003
A
500
B
400
D2002
D2003
2.45
3.33
13
Both Curves Shift
  • When just one curve shifts (and we know the
    direction of the shift) we can determine the
    direction ___________________________
  • ____________________
  • When both curves shift (and we know the direction
    of the shifts) we can determine the direction
    ____________________________
  • ______________________
  • Direction of the other will depend on which curve
    shifts by more

14
The Three Step Process
  • Key Step 1Characterize the Market
  • Decide which market or markets best suit problem
    being analyzed and identify decision makers
    (buyers and sellers) who interact there
  • Key Step 2Find the Equilibrium
  • Describe conditions necessary for equilibrium in
    the market, and a method for determining that
    equilibrium
  • Key Step 3What Happens When Things Change
  • Explore how events or government polices change
    market equilibrium

15
Using Supply and Demand The Invasion of Kuwait
  • Why did Iraqs invasion of Kuwait cause the price
    of oil to rise?
  • Immediately after the invasion, United States led
    a worldwide embargo on oil from both Iraq and
    Kuwait
  • A significant decrease in the oil industrys
    productive capacity caused a shift in the supply
    curve to the left
  • Price of oil increased

16
The Market For Oil
S2
S1
E'
P2
E
P1
D
Q2
Q1
17
Using Supply and Demand The Invasion of Kuwait
  • Why did the price of natural gas rise as well?
  • Oil is a substitute for natural gas
  • Rise in the price of a substitute increases
    demand for a good
  • Rise in price of oil caused demand curve for
    natural gas to shift to the right
  • Thus, the price of natural gas rose

18
The Market For Natural Gas
S
F'
P4
F
D2
P3
D1
Q3
Q4
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