Unit 6

Consumers & Suppliers (Demand & Supply Microeconomics)

MYP 5

Demand

Microeconomics

Demand pdf from GCSE textbook

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The Demand Curve

• Often we desire certain things like luxury cars or jewellery but we don’t have the ability to buy them so they are not a part of what economist consider demand
• Demand is the amount that consumers are willing and able to buy at each given price level
• This is what we call effective demand because it is backed by purchasing power
• We can see that there is an inverse or negative relationship – as the price goes up the demand goes down
• Note also the notation that we use

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Demand Curve

Remember……Demand goes Down!!!

The individual demand curve for a good and market demand

• Each consumer will buy as much of a product they deem as worth it at each given price level
• A demand curve can be plotted for each individual
• To identify the market demand we calculate the sum of the demand from all individuals
• Below individual 1 buys 3 cans of coke, individual 2 buys 2 cans of coke and so the overall demand or the market demand is 2+3 = 5
• This is exactly what you did with the demand for gelato. You worked out your individual demand and then the group (market) demand

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Quantity

D

50p

5

Price

Quantity

D

50p

3

Quantity

D

50p

2

Price

Price

Individual demand 1

Market Demand

Individual demand 2

Demand curves for coke

Movements along the demand curves

• When there is a change in price there is a movement along the demand curve
• When there is a fall in price there is an extension in demand (demand grows because the price is less and it is worth buying more)
• There is a movement down the curve (there is an increase in the quantity demanded)
• When there is an increase in price there is a contraction in demand (because the price is more it becomes less valuable and we buy less)
• There is a movement up the curve (there is a decrease in the quantity demanded)
• Remember – movements along the curve are always caused by a change in price – nothing else!!!!

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Important wording!

A contraction of demand

Quantity Demanded

D

P1

Q1

Q2

P2

A contraction of demand due to a higher price

Price

How to describe this?

At the original price P1 the quantity demanded is Q1. As the price increases to P2 consumers see less value in the product. There is a contraction of demand to Q2. Note: I talk about 1) where we were to start with, then 2) what changes 3)where we have got to

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Answer

In the market for strawberries there has been an increase in price

Draw the diagram

An extension of demand

Answer

In the market for gold there has been a decrease in price

Draw the diagram

Shifts of the demand curves

• What makes someone want to buy more of something at the same price?
• Think about a holiday in a villa in Spain - why would there be more demand for this even though the price had not changed?
• Income – if average incomes rise demand may rise
• Cost of flights – if the cost went down more people may consider - complementary goods
• Other European holidays become more expensive – the villa in Spain would be more attractive. The other European holidays would be known as a substitute

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substitutes – a competing alternative

Complementary goods – goods that are consumed together e.g. printer and print cartridges, Xbox and games

Shifts of the demand curves

• Things that cause a shift of the demand curve (and none of those are price!!) are called determinants of demand
• Prices of complements (things you buy with that product) e.g. ink cartridges with printers
• Advertising and branding that creates desire and loyalty for a product
• Trends/Fashion
• Population!
• Income level – this is the most important
• prices of substitutes (similar products) e.g. Xbox and playstation are substitutes
• Remember CATPIS!!

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There are others like future expectations, weather etc

Activities from P52-54 in handout

Shifts in Demand

Price

Quantity Demanded

D1

P1

Q1

Q2

D2

Increase in Demand

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The curve moves to the Right so the demand is moRe

The shift of the demand curve to the right means that there is more demand at every given price level. This is called a change in demand (not a change in quantity demanded like before)

Time for you to draw and write an explanation

In the market for strawberries there has been a medical journal published that says strawberries prevent cancer.

Draw a diagram

Price

Quantity Demanded

D1

P1

Q1

Q2

D2

Increase in Demand

0

The curve moves to the Right so the demand is moRe

In China there is a massive increase in demand for washing machines. Copper is used to create the electrical wires. What happens in the market for copper?

Price

Quantity Demanded

D1

P1

Q1

Q2

D2

Increase in Demand

0

The curve moves to the Right so the demand is moRe

Draw a diagram and analyse

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Shifts in Demand (Less)

Quantity Demanded

D1

P1

Q1

Q2

D2

Decrease in Demand

Price

0

The shift of the demand curve to the left means that there is less demand at every given price level

The curve moves to the Left so the demand is Less

Time for you to draw and write an explanation

The government has just banned smoking inside public buildings. Describe the effect on the market for cigarettes

Quantity Demanded

D1

P1

Q1

Q2

D2

Decrease in Demand

0

The curve moves to the Left so the demand is Less

Price

Time for you to draw and write an explanation

The government has launched an advertising campaign to show the negative effects of too much sugar in your diet. What will happen to the sugar market?

Quantity Demanded

D1

P1

Q1

Q2

D2

Decrease in Demand

0

The curve moves to the Left so the demand is Less

Price

Normal and Inferior Goods

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• When we say that as income rises the demand for a good will increase we are making an assumption that the good we are discussing is a normal good
• For normal products, more is demanded as income rises, and less as income falls
• There are exceptions called inferior goods
• They are often cheaper poorer quality substitutes for some other good
• With a higher income a consumer can switch from the cheaper substitute to preferred alternative
• As a result, less of the inferior product is demanded at higher levels of income
• An example is cheap bread in developed countries or rice in developing countries

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Normal good – more is demanded when income rises

Inferior good – less is demanded when income rises

Does it look Shifty?

D

Quantity (Q)

Price of

Tennis Balls

Here are some scenarios. On your mini whiteboards draw the change

• The price of tennis balls falls
• The price of tennis rackets goes up
• It is anticipated that tennis balls will go down in price in the next few months
• Slazenger, Adidas and Dunlop start advertising campaigns for their sports equipment
• The population of Glasgow increases
• There are no British success stories at Wimbledon for years and years
• Average incomes in Glasgow rise
• The price of tennis balls goes up
• Cricket becomes cheaper to play and more fashionable as a summer activity

Market for Tennis Balls in Glasgow

Mind your P’s and Q’s!!

Supply

Microeconomics

Pdf from GCSE Text book

Supply

• Supply is the amount of goods or services producers willing and able to supply at different prices in a given time period
• When you think of supply think of firms, businesses, producers – the economic agents that are producing the goods or services to sell.

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The Supply Curve

Price

Quantity

Supply

P1

Q1

P2

Q2

Q3

P3

Supply to the Sky!

• Remember with demand there was an inverse or negative relationship between demand and price and the curve went down?
• With supply there is a positive relationship between price and the amount supplied – the higher the price the higher the supply so the curve goes upwards (to the sky!)

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P

Q

S

10

$3

0

P

Q

S

30

$3

0

Individual firm supplies 20 cakes

Individual firm supplies 10 cakes

Market supply

Individual and Market Supply

• Each individual firm will decide how much to supply at a given price
• The example below shows two individual firms; one that produces 20 at $3 and another that produces 10 at $3
• All the individual supply plans of firms at each price level can be added together to form the market supply curve

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P

Q

S

10

£3

0

P

Q

S

30

£3

0

Individual firm supplies 20 cakes

Individual firm supplies 10 cakes

Market supply

Individual and Market Supply

• The last curve shows the total of both individual firms (assuming there are only 2 in the market) – that is the market supply.
• The market supply therefore is the combined total of all the individual supply plans in that market.
• The total supply of tomato soup, for example, is the sum of all the different producers of tomato soup in the market - Heinz, Campbell's, Cross and Blackwell as well as all the other own brand labels.

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Movements along the supply curve

• Just as we saw in the demand curve movements along the curve are only caused by changes in price
• Because there is a positive relationship the price and quantity move the same way so
• If the price falls there will a fall in quantity supplied – there will be a contraction in supply
• Firms will supply less because they are profit maximisers and there is less potential to make profit

Price

Quantity

Supply

P1

Q1

P2

Q2

Q3

P3

extension

contraction

• If the price increases there will be an increase in quantity supplied – there will be an extension of supply
• Firms will supply more because there is more potential to make profit

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Movements along the supply curve

See if you can write a description of an extension

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Price

Quantity

Supply

P1

Q1

P2

Q2

Q3

P3

extension

contraction

Movements along the supply curve

Now write a description of a contraction

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Price

Quantity

Supply

P1

Q1

P2

Q2

Q3

P3

extension

contraction

Factors causing shifts in supply (the conditions of supply)

• So what causes the supply curve to shift?
• What makes a firm want to supply more (or less) at the same price?
• Well, its many things but just like shifts in the demand curve it is NEVER THE PRICE!!
• Think about the main assumption we make about a firm – it is a profit maximiser.
• So…what do you think would make it want to supply more or less if it is still getting the same price?

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Factors causing shifts in supply (the conditions of supply)

• There are so many but what you need to remember is that the majority of them affect the production costs of a firm
• Changes to raw material prices
• Technology improvements
• Labour productivity
• Regulation and bureaucracy
• Wage rates
• Government subsidies
• Indirect taxes
• Expectations about future prices
• Objectives of sellers in the market
• Other things could be a bumper harvest, new discoveries of oil or precious metals etc

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An outward shift in the Supply Curve

Price

Quantity

S1

P1

Q1

Q2

S2

0

An outward shift or a shift to the right means that there is an increase in supply at every given price level

Sometimes when we draw this diagram it visually looks like the supply curve is lower but don’t be fooled into thinking the supply is less. Always look at the effect on the quantity and remember if the curve moves to the Right the supply is moRe

Again, be careful with your wording – there is an increase in supply (not quantity supplied because that is a movement along the curve)

An inward shift in the Supply Curve

An inward shift or a shift to the left means that there is less supply at every given price level

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The curve moves to the Left so the supply is Less

Price

Quantity

S1

P1

Q1

S2

Q2

Draw

1. A fall in the price of the product itself. Example market: Real estate.
2. An increase in the cost of raw materials. Example market: Chocolate.
3. A decrease in the cost of production technology. Example market: Smartphones.
4. A natural disaster that destroys production facilities. Example market: Agriculture.
5. An increase in the number of suppliers in a market. Example market: Online retail.
6. A government subsidy for the production of a product. Example market: Wind turbines.
7. An increase in taxes on the production of a product. Example market: Alcohol.
8. A decrease in the price of a substitute product. Example market: Butter.
9. A change in the cost of labor or production inputs. Example market: Construction.
10. A change in technology that makes production more efficient or less costly. Example market: Pharmaceuticals.

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Equilibrium

Microeconomics

Exam expectations

Analysis for increase in demand

• The original equilibrium (E1) is at P1,Q1
• After the report to say that fidget toys help mental health demand increases from D1 to D2
• There is a new equilibrium (E2) with an increase in price and quantity at P2,Q2

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Exam expectations

Analysis for decrease in demand

• The original equilibrium (E1) is at P1,Q1
• After the report says that microwave popcorn has links to dementia demand decreases from D1 to D2
• There is a new equilibrium (E2) with a decrease in price and quantity at P2,Q2

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Exam expectations

Analysis for increase in supply

• The original equilibrium is at P1,Q1
• After new technology has been introduced, profit maximising firms in the olive market see a reduction in the cost of production
• Supply increases and shifts from S1 to S2
• The price falls to P2
• The quantity increases to Q2

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Exam expectations

Analysis for decrease in supply

• The original equilibrium is at P1,Q1
• After wages increase, profit maximising firms in the olive market see an increase in the cost of production
• Supply reduces and shifts from S1 to S2
• The price increases to P2
• The quantity falls to Q2

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Activities from P56-58 in handout

Time to Draw!

• In the market for bicycles there is a large increase in corporation tax
• In the market for foreign holidays there is a fall in price of oil
• In the market for TV subscriptions there is an increase in advertising
• In the market for cars government is going to subsidise car production to protect employment
• In the market for white bread consumers are told that brown bread is healthier
• In the market for cocoa the weather is bad for growing
• In the market for bottled water there is an improvement in the technology to produce it
• In the market for printers there is an increase in the price of ink cartridges

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Government Intervention�Indirect taxes, subsidies, and price controls

iGCSE Economics

Indirect Taxes

• An indirect tax is a tax on spending
• Government taxes the firm which increases its cost of production
• The supply curve shifts vertically by the amount of the tax
• Less product is supplied at every price
• The price increases
• There are two types of indirect tax
• This diagram illustrates a specific tax
• The shift is vertically upward of the amount of the tax
• An example would be the tax on a packet of cigarettes

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Indirect tax – tax on expenditure

S

Price

Indirect Taxes

• A percentage tax increases as the selling price increases as shown in the diagram
• An example would be IVA in Italy (currently 20%)

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Indirect tax – tax on expenditure

A percentage tax (Ad Valorem) – the tax is the percentage of the selling price. As the price rises the tax will rise

Quantity

S + tax

Q2

D

Q1

S

tax

P1

P2

tax

Price

Subsidies

Subsidy

• When a subsidy is given to a firm it’s costs are lowered and therefore it will supply more.
• The supply curve shifts to the right as seen in the diagram
• It shifts by the amount of the subsidy
• There are several reasons why government gives subsidies
• To lower the price of essential goods to increase consumption (e.g. milk)
• To guarantee the supply of goods in an industry the government believes is necessary e.g. coal
• To help producers compete overseas (protection of industries)

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Subsidy – an amount of money paid by the government to a firm per unit of output

S+subsidy

P2

Quantity

S

Q1

D

Q2

subsidy

P1

Price

Evaluation of Subsidies (downsides)

• Expensive - opportunity cost – government could spend this money on other things such as building hospitals, roads and schools
• May make firms inefficient
• In a free market they might have to be more efficient to compete (on price)
• Although the subsidy allows consumers to pay a lower price they may also be the taxpayers that are funding the subsidy
• Subsidies can lead to overproduction
• There is a great deal of international debate about subsidies given to farmers in high income countries
• This leads to overproduction and is damaging to farmers in developing countries that cannot compete
• High income countries are accused of dumping their products in developing countries (we will learn more about this later)

Price Controls

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Maximum (low) price controls

• Maximum prices are normally set to protect consumers
• Sometimes called price ceilings
• Often set in markets where the product is a necessity or a merit good e.g. agricultural and food markets or rented accommodation
• This diagram shows the example of a maximum price on the bread market
• At this low price there will be more demand than supply - there will be an excess demand or a shortage
• This could lead to the creation of a black market (illegal market) where the product is sold at a higher price
• There may also be queues

Maximum price – government sets a maximum price which prevents producers from raising their price above it

Example – rent controls on apartments in Manhattan

https://www.youtube.com/watch?v=oJvTTGOHFkU

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Minimum (high) price controls

• These are sometimes called price floors
• Normally set for
• To raise incomes for producers such as agricultural goods
• To protect workers – minimum wage
• Used as an alternative to tax
• In this diagram the government is protecting suppliers of wheat
• Without further interference there will be an excess supply
• Producers may try to sell their excess supply for a lower price illegally or have to find alternative markets

Minimum price – government sets a minimum price which prevents producers from lowering their price below it

Minimum wage

• This is an example of a minimum price
• At the higher wage more people will want to supply themselves to the market
• There will be less demand from the firms because this will increase their cost of production
• There will be a surplus of supply which is unemployment (Qs-Qd)
• The higher the minimum wage the more unemployment there will be

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Minimum wage – government sets a minimum wage which prevents employers from lowering the wages below this level

Create a paper presentation (in pairs) on Government intervention

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You need to cover 4 areas

1. Tax (specific)
2. Subsidy
3. Minimum price
4. Maximum price

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Use 2 sheets of A3 paper and divide the work

When you have finished practice presenting to each other.

I will pick 4 INDIVIDUALS to present (each one will present one type of intervention)

For each one you need

• A diagram
• An explanation of how it works
• A real life example

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Market Failure

https://docs.google.com/presentation/d/1WVGw22sjlettKYSvf7wlK6OZUYhvj8D6/edit

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