Download DEMAND AND SUPPLY

Chapter 4
DEMAND
AND
SUPPLY
Today’s lecture
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Demand
The Law of Demand
The Demand Curve
Shifts in Demand Curve versus
Movement along a Demand Curve
• Individual and Market Demand Curve
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?
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.
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, what’s kind
of shape the demand curve should be like?
A Demand Table
Price per
DVD
A
B
C
D
E
$0.50
1.00
2.00
3.00
4.00
DVD rentals
demanded per
week
9
8
6
4
2
Price per DVDs (in dollars)
From a Demand Table
to a Demand Curve
$6.00
A Demand Curve
5.00
4.00
3.50
3.00
2.00
1.00
.50
0
E
D
Demand
for DVDs
C
B
A
1 2 3 4 5 6 7 8 9 10 111213
Quantity demanded of DVDs (per
week)
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.
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 good’s own price, is shown
by a shift in the demand curve.
Change in quantity
demanded
$10
Change in
demand
$20
B
$20
Price
Price
Quantity Demanded
Versus Demand
B
A
$10
A
D1
0
D1
100
200
Quantity demanded
D0
200
100
Quantity demanded
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.
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.
Shift Factors of Demand
• Shift factors of demand are factors that
cause changes in demand (shifts in the
demand curve).
• Society’s Income
– An increase in income will increase
demand for normal goods.
– An increase in income will decrease
demand for inferior goods.
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.
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.
Question
Would a change in the price of pizza shift
the pizza’s demand curve?
Individual and Market
Demand Curves
Price per + Alice’s Bruce’s Cathy’s Market
DVD
demand + demand+ demand = demand
A $.0.50
B
1.00
C
1.50
D
2.00
E
2.50
F
3.00
G
3.50
H
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
Price per DVD (in dollars)
$4.00
3.50
A market demand curve
is the horizontal sum of
all individual demand
curves
G
F
3.00
E
2.50
D
2.00
C
1.50
B
1.00
0.50
0
A
Cathy
BruceAlice
2 4 6 8 10 12 14 16
Quantity demanded
of DVD per week
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
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.
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, what’s kind of
shape the supply curve should be like?
• 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.
Price (per unit)
The Supply Curve
S
B
PB
PA
0
A
QA
QB
Quantity supplied
(per unit of time)
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.
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 good’s price, is shown by a
shift in the supply curve.
S0
B
$36
$15
A
Change in
quantity
supplied
1700 1900
Barrels per year (millions)
Price (per barrel)
Price (per barrel)
Quantity Supplied Versus Supply
$15
Change in
Supply
A
S0
S1
B
1700 1800
Barrels per year (millions)
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.
Shift Factors of Supply
• Expectations
– If suppliers expect prices to rise in the future,
they may store today’s 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.
Individual and Market Supply
Market
Price
Ann + Barry + Charlie = supply
(per DVD)
A
B
C
D
E
F
G
H
I
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
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
0 $4.00
1 3.50
3
5 3.00
7 2.50
9 2.00
11
1.50
14
15 1.00
Charlie Barry
0.50
Market supply is determined
by adding all quantities
supplied at a given price.
0 A1
Ann
Market
Supply
I
H
G
F
E
D
C
B CA
2
3 4 5 6
7 8 9 10 11 12 13 14 15 16
Quantity of DVDs supplied (per week)
Equilibrium
Price
(per DVD)
$3.50
QS
7
QD
3
Surplus(+)
Shortage (-)
+4
$2.50
5
5
0
$1.50
3
7
-4
Price per DVD
$5.00
Excess supply
4.00
3.50
S
A
3.00
E
2.50
C
2.00
1.50
Excess demand
1.00
1
2
3
4
5
6 7
Quantity of DVDs supplied and
demanded (per week)
D
8
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
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.
Increase in Demand
S0
B
$2.50
Excess demand
A
2.25
D0
0
D1
8
9
10
Quantity of DVDs (per week)
Decrease in Supply
S1
S0
C
$2.50
2.25
B
Excess demand
A
D0
0
8
9
10
Quantity of DVDs (per week)
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.
Questions
• It has been reported that eating red meat
is bad for your health. Using supply and
demand curves, demonstrate the report’s
likely effect on the equilibrium price and
quantity of steak sold in the market.
Questions
• Why does the price of airline tickets rise
during the summer months? Demonstrate
your answer with demand and supply
curves.
Questions
•
a.
b.
c.
d.
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
Summary
• A change in quantity demanded (supplied),
caused only by a change in the good’s 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.
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
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 > quantity supplied,
prices tend to rise.
• When quantity supplied > quantity demanded,
prices tend to fall.
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).