Session 4 Supply and Demand Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those of the Federal Reserve Bank of Dallas or the Federal Reserve System. TEKS (2) Economics. The student understands the interaction of supply, demand, and price. The student is expected to: (A) understand the effect of changes in price on the quantity demanded and quantity supplied; (B) identify the non-price determinants that create changes in supply and demand, which result in a new equilibrium price; and
(C) interpret a supply-and-demand graph using supplyand-demand schedules. Teaching the Terms Market Demand Supply Determinants
Surplus Shortage Markets A market facilitates the interaction of a buyer and a seller as they complete a transaction Buyers, as a group, determine the demand Sellers, as a group, determine the supply Characteristics of Competitive Markets Identical goods or services
Enough buyers and sellers so that no participant can influence the market price everyone is a price taker Demand Law of demand Quantity demanded Demand schedule
Demand curve Determinants of demand The Law of Demand As the price rises, the quantity demand falls. Demand $5 $4 $3
$2 $1 Quantity 10 20 30 40 50 Demand for ____ 6 5
4 Price Price 3 2 1 0 10 20 30
Quantity 40 50 Determinants of Demand Income Price of related goods Complements Substitutes Tastes or preferences Expectations
Number of buyers Shifting Demand 8 7 6 Price 5 4 3 2 1
0 10 20 30 Quantity 40 50 Supply
Law of supply Quantity supplied Supply schedule Supply curve Determinants of supply The Law of Supply Supply
$5 $4 $3 $2 $1 Quantity 50 40 30 20 10
Supply of ____ 6 5 4 Price Price 3 2 1 0 10
20 30 Quantity 40 50 Determinants of Supply
Input prices Technology Expectations Number of sellers Shifting Supply 8 7 6 Price 5
10 20 30 Quantity 40 50 Market Equilibrium Practice
Draw the graph. Which curve is shifting because of the changing market conditions? Supply? Demand? Both? Which direction is the shift? Draw the shift. What is the impact on price and quantity? Price Controls Price Ceiling If price is fixed BELOW the market clearing price Creates a shortage because Qd > Qs Rent controls
Price Floor If price is fixed ABOVE the market clearing price Creates a surplus because Qd < Qs Minimum wage Price Elasticity of Demand Measures the responsiveness of quantity demanded to a change in price Determinants Availability of close substitutes Necessities versus luxuries Definition of the market (food vs. ice cream vs. chocolate ice cream) Time horizon
Price Elasticity and Total Revenue If demand for a good is elastic, price increases lead to lower total revenue If demand for a good is inelastic, price increases lead to higher total revenue Price Elasticity of Supply Measures the responsiveness of quantity supplied to a change in price Determinants Availability of inputs Time
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