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Demand, Supply and
Equilibrium Price
The Market Model
Demand
• Demand is defined as the willingness and
ability for consumers to pay for goods and
services
• Law of Demand=
As price goes up, the quantity demanded goes
down
As price goes down, the quantity demanded
increases
The Demand Curve
• The demand curve
slopes down
• As prices fall
consumers demand
more products
Changes in the Quantity
Demanded
• Price determines
whether more or less of
a product is demanded
• Notice that a change in
the quantity demanded
moves along the same
curve.
Shifts in the Demand
Curve - Levels of Demand
• Non price factors
can shift the
demand curve up
or down
• These include
people’s tastes,
styles or desires
• For example, the
level of demand
for bell bottom
jeans declines, as
people no longer
believe they are
“in style”
Substitute and
Complimentary Products
• Substitute products - e.g. if the price of
chicken goes up, the level of demand
for hamburger will increase
• Complimentary products - e.g. if the
demand for burgers increases, so will
the level of demand for ketchup
The Income Effect
• The income effect - as consumers
incomes fluctuate, so does the level of
demand
• Increases in real wages will increase
the level of demand for goods
• Decreases in real wages will lower the
level of demand for goods
Population increases and
future expectations
• Population increases or decreases can
lead to shifts in the level of demand
• Future expectations of prices can shift
the level of demand. For example, if
people believe that the price of homes
will rise in the future, this will increase
the level of demand in the present
Supply
• Supply is defined as the quantity of goods
that producers will supply at various prices
• The Law of Supply =
As price goes up, the quantity supplied will
increase
As price goes down, the quantity supplied will
decrease
• This is because of the profit motive of
business
The Supply Curve
• The supply curve is
upward sloping
• This is because
businesses will
supply more goods
if prices are higher,
and fewer goods if
prices are low
• These price
changes result in
the change in
quantity supplied
Factors which influence
supply
• The price of inputs - when the cost of land,
labor, and capital change in the process of
production
• Higher costs decreases the level of supply,
while lower costs increases the level of
supply
• Technological improvements which make the
production process more efficient increases
the level of supply
Changes in the number of
sellers
• When there is an increase in the
number of sellers or businesses in a
market, this tends to increase the level
of supply
• Conversely, if the number of sellers
decreases, then the level of supply also
decreases
The Impact of Taxes and
Tariffs
• Changes in tax laws which raise or lower
business taxes effect the level of supply
• Higher taxes to businesses increase their
costs of production and therefore, reduce the
level of supply
• Conversly, lower taxes to businesses
decrease the costs of production, and
therefore, increase the level of supply
• Quotas and tariffs (taxes on imported goods)
reduces the level of supply for domestic
consumers
Shifting Supply Curve
• Increased input
costs or business
taxes will shift the
supply curve to a
lower amount
(s3)left.
• Decreases in input
costs, increased
efficiency, or lower
business taxes will
shift the supply
curve to a higher
amount (s2)right.
Equilibrium Price
• The point at which
the supply curve
and the demand
curve intersect
indicates the
equilibrium price
and quantity in a
market.
• This is also called
the market clearing
price.
Shortages
• Shortages occur
when prices fall
below the
equilibrium price.
For example, at
$10 businesses
will not supply
sufficient products
to meet consumer
demand.
Surpluses
• Surpluses occur
when prices rise
above the
equilibrium
price. For
example, at $16
businesses will
supply more
products than
consumers are
willing to buy.
#1 The impact of
increased demand
• When the consumer
demand curve
increases, both
prices and the
quantity supplied of
the product also
increases
#2 The impact of
decreased demand
• When consumer
demand decreases,
both prices and the
quantity of goods
falls
#3 The impact of
increased supply
• When the supply
level of a product
increases, then
prices fall and the
quantity supplied
rises
#4 The impact of
decreased supply
• When the level of
supply decreases,
prices rise and the
quantity supplied
falls, as well.
Normal Goods
• Normal goods are
products for which
the demand
increases as
peoples’ income
rise and the
demand decreases
as peoples’
incomes fall.
Inferior goods
• Inferior goods are
those products that
decrease in
demand, even when
peoples’ income
rise. Inexpensive
cars or old clunkers
are examples of
inferior goods.
Diminishing Marginal
Utility
• As a person increases consumption of a
product there is a decline in the marginal
utility that person gets from consuming each
additional product
• Marginal means the last unit consumed or
produced
• An example is that the first candy bar gives
more utility, or satisfaction than the last.
Think of experiences you might have had at
a buffet.
Diminishing Marginal
Returns
• This concept occurs on the supply side when
a factor of production is increased, at some
point each additional unit produced will
decline.
• For example, adding fertilizer to a garden will
increase vegetable output, but at some point
more fertilizer will not have the same effect.
• Also in factory situations, adding workers
adds to total output, but at some point adding
additional workers will decrease marginal
output. This occurs as production nears
100% of capacity.
Indeterminate
• When both supply and demand curves
move simultaneously, the movement of
prices and quantities can be
indeterminate.
• This is because we don’t know which
shift is more p
owerful, or more
decisive than the other.
The Rationing Role of
Prices
• If prices are above the equilibrium price, this
signals businesses to produce more of a
product (law of supply)
• If businesses increase supply, prices will
drop
• Conversely, if prices are below equilibrium
price, this signals businesses to produce less
of a product. A smaller supply will raise
prices.
• Therefore, the market rations goods and
services with the price mechanism.
Price Ceilings
• A ceiling is a
government policy
which sets a legal
maximum price that
may be charged for a
good. For example,
rent controlled
apartments are a price
ceiling.
• Classical economists
say that ceilings cause
a shortage of a product
when it is set below the
equilibrium price.
Price Floors
• A price floor is a
government policy
which sets a legal
minimum price that
may be charged for a
particular good. For
example, the
government set a price
floor for wheat during
the Depression
• When floors are set
above the equilibrium
price there will be a
surplus of goods.
The Minimum Wage
• Is the minimum wage a floor or a ceiling?
• Graph the minimum wage.
• According to your graph, what impact does
the minimum wage have on the equilibrium
quantity of labor?
• Should we have a minimum wage? Why or
why not?
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