presentation of economic analysis

8/7/2019 presentation of economic analysis

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Demand, Supply and Price Determination


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The Market Systemy Market consists of:

y Consumers - create a demand for a product

y

Demandy the amount consumers desire to purchase at various

prices

y Not what theywill buy, but what theywould like tobuy!

y Effective demand must be willing AND able to pay


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Individual and Market Demandy Market demand consists of the sum of all

individual demand schedulesin the market

y Represented by a demand curve

y At higher prices, consumers generally willing topurchase less than at lower prices

y Demand curve negative slope, downward slopingfrom left to right


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The Demand Curve. Price ()

Quantity Demanded (000s)

Demand

10

5

The demand curve slopesdownwards from left toright (a negative slope)indicating an inverserelationship between priceand the quantitydemanded. Quantitydemanded will be higherat lower prices than athigher prices. As pricefalls, quantity demandedrises. As price rises,quantity demanded falls.


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The Demand Curve 2y The level of demand

y determines where on the graph it sits

y

Low demand y nearer the origin

y High demand y further from the origin (assuming same scale)

y

Dependent on a variety of factorsy Demand curve moves in response

to changing factors


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The Demand Curve 3y Factors influencing demand

D = f (Pn,PnPn-1,Y,T, P, A, E)y Where:

y

Pn = Pricey PnPn-1 = Prices of othergoods substitutesand complements

y Y = Incomes the level and distributionof income

y

T = Tastesand fashionsy P =The level and structure of the populationy A = Advertisingy E = Expectations of consumers


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The Demand Curve 4Changes in any of the factors other than price causes

the demand curve to shift either:

y Left (Less demanded at each price) or

y Right (More demanded at each price)


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The Demand Curve 5.Price ()

Quantity Demanded (000s)

Demand

10

100

D1

10 200

Changes in any of thefactors affectingdemand other than

price cause the entire

demand curve to shiftto the left (lessdemanded at eachprice) or to the right

(more demanded ateach price).


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The Supply Curvey Factors influencing supply:

y S = f (Pn, Pn..Pn-1,H, N,F1..Fm,E,Sp)y Where:y Pn = Pricey Pn..Pn-1 = Profitability of other goods in production

and prices of goods in joint supplyy H = Technologyy

N = Natural shocksy F1..Fm = Costs of productiony E = Expectations of producersy Sp = Social factors


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The Supply Curvey Changes in any of the factorsOTHERthan price

cause a shift in the supply curve

y Ashift insupply to the left the amountproducers offer for sale at every pricewill be less

y Ashift insupply to the right the amountproducers wish to sell at every price increases

y HINT: Be careful to not confuse supply going upand down with the direction of the shift!


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The Supply Curve.Price

Quantity Bought and Sold (000s)

Supply

3

200

7

800

The supply curveslopes upwards fromleft to right indicatinga positive relationshipbetween supply andprice. As price rises, itencourages producersto offer more for salewhereas a fall in pricewould lead to thequantity supplied to

fall.


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The Supply CurvePrice

tit t l ( )

ppl

4

4

1

1

2

9

C

e i

f t

ef

ct

r

ffecti ppl other than price willcause the entire supplycurve to shift. A shift tothe left results in alower supply at eachprice; a shift to the

right indicates a greatersupply at each price.


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The Market.Pri ( )


S

D

5

600

D1

300

3

450

In an att

mpt to g

t ridof surplus sto

k,

produ

rs will a

ptlow

r pri

s. Low

rpri

s in turn attra

tsom

onsum

rs tobuy. Th

pro

ss

ontinu

s until th

surplus disapp

ars and

quilibrium is on

again r

a

h

d.


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.

The MarketPri ( )


S

D

5

600

D1

300

3

450

In an att

mpt to g

t ridof surplus sto

k,

produ

rs will a

ptlow

r pri

s. Low

rpri

s in turn attra

tsom

onsum

rs tobuy. Th

pro

ss

ontinu

s until th

surplus disapp

ars and

quilibrium is on

again r

a

h

d.


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presentation of economic analysis

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