Chapter 4 : The Market Forces of Supply and Demand

User Generated

avpxlccunz36

Business Finance

Description

Attached files are the powerpoint slides for chapter 4 and the worksheet. This chapter introduces the theory of supply and demand. It considers how buyers and sellers behave and how they interact with one another. It shows how supply and demand determine prices in a market economy and how prices, in turn, allocate the economy’s scarce resources.

Unformatted Attachment Preview

ECON 111 Chapter 4 Handout The plot below represents the local market for health club memberships. 1. What is the equilibrium price and quantity? Label the combination in the graph point 1. 2. The price is $100. a. Find the quantity demanded. You do not have to provide an exact answer. b. Find the quantity supplied. You do not have to provide an exact answer. c. Is there a shortage or a surplus. d. If possible, calculate the amount from your answer to c. e. If the market functions well, how should price react? 3. A business which offers health club memberships closes. a. How does this change impact the market? b. Label the new equilibrium combination 2. c. Does the quantity demanded increase or decrease? d. Does the quantity supplies increase or decrease? e. Does price increase or decrease? 4. Using your answer from part 3., the government offers the tax credit for everyone who purchases health club memberships. a. How does this change impact the market for X? b. Label the new equilibrium combination 3. c. Does the quantity demanded increase or decrease? d. Does the quantity supplies increase or decrease? e. Does price increase or decrease? f. Does the equilibrium quantity increase or decrease? The Market Forces of Supply & Demand Chapter 4 Mankiw 8e Market • A social arrangement • Buyers and sellers exchange information and conduct business • What are the incentives in the market? • An institution designed to realize the market price (P) – The number of transactions is the market quantity (Q) Demand & Supply: Price & Quantity 2 Demand: Relationship b/t P&Q • Demand (D) exists when potential buyers want, can afford, and plan to purchase a good or service • Quantity Demand (QD) is the amount of a good or service buyers plan to purchase at a given price, during a given time period • D & QD are different – Demand is a relationship between P & QD – QD is a measurement at a given P Demand & Supply: Price & Quantity 3 Demand & Affordability • Suppose wealth is $10 • How many units (Q) may be purchased if the price (P) is $1 per unit? • QD if P is $2 per unit? • QD if P=$5? • What does this experiment show between P and QD? Demand & Supply: Price & Quantity 4 Law of Demand • Ceteris paribus, the higher (lower) the P of a good or service, the smaller (greater) is its QD • Demand (D) shows a relationship between P and QD which is – Inverted – Negative – Downward sloping Demand & Supply: Price & Quantity 5 Factors of Demand • Five (5) factors change the Demand Schedule (D) – At each price, quantity demanded changes – In market A, the demand curve (D) shifts 1a. Prices of Related Goods – Substitute ↑P(B) ↑D(A) A Right 1b. Prices of Related Goods – Complement ↑P(B) ↓D(A) A Left 2a. Income – Normal ↑I ↑D Right 2b. Income – Inferior ↑I ↓D Left 3. # Buyers ↑N ↑D Right 4. Preferences Fad ↑D Right 5a. Expectations – Price ↑P ↑D Right 5b. Expectations – Income ↑I ↑D Right Demand & Supply: Price & Quantity 6 The Demand Schedule (D) = Demand • • • • Assume ceteris paribus A list of P and QD Shows the relationship between P & QD Definition. Demand Schedule: The total amount of a good buyers plan to purchase during a given time period, at every possible price Demand & Supply: Price & Quantity 7 The Demand Schedule P ($/gal.) QD (000 gal. / week) $4 80 3.50 90 3 100 2.50 110 2 120 • Ex: Oneonta gas market • P=price & QD=Quantity Demanded • How are P & QD related? • How does the schedule appear? The Demand Curve Demand & Supply: Price & Quantity 8 Supply: Relationship b/t P & Q • Supply (S) exists when potential sellers have technology, resources, and plans to produce and sell a good or service • Quantity Supplied (Qs) is the amount of a good or service firms plan to sell at a given price (P), during a given time period • S is different than Qs Demand & Supply: Price & Quantity 9 Supply & Marginal Profit • Marginal profit is the change in profit when an additional unit is produced & sold • Suppose per unit marginal costs are $2 • How much are firms willing to produce and sell at a price of $1? • Qs if P = $2? • If P = $5? Demand & Supply: Price & Quantity 10 Law of Supply • Ceteris paribus, the higher (lower) the P, the greater (smaller) the Qs • The relationship between P & Qs is – Positive – Direct – Upward sloping Demand & Supply: Price & Quantity 11 Factors of Supply • Six (6) factors change the Supply Schedule (S) – At each price, quantity supplied changes – The supply curve (S) shifts 1. Input prices ↑Costs ↓S Left 2. Resource Availability ↑ ↑S Right 3. Number of Sellers ↑N ↑S Right 4. Technology Better ↑S Right 5. Expected Prices ↑PE ↓S Left 6. Related Goods in Production ↑P(B) Demand & Supply: Price & Quantity ↓S(A) A Left 12 Supply Schedule = Supply • Definition. Supply Schedule: The total amount of a good or service all potential sellers plan to sell at each possible price, during a given time period • Shows a list of prices of quantity supplied Demand & Supply: Price & Quantity 13 The Supply Schedule P ($ / gal) $4 3.50 3 2.50 2 QD QS (000 gal / (000 gal / • Qs = Quantity Supplied week) week) • What is the 80 120 relationship between P & QS? 90 110 • How does the 100 100 schedule appear? The Supply 110 90 Curve 120 80 Demand & Supply: Price & Quantity 14 Market Equilibrium (E) • The price at which buyers and sellers plans are in balance • Buyers and sellers interactions reveal a single price • The price when QD = QS. NOT when D = S! • Equilibrium price (EP) for which QD = QS (NOT D=S) • Equilibrium quantity: EQ when quantity bought is quantity sold Demand & Supply: Price & Quantity 15 Surplus & Shortage • Equilibrium implies balance and stability – P does not change, so choices do not change • Surplus (excess supply): QS > QD – Does price change? • A shortage (excess demand): QS < QD – Does price change? • Market equilibrium – A price when neither surplus nor shortage – QD - QS = 0 – Does price change? Demand & Supply: Price & Quantity 16 Market Equilibrium P QD QS $4 80 120 3.5 90 110 3 100 100 2.5 110 90 2 120 80 QS – P • The point at QD response which D and S intersect +40 Surplus • Equilibrium price: EP for which QD +20 Surplus = QS 0 STABLE • Equilibrium quantity: EQ -20 Shortage when quantity bought is -40 Shortage quantity sold Demand & Supply: Price & Quantity 17 Determine the market price Find the demand schedule Find the supply schedule Jack’s demand for candy bars Acme Chocolatier, Inc. supply of candy bars Price QD $1 9 Price QS 2 6 $1 1 3 2 2 5 3 13 Jill’s demand for candy P QD $1 8 2 6 3 4 Demand & Supply: Price & Quantity Cyan Confectionary Co. supply of candy P QS $1 2 2 7 3 12 18 Changes in Price • When P changes, – Students often confuse D and QD – Or, S and QS – It is important to distinguish b/t these! • When price changes, ceteris paribus: – Demand does NOT change – Supply does NOT change – A movement along the curve Demand & Supply: Price & Quantity 19 Changes in Schedules • When a relevant factor, other than price, changes – Demand Schedule shifts • Right (↑D): ↑P & ↑Q • Left (↓D): ↓P & ↓Q – Supply Schedule shifts • Right (↑S): ↓P & ↑Q • Left (↓S): ↑P & ↓Q Demand & Supply: Price & Quantity 20 Predict Changes • The price of candy bars increases • The price of chocolate, an input, increases • Jack & Jill’s incomes increase Demand & Supply: Price & Quantity 21 Shifts & Prices • What assumption is necessary when predicting the impacts for the gas market from the following? … Suppose: – the price in gasoline increases – Gulf coast refineries shut down due to weather related events – gasoline is a normal good & income increases – more hybrids are purchased & political unrest occurs in an OPEC member Demand & Supply: Price & Quantity 22
Purchase answer to see full attachment
User generated content is uploaded by users for the purposes of learning and should be used following Studypool's honor code & terms of service.

Explanation & Answer

Hello,Attached find the complete...


Anonymous
Just the thing I needed, saved me a lot of time.

Studypool
4.7
Indeed
4.5
Sitejabber
4.4

Related Tags