MACROECONOMICS SUPPLY AND DEMAND DEMAND Demand is a

MACROECONOMICS SUPPLY AND DEMAND

DEMAND • Demand is a schedule or a graph showing the relationship between the price of a product and the amount of consumers are willing and able to buy.

LAW OF DEMAND • The quantity demanded varies inversely with changes in price. • Prices rise; demand down (curve shifts to the left) • Why? • Fewer people can afford product • People buy smaller quantities • People substitute cheaper products

LAW OF DEMAND -2 • Prices fall; demand up (curve shifts to the right) • Why? • More people can afford product. • People buy larger quantities • People substitute product for more expensive/similar products

DEMAND SHIFTS • Change in consumer’s income • Change in population (# of buyers) • Demand for complementary (related) goods (cars/gasoline) • Cost of substitute goods—goods that can replace another (silk/polyester) • Expectations about the economy • Changes in tastes and preferences

TYPES OF DEMAND • Elastic demand—necessities; price will have influence on demand for the product. • Inelastic demand—luxuries; people will buy a product despite a change in price. (ex. : milk for children). The demand line is straight.

SUPPLY • Supply is a schedule or a graph showing the relationship between the price of a product and the amount producers are willing and able to supply.

LAW OF SUPPLY • Sellers will offer more of a product at a high price and less at a low price. Supply curves slope upward. • Prices rise; supply increases (curve shifts right) Why? Profits increase • Prices decrease; supply decreases (curve shifts left) Why? Profits decrease

SUPPLY SHIFTS • Changes in cost of resources (cost of production) • Changes in technology • Changes in the number of sellers/producers (competition) • Future expectations • Unexpected events

PURE COMPETITION ASSUMPTIONS • No single buyer or seller influences the market price • Competing products are identical (buyers and sellers are not influenced by quality or design) • All buyers and sellers have full knowledge of all prices being offered • Buyers and sellers can leave the market at will

MARKET OR EQUILIBRIUM PRICE • The price at which the quantity demanded and the quantity supplied are equal.

EFFECTS OF CHANGES IN DEMAND ON MARKET PRICE • Demand rises; price rises (curve shifts right) • Demand falls; price falls (curve shifts left) • Price varies directly with changes in demand

EFFECTS OF CHANGE IN SUPPLY UPON MARKET PRICE • Supply rises; price falls (curve shifts right) • Supply falls, price rises (curve shifts left) • Price varies indirectly with changes in supply

ELASTICITY AND INELASTICITY • Elastic goods: luxuries; many substitutes; price sensitive • Inelastic goods: necessities; unresponsive to price changes.

PRICES NOT SET BY THE MARKET • Surplus: supply exceeds demand • Shortage: demand exceeds supply • Price floors: established minimum prices that buyers must pay (government farm subsidies) • Price ceilings: established maximum prices that sellers may charge ( price controls)

SHIFTS IN SUPPLY AND DEMAND Problem #1 • The product being considered is jelly beans. • The price of sugar increases. • The price of bubble gum, a close substitute for jelly beans, increases. • A machine is invented that makes jelly beans at a lower cost.

Problem #1 (cont’d) • The price of soda, a complementary good for jelly beans, increases. • Widespread prosperity allows people to buy more jelly beans.

Problem #2 • Assume that a heavy frost destroys half the world’s coffee crop and that people use more cream in coffee than they do in tea. • What is the effect of the loss of the coffee crop on: demand, supply, equilibrium price, and equilibrium quantity for each of the following: coffee, tea, cream and automatic coffee makers

Problem #3 • Assume people’s tastes change in favor of colored sports shirts, which are worn without neckties, and against white dress shirts, which are worn with neckties. • What are the effects of a shift to sports shirts on the demand, supply, equilibrium price and equilibrium quantity for each of the following: sports shirts, dress shirts, neckties and tie clasps?