2020 - 2021

Spring Semester

Information Economy

Dr. Mohamed Elmasry

Course name: Information Economy
Course Code: GEN214
Credit hours: 2
Prerequisite: None

Instructor: [Link] Elmasry

Email: malmasry@[Link]
Phone: 02-33318405
CHAPTER 2
3

Supply and
Demand
Topics to be discussed
4

 The Law of Demand

 Demand Curve
 The Law of Supply
 Supply Curve
 Equilibrium
 Shortages and Surpluses
 Shift in the Demand Curve
 Shift in the Supply Curve
 Price Ceilings & Floors
Demand theory
5

 Demand theory is a theory relating to the relationship

between consumer demand for goods and services and
their prices.
 Demand theory forms the basis for the demand curve,
which relates consumer desire to the amount of goods
available.
 As more of a good or service is available, demand
drops and so does the equilibrium price.
Demand
6

 Quantity demanded is the amount of a good that buyers are

willing and able to purchase.

 Demand is a full description of how the quantity demanded changes

as the price of the good changes.
Demand
7
Demand
8
The Law of Demand
9

 The law of demand states that the quantity demanded of

a good falls when the price of the good rises, provided all
other factors that affect buyers’ decisions are unchanged.

 The reverse is also true: as the price of a good or service falls, its
quantity demanded increases.
The Law of Demand
10

 The law of demand states that the quantity demanded of

a good falls when the price of the good rises, provided all
other factors that affect buyers’ decisions are unchanged.

 The reverse is also true: as the price of a good or service falls, its
quantity demanded increases.
Quiz
11

As the price of a good or service falls, its quantity

demanded also falls.

A. True
B. False
The Law of Demand
12
Demand Curve
13

The demand curve has a negative slope, consistent with

the law of demand.
Quiz
14

The demand curve has a positive slope, consistent

with the law of demand.

A. True
B. False
The Law of Demand—Explanations
15

 There are two ways to explain the Law of Demand

 Substitution
effect
 Income effect
Substitution & Income Effect
16

 The substitution effect is the economic understanding

that as prices rise — or income decreases —
consumers will replace more expensive items with
less costly alternatives.
 Conversely, as the wealth of individuals increases,
the opposite tends to be true, as lower-priced or
inferior commodities are avoided for more
expensive, higher-quality goods and services, known
as the income effect
Substitution Effect
17

 When the price of a good decreases, consumers

substitute that good instead of other competing
(substitute) goods
Substitution Effect
18

1. When the price of 2. Consumption 3. Consumption

Coke decreases… of Pepsi of Coke
decreases… increases

Clothes Coke Books Movies Pepsi

Income Effect
19

 In economics, the income effect is the change in the

consumption of goods caused by a change in
income, whether income goes up or down.
Lower Prices = Higher Income
20

Situation A
If income rises, Situation A
Price of an Apple $1.00 becomes Situation B.
Price of an Orange $2.00
Situation B
Income $10.00
Price of an Apple $1.00
If prices fall, Situation A Price of an Orange $2.00
becomes Situation C.
Income $20.00

Situation C
Price of an Apple $0.50 Q: Which change is better?
Price of an Orange $1.00
A: They are both equally
Income $10.00 desirable. A fall in prices is
equivalent to an increase in
income.
Income Effect
21

 Consumers respond to a decrease in the price of a

commodity as they would to an increase in income
 They increase their consumption of a wide range of
goods, including the good that had a price decrease

1. When the price of 2. 3. Consumption of

Coke decreases… Consumers Coke and other goods
feel richer… increases

Clothes Coke Books Movies Pepsi

Substitution Effect & Income Effect
22

Table of Income and Substitution Effects

While we cannot be absolutely certain about the net result, in general, the
substitution effect is stronger than the income effect.
That is, when the price of hamburgers goes up, you will most likely eat fewer
hamburgers and more hot dogs, since the change in relative prices
(substitution effect) affects you more than the perceived change in your
income (income effect).
Supply
23

 Quantity supplied is the amount of a good that sellers

are willing and able to sell.

 Supply is a full description of how the quantity supplied of a commodity

responds to changes in its price.
Supply
24
The Law of Supply
25

 The law of supply states that, the quantity supplied

of a good rises when the price of the good rises
(and vice versa) , as long as all other factors that
affect suppliers’ decisions are unchanged.
 In other words, there is a direct relationship between price and
quantity: quantities respond in the same direction as price
changes.
The Law of Supply
26
The Law of Supply
27

 Why do producers produce more output when

prices rise?
 They seek higher profits
 They can cover higher marginal costs of production
Quiz
28

The law of supply states that, the quantity supplied of a good rises
when the price of the good rises

A. True
B. False
Supply Curve
29

The supply curve has a positive slope, consistent with the

law of supply.
Quiz
30

The Supply curve has a positive slope, consistent

with the law of Supply .

A. True
B. False
Market Equilibrium
31

A market occurs where buyers and sellers meet to exchange

money for goods.
The price mechanism refers to how supply and demand interact to
set the market price and amount of goods sold.
At most prices planned demand does not equal planned supply.
This is a state of disequilibrium because there is either a shortage
or surplus and firms have an incentive to change the price.
Price determination
32

Interaction of the free market forces of demand and supply to

establish the general level of price for a good or service.

 Price is derived by the interaction of supply and demand

Equilibrium
33

 In economics, an equilibrium is a situation in which:

 thereis no inherent tendency for prices to change,
 quantity demanded equals quantity supplied, and

 the market just clears (market clearing price has been achieved).
Equilibrium
34

Equilibrium is a situation in which opposing forces balance

each other. Equilibrium in a market occurs when the price
balances the plans of buyers and sellers.
The equilibrium price is the price at which the quantity
demanded equals the quantity supplied.
The equilibrium quantity is the quantity bought and sold at
the equilibrium price.
 Price regulates buying and selling plans.
 Price adjusts when plans don’t match.
Equilibrium
35
Equilibrium
36

Equilibrium occurs at a price of $3 and a quantity of 30

units.
Equilibrium: Quantity of Gasoline - Real Example
37
Equilibrium: Quantity of Gasoline - Real Example
38

The demand curve (D) and the supply curve (S) intersect at the equilibrium point E, with a
price of $1.40 and a quantity of 600.
The equilibrium is the only price where quantity demanded is equal to quantity supplied.
At a price above equilibrium like $1.80, quantity supplied exceeds the quantity
demanded, so there is excess supply. At a price below equilibrium such as $1.20, quantity
demanded exceeds quantity supplied, so there is excess demand.
Quiz
39

The demand curve and the supply curve intersect at the

point E, with a price of $1.40 and a quantity of 600.
At a $1.80 :

A. quantity demanded equals quantity supplied.

B. quantity demanded exceeds quantity supplied
C. there is excess demand quantity
D. there is excess supply quantity
Quiz
40

The demand curve and the supply curve intersect at the

point E, with a price of $1.40 and a quantity of 600.
At a $1.20 :

A. quantity demanded equals quantity supplied.

B. quantity supplied exceeds quantity demanded
C. there is excess demand quantity
D. there is excess supply quantity
Quiz
41

In economics, an equilibrium is a situation in which:

A. there is no inherent tendency for prices to change .

B. quantity demanded equals quantity supplied.
C. the market just clears.
D. All of the above.
Shortages and Surpluses
42

 A shortage occurs when quantity demanded exceeds

quantity supplied.
A shortage implies the market price is too low.
 A surplus occurs when quantity supplied exceeds
quantity demanded.
A surplus implies the market price is too high.
Shortages and Surpluses
43
Quiz
44

A surplus implies the market price is too low.

A. True.
B. False.
Quiz
45

A shortage implies the market price is too low.

A. True.
B. False.
Shift in the Demand Curve
46

 A change in any variable other than price that

influences quantity demanded produces a shift in the
demand curve or a change in demand.
 Factors that shift the demand curve include:
 Change in consumer incomes
 Population change
 Consumer preferences
 Prices of related goods:
 Substitutes:
goods consumed in place of one another
 Complements: goods consumed jointly
Quiz
47

All of the following are factors that shift the demand

curve except:
A. Change in consumer incomes
B. Population change
C. Price
D. Consumer preferences
Quiz
48

Fill in the Blank:

A. Substitutes are goods consumed in place of one another.

………………..

B.
Complements are goods consumed jointly.
………………..
The Demand Curve
49

A Change in the Quantity

Demanded Versus a
Change in Demand
A Movement along the
Demand Curve
When the price of the
good changes and other
things remain the same, the
quantity demanded
changes and there is a
movement along the
demand curve.
Shift in the Demand Curve
50

A Shift of the Demand

Curve
If the price remains the
same but one of the other
influences on buyers’ plans
changes, demand changes
and the demand curve
shifts.
Shift in the Demand Curve
51
Shift in the Demand Curve
52

This demand curve has shifted to the right. Quantity

demanded is now higher at any given price.
Equilibrium After a Demand Shift
53

The shift in the demand curve moves the market

equilibrium from point A to point B, resulting in a higher
price and higher quantity.
Shift in the Supply Curve
54

 A change in any variable other than price that

influences quantity supplied produces a shift in the
supply curve or a change in supply.
 Factors that shift the supply curve include:
 Change in input costs
 Increase in technology
 Change in size of the industry
Quiz
55

Factor(s) that shift the supply curve is/are:

A. Change in input costs

B. Increase in technology
C. Change in size of the industry
D. All of the above
The Supply Curve
56

A Change in the Quantity Supplied

Versus a Change in Supply
A Movement Along the Supply Curve

When the price of the good

changes and other influences on
sellers’ plans remain the same, the
quantity supplied changes and
there is a movement along the
supply curve.
Shift in the Supply Curve
57

A Shift of the Supply

Curve
If the price remains the
same but some other
influence on sellers’
plans changes, supply
changes and the supply
curve shifts.
Shift in the Supply Curve
58
Shift in the Supply Curve
59

For an given rental price, quantity supplied is now lower

than before.
Equilibrium After a Supply Shift
60

The shift in the supply curve moves the market equilibrium from
point A to point B, resulting in a higher price and lower quantity.
Price Controls
61

Price Ceilings & Floors

Price Ceilings
62

 Price Ceilings are maximum prices set by the

government for particular goods and services that
they believe are being sold at too high of a price
and thus consumers need some help purchasing them.
Quiz
63

……….. are maximum prices set by the government for

particular goods and services that they believe are
being sold at too high of a price
A. Price Floor.
B. Price Ceilings.
C. Equilibrium Price .
D. All of the above.
Price Ceilings
64

 Resultsin a shortage of a product

 Common examples include apartment rentals and credit
cards interest rates.
 Price ceilings only become a problem when they are set
below the market equilibrium price.
Quiz
65

Price Ceiling:

A. Results in a surplus of a product

B. Results in a shortage of a product
C. Does not affect the quantity supplied.
D. None of the above.
Price Ceilings
66

When the ceiling is set below the market price, there will be
excess demand or a supply shortage.

Producers won't produce as much at the lower price, while

consumers will demand more because the goods are cheaper.

Demand will outstrip supply, so there will be a lot of people who

want to buy at this lower price but can't.
Quiz
67

Price ceilings only become a problem when they are :

A. Above the market equilibrium

B. Below the market equilibrium
C. Equal to the market equilibrium
D. None of the above.
Price Ceilings
68

The shortage may be resolved in many ways:

One way is "queuing"; people have to wait in line for the product,
and only those willing to wait in line for the product will actually
get it.

Sellers might provide the product only to family and friends, or

those willing to pay extra "under the table".

Another effect may be that sellers will lower the quality of the
good sold.

"Black markets" tend to be created by price ceilings.

Price Ceiling
69

A price ceiling is set at $2 resulting in a shortage of

20 units.
Price Floors
70

 Price Floors are minimum prices set by the government

for certain commodities and services that it believes
are being sold in an unfair market with too low of a
price and thus their producers deserve some
assistance..
 Results in a surplus of a product
 Common examples include soybeans, milk, minimum wage
 Price floors are only an issue when they are set above the
equilibrium price, since they have no effect if they are set
below market clearing price
Price Floors
71

When they are set above the market price, then there is a
possibility that there will be an excess supply or a surplus.

If this happens, producers who can't foresee trouble ahead will

produce the larger quantity where the new price intersects their
supply curve.

Unbeknownst to them, consumers will not buy that many goods at

the higher price and so those goods will go unsold.
Price Floor
72

A price floor is set at $4 resulting in a surplus of 20

units.
Quiz
73

Price floor only become a problem when they are :

A. Above the market equilibrium

B. Below the market equilibrium
C. Equal to the market equilibrium
D. None of the above.
Information Economy
74

The End of Chapter 2

coming attraction:
Chapter 3:
Macroeconomics Issues:
(Inflation & Unemployment)