Download Demand and Supply

Demand and Supply
Chapter 3
Competition
Provides consumers with alternatives
Competition by producers to satisfy
consumer wants underlies markets
which are characterized by demand and
supply
Demand
Relates the quantity
of a good that
consumers would
purchase at each of
various possible
prices over some
period of time
Quantity demanded


The quantity that
consumers would
purchase at a given
price
Ceteris paribus
 Holding all else
constant
Demand
Price Quantity
$4
600
$5
400
$6
350
$7
250
$6
Demand
5
350
400
Law of Demand
The quantity demanded of a good will
move inversely to the price of the good
As price increases, quantity demanded
decreases
As price decreases, quantity demanded
increases.
Inverse relationship leads to downward
sloping demand curve
Movement along demand
curve
Occur when price and only price
changes
Go from $6 to $4
Called movement along the demand
curve
Quantity demanded changes
Happens when ceteris paribus occurs

When we hold other things constant
Other things constant
“Assumptions”
Income
Price of related
goods
Tastes
Expected future
prices
When any of these
change then
DEMAND CHANGES
We shift the curve
Create a new
relationship to
quantity demand at
each and every price
Increase in Demand
At each and every price
more of the good is
demanded.
D2
$4
Price
$4
$5
$6
$7
Q1
600
400
350
300
Q2
750
500
450
400
D1
600
750
A shift occurs in the
Demand curve
Increase in Demand
Increase in
consumer income
More money
consumers have the
more they are
willing to pay for a
good
More units sold at
each and every price
Increase in Demand
Normal goods

Demand for these
goods varies directly
with income
Inferior Goods

Demand for these
goods varies
inversely with
income
Increase in Demand
Change in taste
If good becomes in
style then
consumers are
willing to buy more
of the good at any
price
Increase in Demand
Price of related
goods
Complements


Two goods that must
be consumed
together
Decrease in the price
of one will increase
demand for the other
Increase in Demand
Substitutes




Two goods that must
be consumed
separately
Coke and Pepsi
Gasoline and diesel
Increase in price of
one will cause an
increase in the
demand of the other
Increases in Demand
Demand will increase to the extent that
population increases
A change in consumer expectations
about future prices will shift demand in
the present
Decrease in Demand
At each and every price
Less of the good will be
demanded
Price
$4
$5
$6
$7
Q1
600
400
350
300
Q2
500
300
250
200
D1
4
D2
500
Demand curve shifts
600
Decrease in demand
Change in income



Income decreases
Consumers have less
money to spend and
buy less at each and
every price
Depends on inferior
or normal good
Decrease in demand
Change in taste


Something becomes
out of style
Consumers will buy
less at each and
every price
Decrease in demand
Complement

As price of one good
increases, demand
for the other good
decreases
Decrease in demand
Substitutes

As the price of one
substitute
decreases, the
demand for the
other will decrease
Supply
Relates the quantity of a good that will
be offered for sale at each of various
possible prices, over some period of
time, ceteris paribus
Quantity supplied: the quantity of that
will be offered for sale at a given price.
Law of Supply
Supply
There is a direct relationship
between the price of a good
and the quantity supplied
Upward sloping curve due to
Direct relationship
Price
Q1
As price increases, quantity
Supplied increases
$5
100
$6
200
$7
300
$8
400
As price decreases, quantity
Supplied decreases
Movement along Supply Curve
Caused by changes in price and only in
the price of the good
Move from one position on line to
another
4
3
100
150
Changes in Supply
Caused by a change in the other things
constant
At each and every price a new quantity
is supplied
Curve will shift
Increase in Supply
At each and every
price, more of the
good is supplied
7
Supply shifts to the
right
P
Q1
Q2
$5 100 150
$6 200 300
$7 300 400
$8 400 500
S1
S2
300
400
Other things constant
Resource prices
Technology
Number of sellers
Price of jointly
produced goods
Producer
expectations
Production
Restrictions
Increase in Supply
Resource prices
If the price of
resources such as
land, labor and
capital decreases,
supply increases
Increase in supply
Changes in
technology
Makes production
cheaper or easier
Increases supply
Increase in supply
Increase in the
number of sellers
will increase supply
Increase in Supply
Producers
expectations of
future prices
If we expect prices
to decline in the
future, increase
production today
Increase in Supply
Price of jointly
produced goods
If it rises then
supply increases
Price of beef rises,
causing the supply
of leather to
increase
Decrease in Supply
At each and every price less of the good
S2
is supplied
S1
Left shift
6
150
200
Decrease in supply
Decrease in number
of sellers
Increase in resource
prices
Strike or disaster
Price of substitute
rises
Price of jointly
produced product
falls
Producers expect
future prices to rise
Decrease in Supply
Production
restrictions


Natural disasters
Strikes
Equilibrium
When supply and demand meet in the
marketplace, a market price is created
There is only one price that clears the
market, meaning that the quantity
supplied equals the quantity demanded.
A situation in which there is no
tendency for either price or quantity to
change
Equilibrium
Where
Quantity Demanded = Quantity Supplied
One or only one equilibrium price
S
Pe
D
Qe
Equilibrium Surplus
Situation
If market price is above
equilibrium
Then surplus occurs
Qd < Qs
What happens?
Suppliers drop price to sell
inventory
Surplus: Qs > Qd
Price drops until we reach
equilibrium
S
Pa
Pe
D
Qd
Qs
Equilibrium  Shortage
At Pb, a price below
Equilibrium, Qd > Qs
We experience a shortage
Shortage : Qd > Qs
Consumers push the price
until we reach equilibrium
Market always moves
Toward equilibrium
S
Pe
Pb
D
Qs
Qe
Qd
Changes in Market Equilibrium
Caused by shifts in demand or supply
Equilibrium price not longer holds true
Market moves toward new equilibrium
point
Change in Supply
S1
Economy in Equilibrium
At P1 and Q1 (pt. A)
Resource prices drops
P1
Then supply shifts out
At old price, surplus
occurs so market price
is dropped by suppliers
New Eq. is lower price
And larger quantity
S2
A
P2
B
Q1
Q2
Government Intervention
When the market
failure occurs,
government enters
the economy
Price controls
Subsidies
Price controls
Government
artificially creates
the market price
Market will fail to
reach equilibrium
Shortage or surplus
occurs
Price Floor
Government sets
Price above equilibrium
Price.
Causes a surplus
Price cannot drop
S
Pf
Price floor
Pe
D
No market equilibrium
Surplus is permanent
Price floor – minimum
Legal price
Qd
Qe
Qs
Price Ceiling
Price ceiling – maximum
Legal price
If Pc is below Pe then
economy has a shortage
Price cannot rise and
Eliminate shortage
Shortage is permanent
Pe
Price
ceiling
Pc
Qs
Qe
Qd
Subsidies
Government pays
corporations


Not to produce
To reduce production
costs
Change in Demand
Economy in equilibrium
When demand shifts due
To change in income
S
At P1, we face a shortageP2
So market price increases
P1
To P2
D2
New Eq. is higher price and
higher quantity
D1
Q1
Q2