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Chapter 2: Demand

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Chapter 2: Demand & Supply Supply: The Business Side Quantity Supplied The amount of product businesses are willing to supply at each price Law of Supply There is a ... – PowerPoint PPT presentation

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Title: Chapter 2: Demand


1
Chapter 2 Demand Supply
  • Supply The Business Side

2
Supply
Supply is the relationship between the various
possible prices of a product and the quantities
of the product businesses are willing to supply
3
Quantity Supplied
  • The amount of product businesses are willing to
    supply at each price

4
Law of Supply
  • There is a direct relationship between a
    products quantity supplied and its price
  • If price increases, quantity supplied increases
    (ceteris paribus)
  • If price decreases, quantity supplied decreases
    (ceteris paribus)

5
Market Supply
  • The sum of all producers quantity supplied at
    each price

6
The Supply Schedule for Strawberries
7
The Market Supply Curve for Strawberries
P
.
S
.
2.50
.
2.00
Price
.
1.50
.
1.00
0.50
0
Q
15
20
25
10
5
Quantity Supplied (000s of baskets)
8
In Supply vs. in Quantity Supplied
  • A change in supply is represented by a shift of
    the supply curve
  • A change in quantity supplied (represented by a
    movement along a supply curve) is caused by a
    change in price

9
Changes In Supply
  • While price changes will cause quantity supplied
    to change, other factors can cause supply to
    increase or decrease

10
Supply Determinants
  • Number of Producers
  • 2. Resource Prices
  • 3. State of Technology
  • 4. Changes in Weather
  • 5. Prices of Related Goods

11
1. Number of Producers
  • Increase in of producers causes an increase in
    supply (shifts supply curve to the right)
  • Decrease in of producers causes an Decrease in
    supply (shifts supply curve to the left)
  • Direct relationship

12
2. Resource Prices
  • Businesses buy resources (factors of production)
    to produce goods and services
  • Increase in resource prices increase costs
  • An increase in resource prices causes supply to
    decrease (shift to the left)
  • An decrease in resource prices causes supply to
    increase (shift to the right)
  • Indirect relationship

13
3. State of Technology
  • Increased efficiency allows businesses to produce
    more goods and service at every price
  • Improvement in technology will increase supply
    (shift to the right)

14
4. Changes in Nature
  • Earthquakes, early frost, high temperatures,
    floods, etc. can affect the supply of many
    products
  • Poor weather conditions can decrease supply
    (shift to the left)
  • Like wise, a good season can increase the supply
    of products, such as fruit, vegetables, flowers,
    etc. (shift to the right)

15
5. Prices of Related Goods
  • Supply of a product can be influenced by changes
    in the prices of other products.
  • Ex Decline in price of tobacco causes farmers
    to switch to ginseng (a rise in supply, shifting
    S out and right)

16
An Increase In the Supply of Strawberries
  • An increase in supply is represented by a shift
    in the supply curve to the right (S1).
  • At each price point, producers are willing to
    supply more goods. For example, at 1.00,
    producers were supplying 10,000 baskets. Now
    producers are willing to supply 15,000 (an
    increase of 5,000 baskets)

17
An Increase In the Supply of Strawberries
P
S
S1
2.50
2.00
Price
1.50
1.00
0.50
0
Q
15
20
25
10
5
Quantity Supplied (000s of baskets)
18
A Decrease in the Supply of Strawberries
  • A decrease in supply is represented by a shift to
    the left of the supply curve (S0)
  • At all prices, producers are willing to supply
    less strawberries
  • Example At 1.50, producers were willing to
    supply 15,000 baskets. Given the decrease in
    supply, producers are now only willing to supply
    10,000 baskets (a decrease in supply of 5,000
    baskets)

19
A Decrease in the Supply of Strawberries
P
S0
S
2.50
2.00
Price
1.50
1.00
0.50
0
Q
15
20
25
10
5
Quantity Supplied (000s of baskets)
20
Supply Elasticity
  • Also known as Price Elasticity of Supply
  • Measures producers response to the quantity
    supplied of a product to a change in price

21
Elastic Supply
  • More responsive to price changes
  • A given percentage change in a products price
    results in a larger percentage change in its
    quantity supplied.

22
Inelastic Supply
  • Less responsive to price changes
  • A given percentage change in price results in a
    smaller percentage change in quantity supplied.

23
Factors That Affect Supply Elasticity
  • The Immediate Run
  • The Short Run
  • The Long Run

24
The Immediate Run
  • Period where businesses in an industry can make
    no changes in the resources they use (labour,
    capital, natural)
  • In the immediate run, supply is perfectly
    inelastic
  • Fig. 2.15 p. 63

25
The Short Run
  • Period where at least one of the resources can be
    changed
  • Ex. Increasing labour
  • Supply curve can be elastic or inelastic
  • Depends on change in P compared to change in
    Qs

26
The Long Run
  • In the long run, all the resources used by a
    business can be changed.
  • Human, capital natural resources can be altered
  • Supply is elastic
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