Download Demand and Supply

Demand and Supply
Krugman Section 2
Modules 5-7
Demand

demand is a schedule that shows the
various amounts of a product
consumers are WILLING and ABLE to
BUY at each specific price at a
specific time.

Demand Schedule: listing that shows
the # demanded at different prices
Demand Schedule for Donuts
Price
Quantity
$2
1
$1.50
5
$1.00
8
$.75
12
$.50
15
$.25
25
Law of Demand
 There
is an inverse relationship
between P & Q demanded
– If p , D 
– If p , D 
 Substitution
Effect: a lower price
gives an incentive to substitute the
lower-priced good for the higher
priced good
 Marginal
Utility: Extra satisfaction
from getting one more unit of a
product
 Diminishing
marginal utility: the
extra satisfaction we get from one
more unit begins to diminish
Demand Curve
 Always
Downward sloping—indicating
lower quantity demanded at higher
prices, higher quantities at lower
prices
 Change in PRICE reflects movement
along the curve = change in
quantity demanded
 If
a change in demand is NOT caused
by a change in PRICE, the entire
curve will shift = change in
demand
Determinants that affect demand
(other than price)
 Consumer
tastes
 # of buyers
 Income
 Prices of related goods
– Substitute goods
– Complementary goods
 Expectations
Demand Schedule for Donuts
Price
Quantity1
Quantity2
$2
1
3
$1.50
5
7
$1.00
8
12
$.75
12
20
$.50
15
25
$.25
25
35
Demand has increased so the curve has
shifted to the right.
Supply
 Supply
is a schedule that shows the
amount of a product a producer is
WILLING and ABLE to produce and
SELL at each specific price at a
specific time.
Law of supply
 Producers
will produce & sell more of
their product at a high P than at a
low P.
 There is a direct relationship in P & Q
supplied
– If P , S will 
– If P , S will 
Supply Curve
Supply Schedule for cakes
 Upward
sloping—
indicating higher
Qs supplied at
higher P, lower
Qs at lower P
P (Price)
Q
(Quantity)
$30
$25
$20
$15
$10
$5
25
20
18
14
10
1
 Change
in PRICE reflects movement
along the curve = change in quantity
supplied
 If
a change in supply is NOT caused
by a change in PRICE, the entire
curve will shift = change in supply
Determinants that affect supply
(other than price)
 Resource
prices***
 Technology
 Taxes (-) or subsidies (+)
 Price of related goods
 Expectations
 Number of sellers
Supply Schedule for cakes
Price
Q1
Q2
$30
$25
$20
$15
$10
$5
25
20
18
14
10
1
20
15
10
8
5
0
Market Equilibrium
 Quantity
supplied = quantity
demanded
 Prices above equilibrium = surplus of
supply
 Prices below equilibrium = shortage
of supply
 Market Clearing or Market Price is
another name for equilibrium
Graphs on Document Camera or
Board
Surplus
 Shortage
 Price ceiling
 Price floor
 Shifts
