Demand and Supply

Institutions or mechanisms that bring together buyers (demanders) and seller (suppliers) of particular goods, services, or resources.

A schedule or a curve that shows the various amounts of a product that consumers are “willing and able” to purchase at each of a series of possible prices during a specified period of time.

Demand schedule – table Demand curve – graph

sloping downward

Price Quantity Demanded

Price

Quantity Demanded

All else equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.

There is a negative or inverse relationship.

1. Consistent with common sense.2. Diminishing marginal utility: successive units

of a particular product yield less & less satisfaction

INCOME EFFECT SUBSTITUTION EFFECT

A lower price increases the purchasing power of a buyer’s money income, enabling the buyer to purchase more of the product than they could buy before.

Higher prices has the opposite effect.

At a lower price buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive.

The product whose price has fallen is not “a better deal” relative to the other products.

This will include the quantities demanded by all consumers at each of the various possible prices.

You can have a market demand schedule and a market demand curve.

Determinants of demand:

Factors that can and do affect purchases

When these determinants change the demand curve will “SHIFT” to either the right or left.

A shift in the demand curve is called a change in demand

A change in quantity demanded is just a movement from one point to another point caused by a change in

Price only.A

B

Preferences (Taste)A favorable change in

consumer tastes for a product ---- a change that makes the product more desirable --- means that more of it will be demanded at each price.

Income For most products, a rise

in income causes an increase in demand --- Normal Good

Rising income can cause the demand of some goods to behave inversely---Inferior Goods

Neutral goods do not change with a change in income.

Normal goods

Inferior goods

Neutral Goods

Prices of Related Goods A change in the price of a

related good may either increase or decrease the demand for a product

Substitutes - Similar goods; when the price of one & the demand for the other move in the same direction

Complements - goods that are consumed together; when the price of one good & the demand for the other good move in opposite directions

substitutes

complements

Expectations Changes in consumer

expectations may shift demand

Freezing weather destroys much of Florida’s citrus crop

Workers fearful of losing their jobs may reduce their demand for vacation time.

1st round draft picks may splurge on houses & cars

Number of Buyers An increase in the number

of buyers in a market increases demand

A decrease in the number of buyers in a market decreases demand

Increase in life expectancy has increased the demand for medical care; retirement communities, and nursing homes

Baby boomers, etc.

Change in Demand is a shift of the entire demand curve to the right (increase) or to the left (decrease).

Occurs when there is a response to one of the determinants (pipen).

Change in Quantity Demanded is a movement along the curve due to a change in the price of the good demanded.

A schedule or curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period.

Supply schedule is the table of a individual producer.

Law of supply: as price rises, the quantity supplied rises; as price falls, the quantity supplied falls.

Graphical representation of the law of supply.

Price

Quantity Supplied

Resource PricesPrice of the resources

used to make the product

Higher Resource price raises production costs & the firm will supply LESS.

Lower resource price decreases production costs & the firm will supply MORE.

Prices of OTHER goods

Some suppliers can easily switch production lines to make other similar goods that may have found a better price.

TechnologyImprovements in

technology enable firms to produce goods with fewer resources.

Recent improvements in the fuel efficiency of aircraft engines have reduced the cost of providing passenger air service.

Taxes and Subsidies

Increase in a tax will increase production costs and reduce supply.

If gov’t subsidizes the production of a good, it in effect lowers the producers’ costs & increases supply.

ExpectationsChanges in expectations

about the future price of a product may affect the producer’s current willingness to supply that product.

Number of SellersAs more firms enter an

industry, the greater the market supply.

Conversely, the smaller the number of firms in the industry, the less the market supply.

Canada & U.S. have imposed restrictions on haddock fishing to replenish dwindling numbers.

Change in Supply

A change in the entire schedule and a shift of the entire curve.

Caused by a change in Rotten – the determinants of supply

Change in Quantity Supplied

A movement from one point to another point on the curve.

Caused by a change in the price of the product.

The place where supply and demand are equal.

Graphically, where the supply & demand curves intersect.

Surplus or excess supply: The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific price.

Supply

Demand

Surplus

Qs > Qd = surplus

Shortage or excess demand: The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular price.

Shortage

Qd > Qs = shortage

Price

Bushels of corn (thousands)

Demand

Supply$6

$5

$4

$3

$2

$10

2 3 4 5 6 7 8 9

---------------------------Equilibriumprice

Equilibrium quantity

Equilibrium Price is sometimes referred as market-clearing price.

The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent.

Changes in Demand Suppose that supply is

constant and demand increases

Raises equilibrium price and quantity

Suppose supply is constant & demand decreases

decreases equilibrium price and decreases quantity

Changes in Supply Suppose that demand is

constant & supply increases

Lower equilibrium price; greater quantity

Suppose that demand is constant & supply decreases

Higher price; less quantity

Change in Supply

Change in Demand

Effect on Equilibrium Price

Effect on Equilibrium Quantity

Increase Decrease Decrease Indeterminate

Decrease Increase Increase Indeterminate

Increase Increase Indeterminate Increase

Decrease Decrease Indeterminate Decrease