demand

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Chapter 3 demand supply
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To understand Demand Supply the concept of
marginalism is needed Marginalism most
decisions entail weighing the relative costs
benefits of small changes in behavior ALL
DECISIONS ARE MADE AT THE MARGIN
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LARGE CHANGES ARE ACTUALLY A COLLECTION OF SMALL
CHOICES. WHEN MC gtMB AN ACTIVITY WILL NOT BE
INCREASED. The marginal unit is called the last
or extra unit There is no way to know the LAST
unit so every unit is the last
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Decisions about buying selling are based on
opportunity costs
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Demand ALL MARKETS 1.Buyers who demand goods
services resources 2. Suppliers who
make resources or products available Relative
Price price of a good in relations to
another Absolute Price monetary price of a good
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Relative price tells more about a good
the economy than absolute price Relative prices
important to microeconomics
Economists emphasize demand because needs are
vague.
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• Purchasing patterns based on 2 sets
• or relative prices
• Market price prices charged for goods
• Demand price reflects the relative value
• an individual places on the goods

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Demand quantity of a specific good that people
are willing and able to buy during a specific
period of time.

• all else equal
• Given time period
• Lower opportunity cost for purchase
• Negative relationship between
• Price Quantity Demanded

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Reasons for the negative relationship (downward
slope of a demand curve) 1.Substitution effect
People find substitutes for goods that are more
costly relative to other goods 2.Principle of
diminishing marginal utility The more you have
for a good relative to other goods, the less you
desire and are willing to pay additional
units Many times purchase of a good rises when
the price falls
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3. Income effect as your income increase you
can buy more of the good as well as keeping your
present purchases less important or direct that
the substitution effect
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INCOME EFFECT A. IF the purchase takes a BIG
chunk of the budget, THEN Income effect is
more direct. EX HOUSE, CAR B. Demand for
luxuries are esp. responsive to income C. As
incomes rise, demand for inferior goods
declines D. all else equal (ceteris paribus)
income changes the structure of Demand
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Ceteris Paribus 1.enables economists to look at
the influence of ONE variable on Demand 2.
enables economists to look at human behavior
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• Individual Demand Curve
• depicts the maximum number
• of a good people are willing and able
• to purchase at various prices
• Is subjective
• Market Demand Curves
• horizontal sum of the individual curves
• of all potential buyers of a good

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• Other Influences on Demand
• Tastes Preferences
• Income distribution
• Price of related goods
• Number of buyers sellers
• Price expectations
• Taxes, subsidies regulation (govt)

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• Tastes Preferences
• Most advertising is to change these
• Cant be measured precisely
• Does measure trends
• 2. Income distribution
• Income increase causes demand increase
• for high quality goods.
• Normal goods positive relationship to D.

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• Poor peoples demand for inferior goods
• Decreases with income.
• Rich peoples demand for normal goods
• increase with income.
• Transfer of income can change cause
• decline in demand for normal
• inferior goods.
• Be careful on mans normal good is
• another mans inferior good.

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3. Prices of Related Goods Substitutes are the
goods increasingly purchased in place of the
item in question when its price rises. Most
substitutes are weak not close EX
hamburgers/hotdogs/lasazna
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Complementary are consumed together Increase
in the price of a good tends to reduce the
demand for its complement. EX gas, tires and
cars 4. Number of consumers population growth,
immigration, publics age structure,
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5. Expectations about Price, Income or
Availability shortages in the future/ means
buy NOW boost current demand Expecting income
increase, people splurge NOW Postpone
purchases when they expect a rise decrease in
the future Expectation of govt action outlawing
cigarettes, banning of saccharin
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6. Taxes, subsidies, regulation demand for
buyers a relationship between quantity and
price demand for suppliers a relationship
between quantity sold and price received 1 tax
on books consumer demand stays the same supplie
rs see demand decrease because they are getting
a 1 less.
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Changes in Demand
IF A DETERMINATE OF DEMAND OTHER THAN A GOODS
OWN PRICE CHANGES, THERE IS A CHANGE IN DEMAND
AND A SHIFT IN THE DEMAND CURVE
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• Most marketing strategies are aimed at
• tastes preferences
• Shifts to the left show falling demand
• 2. Shifts to the right show increasing demand

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CHANGES IN QUANTITY DEMANDED movement along the
demand curve Caused only by a change in the price
of the good.
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• Supply refers to the quantity of a specific
• good that sellers will provide under
• alternative conditions during a given period
• Producers must expect to gain
• Law of Supply all else equal, higher
• prices induce greater production and offers
• to sell more output during a given period,
• and vice verse
• P increase QS increase
• P decrease QS decrease

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Supply Curve shows the maximum amounts of a
good that firms are willing to furnish at
various prices during a given period
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• Problems with maximizing production
• Increasing costs
• Diminishing returns
• Pay workers overtime
• Attract more workers or
• resources by paying more
• 5. Scheduling errors and break downs
• Supply Price is the minimum price that
• will induce a seller to increase production
• Beyond current level

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Market supply curve horizontal sum of
individual suppliers curves CHANE IN QUANTITY
SUPPLIED IS A MOVEMENT ALONG THE SUPPLY CURVE
AND IS ONLY CAUSED BY A CHANGE IN THE PRICE OF
THE GOOD
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6 DETERMINATES OF SUPPLY 1. Production
Technology influences on technology knowledge
quality of resources legal environment weather/
natural laws COSTS FALL SUPPLY GROWS AS
TECHNOLOGY INCREASES
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Technology can also be bad EX Nuclear
War Expanded life expectancy 2. Resource
Costs supply declines when resource costs
increase. EX raw materials, higher wages,
rents supply increase when resource costs
decline EX lower fertilizer costs expand farm
output
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3. Price of related goods A.Substitute
goods Price hikes increase the quantity of the
good supplied by using resources that could be
devoted to other production. EX corn prices
rise farmers plant more corn Supply of corn
increases BUT Farmers plant less
soybeans Supply of soybeans decreases
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Byproducts(joint products) OR complementary
product EX beef leather increase in price of
one increase in supply of joint product
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4. Producers Expectations A.higher prices in
the future, increase production NOW. B. May
withhold goods now to sell later this can cause
a shortage NOW some goods are easy to make now
and store for the future/ some are not! Durable
goods make NOW sell in the future Non-durable
goods cant
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Long term effects of expectations swollen
inventories are sold new investments become
productive these tend to reduce supply may try
to liquidate inventories causing prices to
fall. A strike may cause a company to produce
more now expecting the strike THIS STUFF IS
TOUGH TO PREDICT!
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5. Number of Sellers more producers, more
supply 6. Taxes, Subsidies, Govt
Regulation from suppliers view supply is the
relationship between price received units
produced and sold. Subsidies increase
supply Taxes decrease supply Govt regulation
decrease in supply
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ALL 6 OF THE DETERMINATES OF SUPPLY OPERATE
PRIMARILY BY CHANGING THE OPPORTUNITY COST OF
PRODUCTION EXCEPT NUMBER OF SELLERS
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CHANGE IN SUPPLY occurs only when the supply
curve shifts. CHANGE IN QUANTITY SUPPLIED is
caused only by a change in the price of the good
in question.
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Its easy to train economists. Just teach a
parrot to say Supply and Demand thomas
carlyle

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MARKET EQUILIBRIUM
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SUPPLY DEMAND JOINTLY DETERMINE PRICES AND
QUANTITY BUYERS DEMAND PRICES SUPPLIERS SUPPLY
PRICES THIS IS CALLED MARKET EQUILIBRIUM OR
CLEAR THE MARKET
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MARKET EQUILIBRIUM IS WHERE THE QUANTITY
DEMANDED AND THE QUANTITY SUPPLIED ARE EQUAL
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SURPLUS IS THE EXCESS OF THE QUANTITY SUPLLIED
OVER QUANTITY DEMANDED WHEN THE PRICE IS ABOVE
EQ. SHORTAGE IS EXCESS OF QUANTITY DEMANDED