DEMAND AND SUPPLY

MARKETS ARE MADE OF BUYERS (DEMANDERS) AND SELLERS (SUPPLIERS)

DEMAND IS A CURVE THAT SHOWS VARIOUS AMOUNT (QUANTITY) OF A PRODUCT THAT

CONSUMERS ARE WILLING AND ABLE TO BUY AT A SPECIFIC POINT OF TIME

• (1) ALWAYS WILLING, NOT ALWAYS ABLE

• (2) PERIOD OF TIME MUST BE SPECIFIC BECAUSE IT PROVIDES CONTEXT

• IMMEDIATE SHORT RUN, SHORT RUN, LONG RUN – DEPENDS ON VARIABLE INPUTS

* SLOPE IS NOT CONSTANT(DEPENDENT ON DATA)

* AS PRICE DROPS, DEMAND GOES WAY UP

• DRAW THE GRAPH… MR. D

LAW OF DEMAND – THERE IS A NEGATIVE OR INVERSE RELATIONSHIP BETWEEN PRICE

AND QUANTITY DEMANDED

• AS PRICE FALLS, QUANTITY DEMANDED RISES• ASSUMPTIONS – OTHER THINGS BEING EQUAL AND WE IGNORE SUBSTITUTES

(1)CONSISTENT WITH COMMON SENSE – EX.) SALES

(2)BUYERS DERIVE LESS BENEFIT FOR EACH UNIT CONSUMED. DIMINISHING MARGINAL UTILITY ADDITIONAL UTILITY ONLY IF PRICE IS LOWER.

EX.) BURRITOS

(3) INCOME EFFECT AND SUBSTITUTION EFFECT

• LOWER PRICE INCREASES PURCHASING POWER OF BUYERS’ MONEY

• CAN BUY MORE

• LOWER PRICE MAKES OTHER PRODUCTS MORE EXPENSIVE

THERE ARE TWO TYPES OF MOVEMENT WITH DEMAND CURVES

CAN MOVE ALONG THE CURVE OR CAN SHIFT THE WHOLE CURVE

TO MOVE ALONG THE CURVE, THERE REQUIRES A CHANGE IN PRICE ∆P

TO SHIFT THE WHOLE CURVE, YOU HAVE TO LOOK TO DETERMINANTS OF DEMAND

DETERMINANTS OF DEMAND

•PREFERENCES•# OF BUYERS IN MARKET•CONSUMER INCOMES•PRICES OF RELATED GOODS•CONSUMER EXPECTATIONS

TASTES / PREFERENCES

FAVORABLE CHANGE IN CONSUMER TASTES

SHIFTS THE CURVE RIGHT OR LEFT DEPENDING ON THE REACTION

# OF BUYERS / SIZE OF MARKET

•WITH AN INCREASE OR DECREASE IN MARKET SIZE OR # OF BUYERS…

•DEMAND WILL SHIFT TO THE RIGHT OR LEFT

•MORE BUYERS, MORE DEMAND

•LESS BUYERS, LESS DEMAND

INCOME•USUALLY AS INCOME INCREASES, DEMAND INCREASES

•NORMAL GOODS – DEMAND VARIES DIRECTLY (POSITIVE RELATIONSHIP) WITH INCOME

• INFERIOR GOODS – DEMAND VARIES INVERSELY (NEGATIVE RELATIONSHIP) WITH INCOME

• SO DEPENDING ON THE GOOD AND MY SITUATION, DEMAND WILL EITHER INCREASE OR DECREASE

PRICES OF RELATED GOODS• DEMAND WILL SHIFT DEPENDING ON PRICES OF

RELATED GOODS

• SUBSTITUTE GOOD – SUBSTITUTE IN PLACE FOR ANOTHER EX.) BREAD FOR HOT DOG BUN

• GOOD 1 GOOD 2

• PRICE ꜛ DEMAND ꜛ

• PRICE ꜜ DEMAND ꜜCOMPLEMENTARY GOOD – USED TOGETHER EX.) ICE CREAM AND CONE

GOOD 1 GOOD 2PRICE ꜛ DEMAND ꜜPRICE ꜜ DEMAND ꜛ

CONSUMER EXPECTATIONS•WHAT PEOPLE EXPECT TO HAPPEN INFLUENCES BEHAVIOR TODAY

• IF YOU EXPECT THAT THE PRICE OF GAS IS GOING TO DOUBLE AT THE END OF THE WEEK…

•WHAT WOULD YOU DO TODAY?

REMEMBER…•CHANGE IN DEMAND SHIFTS THE WHOLE CURVE

•CHANGE IN QUANTITY DEMAND MOVES ALONG THE CURVE

TO THE PACKET!!!

SUPPLY

•A CURVE SHOWING VARIABLES AMOUNTS OF A PRODUCT THAT PRODUCERS ARE WILLING AND ABLE TO MAKE AVAILABLE FOR SALE DURING A PERIOD

(1) always willing, not always able(2) period of time must be specific because it provides context

Immediate short run, short run, long run – depends on variable inputs

LAW OF SUPPLY (MOVES)•AS PRICE RISES, THE QUANTITY SUPPLIED RISES

•AS PRICE FALLS, THE QUANTITY SUPPLIED FALLS• REMEMBER, FROM THE VIEWPOINT OF PRODUCERS

• DRAW THE GRAPH, MR. D

• MARKET SUPPLY IS DERIVED FROM INDIVIDUAL SUPPLY

• SUPPLY CURVE IS UPWARD (POSITIVE RELATIONSHIP)

• REFLECTS LAW OF SUPPLY

•DETERMINANTS (SHIFTS)• RESOURCE PRICES TECHNOLOGY

• TAXES + SUBSIDIES PRICES OF OTHER GOODS

• PRODUCER EXPECTATIONS # OF SELLERS

RESOURCE PRICES•HIGHER RESOURCE PRICES RAISE PRODUCTION COSTS

• PRICES OF RESOURCES SUPPLY

• PRICES OF RESOURCES SUPPLY

TECHNOLOGY

•ALLOWS PRODUCTION AT A LOWER COST OF INPUTS

• PRICE DROPS SUPPLY RISES

TAXES AND SUBSIDIES

•TAX = COSTS

•PRICE RISES SUPPLY DROPS

•SUBSIDIES = BENEFITS

•PRICE DROPS SUPPLY RISES

PRICES OF OTHER GOODS•SUBSTITUTION IN PRODUCTION

•SIMILAR GOODS AND HIGHER PRICES COULD ENTICE OR TURN OFF CONSUMERS

•OTHER GOODS -

•PRICES INCREASE SUPPLY INCREASE

PRODUCER EXPECTATIONS

•MUCH TRICKIER THEN CONSUMER EXPECTATIONS

•HARDER BECAUSE YOU ACTUALLY HAVE TO MAKE THE STUFF

• THINK ABOUT FARMERS AND MANUFACTURING

# OF SELLERS

•LIKE THE DEMAND DETERMINANT

• IF THE MARKET INCREASES

•THE SUPPLY INCREASES

EQUILIBRIUM QD = QS

• EQUILIBRIUM PRICE – THE PRICE WHERE THE INTENTION OF BUYERS AND SELLERS MATCH

• EQUILIBRIUM QUANTITY – THE QUANTITY DEMAND AND QUANTITY SUPPLY AT EQUILIBRIUM PRICE

• IT’S THE INTERSECTION OF DEMAND AND SUPPLY CURVES

• DRAW THE GRAPH MR. D

SURPLUS - EXCESS SUPPLY, NOT ENOUGH DEMAND ,PRICE STARTS HIGH AND WILL BE DRIVEN DOWNSHORTAGE – EXCESS DEMAND, NOT ENOUGH SUPPLY, PRICE STARTS LOW AND WILL BE DRIVEN UP

COMPETITION DRIVE…

PRODUCTIVE EFFICIENCY - PRODUCTION AT LEAST COST

- ALLOWS INPUTS TO BE FREED UP FOR OTHER THINGS

ALLOCATIVE EFFICIENCY- LOOKING FOR THE MIX OF G/S MOST VALUED BY A

SOCIETY

DEMAND REFLECTS MARGINAL BENEFITS

SUPPLY REFLECTS MARGINAL COSTS