Demand Forecasting

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Slide 1: 

The Basics of Supply and Demand

Introduction : 

Introduction What are supply and demand? What is the market mechanism? What are the effects of changes in market equilibrium? 2

Topics to Be Discussed : 

Topics to Be Discussed How do we understand and predict the effects of changing market conditions? What are the effects of government intervention – price controls? 3

Supply and Demand : 

Supply and Demand Supply and demand analysis can: Help us understand and predict how real world economic conditions affect market price and production Analyze the impact of government price controls, minimum wages, price supports, and production incentives on the economy Determine how taxes, subsidies, tariffs and import quotas affect consumers and producers 4

Supply and Demand : 

Supply and Demand The Supply Curve The relationship between the quantity of a good that producers are willing to sell and the price of the good Measures quantity on the x-axis and price on the y-axis 5

The Supply Curve : 

The Supply Curve The supply curve slopes upward, demonstrating that at higher prices firms will increase output The Supply Curve, Graphically Depicted Quantity Price ($ per unit) 6

The Supply Curve : 

The Supply Curve Other Variables Affecting Supply Costs of Production Labor Capital Raw Materials Lower costs of production allow a firm to produce more at each price and vice versa 7

Change in Supply : 

Change in Supply The cost of raw materials falls Produced Q1 at P1 and Q0 at P2 Now produce Q2 at P1 and Q1 at P2 Supply curve shifts right to S’ P Q 8

The Supply Curve : 

The Supply Curve Change in Quantity Supplied Movement along the curve caused by a change in price Change in Supply Shift of the curve caused by a change in something other than the price of the good Change in costs of production 9

Supply and Demand : 

Supply and Demand The Demand Curve The relationship between the quantity of a good that consumers are willing to buy and the price of the good Measures quantity on the x-axis and price on the y-axis 10

The Demand Curve : 

The Demand Curve The demand curve slopes downward, demonstrating that consumers are willing to buy more at a lower price as the product becomes relatively cheaper. Quantity Price ($ per unit) 11

The Demand Curve : 

The Demand Curve Other Variables Affecting Demand Income Increases in income allow consumers to purchase more at all prices Consumer Tastes Price of Related Goods Substitutes Complements 12

Change in Demand : 

Change in Demand Income Increases Purchased Q0, at P2 and Q1 at P1 Now purchased Q1 at P2 and Q2 at P1 Same for all prices Demand curve shifts right 13

The Demand Curve : 

The Demand Curve Changes in quantity demanded Movements along the demand curve caused by a change in price Changes in demand A shift of the entire demand curve caused by something other than price Income Preferences 14

The Market Mechanism : 

The Market Mechanism The market mechanism is the tendency in a free market for price to change until the market clears Markets clear when quantity demanded equals quantity supplied at the prevailing price Market clearing price – price at which markets clear 15

The Market Mechanism : 

The Market Mechanism The curves intersect at equilibrium, or market- clearing, price. Quantity demanded equals quantity supplied at P0 16

The Market Mechanism : 

The Market Mechanism In equilibrium There is no shortage or excess demand There is no surplus or excess supply Quantity supplied equals quantity demanded Anyone who wants to buy at the current price can and all producers who want to sell at that price can 17

Market Surplus1 : 

Market Surplus1 The market price is above equilibrium There is excess supply - surplus Downward pressure on price Quantity demanded increases and quantity supplied decreases The market adjusts until new equilibrium is reached 18

The Market Mechanism : 

The Market Mechanism At P1, price is above the market clearing price Qs > QD Price falls to the market-clearing price Market adjusts to equilibrium 19

The Market Mechanism : 

The Market Mechanism The market price is below equilibrium: There is excess demand - shortage Upward pressure on prices Quantity demanded decreases and quantity supplied increases The market adjusts until the new equilibrium is reached 20

The Market Mechanism : 

The Market Mechanism At P2, price is below the market clearing price QD > QS Price rises to the market-clearing price Market adjusts to equilibrium 21

The Market Mechanism : 

The Market Mechanism Supply and demand interact to determine the market-clearing price When not in equilibrium, the market will adjust to alleviate a shortage or surplus and return the market to equilibrium Markets must be competitive for the mechanism to be efficient 22

Changes in Market Equilibrium : 

Changes in Market Equilibrium Equilibrium prices are determined by the relative level of supply and demand Changes in supply and/or demand will cause change in the equilibrium price and/or quantity in a free market 23

Changes in Market Equilibrium : 

Changes in Market Equilibrium Raw material prices fall S shifts to S’ Surplus at P1 between Q1, Q2 Price adjusts to equilibrium at P3, Q3 24

Changes in Market Equilibrium : 

Changes in Market Equilibrium Income Increases Demand increases to D’ Shortage at P1 of Q1 to Q2 Equilibrium at P3 and Q3 25

Changes in Market Equilibrium : 

Changes in Market Equilibrium Income increases and raw material prices fall Quantity increases If the increase in D is greater than the increase in S price also increases 26

Shifts in Supply and Demand : 

Shifts in Supply and Demand When supply and demand change simultaneously, the impact on the equilibrium price and quantity is determined by: The relative size and direction of the change The shape of the supply and demand models 27

The Price of a College Education : 

The Price of a College Education The real price of a college education rose 55 percent from 1970 to 2002 Increases in costs of modern classrooms and wages increased costs of production – decrease in supply Due to a larger percentage of high school graduates attending college, demand increased 28

Market for a College Education : 

Market for a College Education New equilibrium was reached at $4,573 and a quantity of 12.3 million students 29

The Long-Run Behaviorof Natural Resource Prices : 

The Long-Run Behaviorof Natural Resource Prices Consumption of copper has increased about a hundredfold from 1880 through 2002 The long term real price for copper has remained relatively constant Increased demand as world economy grew Decreased production costs increased supply 30

Resource Market Equilibrium : 

Resource Market Equilibrium 31

Resource Market : 

Resource Market Conclusion Decreases in the costs of production have increased the supply by more than enough to offset the increase in demand 32

Effects of Price Controls : 

Effects of Price Controls Markets are rarely free of government intervention Imposed taxes and granted subsidies Price controls Price controls usually hold the price above or below the equilibrium price Excess demand – shortage Excess supply – surplus 33

Effects of Price Controls : 

Effects of Price Controls Price is regulated to be no higher than Pmax Quantity supplied falls and quantity demanded increases A shortage results 34

Effects of Price Controls : 

Effects of Price Controls Excess demand sometimes takes the form of queues Lines at gas stations during 1974 shortage Sometimes get curtailments and supply rationing Natural gas shortage of the mid ’70’s Producers typically lose, but some consumers gain. Some consumers lose. 35

Price Controls andNatural Gas Shortages : 

Price Controls andNatural Gas Shortages In 1954, the federal government began regulating the wellhead price of natural gas In 1962, the ceiling prices that were imposed became binding and shortages resulted 36

Price Controls andNatural Gas Shortages : 

Price Controls andNatural Gas Shortages Price controls created an excess demand of 7 trillion cubic feet Price regulation was a major component of US energy policy in the 1960s and 1970s, and it continued to influence the natural gas markets in the 1980s 37

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