the ppt files have covered topic; Demand and Supply Elasticities Efficiency and The Incidence of Tax, which is this assignment needed
Chapter 2 © 2016 Pearson Education Australia Principles of Economics (Econ 1008)VV Topic 2 Demand and Supply Dr Vandana Arya Dr Kesten Green © 2016 Pearson Education Australia Last Week Define economics – Chapter 1 Scarcity – Chapter 1 The fundamental questions – Chapter 2 Production Possibilities – Chapter 3 Opportunity cost – Chapter 3 Economic Growth – Chapter 3 © 2016 Pearson Education Australia This Week…….. Understanding the concept of demand Factors causing change in demand Change in Quantity demanded vs change in demand Supply Factors causing change in supply Change in Quantity supplied vs change in supply Equilibrium Effect of changes in demand and supply on equilibrium © 2016 Pearson Education Australia COMPETITIVE MARKETS A market is any arrangement that brings buyers and sellers together. A market might be a physical place or a group of buyers and sellers spread around the world who never meet. * © 2016 Pearson Education Australia 4.1 DEMAND Quantity demanded is the amount of a good, service, or resource that people are willing and able to buy during a specified period at a specified price. * Don’t dive right in by drawing a demand-supply graph on the board. Tease the ideas out of the students with one of these exercises: Quick exercise to generate demand curve: Pick a good (say a slice of pizza) and propose that a person would be willing to buy one slice at a price of $4. Now pick a student and ask the student if you reduced the price to $3 a slice, how much pizza would he or she be willing to buy. Next ask the same student how much he or she would buy at $2 per slice and then ask about $1 a slice. It is helpful for you to pick the initial price and quantity so the student has a starting point for the subsequent choices. You are then guaranteed an easy-to-graph relationship between price and quantity. Do this same experiment for one or two more students. Use the data provided by your volunteer students by collecting the demand schedule on the board. Graph the resulting demand curve, explicitly labelling the axes. Make the point that as the price of a slice falls the students are willing to buy more slices, and that as the price of a slice rises the students are willing to buy fewer slices. Then inform the students that they have just “discovered” the law of demand! Finally, use the demand curve by moving between several points on the curve. Emphasise that these “movements along the demand curve” are a change in the quantity demanded and are the result of changes in the price of a slice of pizza. © 2016 Pearson Education Australia 4.1 DEMAND Demand Schedule and Demand Curve Demand is the relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same. Demand is illustrated by a demand schedule and a demand curve. * Begin at a low price: say 10¢ a bottle and count the number willing to buy. Raise the price in 10¢ increments and keep tally of the number who are willing to buy at each price. When the number willing to buy equals the number of bottles you have for sale, do the transactions. (If you make a profit, and you might do so, tell the students that the profit, small though it is, will go the department fund for undergraduate activities—and deliver on that promise.) Now use the data to make a demand curve for Coke (or other drink) in your classroom today. Emphasise the law of demand. Also emphasise that every demand curve relates to a market for the good (as defined by geography or some other spatial dimension) and for a given time period. Now that you have a demand curve, you can do some thought experiments that will shift it. Ask: How would this demand curve have been different if the temperature in the classroom was 10 degrees higher/lower? How would this demand curve have been different if half the class was sick and absent today? How would this demand curve have been different if there was a Coke machine right in the classroom? (Save your demand data for later. We’ll make some suggestions for its further use in Chapter 5 on the elasticity of demand.) © 2016 Pearson Education Australia 4.1 DEMAND Demand schedule is a list of the quantities demanded at each different price when all the other influences on buying plans remain the same. Demand curve is a graph of the relationship between the quantity demanded of a good and its price when all other influences on buying plans remain the same. * Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard/Essentials of Economics/3rd edition At a price of $700, 3 million tablets will be purchased per month Quantity (millions of tablets per month) Demand 0 Demand schedule and demand curve: Price (dollars per tablet) * 3 $700 Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard Essentials of Economics/3e Demand Schedule Price (dollars per tablet)Quantity (millions of tablets per month) $7003 * Figure 3.1: Demand schedule and demand curve. As the price changes, the quantity of tablets consumers are willing to buy changes. We can show this as a demand schedule in a table, or as a demand curve on a graph. The table and graph both show that as the price of tablets falls the quantity demanded rises. When the price of tablets is $700, 3 million tablets are purchased per month. Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard/Essentials of Economics/3rd edition As the price falls, the quantity of tablets demanded increases 4 Quantity (millions of tablets per month) Demand 0 Price (dollars per tablet) Demand schedule and demand curve: * 3 $700 600 Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard Essentials of Economics/3e Demand Schedule Price (dollars per tablet)Quantity (millions of tablets per month) $7003 600 4 When the price of tablets drops to $600, 4 million tablets are purchased per month. Therefore, the demand curve is downward sloping. * Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard/Essentials of Economics/3rd edition As the price falls, the quantity of tablets demanded increases 4 5 Quantity (millions of tablets per month) Demand 0 Price (dollars per tablet) Demand schedule and demand curve: * 3 $700 600 500 Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard Essentials of Economics/3e Demand Schedule Price (dollars per tablet)Quantity (millions of tablets per month) $7003 6004 5005 When the price of tablets drops to $500, 5 million tablets are purchased per month. * Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard/Essentials of Economics/3rd edition As the price falls, the quantity of tablets demanded increases 4 5 6 Quantity (millions of tablets per month) Demand 0 Price (dollars per tablet) Demand schedule and demand curve: * 3 $700 600 400 500 Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard Essentials of Economics/3e Demand Schedule Price (dollars per tablet) Quantity (millions of tablets per month) $7003 6004 5005 4006 When the price of tablets drops to $400, 6 million tablets are purchased per month. * Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard/Essentials of Economics/3rd edition 0 500 Demand 600 400 300 As the price falls, the quantity of tablets demanded increases Quantity (millions of tablets per month) Price (dollars per tablet) 4 3 5 6 7 $700 Demand schedule and demand curve: * Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard Essentials of Economics/3e Demand Schedule Price (dollars per tablet) Quantity (millions of tablets per month) $7003 6004 5005 4006 3007 When the price of tablets drops to $300, 7 million tablets are purchased per month. * © 2016 Pearson Education Australia 4.1 DEMAND Law of Demand Other things remaining the same, If the price of the good rises, the quantity demanded of that good decreases. If the price of the good falls, the quantity demanded of that good increases. * Experiment to generate demand curve (needs about 30 minutes): Of the hundreds of classroom experiments that are available today, very few are worth the time they take to conduct. The classic demand-revealing experiment is one of the most productive and worthwhile ones. Bring to class 2 bottles of ice-cold, ready-to-drink, Coke or bottled water or sports drink. (If your class is very large, bring 6 bottles). Tell the students that you have these drinks and ask them to indicate if they would like one. Most hands will go up and you are now ready to make two points: (i) The students have just revealed a want but not a demand. (ii) You don’t have enough bottles to satisfy their wants, so you need an allocation mechanism. Ask the students to suggest some allocation mechanisms. You might get suggestions such as: give them to the oldest, the youngest, the tallest, the shortest, the first-to-the-front-of-the-class. For each one, point out the difficulty/inefficiency/inequity. If no one suggests selling them to the highest bidder, tell the class that you are indeed going to do just that. Tell them that this auction is real. The winner will get the drink and will pay. Ask for a show of hands of those who have some cash and can afford to buy a drink. Explain that these indicate an ability to buy but not a definite plan to buy. Begin the auction. Appoint a student to count hands (more than one for a big class) and appoint another student to keep a spreadsheet (see the Parkin Website for a sample that you can download). [continued on next slide note] © 2016 Pearson Education Australia 4.1 DEMAND Individual Demand and Market Demand Market demand is the sum of the demands of all the buyers in a market. The market demand curve is the horizontal sum of the demand curves of all buyers in the market. * © 2016 Pearson Education Australia 4.1 DEMAND * © 2016 Pearson Education Australia 4.1 DEMAND Changes in Demand Change in demand is a change in the quantity that people plan to buy when any influence other than the price of the good changes. A change in demand means that there is a new demand schedule and a new demand curve. * Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard/Essentials of Economics/3rd edition Price P 0 Q1 Q2 Quantity Demand 1 An increase in demand * Copyright ©2016 Pearson Australia (a division of Pearson Australia Group Pty Ltd) – 9781486022847/Hubbard Essentials of Economics/3e Demand 2 * When consumers increase the quantity of a product they wish to buy at a