siides_02_H.pdf - Outline THE BASICS OF SUPPLY AND DEMAND...

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THE BASICS OF SUPPLY AND DEMAND 1 Outline Introducing demand and supply The market mechanism Excess supply / demand Change in equilibrium prices and quantities Price controls 2 Outline Introducing demand and supply The market mechanism Excess supply / demand Change in equilibrium prices and quantities Price controls 3 Supply and demand Help us understand and predict how real-world economic conditions affect market price and production Analyze the impact of government price controls on the economy Determine how taxes and subsidies affect consumers and producers 4
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Supply curve Supply curve: relationship between the quantity of a good that producers are willing to sell and the price of the good Measures quantity on the x-axis and price on the y-axis Q S = Q S ( p ) 5 Supply curve The supply curve slopes upward, demonstrating that at higher prices, firms will increase output. q 1 p 1 S q p Change in supply Many variables affect position of supply curve Particularly important are production costs: - labor - capital - raw materials Lower production cost allows a firm to produce more at each price Examples - oil price drops from $70/barrel to $60/barrel - workers wage decreases from $30/hour to $25/hour 7 Change in supply Supply shift: for a given price (e.g., p 1 ) now produce more ( q 2 ) than before ( q 1 ) q 1 q 2 p 1 S 1 S 2 q p
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Supply curve Very important distinction: Change in quantity supplied : movement along the curve caused by a change in price Change in supply : shift of the curve caused by a change in something other than the price of the good 9 Demand curve Demand curve: relationship between the quantity of a good that consumers are willing to buy and the price of the good Measures quantity on the x-axis and price on the y-axis Q D = Q D ( p ) 10 Demand curve The demand curve slopes downward, demonstrating that consumers are willing to buy more as the product becomes relatively cheaper q 1 p 1 D q p Change in demand Many variables affect position of the demand curve, including Income - increases in income allow consumers to purchase more at all prices Consumer tastes Price of related goods - substitutes (subway and bicycle) - complements (peanut butter and jelly) 12
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Change in demand Demand shift: for a given price (e.g., p 1 ) now demand more ( q 2 )
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