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Price
Supply
Pe
Supply & Demand:
the basics
Demand
Quantity
Qe - Dr. D. Foster
W.A. Franke College of Business
Price
Demand = Consumers
Law of Demand: Supply
All else equal,
the quantity demanded of a good, that consumers
are willing to buy and able to pay for,
varies inversely with its price.
Pe
Supply = Producers
Supply Relationship:
All else equal,
Demand
the quantity supplied of a good, that producers are
willing to sell and able to produce,Quantity
varies directly with its price.
Qe
Demand
Price
Price
Pe
Supply
A change in the price
of the good
will cause a movement along the
curve:
Change in Quantity Demanded
(ΔQD)
Demand
Qe
Quantity
Quantity
Demand
Price
A change in some other relevant
factor of demand
for the good
Supply
will cause a shift in the curve:
Price
Change in Demand (ΔD)
Increase
in
Demand
Pe
Decrease
in
Demand
D2
Qe
D1
Demand
D3
Quantity
Quantity
Supply
Price
Price
Supply
A change
in the price
of the good will cause
a movement along the
curve:
Pe
Change in Quantity
Supplied
(ΔQS)
Demand
Qe
Quantity
Quantity
Supply
Price
Price
A change in some other
relevant factor of supply
Supply
for the good
will cause a
shift in the curve:
Decrease
in Supply
Change in Supply (ΔS)
Pe
Increase
in Supply
S3
Demand
S1
S2
Qe
Quantity
Quantity
Price
Factors that affect Demand
• Income
Supply
• Tastes and Preferences
• Expectations
• Others (price of substitute/complement goods;
size of market)
Pe
Factors that affect Supply
• A change in the costs of production
• A change in technology
Demand
• A changes in taxes/subsidies/restrictions
• Others (price of other goods; expectations;
Quantity
size of market ).
Qe
Price
Putting
Demand & Supply Together
Price
Supply
At P3 a
shortage will
drive up
prices.
P1
Pe
Supply
At P1 a surplus
will drive
down prices.
P2
P3
Q1 Q2 QQ3
e
At P2 the
market is in
Demand
Demand
equilibrium.
Quantity
Quantity
Price
Price Controls - Ceilings
Price
Supply
Supply
A price ceiling is a
maximum (legal)
price.
Pe
To
Pebe “effective” it
must be set below Pe
P*
Demand
What problem does
this cause?
DemandQuantity
How is it resolved?
QS
Qe
QD
Quantity
Qe
Price
Price Controls - Floors
Supply
Price
Supply
A price floor is a
minimum (legal)
price.
P*
Pe
To
Pebe “effective” it
must be set above Pe
Demand
What problem does
this cause?
Demand
How is it resolved?
Quantity
QD
Qe
Qe
QS
Quantity
Price
Supply
& Demand Problems
#1. In the market for oranges, what will
happen if
Supply
there is great weather in Florida and California?
Price
Supply
Pe
Pe
Demand
Demand
Quantity
Qe
Qe
Quantity
Price
Supply
& Demand Problems
#1. In the market for oranges, what will
happen if
Supply
there is great weather in Florida and California?
Costs fall = supply increases
price falls & output rises
Price
Supply
Pe
New Supply
Pe
New Price
Demand
Demand
Quantity
Qe New
Quantity
Qe
Quantity
Price
Supply
Pe
Supply & Demand:
the basics
Demand
Quantity
Qe - Dr. D. Foster
W.A. Franke College of Business