Demand and Supply

1. Demand and Supply Chapter 3

2. Competition • Provides consumers with alternatives • Competition by producers to satisfy consumer wants underlies markets which are characterized by demand and supply

3. Relates the quantity of a good that consumers would purchase at each of various possible prices over some period of time Quantity demanded The quantity that consumers would purchase at a given price Ceteris paribus Holding all else constant Demand

4. Demand $6 Demand 5 400 350

5. Law of Demand • The quantity demanded of a good will move inversely to the price of the good • As price increases, quantity demanded decreases • As price decreases, quantity demanded increases. • Inverse relationship leads to downward sloping demand curve

6. Movement along demand curve • Occur when price and only price changes • Go from $6 to $4 • Called movement along the demand curve • Quantity demanded changes • Happens when ceteris paribus occurs • When we hold other things constant

7. Income Price of related goods Tastes Expected future prices When any of these change then DEMAND CHANGES We shift the curve Create a new relationship to quantity demand at each and every price Other things constant“Assumptions”

8. Increase in Demand At each and every price more of the good is demanded. D2 $4 D1 750 600 A shift occurs in the Demand curve

9. Increase in Demand • Increase in consumer income • More money consumers have the more they are willing to pay for a good • More units sold at each and every price

10. Increase in Demand • Normal goods • Demand for these goods varies directly with income • Inferior Goods • Demand for these goods varies inversely with income

11. Increase in Demand • Change in taste • If good becomes in style then consumers are willing to buy more of the good at any price

12. Increase in Demand • Price of related goods • Complements • Two goods that must be consumed together • Decrease in the price of one will increase demand for the other

13. Increase in Demand • Substitutes • Two goods that must be consumed separately • Coke and Pepsi • Gasoline and diesel • Increase in price of one will cause an increase in the demand of the other

14. Increases in Demand • Demand will increase to the extent that population increases • A change in consumer expectations about future prices will shift demand in the present

15. Decrease in Demand At each and every price Less of the good will be demanded D1 4 D2 500 600 Demand curve shifts

16. Decrease in demand • Change in income • Income decreases • Consumers have less money to spend and buy less at each and every price • Depends on inferior or normal good

17. Decrease in demand • Change in taste • Something becomes out of style • Consumers will buy less at each and every price

18. Decrease in demand • Complement • As price of one good increases, demand for the other good decreases

19. Decrease in demand • Substitutes • As the price of one substitute decreases, the demand for the other will decrease

20. Supply • Relates the quantity of a good that will be offered for sale at each of various possible prices, over some period of time, ceteris paribus • Quantity supplied: the quantity of that will be offered for sale at a given price.

21. Law of Supply Supply There is a direct relationship between the price of a good and the quantity supplied Upward sloping curve due to Direct relationship As price increases, quantity Supplied increases As price decreases, quantity Supplied decreases

22. Movement along Supply Curve • Caused by changes in price and only in the price of the good • Move from one position on line to another 4 3 100 150

23. Changes in Supply • Caused by a change in the other things constant • At each and every price a new quantity is supplied • Curve will shift

24. Increase in Supply S1 • At each and every price, more of the good is supplied • Supply shifts to the right S2 7 400 300

25. Other things constant • Resource prices • Technology • Number of sellers • Price of jointly produced goods • Producer expectations • Production Restrictions

26. Increase in Supply • Resource prices • If the price of resources such as land, labor and capital decreases, supply increases

27. Increase in supply • Changes in technology • Makes production cheaper or easier • Increases supply

28. Increase in supply • Increase in the number of sellers will increase supply

29. Increase in Supply • Producers expectations of future prices • If we expect prices to decline in the future, increase production today

30. Increase in Supply • Price of jointly produced goods • If it rises then supply increases • Price of beef rises, causing the supply of leather to increase

31. Decrease in Supply • At each and every price less of the good is supplied • Left shift S2 S1 6 200 150

32. Decrease in number of sellers Increase in resource prices Strike or disaster Price of substitute rises Price of jointly produced product falls Producers expect future prices to rise Decrease in supply

33. Decrease in Supply • Production restrictions • Natural disasters • Strikes

34. Equilibrium • When supply and demand meet in the marketplace, a market price is created • There is only one price that clears the market, meaning that the quantity supplied equals the quantity demanded. • A situation in which there is no tendency for either price or quantity to change

35. Equilibrium Where Quantity Demanded = Quantity Supplied One or only one equilibrium price S Pe D Qe

36. Equilibrium Surplus Situation If market price is above equilibrium Then surplus occurs Qd < Qs What happens? Suppliers drop price to sell inventory Surplus: Qs > Qd Price drops until we reach equilibrium S Pa Pe D Qs Qd

37. Equilibrium  Shortage At Pb, a price below Equilibrium, Qd > Qs We experience a shortage Shortage : Qd > Qs Consumers push the price until we reach equilibrium Market always moves Toward equilibrium S Pe Pb D Qd Qe Qs

38. Changes in Market Equilibrium • Caused by shifts in demand or supply • Equilibrium price not longer holds true • Market moves toward new equilibrium point

39. Change in Supply S1 Economy in Equilibrium At P1 and Q1 (pt. A) Resource prices drops Then supply shifts out At old price, surplus occurs so market price is dropped by suppliers New Eq. is lower price And larger quantity S2 A P1 P2 B Q2 Q1

40. Government Intervention • When the market failure occurs, government enters the economy • Price controls • Subsidies

41. Price controls • Government artificially creates the market price • Market will fail to reach equilibrium • Shortage or surplus occurs

42. Price Floor Government sets Price above equilibrium Price. Causes a surplus Price cannot drop No market equilibrium Surplus is permanent Price floor – minimum Legal price S Pf Price floor Pe D Qd Qe Qs

43. Price Ceiling Price ceiling – maximum Legal price If Pc is below Pe then economy has a shortage Price cannot rise and Eliminate shortage Shortage is permanent Pe Price ceiling Pc Qe Qs Qd

44. Subsidies • Government pays corporations • Not to produce • To reduce production costs

46. Change in Demand Economy in equilibrium When demand shifts due To change in income At P1, we face a shortage So market price increases To P2 New Eq. is higher price and higher quantity S P2 P1 D2 D1 Q1 Q2