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Chapter 3 Supply and Demand

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Title: Chapter 3 Supply and Demand


1
Chapter 3 Supply and Demand
  • Additional Circular Flow Model

2
What Determines a Persons Income in the Market?
  • This means what is the value of the human being?
  • Determined by
  • a) value of their product. Rock singer,
    athlete, Shaq, Oprah, department store clerk,
    insurance salesman, teacher
  • b) supply and demand. If lot of people doing
    same things you are not likely to be paid
    much.(underwater welders). As demand for
    product decreases, reduces number of available
    jobs gas station jobs!
  • c) if demand for product lacking- rewards
    minimal and number of competing workers is few,
    demand high, wages high. 20 years ago heart
    surgeons

3
Who Determines the value of a product?
  • The value of the product is the worth that
    society puts on it.
  • What worth does society put on sports?
  • What worth does society put on music industry?
  • What worth does society put on sport cars,
    SUVs, large houses, motorcycles, eating out,
    designer clothes, entertainment. Etc, etc. etc.
    Education?

4
WORKING MODEL OF THE ECOMONY
International Participants
  • Product Market

Payments for Goods Services
Receive Goods Services
Injection
Investment
Government
Banks
BUSINESS
HOME
Savings
Taxes
Leakage
Land,Labour, Capital, Entrepreneurs
Rent, Wages, Interest, Profit
Factor Market
ST gt IG Recession IG gt ST Inflation
International Participants
Leakage S T I G Injection
5
Circular Flow Explanation
  • Flow of resources in the market shows how the
    market works
  • In market system, voluntary exchanges continually
    take place in circular flow model
  • System works that what is an expense to one is
    ultimately an income to the other

6
Two Leakages Explained
  • Savings and Taxes
  • Savings does not help unless it is invested back
    into the flow (economy).
  • Financial intermediaries why are they called
    this?
  • (because they take savings of one group and make
    it available to another to borrow or invest)
  • Financial Intermediaries are banks, savings
    loan, credit unions, stock market, insurance
    companies.
  • If savings is greater than investment..business
    expenses mount.

7
  • Taxes are also a leakage.
  • Government injects tax dollars back into the
    economy (flow) by spending the money that taxes
    take out.
  • What expenditures does government make into the
    flow?
  • Money spent on redistribution of income or
    transfer payments is not productive into the
    flow. Why?This is where a lot of the
    controversy occurs about stimulus package.

8
  • S T greater than I G recession
  • G I greater than S T inflation
  • Supply-siders favor strong I
  • Demand-siders (Keynesian economy) favor strong G
    this is where we are now for most of populous
    thinking

9
What if???
  • Banks will not loan money?
  • People lose their jobs?
  • Companies are not hiring?
  • People are under-employed?
  • Consumption decreases significantly?

10
Characteristics of Recession/Inflation
  • Recession
  • Businesses not selling what it produces
  • Inventories accumulate
  • Businesses then cut down on employment (hence
    unemployment/layoffs)
  • Inflation
  • _____________________________
  • Government and investors spending more
  • Inventories begin to be depleted
  • Prices increase
  • Production increases
  • More workers are hired

11
What is a Market?
  • Any Place Where Goods and Services are
    Voluntarily Exchanged
  • (brings together buyers and sellers)
  • Price is a primary influence in determining
    allocation of resources in our free enterprise
    economy.
  • Difference between Price, Value, Utility
  • Price value of product in terms of money
  • Value has to do with relative scarcity
    exchange value
  • Utility satisfaction that good or service can
    provide

12
Law of Supply
  • As the price of the product increases, the
    quantity that the supplier tends to supply also
    increases.
  • Ceteris Paribus Ceteris Paribus
    Assumption KAY-ter-us PEAR-uh-bus
  • Nothing changes except the factor or factors
    being studied.
  • Other things constant equal

13
Economics as a Science (cont'd)
  • Ceteris Paribus Assumption KAY-ter-us
    PEAR-uh-bus
  • Nothing changes except the factor or factors
    being studied.
  • Other things constant
  • Other things equal

14
Law of supply
  • positive relationship between the quantity of a
    good supplied and price.
  • PRICE IS THE INDEPENDENT VARIABLE

15
Determinants of Supply
  • Technique of production (technology)
  • (ovens, organic farming)
  • Resource Prices (Factor Costs) cost of inputs
  • Taxes and Subsidies
  • Prices of Other Goods (decline in wheat will
    cause farmer to shift to corn)
  • Expectations- (farmers expect price to rise..
    Hold back production)
  • Number of sellers in market more sellers,
    greater supply.

16
Important Concepts
  • Change in Supply (shifting of curve)
  • Or
  • Change in Quantity Supplied (movement along curve)

17
Ability to Respond to Price varies
  • Often the ability of an individual firm to
    respond to an increase in price is limited or
    constrained by its existing scale of operations,
    or capacity, or ability to obtain resources.. IN
    SHORT RUN
  • Examples
  • IN LONG RUN can adjust. The greater the amount
    of time producers have to adjust, the greater
    their output response.

18
Law of Demand
  • AS THE PRICE OF A GOOD DECREASES THE QUANTITY
    DEMANDED TENDS TO INCREASE.
  • Ceteris Paribus
  • Price once again is the independent variable!

19
  • Wishing for a new boat does not constitute
    demand one must be WILLING AND ABLE to purchase
    a boat.
  • Generally speaking. The higher the price
    obstacle, the less of a product a consumers will
    buy.
  • Bargain days are based on law of demand.

20
  • The greater the want satisfaction. The greater
    the utility
  • Marginal Utility How much more utility do you
    get adding or subtracting units (more doughnuts
    more cars more steak in one day)
  • DIMINISHING MARGINAL UTILITY.
  • As the number of units of a product a consumer
    has increases, the satisfying power for each
    extra unit decreases.

21
Utility
  • Purpose of Utility analysis is to study how
    people behave not how they think.
  • Theory of consumer choice is based on the idea
    that each consumer spends his/her income in a way
    that yields the greatest satisfaction.

22
Determinants of Demand
  • 1.Preferences
  • 2.Prices of Related Goods
  • 3.Number of Buyers
  • 4.Expectations of future price
  • 5.Income

23
Determinants of Demand
  • Tastes and preferences
  • Taste changes throughout our lifetime.

24
2 Determinant Prices of Related Goods
  • Your preference is Coke price skyrockets.
  • Affected in the market by substitute goods and
    complimentary goods.
  • Substitute goods anything that can be
    substituted for the product or service desired
  • (Coke/Pepsi,
  • Millers/Coors,
  • potato chips/popcorn).
  • If price of Coke rises and consumer doesnt feel
    strongly about brand preference will buy Pepsi
    until Coke price declines)
  • When two products are substitutes, the price of
    one good and the demand for the other are
    DIRECTLY RELATED.

25
  • Complementary Goods Goods that go along with
    other goods consumers buy
  • peanut butter/jelly, beer/pretzels,
    milk/cookies, golf balls/golf tees,
  • When two goods are complements, an increase in
    the price of one good adversely affects the
    demand for the other and creates an inverse
    relationship.

26
  • Independent Goods No connection between price
    and demand (cars/bread)

27
Determinants Continued
  • 3. Number of buyers
  • The number of buyers will increase demand for
    the product which (if supply is fixed) will drive
    up the price.)

28
Determinant 4
  • Income- RATHER OBVIOUS HERE.
  • Show shifts
  • Superior or Normal goods commodities whose
    demand varies DIRECTLY with money income.
  • INFERIOR OR POOR MANS GOODS.
  • Goods whose demand varies inversely with a change
    in money income.

29
  • 5. Expectations
  • If you are in medical school or law school, the
    expectation of you getting a larger income when
    you get out of school will affect your demand for
    goods Inheriting money, winning the lottery!

30
IMPORTANT CONCEPTS OF DEMAND
  • Change in Demand
  • OR
  • Change in Quantity Demanded

31
Terms to Remember
  • Profit
  • TR-TC
  • Total Revenue
  • P x Q
  • Marginal Utility
  • To maximize utility, consumers should choose
    that good which delivers the most marginal
    utility per dollar. Optimal utility is then
    achieved.
  • Optimal consumption mix of output that maximizes
    total utility for the limited amount of income
    you have to spend.

32
Equilibrium
  • Equilibrium market clearing price supply and
    demand are in balance.
  • Does not occur often if ever with the constantly
    changing invisible hand and the consumer
    fickleness.
  • In our U.S. economy we have consumer
    sovereignty which tends to shift both curves or
    move along the curve almost continuously.

33
Ceilings and Floors
  • Price Ceiling-
  • a legally established maximum price that sellers
    may charge (rent control)
  • Direct effect of a price ceiling is a shortage
  • Secondary effect- reduction in the quality of the
    good, inefficient use, lower future supply, black
    markets,

34
  • Price Floors
  • Price floor is a legally established minimum
    price that buyers must pay. (minimum wage)
  • Direct effect reduces employment of low-skilled
    labor
  • Indirect effects reduction in nonwage component
    of compensation (perks), lesson-the-job training.

35
Recap Ceilings and Floors
P
S
P
S

D
D
Q
Q
36
Black Markets
  • Markets that operate outside the legal system
  • Have a higher incidence of defective products,
    higher profit rates, greater violence
    (cigarettes, drugs both prescription and
    illegal, Levis during cold war)

37
Equilibrium Tutorial
  • Equilibrium

38
Supply and Demand for Cowboy Tickets
  • http//www.tickco.com/schedule/dallas-cowboys/
  • http//www.tickco.com/schedule/new-england-patriot
    s/

39
(No Transcript)
40
Kiley is my best friend She Supplies a lot of
love! ?
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