Economics 100

1. Economics 100 Lecture 7 Demand III

2. Demand and Supply: Predicting Changes in Price and Quantity • A change in demand • A change in supply • A change in both demand and supply

3. An Increase in Demand • When there is an increase in demand: • At the original price, there is a shortage • At the original quantity, buyers are willing to pay more than the current price • The price rises

4. An Increase in Demand • As the price rises: • The quantity supplied increases (and also the quantity demanded comes down a bit from its current level) • The shortage is eventually eliminated • Let’s see how this process works

5. An Increase in Demand • Initially, demand and supply are as shown here • The price is $3 and the quantity is 4 million tapes a week

6. An Increase in Demand • Then, demand increases • The demand curve shifts rightward.

7. An Increase in Demand • At the original price, there is a shortage • At the original quantity, buyers are willing to pay more

8. An Increase in Demand • So, the price rises • As the price rises, the quantity supplied increases

9. An Increase in Demand • In the new equilibrium, the shortage has been eliminated • The market has pulled more resources into the production of this good.

10. A Decrease in Demand • When there is a decrease in demand: • At the original price, there is a surplus • At the original quantity, buyers are willing to pay less than the current price (which is the sellers’ minimum willingness to accept) • The price falls

11. A Decrease in Demand • As the price falls: • The quantity supplied decreases • The surplus is eventually eliminated • This process takes place in the opposite direction to that we’ve just looked at

12. An Increase in Supply • When there is an increase in supply: • At the original price, there is a surplus • At the current quantity supplied, buyers are willing to pay less than the current price • The price falls

13. An Increase in Supply • As the price falls: • The quantity demanded increases • The surplus is eventually eliminated • Let’s see how this process works

14. A Decrease in Supply • When there is a decrease in supply: • At the original price, there is a shortage • At the original quantity, buyers would be willing to pay less than the current price (but at the current quantity buyers are willing to pay more than the original price) • The price rises

15. A Decrease in Supply • As the price rises: • The quantity demanded decreases The shortage is eventually eliminated • This process works just like the ones we’ve looked at, but in the opposite direction

16. Changes in both Demand and Supply • When both demand and supply increase, the quantity traded increases but the price may either rise or fall (or stay constant!) • When demand decreases and supply increases, the price falls and the quantity traded might increase or decrease (or stay constant) • When demand increases and supply decreases, the price rises and the quantity traded might increase or decrease or stay constant

17. Next • Any questions about today’s material? • Practice with MyEconLab! • Learn how to get the answers for this lecture’s quizzes by using your own graphs done by hand, use algebra for linear functions, and excel files if you are good at using it… • Read Chapter 4 on Elasticity