DEMAND AND SUPPLY - mizu.lecture.ub.ac.id

3DEMAND AND SUPPLY

© 2012 Pearson Addison-Wesley


What makes the prices of oil and gasoline doublein just one year?

Will the price of gasoline keep on rising?

Are the oil companies taking advantage of people?

Some prices rise, some fall, and some fluctuate.

This chapter explains how markets determineprices and why prices change.


A market is any arrangement that enables buyers andsellers to get information and do business with each other.

A competitive market is a market that has many buyersand many sellers so no single buyer or seller can influencethe price.

The money price of a good is the amount of moneyneeded to buy it.

The relative price of a good—the ratio of its money priceto the money price of the next best alternative good—is itsopportunity cost.

Market and Prices


If you demand something, then you

1. Want it,

2. Can afford it, and

3. Have made a definite plan to buy it.

Wants are the unlimited desires or wishes people have forgoods and services. Demand reflects a decision aboutwhich wants to satisfy.

The quantity demanded of a good or service is theamount that consumers plan to buy during a particulartime period, and at a particular price.

Demand


The Law of DemandThe law of demand states:

Other things remaining the same, the higher the price of agood, the smaller is the quantity demanded; and

the lower the price of a good, the larger is the quantitydemanded.

The law of demand results from

Substitution effect

Income effect

Demand


Substitution EffectWhen the relative price (opportunity cost) of a good orservice rises, people seek substitutes for it, so thequantity demanded of the good or service decreases.

Income Effect

When the price of a good or service rises relative toincome, people cannot afford all the things theypreviously bought, so the quantity demanded of thegood or service decreases.

Demand


Demand Curve and Demand ScheduleThe term demand refers to the entire relationship betweenthe price of the good and quantity demanded of the good.

A demand curve shows the relationship between thequantity demanded of a good and its price when all otherinfluences on consumers’ planned purchases remain thesame.

Demand


Figure 3.1 shows a demand curve for energy bars.

Demand



A rise in the price, otherthings remaining the same,brings a decrease in thequantity demanded and amovement up along thedemand curve.A fall in the price, otherthings remaining the same,brings an increase in thequantity demanded and amovement down along thedemand curve.

Demand


Willingness andAbility to Pay

A demand curve is also awillingness-and-ability-to-pay curve.

The smaller the quantityavailable, the higher is theprice that someone iswilling to pay for anotherunit.

Willingness to paymeasures marginal benefit.

Demand


A Change in DemandWhen some influence on buying plans other than the priceof the good changes, there is a change in demand forthat good.

The quantity of the good that people plan to buy changesat each and every price, so there is a new demand curve.

When demand increases, the demand curve shiftsrightward.

When demand decreases, the demand curve shiftsleftward.

Demand


Six main factors that change demand are

The prices of related goods

Expected future prices

Income

Expected future income and credit

Population

Preferences

Demand


Prices of Related Goods

A substitute is a good that can be used in place ofanother good.

A complement is a good that is used in conjunction withanother good.

When the price of substitute for an energy bar rises orwhen the price of a complement of an energy bar falls, thedemand for energy bars increases.

Demand


Expected Future Prices

If the expected future price of a good rises, currentdemand for the good increases and the demand curveshifts rightward.

Income

When income increases, consumers buy more of mostgoods and the demand curve shifts rightward.

A normal good is one for which demand increases asincome increases.

An inferior good is a good for which demand decreasesas income increases.

Demand


Expected Future Income and CreditWhen expected future income increases or when credit iseasy to obtain, the demand might increase now.PopulationThe larger the population, the greater is the demand for allgoods.PreferencesPeople with the same income have different demands ifthey have different preferences.

Demand


Figure 3.2 shows anincrease in demand.

Because an energy baris a normal good, anincrease in incomeincreases the demandfor energy bars.

Demand



A Change in the QuantityDemanded Versus aChange in DemandFigure 3.3 illustrates thedistinction between achange in demand and achange in the quantitydemanded.

Demand



Movement Along theDemand Curve

When the price of the goodchanges and everythingelse remains the same, thequantity demandedchanges and there is amovement along thedemand curve.

Demand


A Shift of the DemandCurve

If the price remains thesame but one of the otherinfluences on buyers’plans changes, demandchanges and the demandcurve shifts.

Demand


If a firm supplies a good or service, then the firm

1. Has the resources and the technology to produce it,

2. Can profit from producing it, and

3. Has made a definite plan to produce and sell it.

Resources and technology determine what it is possible toproduce. Supply reflects a decision about whichtechnologically feasible items to produce.

The quantity supplied of a good or service is the amountthat producers plan to sell during a given time period at aparticular price.

Supply


The Law of SupplyThe law of supply states:

Other things remaining the same, the higher the price of agood, the greater is the quantity supplied; and

the lower the price of a good, the smaller is the quantitysupplied.

The law of supply results from the general tendency for themarginal cost of producing a good or service to increaseas the quantity produced increases (Chapter 2, page 35).

Producers are willing to supply a good only if they can atleast cover their marginal cost of production.

Supply


Supply Curve and Supply ScheduleThe term supply refers to the entire relationship betweenthe quantity supplied and the price of a good.

The supply curve shows the relationship between thequantity supplied of a good and its price when all otherinfluences on producers’ planned sales remain the same.

Supply


Figure 3.4 shows a supplycurve of energy bars.

A rise in the price of anenergy bar, other thingsremaining the same,brings an increase in thequantity supplied.

Supply



Minimum Supply PriceA supply curve is also aminimum-supply-pricecurve.As the quantity producedincreases, marginal costincreases.The lowest price at whichsomeone is willing to sellan additional unit rises.This lowest price ismarginal cost.

Supply


A Change in SupplyWhen some influence on selling plans other than the priceof the good changes, there is a change in supply of thatgood.

The quantity of the good that producers plan to sellchanges at each and every price, so there is a new supplycurve.

When supply increases, the supply curve shifts rightward.

When supply decreases, the supply curve shifts leftward.

Supply


The five main factors that change supply of a good are The prices of factors of production

The prices of related goods produced

Expected future prices

The number of suppliers

Technology

State of nature

Supply


Prices of Factors of Production

If the price of a factor of production used to produce agood rises, the minimum price that a supplier is willing toaccept for producing each quantity of that good rises.

So a rise in the price of a factor of production decreasessupply and shifts the supply curve leftward.

Supply


Prices of Related Goods Produced

A substitute in production for a good is another good thatcan be produced using the same resources.

The supply of a good increases if the price of a substitutein production falls.

Goods are complements in production if they must beproduced together.

The supply of a good increases if the price of acomplement in production rises.

Supply


Expected Future Prices

If the expected future price of a good rises, the supply ofthe good today decreases and the supply curve shiftsleftward.

The Number of Suppliers

The larger the number of suppliers of a good, the greateris the supply of the good. An increase in the number ofsuppliers shifts the supply curve rightward.

Supply


TechnologyAdvances in technology create new products and lowerthe cost of producing existing products.So advances in technology increase supply and shift thesupply curve rightward.The State of NatureThe state of nature includes all the natural forces thatinfluence production—for example, the weather.A natural disaster decreases supply and shifts the supplycurve leftward.

Supply


Figure 3.5 shows anincrease in supply.

An advance in thetechnology for producingenergy bars increases thesupply of energy bars andshifts the supply curverightward.

Supply



A Change in the QuantitySupplied Versus aChange in SupplyFigure 3.6 illustrates thedistinction between achange in supply and achange in the quantitysupplied.

Supply



Movement Along theSupply Curve

When the price of the goodchanges and otherinfluences on sellers’ plansremain the same, thequantity supplied changesand there is a movementalong the supply curve.

Supply


A Shift of the SupplyCurve

If the price remains thesame but some otherinfluence on sellers’ planschanges, supply changesand the supply curveshifts.

Supply


Equilibrium is a situation in which opposing forces balanceeach other. Equilibrium in a market occurs when the pricebalances the plans of buyers and sellers.

The equilibrium price is the price at which the quantitydemanded equals the quantity supplied.

The equilibrium quantity is the quantity bought and soldat the equilibrium price.

Price regulates buying and selling plans.

Price adjusts when plans don’t match.

Market Equilibrium


Price as a RegulatorFigure 3.7 illustrates theequilibrium price andequilibrium quantity.

If the price is $2.00 a bar,the quantity suppliedexceeds the quantitydemanded.

There is a surplus of6 million energy bars.

Market Equilibrium



If the price is $1.00 a bar,the quantity demandedexceeds the quantitysupplied.There is a shortage of9 million energy bars.

If the price is $1.50 a bar, thequantity demanded equalsthe quantity supplied.There is neither a shortagenor a surplus of energy bars.

Market Equilibrium


Price AdjustmentsAt any price above theequilibrium price, a surplusforces the price down.At any price below theequilibrium price, a shortageforces the price up.At the equilibrium price,buyers’ plans and sellers’plans agree and the pricedoesn’t change until someevent changes eitherdemand or supply.

Market Equilibrium


An Increase in DemandFigure 3.8 shows thatwhen demand increasesthe demand curve shiftsrightward.

At the original price, thereis now a shortage.The price rises, and thequantity supplied increasesalong the supply curve.

Predicting Changes in Price and Quantity



An Increase in SupplyFigure 3.9 shows thatwhen supply increasesthe supply curve shiftsrightward.

At the original price, thereis now a surplus.

The price falls, and thequantity demandedincreases along thedemand curve.




All Possible Changes inDemand and SupplyA change demand orsupply or both demandand supply changes theequilibrium price and theequilibrium quantity.



Change in Demand withNo Change in Supply

When demand increases,

there is a movement upalong the supply curve.

The equilibrium price risesand the equilibriumquantity increases.



When demand decreases,the equilibrium price fallsand the equilibriumquantity decreases.



Change in Supply withNo Change in Demand

When supply increases,

there is a movementdown along the demandcurve.

The equilibrium price fallsand the equilibriumquantity increases.



When supply decreases,

the equilibrium price risesand the equilibriumquantity decreases.



Increase in Both Demandand Supply

An increase in demand andan increase in supplyincrease the equilibriumquantity.

The change in equilibriumprice is uncertain because theincrease in demand raisesthe equilibrium price and theincrease in supply lowers it.



Decrease in Both Demandand Supply

A decrease in both demandand supply decreases theequilibrium quantity.

The change in equilibriumprice is uncertain becausethe decrease in demandlowers the equilibrium priceand the decrease in supplyraises it.



Decrease in Demand andIncrease in Supply

A decrease in demand andan increase in supply lowersthe equilibrium price.

The change in equilibriumquantity is uncertain becausethe decrease in demanddecreases the equilibriumquantity and the increase insupply increases it.



Increase in Demand andDecrease in Supply

An increase in demand and adecrease in supply raises theequilibrium price.

The change in equilibriumquantity is uncertain becausethe increase in demandincreases the equilibriumquantity and the decrease insupply decreases it.











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DEMAND AND SUPPLY - mizu.lecture.ub.ac.id