Chapter 4 Demand and Supply

I. The marketplace 
II. Demand 
III. Supply
IV. Equilibrium 1 video
V. Ceilings and Floors 1 videos
VI. Changes in Supply & Demand Videos 2 videos  
VII. Valuing Bonds 1 video

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Math Reviews short basic math skills plus calculus 
for microeconomics from R. L. Reynolds, Boise State.        

I. The marketplace
     A. A market is defined as an institution or mechanism which promotes trade by 
          bringing together buyers (demanders) and sellers ( suppliers).
     B. Replaced barter1
which is the direct exchange of goods. for more see
          wikipedia.org/Barter
  
C. A modern market brings money and prices into the circular flow of goods.

II. Demand is willingness to buy.
    
A. Demand is a schedule of the amounts of goods and services consumers
          are willing and able to buy at a set of prices.
    
B. Total demand is the Horizontal Summation of individual demand.
     C. Law of demand:: price and quantity are inversely related.
         1. As price goes up, quantity demanded goes down.
         2. As price goes down, quantity demanded goes up.
         3. More is bought as price drops because of the Income and Substitution Effects.
             a. Income Effect: as the price of a good drops, consumers feel richer and buy more.
             b. Substitution Effect: as the price of a good drops, it becomes cheaper relative
                 to other goods and consumers buy more.
             c.  Income and Substitution Effects Video
             d. Example
             e. Optional
                 1) Indifference Curves and Budget Lines
                 2) Graphic Analysis using budget lines and indifference goods  

 

Quantity
1
2
3
4
5

 

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      D. What determines demand   
      
    1. Tastes or preferences of consumers
     
     2. Number of consumers
          
3. Incomes of consumers
            
  a. normal (superior) goods such as steak and vacations - more is purchased 
                   as income increases. 
            
  b inferior goods such as bread and hamburger - less is purchased as income
                  increases.
         
4. Consumer expectations
     
5. Price of related goods
              
a. Substitutes are goods that compete with each other such as hot dogs and
                   hamburgers. If the price of a good increases, the demand for its substitutes
                   will increase.
           
    b. Complements are goods that are purchased together like hot dogs and rolls.
              
     If the price of a good increases, the demand for its complement will decrease.
         
6. ''Ceteris Paribus'' Latin for all other variables remain same.. So one variable
              changed at a time.
    
  E. Changes (shifts) in Demand
      
    1. A decrease in demand shifts the demand curve to the left
    
      2. An increase in demand shifts the demand curve to the right
Note: Increase is to the right 
because the x-axis increases
to the right.

 
       F.  Explorations in Economic Demand by Kim Sosin, Department of Economics
         of the University of Omaha
has good examples.
   
G. Check your knowledge of Demand by answering questions provided by Samuel L. 
         Baker, Ph.D.
of the University of South Carolina
.

III. Supply is willingness to sell
     
A. Supply is a schedule of the amounts of goods or services
           producers are willing and able to sell at a set of prices.
      B. Law of supply: price and quantity supplied are directly
           related because price and expected profit are directly related
          1. As price goes up, quantity supplied goes up
          2. As price goes down, quantity supplied goes down
      C. Supply schedule 
          
Price       5  4   3   2  1 
                  Quantity 1   2   3   4  5

               

                                                     
     
D. What determines supply
          
1. Product costs as affect2ed by
               a. Technology
               b. Resource prices
               c. Government involvement with taxes and subsidies
           2. Price of related goods
               a. If 2 goods are substitutes, price up for one will increase supply 
                   of the other (price of gasoline up, supply of alternative fuels
                   increases) as companies see more potential profit
      E. An increase in supply shifts the supply curve to the right
      F. Explorations in Economic Supply from Dr. Kim Sosin
          of the University of Omaha
has good examples.

 

IV. Equilibrium  
      
    is where suppliers and demanders agree on price and quantity as depicted
        by the intersection of their supply and demand curves. 
       A. If the price is too high, a surplus results and price must be lowered as when
           the world economic slowdown in 1999 required lowering price to work down supply. 
       B. If the price is too low, a shortage results. This happens with toys every Christmas i.e.
           Cabbage Patch Dolls
       C. If they can not agree, as happened with Beta videotape machines, then the curves do
           not intersect and the goods are not sold.  

         D. Disequilibrium, Surplus, and Shortage
    
E. Rationing function of price
         
1. When competitive forces of supply and 
              demand result in an equilibrium, a rationing
              function of goods produce to consumers 
              has occurred.
          2. Competition has made it an efficient 
              allocation of resources.

 

V. Government imposed price ceilings and floors
        
  A. A price ceiling keeps prices from rising (rent control) helping renters but often 
           resulting in a shortage of housing as investors seek higher returns elsewhere.
      B. A price floor keeps prices from falling (farm price supports) helps farmers 
           though a surplus often results as more of supported crops are produced.
      C. Econ Concepts in 60 Seconds Video on Government Price Controls

VI. Changes in supply and demand affect equilibrium
    
     A. Econ Concepts in 60 Second Video on Double Shifts in Supply and Demand
         B Econ Concepts in 60 Seconds Video on Shifting Supply and Demand
  
     C. Another View
         D up and S 
             up equally

         D up causes 
         P up
and Q up

         S up causes 
         P down
and Q up

         Result is 
         P same
and Q up

D up and S 
down equally  

D up causes 
P up
and Q up 

S down causes 
P up
and Q down 

Result is 
P up
and Q same

       D down and S 
          up equally

      D down causes
      P down and Q down

      S up causes 
      P down
and Q up

      Result is
      P down and Q same
D down and S  
down equally 

D down causes 
P down
and Q down 

S down causes 
P up
and Q down 

Result is 
P same
and Q down

     D. View a dynamic model of Changes in Supply, Demand and Market Equilibrium
          by Dennis Kaufman University of Wisconsin-Parkside.

     E. Unequal Shifts in Demand and Supply
                            D up and S up more

                          D up and S down more


          Check your knowledge of Supply, Demand, and Equilibrium by answering 
       questions provided by Samuel L. Baker, Ph.D. of the University of South Carolina.
        More Excellent Supply/Demand Practice from  ecedweb.unomaha.edu/home.cfm
       For a real life example visit Cattle Market Equilibrium
VII. Valuing Bonds Using Supply and Demand
           
   1. A bond is a promise to pay over time.
        2. Suppose you buy a twenty year, $10,000 bond paying 5% per year at face value
            of $10,000. Face value is called par value.
            a) A few years go by and you need money and one choice is to sell the bond.
            b) If the interest rates on a bond goes down, people will be very anxious to buy, 
                 demand will be high pushing price up and your will receive more than $10,000.
            c) If rate shave gone down, no one will give you $10,000, demand will be low, 
                 so if you need the money, it will sell for less, below par.
            d) You can hold for twenty years and receive par value.
        3. Therefore, interest rates and bond values (prices) go in the opposite direction, 
            if interest rates down, old bond price up because they are at the old higher rate.
     
    4. This is called the interest rate risk for bonds. Other risks have to do with issuer 
            default and  monetary inflation.
        5. Market Value of Issued Bond Kahn  Video from Khan Academy
        6. studyfinance.com  calculates the new bond value when interest rate drops.

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