Supply and Demand

1. Supply and Demand (And Graphing Applications)

2. Supply and Demand: Modeling a Competitive Market • For a market to be competitive, there has to be several buyers and sellers – so that the aggregate effect sets prices, not a single player’s actions • The behavior of competitive markets is well described by the supply and demand model • Because we are studying Macroeconomics, we do not look at individualized aspects of the model – but we focus instead on Aggregate Supply and Aggregate Demand

3. The Demand Curve • Demand is somewhat determined by price. • For the graph, price level is on the vertical axis while quantity demanded is on the horizontal. • Because demand for a product goes down as the price rises, demand curves slope downward.

4. Changes in Demand • Change in demand shifts the position of the demand curve. • An increase in demand moves the demand curve to the right, while a decrease in demand moves the demand curve left. • “Change in demand” is different from movements along the original demand curve, which are caused by changes in a good’s price.

5. Shifting the Demand Curve • Five Principal Factors that Shift the Demand Curve • Changes in the prices of related goods or services – Demand for substitutes increases when a good’s price rises and demand for complements increase when a good’s price falls. • Changes in income – Demand for most goods increase with the rise in income, with the exception of inferior goods. • Changes in tastes – When fads and preferences change, this shifts demand curves. • Changes in expectations – Expected changes in prices or income impact demand. • Changes in the number of consumers – Population changes shift demand curves.

6. The Supply Curve • Supply is also somewhat determined by price. • Because supply of a product goes up as the price rises, supply curves slope upward. • “Change in supply” is different from movements along the original supply curve, which are caused by changes in a good’s price.

7. Changes in Supply • Change in supply shifts the position of the supply curve. • “Change in supply” is different from movements along the original supply curve, which are caused by changes in a good’s price. • An increase in supply moves the supply curve to the right, while a decrease in supply moves the supply curve left.

8. Shifting the Supply Curve • Five Principal Factors that Shift the Supply Curve • Changes in input prices – When components of production are more costly, producers make less and supply decreases. • Changes in the prices of related goods or services – When producers create complements simultaneously, supply of both products may be driven by the price of only one. Supply of substitutes increases as the price for the other product falls. • Changes in technology – New tech tends to decrease cost of production, leading to greater production • Changes in expectations – Expectation of increased price can inspire producers to hold out for the “right time” to sell to maximize profit. • Changes in the number of producers – The number of producers shifts the supply curve.

9. The First Two “Laws” • Law of Demand – Ceteris paribus, higher prices for a good lead people to demand a smaller quantity of that good. • Law of Supply – Ceteris paribus, the higher the price being offered, the more of any good or service producers are willing to sell.