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The cornerstone of the Free Market Economic System
What is Demand?
• Demand – “the Willingness and Ability of a
buyer to purchase differing quantities of
particular good and/or service at different
prices.”
– There is NO demand for a good or service until
this requirement is met
• I am Willing to buy a Hummer, but I do not have the
Ability to buy one at its current price – I do not have a
demand for a Hummer.
What is the Law of Demand?
• States that:
– As the price of a good or service decreases, the
quantity demanded will increase,
– As the price of a good or service increases the
quantity demanded will decrease
• There is an INVERSE relationship between the price
and quantity demanded
Demand Curve
The Market for Gasoline
Demand Schedule
Market Data – sum
of all Individual quantity
demanded/price
combinations
“Quantities Demanded
At different Prices”
Bill
Sue
John
$.50
75
50
100
$1.00
60
40
50
150
$2.00
20
10
20
50
Individual Quantities Demanded
at each price
The Market
200
Market Quantity
Demanded at
each price
Demand Curve
Demand Schedule
Market for Gasoline
Price
Of
Gasoline
Market Data – sum
of all Individual quantity
demanded/price
combinations
“Quantities Demanded
At different Prices”
The individual quantities demanded
are added HORIZONTALLY to
derive the MARKET QUANTITY
At each price (at $.50 add 75+50 +75
To get 200 gal. of gasoline
$2.00
$1.00
.
.
.
$.50
50 75 100
150
Quantity of Gasoline
200
Demand*
300
Demand Curve
Demand Schedule
Market for Gasoline
Price
Of
Gasoline
Market Data – sum
of all Individual quantity
demanded/price
combinations
“Quantities Demanded
At different Prices”
The individual quantities demanded
are added HORIZONTALLY to
derive the MARKET QUANTITY
At each price (at $.50 add 75+50 +75
To get 200 gal. of gasoline
$2.00
$1.00
.
The Demand Curve is comprised
of an infinite number of Price/
Quantity Demanded combinations
-a change in the price of gasoline
causes movement ALONG the
Demand Curve
.
.
$.50
50 75 100
150
Quantity of Gasoline
200
Demand*
300
Determinants of Demand
(Factors That Shift The Demand Curve)
•
•
•
•
Change in Consumer taste/preference
Change in the number of buyers
Change in consumer incomes
Change in the prices of complementary
and substitute goods
• Change in consumer expectations
Demand Curve
Market for Gasoline
Price
Of
Gasoline
What shifts the Demand Curve?
Changes in Income
$2.00
Income INCREASES
We can afford 50% more
gallons of Gasoline at
every price.
$1.00
..
..
..
Demand1
$.50
Demand*
50 75 100
150
Quantity of Gasoline
200
300
Demand Curve
What shifts the
Demand Curve?
Market for Gasoline
Price
Of
Gasoline
$2.00
Changes in Income
Income DECREASES
We can afford 50% fewer
Gallons of Gasoline at
every price
$1.00
$.50
..
. .
. .
Demand1
25
50
100
Quantity of Gasoline
200
Demand*
Demand Curve
Market for gasoline
Price
Of
What shifts the Demand Curve?
Changes in Number of Buyers
$2.00
INCREASES – because of
economic opportunities more
$1.00
people move to Texas.
Texas needs 50% more
Gallons of Gasoline at
every price
..
..
..
Demand1
$.50
Demand*
50 75 100
150
Quantity of Gasoline
200
300
Demand Curve
Market for Gasoline
Price
Of
Gasoline
What shifts the
Demand Curve?
$2.00
Changes in Number of Buyers
DECREASES – because of
economic opportunities more
people move OUT OF Texas
We need 50% fewer
Gallons of Gasoline at
every price
$1.00
$.50
..
. .
. .
Demand1
25
50
100
Quantity of Gasoline
200
Demand*
Demand Curve
Market for Oranges
Price
Of
Oranges
What shifts the Demand
Curve?
$2.00
1. Changes in Consumer
Preferences
1. Consumers express a
positive
preference for a good.
$1.00
“Study shows that eating
an orange a day reduces
cancer risks”
$.50
..
..
..
Demand1
Demand*
50 75 100
150
Quantity of Oranges
200
300
Demand Curve
Market for Oranges
Price
Of
Oranges
What shifts the Demand Curve?
Changes in Consumer
Preferences
1. Consumers express a
negative
Preference for a good.
“Study shows that eating
oranges
stunts your growth” (or
something
Ridiculous like that…)
$2.00
$1.00
$.50
..
. .
. .
Demand1
25
50
100
Quantity of Oranges
200
Demand*
Market for Apples
Price
Of
Apples
What shifts the Demand
Curve?
1. Availability of Substitutes
– good that
can be used in place of a
good
“The price of oranges
INCREASES
Dramatically because
of a poor harvest.”
$2.00
$1.00
..
..
..
Demand1
$.50
Demand*
50 75 100
150
Quantity of Apples
200
300
Market for Apples
Price
Of
Apples
What shifts the Demand
Curve?
$2.00
1. Availability of Substitutes
“The price of
Oranges
DECREASES
Dramatically
because of a record
harvest.”
$1.00
$.50
..
. .
. .
Demand1
25
50
100
Quantity of Apples
200
Demand*
Market for Flashlights
Price
Of
Flashlights
What shifts the Demand
Curve?
$2.00
Changes in the
Price of a
Complement – A good that
is typically used with
another good
$1.00
“Price of
batteries
DECREASES”
..
..
..
Demand1
$.50
Demand*
50 75 100
150
200
Quantity of Flashlights
300
Market for Flashlights
Price
Of
SUV’s
What shifts the Demand Curve?
Changes in the Price of a
Complement -A good that is
typically used with another good
“Battery prices
INCREASE”
$2.00
$1.00
$.50
..
. .
. .
Demand1
25
50
100
Quantity of flashlights
200
Demand*

IF Income INCREASES and the Demand for a
good INCREASES, then that good is called a
NORMAL GOOD.
 Make more money and you want more steak,
luxury cars, vacations, etc.

If Income DECREASES and the Demand for a
good DECREASES , then that good is called a
NORMAL GOOD.
 Make less money and you want less steak, fewer
luxury cars, fewer vacations, etc

If Income INCREASES and the Demand for a
good DECREASES, then that good is called
an INFERIOR GOOD.
 Make more money and you want fewer Hot dogs,
fewer Kia’s, fewer vacations to local parks, etc

If Income DECREASES and the Demand for a
good INCREASES, then that good is call an
INFERIOR GOOD,
 Make less money and you want more hot dogs,
more Kia’s, more trips to local parks, etc.
 If
two goods are Substitutes: when the Price
of Good 1 INCREASES then the DEMAND for
the SUBSTITUTE (Good 2) INCREASES.
 If two goods are Substitutes: when the Price
of Good 1 DECREASES then the DEMAND for
the SUBSTITUTE (Good 2) DECREASES
 There is a DIRECT relationship when the
price of one good changes and the effect
on the DEMAND for the other--SUBSTITUTES!!!
 If
two goods are Complements: when the
Price of Good 1 INCREASES then the DEMAND
for the Complement (Good 2) DECREASES.
 If two goods are Complements: when the
Price of Good 1 DECREASES then the
DEMAND for the Complement(Good 2)
INCREASES
 There is an INVERSE relationship when the
price of one good changes and the effect
on the DEMAND for the other--COMPLEMENTS!!!
What is Supply?
• Supply – “The Willingness and Ability of
sellers to produce and offer for sale different
quantities of goods and/or services at
different prices”
– You must now think as a producer – you want to
get the highest price possible if you are going to
work harder to supply more
What is the Law of Supply
• States that:
– As the price of a good or service increases the
quantity supplied will increase
– As the price of a good or service decreases the
quantity supplied will decrease
There is a DIRECT relationship between price and
quantity supplied
Supply Curve
The Market for Gasoline
Supply Schedule
Market Data – sum
of all Individual quantity
supplied/price
combinations
“Quantities Supplied
At different Prices”
Gas #1
Gas #2
Gas #3
The Market
$.50
10
15
25
50
$1.00
40
10
50
100
$2.00
50
50
100
200
Individual Quantities Supplied
at each price
Market Quantity
Demanded at
each price
Supply Curve
Quantity Supplied
at each price
Supply Curve – infinite
Number of price and
quantity combinations
Supply schedule –
Quantity supplied at
Different prices
“THE SAME LOGIC AS
THE DEMAND SCHEDULE”
Price
Of
Gasoline
Market for Gasoline
$2.50
S*
$2.00
$1.50
$1.00
$.50
50
100
150
Quantity of Gasoline
200
Supply Curve
Quantity Supplied
at each price
Supply Curve – infinite
Number of price and
quantity combinations
Supply schedule –
Quantity supplied at
Different prices
“THE SAME LOGIC AS
THE DEMAND SCHEDULE”
Price
Of
Gasoline
$2.50
$2.00
Market for Gasoline
The Supply Curve is comprised
of an infinite number of Price/
Quantity Supplied combinations
-a change in the price of gasoline
causes movement ALONG the
Supply Curve
S*
$1.50
$1.00
$.50
50
100
150
Quantity of Gasoline
200
Supply Curve
Quantity Supplied
at each price
Price
Of
Gasoline
Market for Gasoline
$2.50
S*
$2.00
What SHIFTS the
Supply Curve?
$1.50
$1.00
$.50
50
100
150
Quantity of Gasoline
200
Determinants of Supply
Things That Shift Supply Curve
•
•
•
•
•
•
Change in Resource Prices (Input Prices)
Change in Technology
Change in Taxes or Subsidies
Change in producer expectations
Change in number of suppliers
Change in exogenous variables (bad weather, Terrorism,
etc)
• BOTTOM LINE ON SUPPLY CURVE SHIFTS
– Anything that increases the cost of production decreases supply
– Anything that decreases the cost of production increases supply
Supply Curve
Price
Of
Gasoline
Quantity Supplied
at each price
Market for Gasoline
$2.50
S*
$2.00
What SHIFTS the
Supply Curve?
Change in the price
of the resources used to
make a good
$1.50
$1.00
$.50
50
100
150
Quantity of Gasoline
200
Supply Curve
Quantity Supplied
at each price
Price
Of
Gasoline
Market for Gasoline
S1
$2.50
$.50
S*
$2.00
What SHIFTS the
Supply Curve?
$1.50
$.50
Resource Price INCREASES
$1.00
“Oil prices skyrocket
because of a terrorist
attack on key oil fields
in the Middle East” – The cost
Of producing gasoline INCREASES
By $.50
$.50
$.50
50
100
150
Quantity of Gasoline
200
Supply Curve
Quantity Supplied
at each price
Market for Gasoline
Price
Of
Gasoline
$2.50
S*
$2.00
What SHIFTS the
Supply Curve?
S1
-$.50
$1.50
Resource Price DECREASES
$1.00
“Oil prices decrease
because of new discoveries of
Reserves off the coast of California
– The cost
Of producing gasoline DECREASES
By $.50
-$.50
$.50
-$50
50
100
150
Quantity of Gasoline
200
Supply Curve
Quantity Supplied
at each price
Price
Of
Gasoline
Market for Gasoline
S1
$2.50
$.50
S*
$2.00
What SHIFTS the
Supply Curve?
$1.50
$.50
Change in Taxes
Government INCREASES
The Business Tax
On gasoline production– The cost
Of producing gasoline INCREASES
By $.50
$1.00
$.50
$.50
50
100
150
Quantity of Gasoline
200
Supply Curve
Quantity Supplied
at each price
Market for Gasoline
Price
Of
Gasoline
$2.50
S*
$2.00
What SHIFTS the
Supply Curve?
S1
-$.50
$1.50
Change in Taxes
$1.00
“Government DECREASES the
Business Tax On gasoline
production– The cost
Of producing gasoline DECREASES
By $.50
-$.50
$.50
-$50
50
100
150
Quantity of Gasoline
200
Supply Curve
Price
Of
Gasoline
Quantity Supplied
at each price
Market for Gasoline
S1
$2.50
$.50
S*
$2.00
What SHIFTS the
Supply Curve?
$1.50
$.50
Changes in Subsidies
(Payment from govt. to Producer)
$1.00
$.50
– SUBSIDY DECREASES -The cost
of producing gasoline INCREASES
by $.50
$.50
50
100
150
Quantity of Gasoline
200
Supply Curve
Quantity Supplied
at each price
Market for Gasoline
Price
Of
Gasoline
$2.50
S*
$2.00
What SHIFTS the
Supply Curve?
Changes in Subsidies
(Payment from govt. to
Producer)
S1
-$.50
$1.50
$1.00
-$.50
$.50
– SUBSIDY INCREASES -The cost of
producing gasoline DECREASES
by $.50
-$50
50
100
150
Quantity of Gasoline
200
Supply Curve
Market for Gasoline
Price
Of
Gasoline
Quantity Supplied
at each price
$2.50
S*
$2.00
What SHIFTS the
Supply Curve?
$1.50
Change in Producer
Expectations/Exogenous variable -
$1.00
S1
-$.50
“Gas prices are expected to decrease in
$.50
the future because of advances in
alternative fuels” (producers make
gas to get the higher price today” -$50
-$.50
50
100
150
Quantity of Gasoline
200
Supply Curve
Price
Of
Gasoline
Quantity Supplied
at each price
Market for Gasoline
S1
$2.50
$.50
S*
$2.00
What SHIFTS the
Supply Curve?
$1.50
$.50
Change in Producer
Expectations/Exogenous variable - $1.00
“Gas prices are expected to
increase in the future because
of an impending natural
disaster (producers make LESS
gas today to get the higher
price in the future”
$.50
$.50
50
100
150
Quantity of Gasoline
200