College Principles ofPhysics Economics Chapter # Chapter Chapter Demand andTitle Supply PowerPoint Image Slideshow Demand & supply Organic vegetables and fruits locally grown and sold should cost less than regular produce because of low transportation cost That is not, however, usually the case Free Market System Supply and Demand: the name of the most important model in all economics Market: a network of buyers and sellers negotiating prices Price: the amount of money that must be paid for a unit of a good or service Quantity: the amount of a good or service bought or sold Demand and Supply Consumers: market participants buying goods and services Producers: market participants selling goods and services Equilibrium Price: the money payment at which consumers and producers agree to transact Equilibrium Quantity: the amount of output exchanged at the equilibrium price Demand and Supply Quantity Demanded: the amount of a good or service consumers are willing and able to buy at a particular price Quantity Supplied: the amount of a good or service producers are willing and able to sell at a particular price Demand and Supply Demand shows the relationship between price and quantity demanded, all being equal Supply shows the relationship between price and quantity supplied, all being equal demand The Law of Demand: quantity demanded and price are negatively related The demand is downward sloping Reasons: income effect and substitution effect supply The Law of Supply: quantity supplied and price are positively related The supply is upward sloping Reason: Profitability Demand and Supply Market Equilibrium: A condition at which independent plans of consumers and producers coincide in the market Demand = Supply to determine the equilibrium price and quantity No shortage or surplus Demand and Supply Shortage: At a price lower then the equilibrium price, quantity demanded exceeds quantity supplied Surplus: At a price higher then the equilibrium price, quantity supplied exceeds quantity demanded In a “free market,” price adjustments eliminate shortage or surplus SHIFT in demand Increased demand is a shift to the right from D to D1 Decreased demand is a shift to the left from D to D2 Determinants of Demand • • • • • • • Consumer Taste or Preference Consumer Income Price of Substitute and Complementary Goods Population: Number of Buyers Expectations of Price Change Sales Taxes Government Subsidies Determinants of Demand With an increase in income, consumers will purchase larger quantities, causing the demand curve to increase (shifting to the right) SHIFT in supply Increased supply is a shift to the right from S to S2 Decreased supply is a shift to the left from S to S1 Determinants of Supply • Price of Inputs (e.g., wages and salaries) • Production Technology • Price of Related Goods • Number of Sellers • Expectations of Price Change MARKET FOR SALMON Good weather to fish leads to and increase in supply of salmon, causing its price to decline and quantity to increase MARKET FOR NEWSPAPER A change in tastes from print news sources to digital sources results in a leftward shift in demand for the former The result is a decrease in both equilibrium price and quantity MARKET FOR POSTAL SERVICES (a) Higher wages causes the supply to decline, decreasing the quantity, but increasing the price (b) Communicating by E-mail & Text-message causes the demand to decline, decreasing both quantity and price Shift in demand & Supply Supply and demand shifts cause changes in equilibrium price and quantity Price ceiling When the government set the market price below the equilibrium price, causing a shortage At P = 500, shortage = 19 – 15 = Price floor When the government set the market price above the equilibrium price, causing a surplus At Pf > Pe, surplus = 19 – 15 = Gains from trade Gains from trade Consumer Surplus: Total benefit to the consumer as a result of buying a good at the equilibrium price Area of triangle F = 0.5(180 – 80)(28 – 0) = $1,120 Producer Surplus: Total benefit to the producer as a result of selling a good at the equilibrium price Area of triangle G = 0.5(80 – 30)(28 – 0) = $700 Government & gains from trade Price ceiling and price floor cuts into consumer surplus and producer surplus causing market disequilibrium and inefficiency Triangles (U + W) and (J + K) are called Dead Weight Loss due to deviation of market price from equilibrium price Government & gains from trade ... from S to S1 Determinants of Supply • Price of Inputs (e.g., wages and salaries) • Production Technology • Price of Related Goods • Number of Sellers • Expectations of Price Change MARKET FOR... to D2 Determinants of Demand • • • • • • • Consumer Taste or Preference Consumer Income Price of Substitute and Complementary Goods Population: Number of Buyers Expectations of Price Change Sales... because of low transportation cost That is not, however, usually the case Free Market System Supply and Demand: the name of the most important model in all economics Market: a network of buyers