DEMAND AND SUPPLY

1
DEMAND AND SUPPLY

• Chapter 4

2
Todays lecture

• Demand
• The Law of Demand
• The Demand Curve
• Shifts in Demand Curve versus Movement along a
  Demand Curve
• Individual and Market Demand Curve

3
Demand

• Demand is the amount of goods that buyers are
  willing and able to purchase.
• The air that we need to breathe everyday is our
  demand?

4
The Law of Demand

• The Law of Demand
• Quantity demanded rises as price falls, other
  things constant.
• Quantity demanded falls as price rises, other
  things constant.

5
The Demand Curve

• Demand Curve is a graph of the relationship
  between the price of a good and the quantity
  demanded.
• Based on the law of demand, whats kind of
  shape the demand curve should be like?

6
From a Demand Table to a Demand Curve
6.00
A Demand Curve
A Demand Table
5.00
Price per DVD
DVD rentals demanded per week
4.00
3.50
Price per DVDs (in dollars)
3.00
A B C D E
0.50 1.00 2.00 3.00 4.00
9 8 6 4 2
2.00
1.00
.50
0

3
1
2
4
5
6
7
8
9
10
11
12
13
Quantity demanded of DVDs (per week)
7
Quantity Demanded Versus Demand

• Quantity demanded refers to a specific amount
  that will be demanded per unit of time at a
  specific price, other things constant.
• Quantity demanded refers to a specific point on
  the demand curve.
• A change in quantity demanded, caused only by a
  change in the price of the good itself, is shown
  by a movement along a demand curve.

8
Quantity Demanded Versus Demand

• Demand refers to a schedule of quantities of a
  good that will be bought per unit of time at
  various prices, other things constant.
• It refers to the entire demand curve.
• A change in demand, caused by anything other than
  the goods own price, is shown by a shift in the
  demand curve.

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Quantity Demanded Versus Demand
Change in quantity demanded
Price
Price
Change in demand
20
B
A
A
10
10
D1
D1
D0
0
200
200
100
Quantity demanded
Quantity demanded
10
Normal good vs Inferior good

• Normal good is the good that an increase in
  income leads to an increase in demand, other
  things constant.
• Inferior good is the good that an increase in
  income leads to a decrease in demand, other
  things constant.

11
Substitutes vs Complements

• Substitutes are often pairs of goods that are
  used in place of each other and an increase in
  the price of one leads to an increase in the
  demand for the other.
• Complements are often pairs of goods that are
  used together and an increase in the price of one
  leads to a decrease in the demand for the other.

12
Shift Factors of Demand

• Shift factors of demand are factors that cause
  changes in demand (shifts in the demand curve).
• Societys Income
• An increase in income will increase demand for
  normal goods.
• An increase in income will decrease demand for
  inferior goods.

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Shift Factors of Demand

• Prices of Other Goods
• When the price of a substitute good falls, demand
  falls for the good whose price has not changed.
• When the price of a complement good falls, demand
  rises for the good whose price has not changed.
• Tastes
• A change in taste will change demand with no
  change in price.

14
Shift Factors of Demand

• Expectations
• If you expect your income to rise, you may
  consume more now.
• If you expect prices to fall in the future, you
  may put off purchases today.
• Taxes and Subsidies
• Taxes increase the cost of goods, thereby
  reducing demand.
• Subsidies have an opposite effect.

15
Question

• Would a change in the price of pizza shift the
  pizzas demand curve?

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Individual and Market Demand Curves
A market demand curve is the horizontal sum of
all individual demand curves
4.00
Price per DVD
Alices demand
Bruces demand
Market demand
Cathys demand




3.50
3.00
.0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
9 8 7 6 5 4 3 2
6 5 4 3 2 1 0 0
1 1 0 0 0 0 0 0
16 14 11 9 7 5 3 2
A B C D E F G H
2.50
Price per DVD (in dollars)
2.00
1.50
1.00
0.50
0
2
4
6
8
10
12
14
16
Quantity demanded of DVD per week
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Supply

• Supply
• The Law of Supply
• The Supply Curve
• A Shift in Supply Curve vs a Movement along a
  Supply Curve
• Individual and Market Supply Curve

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Supply

• Supply is the amount of a good that sellers are
  willing and able to sell.
• The Law of Supply
• Quantity supplied rises as price rises, other
  things constant.
• Quantity supplied falls as price falls, other
  things constant.

19
The Supply Curve

• Supply Curve is a graph of the relationship
  between the price of a good and the quantity
  supplied.
• Based on the law of supply, whats kind of
  shape the supply curve should be like?

20
The Supply Curve

• The supply curve is the graphic representation of
  the law of supply.
• The supply curve slopes upward to the right
  because the relationship between quantity
  supplied and the price is positive
• As price increases, the quantity supplied
  increases.

S
B
PB
A
PA
QA
QB
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Quantity Supplied Versus Supply

• Quantity supplied refers to a specific amount
  that will be supplied at a specific price.
• Quantity supplied refers to a specific point on
  the supply curve.
• A change in quantity supplied, caused only by a
  change in the price of the good itself, is shown
  by a movement along the supply curve.

22
Quantity Supplied Versus Supply

• Supply refers to a schedule of quantities a
  seller is willing to sell per unit of time at
  various prices, other things constant.
• Supply refers to the whole supply curve.
• A change in supply, caused by anything other than
  the goods price, is shown by a shift in the
  supply curve.

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Quantity Supplied Versus Supply
S0
S0
Change in Supply
S1
Price (per barrel)
Price (per barrel)
B
36
Change in quantity supplied
A
15
15
1700
1800
1700
1900
Barrels per year (millions)
Barrels per year (millions)
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Shift Factors of Supply

• Shift factors of supply are factors that cause
  changes in supply (shifts in the supply curve).
• Price of Inputs
• When costs go up, profits go down, so that the
  incentive to supply also goes down.
• Technology
• Advances in technology reduce the number of
  inputs needed to produce a given supply of goods,
  decreasing costs, increasing profits, leading to
  increased supply.

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Shift Factors of Supply

• Expectations
• If suppliers expect prices to rise in the future,
  they may store todays supply to sell later,
  decreasing supply now.
• Taxes and Subsidies
• When taxes increase, costs go up, and profits go
  down, causing a decrease in supply.
• When subsidies increase, costs decrease, and
  profits increase, leading to an increase in
  supply.

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Individual and Market Supply

Charlie
Barry



Charlie
Barry
Ann
Market Supply
0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00
A B C D E F G H I
0 1 3 5 7 9 11 14 15
0 1 2 3 4 5 6 7 8
0 0 1 2 3 4 5 5 5
0 0 0 0 0 0 0 2 2
I
H
G
F
E
D
C
CA
B
Market supply is determined by adding all
quantities supplied at a given price.
A
0
1 2 3 4 5 6 7 8 9 10 11 12
13 14 15 16
Quantity of DVDs supplied (per week)
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Equilibrium
5.00
S
Price (per DVD) QS QD Surplus() Shortage (-)
3.50 7 3 4
2.50 5 5 0
1.50 3 7 -4
Excess supply
4.00
3.50
A
3.00
Price per DVD
E
2.50
C
2.00
1.50
D
1.00
6
7
8
1
2
3
4
5
Quantity of DVDs supplied and demanded (per week)
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Concepts

• Equilibrium is a situation in which supply and
  demand have been brought into balance.
• Equilibrium price is the price that balances
  supply and demand.
• Equilibrium quantity is the quantity supplied and
  quantity demanded when the price has adjusted to
  balance supply and demand

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Equilibrium

• When the market is not in equilibrium, there is
  either excess demand or excess supply.
• Excess supply a surplus, the quantity supplied
  is greater than the quantity demanded, and prices
  fall.
• Excess demand a shortage, the quantity demanded
  is greater than the quantity supplied, and prices
  rise.
• When quantity demanded equals quantity supplied,
  prices have no tendency to change.

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Increase in Demand
S0
B
2.50
A
Price (per DVDs)
2.25
D1
D0
0
9
8
10
Quantity of DVDs (per week)
31
Decrease in Supply
S1
S0
2.50
Price (per DVDs)
A
2.25
D0
0
9
8
10
Quantity of DVDs (per week)
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Shifts in Supply and Demand

• Shifts in either supply or demand change
  equilibrium price.
• An increase in demand or a decrease in supply
• Creates excess demand at the original equilibrium
  price.
• Excess demand increases price until a new higher
  equilibrium price and quantity are reached.

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Questions

• It has been reported that eating red meat is bad
  for your health. Using supply and demand curves,
  demonstrate the reports likely effect on the
  equilibrium price and quantity of steak sold in
  the market.

34
Questions

• Why does the price of airline tickets rise during
  the summer months? Demonstrate your answer with
  demand and supply curves.

35
Questions

• Show how the equilibrium price and quantity will
  be affected by each of the following factors
• Bad weather wreaks havoc with the tea crop
• A technological innovation lowers the cost of
  producing tea
• Consumers income falls.( Assume tea is a normal
  good.)
• A medical report implying tea is bad for your
  health is published

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Summary

• A change in quantity demanded (supplied), caused
  only by a change in the goods own price, is a
  movement along the demand (supply) curve.
• A change in demand (supply) is a shift of the
  entire demand (supply) curve.
• Factors that affect supply and demand other than
  price are called shift factors.

37
Summary
Shift Factors of Demand Shift Factors of Supply
Income Price of Inputs
Prices of Other Goods Technology
Tastes Expectations
Expectations Taxes and Subsidies on Producers
Taxes and Subsidies on Consumers
38
Summary

• A market demand (supply) curve is the horizontal
  sum of all individual demand (supply) curves.
• When quantity demanded equals quantity supplied
  at equilibrium, prices have no tendency to
  change.
• When quantity demanded gt quantity supplied,
  prices tend to rise.
• When quantity supplied gt quantity demanded,
  prices tend to fall.

39
Summary

• When the demand curve shifts to the right (left),
  equilibrium price rises (declines) and
  equilibrium quantity rises (falls).
• When the supply curve shifts to the right (left),
  equilibrium price declines (rises) and
  equilibrium quantity rises (falls).