Download Quantity Demanded

CHAPTER 3 DEMAND, SUPPLY,
AND MARKET EQUILIBRIUM
AP ECONOMICS
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MICROECONOMICS
That part of economics that deals with
behavior and decision making by small
units, such as individuals and firms
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The Market Forces of
Supply and Demand
Supply and Demand are the two words
that economists use most often.
Supply and Demand are the forces that
make market economies work!
Modern microeconomics is about
supply, demand, and market
equilibrium.
3
Markets and Competition
The terms supply
and demand refer
to the behavior of
people. . .
. . .as they interact
with one another
in markets.
4
Market: any institution,
mechanism, or arrangement which
facilitates exchange.
A market is a group of buyers
and sellers of a particular good
or service.


Buyers determine demand...
Sellers determine supply...
Markets bring together buyers
and sellers.
Examples:






Gas station
E-commerce site
Local music store
Farmer’s roadside stand
NYSE
Auctions
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DEMAND
For this to work there has to be
“wanting” of a product
Consumers have to desire the product
and have the willingness and ability to
buy a product
Use schedules and graphs to represent
approximations of consumer behavior
6
Ceteris Paribus . . .
...implies that all the
relevant variables (e.g.
determinants of
demand) are held
constant, except the
one(s) being studied
at the time.
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DEMAND
Demand Schedules

a table listing that
shows the quantity
demanded at all
prices that might
prevail in the market
at a given time
Demand Curves

graphs that plot the
quantity demanded
at all prices
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The Concept of Demand. . .
Quantity Demanded
refers to the amount
P
(quantity) of a good that
buyers are willing and
able to purchase at
alternative prices for a
given point in time.

Point in time is a specific
period could mean a day,
a week, or a month
D
Q
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LAW OF DEMAND
Demand for an economic product varies
inversely with its price
Prices
Quantity Demanded
Prices
Quantity Demanded
The movement along a demand curve
shows a CHANGE IN THE QUANTITY
DEMANDED or a change in the quantity
of the product purchased in response to
a change in price
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Determinant of Demand:
Market Price
Law of Demand:
There exists an inverse
relationship between
Price and Quantity
Demanded.
P
(Negative
Relationship)
D
Q
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Price of Ice Cream
Example: Demand For Ice
Cream
Demand
D
Quantity of Ice Cream
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UTILITY
Usefulness or satisfaction from consumption
MARGINAL UTILITY


the extra usefulness or satisfaction a person gets
from acquiring one more unit of a product
Example: Drinking glass of ice-cold lemonade
after playing a hard game of tennis or basketball
on a hot summer afternoon
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MARGINAL UTILITY CONT.
Consumers keep on buying a product until they
reach a point where the last unit consumed gives
enough, and only enough, satisfaction to justify
the price.
When consumers reach the point that the marginal
utility is less than the price, you will stop buying.
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DIMINISHING MARGINAL
UTILITY
The more units of a certain economic product
a person can acquire, the less eager that
person is to buy still more.
As people’s wants for a particular product
become more fully satisfied, they become less
willing to spend their limited incomes to buy
more of that product.
The principle of diminishing marginal utility
can also be used to explain the downwardsloping nature of the demand curve
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EFFECTS OF QUANTITY
DEMANDED
Income Effect


the change in the quantity demanded because of a change
in the consumer’s real income when the price of a
commodity changes
Increases the purchasing power of a buyer’s money income
enabling the buyer to purchase more of the product than
before
Substitution Effect


the change in quantity demanded because of the change in
relative price of the product
Buyers have the incentive to substitute a less expensive
product for similar products that are now relatively more
expensive
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QUANTITY DEMANDED AND
DEMAND ARE NOT THE SAME
When QUANTITY DEMANDED (Qd) changes, it
does so because of a change in the
PRICE (P) of a product, and movement occurs
along the current demand curve
When DEMAND (D) changes, the entire
demand curve moves or shifts. The change
in demand results in an entirely new curve.
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Determinant of Demand:
Prices of Related Goods
When the fall in
price of one good
increases the
demand for
another good, the
two goods are
complements.
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Changes in Quantity
Demanded
Price
$2.00
D
Quantity
7
19
Changes in Quantity
Demanded
Price
$2.00
$1.00
D
7
Quantity
13
20
Change in Demand
Price
$2.00
D
Quantity
7
21
Change in Demand
Price
$2.00
D2
D Quantity
7
10
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Market Demand
Adding all the quantities demanded by
all consumers at each of the various
possible prices, we can get from
individual demand to market demand
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Determinants of Demand
What factors
determine how
much ice cream you
will buy?
What factors
determine how
much will you really
purchase?
Demand Shifters
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Determinants of Demand
1. Consumers’ Tastes and
Preferences
2. Number of Consumers (buyers)
3. Consumers’ Income
4. Price of Related Goods
5. Consumer Expectations
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CAUSES FOR CHANGES IN
DEMAND (DETERMINANTS)
Consumer Income
Consumer Tastes
Price of Related Goods


Substitutes
Complements
26
Determinant of Demand:
Prices of Related Goods
When the fall in
price of one good
reduces the
demand for
another good, the
two goods are
substitutes.
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CHANGE IN DEMAND OR
SHIFT IN DEMAND
Shift to the Right

increase in demand
Shift to the Left

decrease in demand
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GOODS
Normal Goods


Goods for which demand increases when income
increases
Most goods are normal goods
Inferior Goods



Goods and services for which demand decreases
when income increases.
Inferior is not the products quality
Generic brand products, hamburgers, and used
clothing
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Determinant of Demand:
Income
As income increases
the demand for a
normal good will
increase.
P
D
D2
Q
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Determinant of Demand:
Income
As income increases
the demand for a
normal good will
increase.
As income increases
the demand for a
inferior good
decrease.
P
D2
D
Q
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CHAPTER 3--SUPPLY
AP ECONOMICS
32
SUPPLY
The quantity of goods and
services that producers are
willing to offer at various
possible prices other things
equal during a given time
period

Example: During the winter
months, for example, jacket
manufacturers offer a certain
quantity of jackets at each
price.
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Supply of Ice Cream
Price
S
Quantity
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LAW OF SUPPLY
States that producers supply more goods and
services when they can sell them at higher
prices and fewer goods and services when they
must sell them at lower prices
Quantity supplied is directly related to the
prices that producers can charge for their
goods and services

Example: If producers of a compact disc (CD)
players can charge $300 for their products, they will
make more CD players than if they could charge only
$200.
 PRICE
 PRICE
QUANTITY SUPPLIED
QUANTITY SUPPLIED
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The Concept of Supply. . .
Quantity Supplied
refers to the amount
P
S
(quantity) of a good
that sellers are willing
and able to make
available for sale at
alternative prices for a
given point in time.
Q
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QUANTITY SUPPLIED
The amount of a good and service
that a producer is willing to sell at
each particular price

PRICE is the key factor affecting not
only quantity demanded but also the
quantity supplied
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Changes in Quantity Supplied
S
Price
$2.00
Quantity
7
38
Changes in Quantity Supplied
S
Price
$2.00
$1.00
Quantity
1
7
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SUPPLIERS WANT A PROFIT
Suppliers actions are based on the
pursuit of profits
PROFIT is the amount of money
remaining after producers have paid all
of their costs
Businesses make a profit when
revenues are greater than the costs of
production
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COSTS OF PRODUCTION
Wages, salaries, rent, interest on loans,
bills for electricity, raw materials, and any
other goods and services used to
manufacture a product
To make a PROFIT, producers must
provide goods and services that
consumers want—at prices that
consumers are willing and able to pay
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PROFIT MOTIVE
Governs how individual
companies make decisions
and it also helps direct the use
of resources in the entire
market
It can cause an increase or a
decrease in production for one
company or many companies
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SUPPLY
Supply Schedule


Lists each quantity of a
product that producers are
willing to supply at various
market prices
It shows the relationship
between the price of a
good or service and the
quantity that producers
will supply
Supply Curves

Plot the relationship on
a graph between the
price of a good or
service and the
quantity supplied
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CHANGES IN SUPPLY
PRICE CHANGES affect the
QUANTITY SUPPLIED
DETERMINANTS OF SUPPLY are the
non-price factors that can shift an entire
supply curve of a product.
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Change in Supply
S
Price
$2.00
Quantity
7
45
Change in Supply
S
Price
S2
$2.00
Quantity
7
11
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DETERMINANTS OF SUPPLY
Prices of resources
Government tools

Taxes and Subsidies and
Regulations
Technology
Prices of related goods
Producer expectations
Competition or # of
sellers (producers)
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Determinant of Supply:
Market Price
Law of Supply
S
P
There exists an
direct (positive)
relationship
between Price
and Quantity
Supplied.
Q
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RESOURCES CAUSE SHIFTS
A change in the price of resources or factors of
production can shift an entire supply curve
A RESOURCE is anything that can be used in the
production of a good or service
 Resources include raw materials, electricity,
and workers’ wages
These resources contribute to a business’s costs
of production
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RESOURCES CONT.
Any price change for a resource increases or
decreases a business’s production costs
When the price of a resource falls, production
costs fall accordingly. Lower production costs
mean that a business can supply more of the
product for the same cost


Lower production costs also create greater profits,
which will cause the businesses to increase production
even more
Higher production costs mean that the company cannot
supply as much of the product at the same cost as
before
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TECHNOLOGY
Makes production more efficient and less
expensive
This causes the costs of production to
decrease and producers are able to supply
more goods and services at each and every
price and increase their profits
Technology also has a cost
A company may have to pay researchers or
other companies for the desired technology
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GOVERNMENT TOOLS
Can cause the supply curve for goods and
services to shift either right or left
The three main tools are

Taxes
 Businesses treat them as cost
 Increase in sales tax or property tax will increase
production costs
 Reduce supply

Subsidies
 Lowers the producer’s cost
 Increases supply
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REGULATIONS
Rules passed by the government to protect the public
as to how companies conduct business
REGULATIONS are designed to prevent pollution,
discrimination, and other problems that affect citizens
Loose government regulations tend to increase supply
Strict government regulations tend to decrease supply
 Example: Strict pollution controls force companies
to spend more money on finding safe ways to
dispose of waste and toxic materials. Complying
with these regulations cause a companies
production costs to increase. Supply curve would
shift to the left because higher production costs
lower the supply.
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COMPETITION
Tends to increase supply, while a
lack of competition tends to
decrease supply
Suppliers can leave as well as enter
the market
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PRICES OF RELATED GOODS
Means that the changes in a product’s
price can affect the supply for the
product’s related goods


Substitutes
Complements
These changes in prices can cause the
supply curve to shift left or right
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PRODUCER EXPECTATIONS
Cause production decisions to change
based on their expected future income
Producers’ income depends on the prices
they can charge for their products
The expectations they have of future
changes in the price of the product can
affect how much of their product they
supply to the market now
These expectations can cause the supply
curve to shift left or right
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CHAPTER 3—MARKET
EQUILIBRIUM
AP ECONOMICS
57
MARKET EQUILIBRIUM
A situation in which prices are
relatively stable, and the
quantity of goods and
services supplied is equal to
the quantity demanded
Qs=Qd
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Supply and Demand Together
Equilibrium Price--Ep or Pe
The price at which the supply and demand
curve intersect. Quantity Supplied and
Quantity Demanded are equal.
Equilibrium Quantity—Eq or Qe
The quantity at which the supply and
demand curve intersect.
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Forces of Demand and
Supply. . .
Price
S
E
EP
Quantity
D
EQ
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Forces of Demand and Supply
At Rest
Market Equilibrium
Price
S
E
EP $2.00
Quantity
D
7 EQ
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SURPLUS
Quantity Supplied > Quantity Demanded
Qs>Qd
Suppliers may have built up inventories in
their warehouses, only to find that they did not
receive enough orders for the products
Lower their prices to attract more buyers
Offer fewer products for sale at the next
trading period
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Actions of buyers and sellers
that move toward equilibrium.
Price
S
E
D
Quantity
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Actions of buyers and sellers
that move toward equilibrium.
Price
Excess Supply
S
E
D
Quantity
64
SHORTAGE
Quantity Demanded > Quantity Supplied
Qd>Qs
Producers have no more products to sell even
though additional buyers are willing to
purchase them at the existing price
Suppliers wish they had charged higher prices
for what they already sold
Price and Quantities would have to increase in
the next trading period
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Actions of buyers and sellers
that move toward equilibrium.
Price
S
E
D
Quantity
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Actions of buyers and sellers
that move toward equilibrium.
S
Price
E
Excess
Demand
D
Quantity
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EQUILIBRIUM PRICE
Quantity Demanded = Quantity
Supplied
Price that “clears the market”
There is not a surplus or shortage
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Change in demand due to hot
weather
S
Price
E2
New
Equilibrium
Pe
E
Pe
D
Qe
Qe
D2
Quantity
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PRICES ARE FIXED?
Special interest groups result in government
policies that fix prices people either receive or
pay
Price supports prevent the price system from
effectively transmitting information in the
market
Economists argue that fixed prices are
government policies whose costs usually
outweigh their benefits
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TYPES OF FIXED COSTS
PRICE CEILINGS
The maximum legal
price that can be
charged
Affects the allocation
of resources

PRICE FLOORS
The lowest legal
price that can be
paid for a good or
service

Ex: minimum wage
Ex: rental property
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Government Set Prices
Price
S
Price Floors
E
Price Ceilings
D
Quantity
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WITHOUT PRICES
Rationing – A system under which a
government agency decides
everyone’s fair share
Ration Coupon – A ticket or receipt
that allows the holder to purchase a
certain amount of the product
Used during wartime
Problems w/o prices



Fairness
High Administrative Costs
Diminished Incentives
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Efficient Allocation MC = MB
MC = Productive Efficiency (Producer) (S Slope)

Productive Efficiency
 Production of a particular good in the least costly way
 Making available more valuable resources to produce other
goods

Supply reflects the marginal cost (MC)
MB = Allocative Efficiency (Consumer) (D Slope)

Allocative Efficiency
 Particular mix of goods and services most highly valued by
society
 Assignment of certain resources for the production of these
goods


Demand reflects the marginal benefit (MB) based on utility
Equilibrium MB=MC and thus allocative efficiency
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