Agribusiness Library Lesson 060101 Supply and Demand 1

Objectives 1. Define supply, identify factors that affect supply, and explain the Law of Supply. 2. Define demand, identify factors that affect demand, and explain the Law of Demand. 3. Analyze the supply and demand relationship, define market equilibrium, define disequilibrium, and analyze the factors that cause disequilibrium. 4. Examine how government actions can impact supply and demand for products. 2

Terms z ceteris paribus z complement good z demand curve z expectations of consumers z expectations of producers z income z Law of Demand z Law of Supply z market equilibrium z number of buyers z number of sellers z price ceilings z price floors 3

Terms (cont’d) z prices of related goods z quantity demanded z quantity supplied z resource prices z shortage z subsidy z substitute good z supply curve z surplus z tastes and preferences z taxes z technology 4

What is supply? What is the relationship between price and quantity supplied? What is the Law of Supply? The Law of Supply states that as the market price of a good or a service increases, the quantity supplied in the market will also increase: ceteris paribus. (Note ceteris paribus is a Latin term that means “everything else held constant. ”) 5

What is supply? What is the relationship between price and quantity supplied? What is the Law of Supply? A. Supply is the relationship between market price and the amount of goods and services produced in the economy. 1. The supply curve is a graphical depiction of the relationship between price and quantity supplied. The supply curve slopes upward, so it is positively sloped. 6

What is supply? What is the relationship between price and quantity supplied? What is the Law of Supply? A. Supply (cont’d) 2. Changes in market price will only change quantity supplied, which is a movement along the supply curve. 3. All non-price, supply-related changes in the market will shift the supply curve left or right. 7

What is supply? What is the relationship between price and quantity supplied? What is the Law of Supply? B. A number of non-price changes shift the supply curve. 1. The number of sellers in the market will influence the supply curve. An increase in the number of sellers in the market will shift the supply curve right. 2. Technology will influence the supply curve. Technologies that make production more efficient will shift the supply curve to the right. 8

What is supply? What is the relationship between price and quantity supplied? What is the Law of Supply? 3. Resource prices will influence the supply curve. An increase in the price of inputs will shift the supply curve to the left. 4. Expectations of producers will influence the supply curve. If producers expect demand for their goods and services to increase, then the supply curve will shift right. 5. Prices of other goods the firm could produce will influence the supply curve. If the prices of other goods the firm could produce rise, then the supply curve will shift left. 9

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What is demand? What is the relationship between price and quantity demanded? What is the Law of Demand? The Law of Demand states that as the market price of a good or a service increases, the quantity demanded of that good or service decreases: ceteris paribus. A. Demand is the relationship between market price and the amount of goods and services purchased in the economy. 11

What is demand? What is the relationship between price and quantity demanded? What is the Law of Demand? The demand curve is a graphical depiction of the relationship between price and quantity demanded. The demand curve slopes downward, so it is negatively sloped. 2. Changes in market price will only change quantity demanded, which is a movement along the demand curve. 3. All non-price, demand-related changes in the market will shift the demand curve left or right. 1. 12

What is demand? What is the relationship between price and quantity demanded? What is the Law of Demand? B. A number of non-price changes shift the demand curve. 1. The number of buyers in the market will influence the demand curve. An increase in the population in the market will shift the demand curve right. 2. Tastes and preferences will influence the demand curve. When consumers develop a stronger preference for a good or a service, the demand curve will shift right. 13

What is demand? What is the relationship between price and quantity demanded? What is the Law of Demand? 3. Income will influence the demand curve. An increase in consumers’ income will shift the demand curve to the right. 4. Expectations of consumers will influence the demand curve. If consumers expect the price of a particular good or service to increase, the demand curve will shift right. 14

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What is demand? What is the relationship between price and quantity demanded? What is the Law of Demand? 5. Prices of related goods consumers can buy will influence the demand curve. a. If the price of a complement good rises, the demand curve will shift left. For example, if the price of buns increases, the demand for hot dogs will shift left. b. If the price of a substitute good rises, the demand curve will shift right. For example, if the price of hamburgers increases, the demand for hot dogs will shift right. 16

What is the relationship between supply and demand? What conditions are necessary for the market to be in equilibrium? What factors might cause the market to be in disequilibrium? Market equilibrium occurs when the market price is set such that quantity supplied is exactly equal to quantity demanded. A. Markets “clear” when they are in equilibrium. Therefore, quantity supplied is exactly equal to quantity demanded, thereby “clearing” the marketplace of all goods. 17

What is the relationship between supply and demand? What conditions are necessary for the market to be in equilibrium? What factors might cause the market to be in disequilibrium? B. Markets are in disequilibrium when the price is such that quantity supplied is more than or less than quantity demanded. 1. Price ceilings occur when the government sets a price, a maximum price for a good or a service. If the ceiling is set below the market clearing shortage will exist. 18

What is the relationship between supply and demand? What conditions are necessary for the market to be in equilibrium? What factors might cause the market to be in disequilibrium? 2. Price floors occur when the government sets a minimum price for a good or a service. If the price floor is set above the market clearing price, a surplus will exist. 3. If a price ceiling is set above the market clearing price or a price floor is set below the market clearing price, the market will remain in equilibrium. 19

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What impact can government actions have on the supply and demand for goods and services? Governments can use taxes and subsidies to influence supply and demand. A. Governments can provide additional funds to consumers in the form of a subsidy (monetary assistance) to purchase a specified good or service. 21

What impact can government actions have on the supply and demand for goods and services? 1. Subsidies will encourage consumers to purchase more of the subsidized good or service. This will shift the demand curve to the right. 2. Governments may use subsidies to encourage the adoption of efficient technologies that might be too costly for consumers to purchase. 22

What impact can government actions have on the supply and demand for goods and services? B. Governments can tax consumers to discourage the purchase of a specified good or service. 1. Taxes (extra fees/charges levied by the government) will discourage consumers from purchasing certain goods or services. This will shift the demand curve to the left. 23

What impact can government actions have on the supply and demand for goods and services? B. Governments can tax consumers (cont’d) 2. Governments may use taxes to reduce the demand for products that are harmful to society. For example, a tax exists on tobacco products, which have been shown to affect public health negatively. Such taxes are frequently called “sin taxes. ” 24

What impact can government actions have on the supply and demand for goods and services? C. Governments can provide additional funds to producers in the form of a subsidy so they can produce more of a specified good or service. 1. Subsidies encourage producers to supply more of the subsidized good or service. This will shift the supply curve to the right. 2. Governments may use subsidies to encourage the production of goods and services that benefit society. 25

What impact can government actions have on the supply and demand for goods and services? D. Governments can tax producers to discourage the supply of a specified good or service. 1. Taxes will discourage producers from supplying the taxed good or service. This will shift the supply curve to the left. 2. Governments may use taxes to reduce the supply of a product that is harmful to society. 26