Intro Economics Survey Course
Intro Economics Survey Course ECON 201
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This 22 page Class Notes was uploaded by Kelsi Adams I on Monday October 26, 2015. The Class Notes belongs to ECON 201 at University of Tennessee - Knoxville taught by Kenneth Baker in Fall. Since its upload, it has received 15 views. For similar materials see /class/229886/econ-201-university-of-tennessee-knoxville in Economcs at University of Tennessee - Knoxville.
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DEMAND SUPPLY AND MARKETS Where do 1 ces come from OVERVIEW Questions of the Day El Where do prices come from How are they determined El What do we mean by a market El How do we use supply and demand a What motivates buyers or sellers El What is the invisible handquot El What happens to the market when conditions change MARKETS El Demand and supply is an economic model used to explain prices a Show where prices come from a Predict how they change El Demand and supply together make up a market El The model works best when aAll goodsare i There are so many individual buyers and sellers that Markets Determine Prices So What a Q Why do we care about the market u A Because markets l What How to produce them How to allocate the goodsservices El Using a market mechanism is What is a Market El Demand and supply make up two sides of a MARKET D A collection of buyers and sellers that through their actions or potential interactions determine the price of goodsservices El Any institution that facilitates the voluntary exchange of oo s and services for other goodsservices or money D The institution through which buyers and sellers interact and engage in voluntary exchange El Interactions between buyers and sellers that determine the price of goodservice Market Examples El Any good or service where one group of people wish to provideproducesell the good and another group of people wish to buy the good makes a market El Goods Market food clothes CD s cars tickets etc El Services Market El Resource Market inputs to production El Credit Market borrowinglending El Currency Market El Market Definition D Market d n who is included and n This can be a subiecliye process D You can examine the model from a From very broad to very narrow a Marker for automobiles carsancl trucks new and used a Market for a Market for a Market for a Market for DEMAND D All those D All those interested or even potentially interested whether households firms or government El Back to our basic question I Whano produce How mud of a good to produce How rnany iei airplanes to produce each rnaninz How rnany Boelng iei airplanes to produce each month How rnany Boelng 7E7 iei airplanes to produce each month How much do buyers want D Part of the answer lies with buyers how much do they want exactly D What affects how much they want a What could change in your life to induce you to buy more or less of a goodservice than you do right now i Price of the goodservice 2 3 A Price expectations by consumers Price El Quantity Demanded The amount of a good or service t at n Celeri Paribu means El Law of Demand Price and quantity demanded are a As price rises qudmiiy derndnded falls peoplewish to buy less hr ihe good as ii betomes more expensive 1 As price falls qudnmy demanded rise eoplewish to buy more Dr ihe good as ii betomes heaper Price and Quantity Demanded El There are 3 ways to show the negative relationship between price P and quantity demanded Qd 1 Demand Function 2 Demand 3 Demand Curve Demand Function Example El Demand Funci n A mathematical formula that El Suppose fictional person named K demands do dadsquot n We can write K s demand for dodads as a function i This will show ihe relationship heiweeh ihe price of dodads P and ihe amount he wishesio buy per month Qd Demand Schedule Example Ex mple K s Demand Schedule demand for dodads 5 Guam y Demanded per momh Atable that shows the relationship between the price ofthe good and the amount demanded P e doduds 18 We can mi in the scheduieb 15 piugging numbers intothefunction 12 9 a Demand Curve Example P Piot the Scheduie to get the m eman curve K s Guamin nded 15 per monlh i 2 3 4 0dodadslmonth Oiher Fadors D Remember These points and this curve are cereris pwibus WH EN TH EY CHAN GE TH EY SHIFT TH E D EMAN D CU RVE Demand Shifters Income D Normal Goods have a 1 As your income 1 so does D As K s income increases K purchases more dodads per month even it o Opposite also rue as incom i does he amount of he e so good buyers demand Iii ing each poinl Io Ihe Ie I Inferior Goods he exception 0 he rule Exampies Demand Shifters Income p if K s income riSeS a is 12 Wquot e 3 WW WWW a dodadslmonth Demand Shifters Prices of Related Goods B When 2 goods are related it means that when the of good A changes buyers react by changing the amount they buy of good B D Complement Goods goods D Substitute Goods goods consumed Demand Shifters Prices of Related Goods El Complement Goods goods consumed at Examples El How are these related El A decrease in the price of the first good causes an I Opposite also true Demand Shifters Prices of Related Goods El Substitute Goods consumed 1 Examples El How are these related El A decrease in the price of the first good causes 1 Opposite also true Demand Shifters TastesPreferences El Preferencestastes change over time some goods become more popular some become less popular El When a good becomes more popularfashionable demand shifts right at every point I Opposite also true when a good becomes less popular demand shifts left at every point Demand Shifters Price Expectations El Buyers sometimes expect the price of the good to change in the future and this may affect how much of the good they want to buy today D If buyers think the price of the good will rise in the near future will they want to buy more or less today a El Opposite also true Demand Shifters Any Others El Anything other than a change in the price of the good itself that makes buyers wish to buy more or less of the good will shift the demand curve D An increase in demand is a shift to the right D A decrease in demand is a shift to the E Individual and Market Demand El Market Demand the summation of each individual s quantity demanded at every price D As an example lets simplify our world to 3 people who Markei Demand Murkel P Demand per mm WE 15 15 1 12 4 12 9 8 a 12 3 16 D x 1 r 1 i i 25 12 WE a do dadsmonm Summary Market Demand Shifters n Detreose m Dnsumer mmmes n E u ntreose m Dnsumer mmmes a E D u ntreose m pr e er a a E 24 a u ntreose m pHEE er a subsmme u Detreose m p te er a subsmme and and u Mere papu or u Less papu or u Benennor p te Wm nse m near a Benennor p te wm foH m near fumre fmure u ntreose m number er buyers u Detreose m number er buyers u Any honge HER T AN THE u buy mere DfWE gDDdSEWKE buy 255 er We gDDdSEWKE Demand vs Qualan Demanded P Aenange m we pnee er me guud user Mr eause evementareng he demand eurve and rs eaued a enange m duanmy demanded Aenange m anymmg erse sm sthe ennre demand curve and rs eaued a enange m demand D D Q dodadslmonth Practice Drawa typicaldemand curve forbacon What L 4 L n Increaseordecrease Shiftleftorright Priceofeggs falls Price of bacon falls A new report by theAmerican Health Institutewams SUPPLY D The other V2 of the market All those i All those interested or even potentially interested whether households firms or government D Back to our basic questions u Whano produce How much of a good to produce I How many airplanes per month a How many Boeing airplanes per month a How many Boeing 787 airplanes per month a How many etcdads How much do sellers wantto make D Part of the answer lies with buyers but the other part of the answer lies with the sellers How much are they willing to produce D What affects how much they want to make iPrice 2 3 A Change in technology of production 5 Price of the GoodService itself El Quantity Supplied The amount of a good or service that 1 Again holding all factors except price consrdm El Law of Supply Price and quantity supplied are a As price rises qudmiry supplied rlrms Wlsh m supply more ur the good when the prlEE rlses i As price falls quantity supplied rlrms Wlsr m supply less ur the good as ll becomes cheaper Price and Quantity Supplied El Like demand there are 3 ways to show this relationship between price and quantity supplied Qs l Supply Function mathematical 2 Supply Schedule table that shows 3 Supply Curve graphical representation of the relationship between P and Qs Example Supply Function and Schedule Suppose that there is a ctional producer of dodads Bud Bud s supply schedule Bud s supply function is given by per month 12 We can ll in the schedule by 9 plugging numbers into he Jnction 6 Example Supply Curve m m we Supply scheduietothe Supply curve Z 4 B E madodadslmonth Other Factors D Remember These points are all ceieris paribus OTHER FACTORS THAT AFFECT THE ALL QUANTITIES OF GOODS SELLERS ARE PREPARED TO SUPPLY ARE SHIFT FACTORS Supply Shifters Price of Inputs D To produce the good or service firms have to buy inputs 1 Firms buy labor cu pilul fuel electricitytransportation raw materials etc and produce some output D What happens to the amount of output a firm condesires to produce if the price of its inputs jgu holding the price of the output good it sells the some n It becomes u Opposite also true Supply Shifters Price of Inputs Suppose hops l5 an lnpullo oooaos and the pnce of hops rlses Supply Shifters Price Expectations El Sellers sometimes expect the price of the good to change in the future and this may affect how much of the good they want to produce and sell today El f sellers think the price of the good will fall in the future i they a El Opposite also true I If sellers believe the price will rise in the future they may Supply Shifters Advance in Technology El A change in technology increases the productivity of the firm and its workers meaning the firm can produc more output with the same amount of resourcesinputs El A change in technology always increases productivity and this Supply Shifters Any others El Anything otherthan a change in the price of the good itself that makes sellers wish to supply more or less of the good will shift the supply curve El Examples El An increase in supply is a shift to the El A decrease in supply is a shift to the Individual and Market Supply Market Suggiyeme Summation of each iiim s quantity Supplied at eyeiy price As an example lets Simplify ourworld to 2 firms who suppiy doedads Bud39s Supply com Supply Market Supply a a P Q P 5m 7 18 is I 5 is I i2 I 5 i2 I 9 I 4 Q I e I 3 e I 3 I 2 3 I Market Supply p 18 i5 2 18 9 l5 l2 ll B 9 8 3 6 5 3 2 Z 5 E l l l 4 l 7 a dodadslmonth Summary Market Supply Shifters D I n i e i D h u Decrease in pure Bf inputs in increase in pHEE Bf inputs in Advancement m prudumnn 39Ethnn ugr n Behe hot pnre Wm rise in me u Behe hot pHEE Wm foH mme near future quotEGWWE n Decrease mme number Bf a increase in the number nfseHers seHErs in Any Ehonge 0TH R THAN THE a Any Ehonge OTHER THAN THE VRTCE OF THE GOOD TTsELE VRTCE OF THE GOOD TTsELE m t cuidruuse p uremc the c id ruus prcduremc seH mere DHHE gccdsemre 52H Tess Bf me gDDdservite S 22 1 vs Quunl t Supp 1 P A change m the price 5 ufthe guuu Ttseit Wm cause a muvement aiung the suppiy me am is named a caueu a change m suppiy a dodadslmonth Practlce Draw a typical supply curve for tennis racquets wnat na pens to it under each ofthe following situations Increase or Decrease Shift left or right Price of cow gut used for racquet string falls Afall in the number of racquet manufacturers Afall in the price of tennis balls MARKETS AND EQUILIBRIUM El Bringing supply and demand together creates our free market El Why is the market so important 1 Because that is where 1 Because that is El Market Eguilibrium the price where quantity demanded by consumers is D What happens if we bring our 5 people together The Market for DoDadsquot D What happens if we bring our 5 people together 1 K L M Mr Bud and Mrs Coors D How many dodads will Mr Bud and Ms Coors produce in total D How much will each one produce D How many dodads will K L and M buy in total a How many will K gel M L D What will be the market price Marks um E Market Mu el Iy Demand Supp Pdodads 17 15 14 1 12 11 4 9 s s a 5 12 3 2 1o 12 4 5 8 11121416 0 dodadsmonth At Equ u The market is at rest there is no tendency for change a no forcex u Sellers can sell as much as they want I provided that they a how much does Bud want to xell u Buyers can buy as much as they want u provided that they n how much does K wanno buy u Quantity demanded Qd equals quantity supplied Qs u the exact amount buyerx want is the exact amount xellerx produce What if we aren t at equ rium El If the market is not in equilibrium then market forcesquot will begin to push itself back towards equilibrium El If the current price is higher than P then El If the current price is lower than P then El This is known as El How does it work The Invisible Hand P gt P P What happens to K L M Bud and Coors ifP 12 D a dodadslmonth The Invisible Hand P lt P P What happens to K L M Bud and Coors if P 6 S D 52 5 E n a dodadsmonth Equill rlum in ihe Dodud Marks D The price of 9 is ihe onlx price where K L M Bud and Coors are D At a price of 9 i Bud wishes lo a Coors wishes lo produce and sell 41an i K wumslo buy 3 nailst u L wums DMwumslo buy 11an M01 rkeis and Allocation p Market ALP3399 se Hers wish L9 SUDDW supp iy a Lotai of B doedads Ag P 9 buyerS WiSh to may 613Vb a39dcvrdadg Market Demand so a dodadslmonth El The market El In a theoretically free market u how much a who geisio buy the good a who geisio sell the good u how much eacl buyer gels and how much eacl seller sells El This is how we answer our 3 Big Questionsquot SupplyDemand like Tug of War Buyers Sellers What does this all mean a What do prices mean D What does it mean it a new Lexus LS 460 sells for 75000 a What does it mean it the average plumber earns 20I10ur I Where do these numbers come from and what do they mean u Clearly this is complicated and involves a lot of factors but focus on two main ideas I Supply the price of a goodservice reflects its 2 Demand the price of a goodservice reflects CHANGES IN EQUILIBRIUM D How do changes in supply andor demand affect our market El How does it change the equilibrium price P and quantity Q2 El Three steps to finding the new equilibrium U o 2 to re is the new equilibrium PQ relative to the old equilibrium a Has prlEE risen or fallen n Has quantity risen or fallen Change in Equilibrium exarrple Market for coffee after an irrprovement in the technology of processing coffee beans p An improvement in Mam technology or production Gaffes Supply m S urlglnal e Market Demand 0 a coffee 59 Change in Equil rium exarrple Market for gasoline during Sumner Summer l5 prime vacation tirne tor many families M arkEt Supply Market Demand a gas on 20 Change in Equi I rium exanple Market for coffee after an unusually poor growing season new e Market Supply eeeeeeeeee urigmal e Market Demand a Gaffes s1 Change in Equilibrium exanple Market for coffee after a fall in the price of Red Bull P AfaHmihe pnce ofRed Bun would cause people Slam to buy more Red Bull Upp v urigmal e Market Demand w a coffee Simulluneous Changes in Demand and Supply ya uline P per gallon 53 a 0 gallons ofgas 21 Does that result make sense D A decrease in supply causes ll D An increase in demand causes D lj They both cause an increase in P but the effect on Q is D For yourself see what happens with i an increase in both supply and demand i a decrease in both supply and demand a a decrease in demand and an increase in supply Practice v Foreach of the following scenarios determine the effecton the equilibrium price and quantit Market forDVDs Fall in the price of home theater systems A decrease in the cost of plastic used to make DVD s o Marketfornew homes ii i i i I An increase in the price oflurnbertimer i s n c a Summary Shifting Demand 8c Supply El Shifts in D 1 Increase in D Increase in P and Q I Decrease in D Decreasein P and Q El Shifts in S a increase in s Decrease in P increase in Q ii Decrease in s increase in P Decrease in Q El Simultaneous Shifts in D and S u Increase in both D and s Increase in Q P ambiguous ii Decrease in both D and s Decrease in Q P ambiguous in increase in D Decrease in s increase in P Q ambiguous u Decrease in D increase in s Decrease in P Q ambiguous 22