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SUPPLY AND DEMAND
CH 4 SEC 2
CH 5 SEC 1
CH 6 SEC 2
Chapter 4 Section 2
The Law of Demand
I. Explain the causes of a change
in quantity demanded.

A.
Microeconomics

Branch of economics that deals with
behavior and decision making by small
units such as an individual or business.
3
I. Explain the causes of a change
in quantity demanded.

B.
Demand


C.
Combination of desire, ability, and
willingness to buy a product.
Law of Demand



The demand for an economic product
varies inversely with its price.
When prices goes up, demand goes down
When prices go down, demand goes up
4
What is a demand schedule?
The numerical representation of the inverse relationship
between price and quantity.
Price per pair of jeans
A
B
C
D
E
F
$60
$50
$40
$30
$20
$10
Quantity demanded
per year
0
1
2
3
4
5
Can you show me a model?
Demand for Jeans per year

A demand curve
$70

Price per pair of jeans
$60
$50
$40
$30
$20
D
$10
$0
0
1
2
3
4
Quantity of jeans demanded per year
5

the graphic
representation of
the inverse
relationship
between price and
quantity
demanded
a demand
schedule that has
been graphed
I. Explain the causes of a change
in quantity demanded.

D.
Change in the quantity demanded



A change in the quantity of the product
purchased in response to a change in
price.
Move from one point on the demand curve
to a new point on the same demand
curve.
Income Effect and Substitution Effect
7
What is the difference between
demand and quantity demanded



A quantity
demanded is
determined by price
A change in price
will cause a change
in quantity
demanded
Graphically, it is a
movement from one
point on the curve
to another
I. Explain the causes of a change
in quantity demanded.

D.
Change in the quantity demanded


Income Effect
 Change in quantity demanded because
of a change in the consumer’s real
income due to a change in price.
Substitution Effect
 Change in quantity demanded because
of a change in the relative price of the
product.
9
II. Describe the factors that could
cause a change in demand.

A. Change in demand




Consumers demand different amounts at
every price, causing the demand curve to
shift to the left or the right
Demand increases – shift right
Demand decreases – shift left
Income, tastes, related products
10
Well, what is a change in
demand?

Price


D3
D2
D1

0
Quantity
Demand is the whole
curve.
It is determined by the
five non-price
determinants.
A change in one of
those will cause a
change in demand.
Graphically, it is a shift
of the entire curve
II. Describe the factors that could
cause a change in demand.

A. Change in demand

Consumer Income
 If income increases, you buy more
 If income decreases, you buy less

Consumer Taste
 If you prefer something, you buy more
 If you dislike something, you buy less
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II. Describe the factors that could
cause a change in demand.

A. Change in demand

Prices of related products
 Substitutes
 Products that can be used in place of
other products – Coke vs. Pepsi
 Complements
 Products that tend to be used
together – Coffee and Cream
13
III. Understand diminishing
marginal utility.

A. Marginal Utility


Extra usefulness or satisfaction from
acquiring one more unit of a product.
B. Diminishing Marginal Utility

The more units of a certain economic
product a person acquires, the less eager
that person is to buy more.
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Chapter 5 Section 1
The Law of Supply
I. Understand the meaning
and concept of supply.

A. Supply


Schedule of quantities offered for sale at
all possible prices in a market.
B. Law of Supply



Economic principle stating that the
quantity supplied varies directly with its
price
Price goes up, supply goes up
Price goes down, supply goes down
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II. Explain difference between
supply schedule and curve.

C. Supply Schedule


Quantity demand on the x axis - Price per
unit on the y axis. Points to be plotted.
D. Supply Curve

Slopes upward and to the right.
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Supply Schedule
A
B
C
D
E
F
Price per pair of
Quantity
jeans
supplied per year
$60
5
$50
4
$40
3
$30
2
$20
1
$10
0
Can you show me a model?

Supply of Jeans per Year
$70

Price per pair of jeans
$60
$50
$40
$30
$20
$10

$0
0
1
2
3
4
Quantity supplied per year
5
A supply curve
The graphic
representation of
the direct
relationship
between price and
quantity supplied.
It is a supply
schedule that has
been graphed
III. Explain change in quantity
supplied.

A.
Change in the quantity supplied

Quantity supplied
 Amount that producers bring to the
market at any one price.

Change in the quantity supplied
 Change in amount offered for sale in
response to a change in price.
 Move from one point on the supply
curve to a new point on the same
supply curve.
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What is the difference between
supply and quantity supplied?

S
Price
P2

P1

0
Q1
Quantity
Q2
Quantity supplied is
determined by
price.
A change in price
will cause a change
in quantity supplied.
Graphically, it is a
movement from one
point on a supply
curve to another.
IV. Specify the reasons for a
change in supply.

A. Changes in supply




Producers offer different amounts of
products for sale at all possible prices in
the market.
Supply increases – shift right
Supply decreases – shift left
Number of reasons for shifts
22
So, what’s the story on changes
in supply?
S2




Supply is the whole
curve.
It is determined by the
five non-price
determinants of supply.
A change in one of
those will cause a
change in supply
Graphically, it is a shift
of the curve
S1
Price
S3
0
Quantity
IV. Specify the reasons for a
change in supply.

A. Changes in supply




1) Costs of Inputs – what its takes to
make the product
2) Productivity - efficiency increases
supply
3) Technology – can be good or bad
4) Number of sellers – competition
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IV. Specify the reasons for a
change in supply.

A. Changes in supply

5) Taxes and Subsidies
 Taxes increase the costs to make the
product
 Subsidies are government payments
to an individual or business to
encourage or protect a certain type of
economic activity.
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IV. Specify the reasons for a
change in supply.

A. Changes in supply

6) Expectations – if a supplier thinks
prices are going up
they will withhold
supply.

7) Government regulations – restricts
supply.
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Chapter 6 Section 2
How Prices are Determined
I. Understand how prices are
determined in competitive markets.

A. The Adjustment Process

1) Moves toward market equilibrium
 Situation in which prices are relatively
stable and the quantity supplied is
equal to quantity demanded.
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Demand and Supply
Demand and Supply for Jeans per year
Price per pair of jeans
$70
S
$60
$50
Equilibrium
$40
Pe
$30
$20
D
$10
$0
0
1
2
Qe
3
4
Quantity of jeans per year
5
6
I. Understand how prices are
determined in competitive markets.

A. The Adjustment Process

2) Surplus
 Situation in which the quantity supplied
is greater than the quantity demanded
at a given price.
 If there is a surplus, the price is likely to
decrease.
30
Surplus
Demand and Supply for Jeans per year
Price per pair of jeans
$70
$60
S
$50
$40
Qs>Qd
$30
Surplus
$20
D
Amount of the surplus
$10
$0
0
1
Qd
2
3
4
Qs
Quantity of jeans per year
5
6
I. Understand how prices are
determined in competitive markets.

A. The Adjustment Process

3) Shortage
 Situation in which the quantity
demanded is greater than the quantity
supplied at a given price.
 If there is a shortage, the price is likely
to increase.
32
Shortage
Demand and Supply for Jeans per year
Price per pair of jeans
$70
Amount of the shortage
$60
S
$50
Qd>Qs
$40
Shortage
$30
$20
D
$10
$0
0
1
Qs
2
3
Qd 4
Quantity of jeans per year
5
6
I. Understand how prices are
determined in competitive markets.

A. The Adjustment Process

4) Equilibrium Price
 The price that creates neither a shortage
nor a surplus.
 Intersection of supply and demand
curves.
 Price where q supplied is = q demanded
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II. Explain the importance of an
economic model.

A. Economic Model

A set of assumptions that can be used to
help analyze behavior and predict
outcomes.
 1) Listed in a table
 2) Illustrated with a graph
 3) Stated algebraically
35
Changes in Demand
Demand and Supply for Jeans per year
Price per pair of jeans
$70
$60
S
$50
Pe3
$40
Pe1
$30
Pe2
$20
D3
D2
$10
$0
0
1
Qe2
2
Qe1
3
Qe3
4
Quantity of jeans per year
D1
5
6
Changes in Supply
Demand and Supply for Jeans per year
S2
Price per pair of jeans
$70
S
$60
Pe2
$50
S3
$40
Pe1
$30
Pe3
$20
D
$10
$0
0
Qe2
1
2
Qe1 3
Qe3
4
Quantity of jeans per year
5
6
Changes in Demand and
Supply
Demand and Supply for Jeans per year
Price per pair of jeans
$70
S2
$60
S1
$50
$40
Pe
$30
$20
D2
D1
$10
$0
0
1
Qe2
2
Qe1
3
4
Quantity of jeans per year
5
6
Changes in Demand and
Supply
Demand and Supply for Jeans per year
Price per pair of jeans
$70
S2
$60
Pe2
$50
S1
$40
Pe1
$30
D2
$20
D1
$10
$0
0
1
2
Qe1 Qe2
3
4
Quantity of jeans per year
5
6