Demand Chapter 2 Finals

7/31/2019 Demand Chapter 2 Finals

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Chapter 2


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Buyers or Consumers are sometimescalled demanders.

Consumers are said to demandproducts in the market place.Demandrefers to the consumption

behavior of buyers in the market.

Demandalso means the willingness topay of consumers at various prices andquantities.


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Prices are the tools by

which the market

coordinates individualdesires.


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Quantity demanded rises as price falls,other things held constant (such asincome or the prices of competitiveproducts).Quantity demanded falls as prices rise,

other things constant.

Therefore, there is an inverse ornegative relationship between price andquantity demanded.


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What accounts for the law of demand?

People tend to substitute for goodswhose price has gone up


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The demand curve is the graphicrepresentation of the law of demand.

The demand curve slopes downward

and to the right.

As the price goes up, the quantity

demanded goes down.


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The slope tells us that quantity demanded variesindirectlyin the opposite directionwith price.

The slope of the demand curve is negative

because the relationship between price andquantity is inverse.

A simple equation of demand in slope-interceptform is

Qd = a - mP

Slope is negative


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Other things constant means that all

other factors that affect the analysis

are assumed to remain constant,whether they actually remain constant

or not.

These factors may include changingtastes, prices of other goods, the

income of the buyers, even the

weather.


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D

Price

(perun

it)

0

Quantity demanded (per unit of time)

PA

QA

A


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Demand refers to a schedule ofquantities of a good that will be

bought per unit of time at various

prices, other things constant.

Graphically, demand refers to

the entire demand curve.


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Graphically, it refers to a specificpointon the demand curve.


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A movement along ademand curve is thegraphical representation of

the effect of a change inprice on the quantitydemanded.


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A shift in demand is the graphical

representation of the effect ofanything other than price on demand.

The original curve will move tothe right or to the left.


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0

D1

Change in quantity demanded(a movement along the curve)

B

Price

(peru

nit)

Quantity demanded (per unit of time)100

$2

$1

200

A


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D0

Price

(peru

nit)

Quantity demanded (per unit of time)100

$2

$1

200

A

D1

Change in demand(a shift of the curve in this

case a decrease in demand)

250

B


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Shift factors of demand

are those that cause shifts

in the demand curve tothe right or left.


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Shift factors of demand includebut are not

limitedto the following:

Society's income The prices of other goods

Tastes

Expectations


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A rise in income will increase demand

for goods.

When the prices of substitutegoods fall, you will consume less ofthe good whose price has not

changed. A change in taste will change

demand with no change in price.


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If you expect your income torise, you may consume more

now.

If you expect prices to fall inthe future, you may put offpurchases today.


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The demand table assumes all the following:

As price rises, quantity demanded

declines.

Quantity demanded has a specific timedimension to it.

All the products involved are identical in

shape, size, quality, etc.

The schedule assumes that everything

else is held constant.


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Plot each point in the demand table ona graph and connect the points toderive the demand curve.

The demand curve graphically conveysthe same information that is on thedemand table.

The curve represents the maximumprice that you will for various quantitiesof a goodyou will happily pay less.


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Price

percassett

e

(in

do

llars)

A Demand

Curve

Quantity of cassettes demanded(per week)

1 2 3 4 5 6 7 8 9101112

13

$6.00

5.00

4.00

3.00

2.00

1.00.50

0

3.50

E

D

C

BFA

Price per

cassette

A

B

C

D

E

A Demand Table

Cassette

rentalsdemandedper week

$0.50

1.00

2.003.004.00

9

8

6

4

2

Demandfor

cassettes


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A market demand curve is the

horizontal sum of all individual

demand curves.The market demand curve is

determined by adding the

individual demand curves of allthe demanders.


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Real world sellers do not add upindividual demand curves.

They estimate total marketdemand for their product whichbecomes smooth and downwardsloping curve.


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The demand curve is downward sloping for

the following reasons:

At lower prices, existingdemanders buy more.

At lower prices, newdemanders enter the market.


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(1)Price percassette

$.0.501.001.502.002.503.003.504.00

(2)Alicesdemand

(3)Brucesdemand

(2)Cathysdemand

(3)Marketdemand

98765432

65432100

11000000

16141197532

ABCDEFGH

Quantity of cassettes demanded per w

2

Cathy BruceAlice

D

A

C

E

F

G

$4.003.50

3.002.50

2.00

1.50

1.00

0.50

0Pricep

ercassette

(ind

ollars)

4 6 8 10 12 14 16

B


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Individuals control the factors of

production.

Factors of production are theresources or inputs, necessary toproduce goods or services.

Individuals supply factors ofproduction to intermediaries or

firms.


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The analysis of the supply of produced goods

has two parts:

An analysis of the supply of thefactors of production to firms.

An analysis of why firms transform

those factors of production intofinal goods and services.


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Quantity supplied rises as price rises, other

things constant.

Quantity supplied falls as price falls, other

things constant.Thus, there is a direct orpositive

relationship between price and quantity

supplied.


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The law of supply is accounted for by two factors:

When prices of their product rise,firms arrange their activities to supplymore of the good to the market,substituting production of that goodfor the production of other goods.

Assuming firms' costs are constant, a

higher price means higher profits. Or, assuming firms costs rise as

production increases, they must raiseprice to cover their cost increase.


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The supply curve is the graphic representationof the law of supply.

The supply curve slopes upward to the right.The slope tells us that the quantity supplied

varies directlyin the same directionwith theprice.

A simple equation of supple isQs = a + mP

Slope is positive


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Quantity supplied (per unit of time)

0

S

A

Price

(per

unit)

PA

QA


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Supply refers to a schedule ofquantities a seller is willing tosell per unit of time at various

prices, other things constant.


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If the amount supplied is affected by anythingother than a change in price, there will be ashift in supply.

Shift in supply -- the graphicrepresentation of the effect of achange in a factor other than priceon supply.


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Quantity supplied refers to aspecific amount that will be

supplied at a specific price.


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Changes in price causes changes inquantity supplied represented by a

movement along a supply curve.


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Price

(perunit)


S0

Shift in Supply(a shift of the curve in this case an

increase in supply)

S1

$15A B

1,250 1,500


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Change in quantitysupplied (a movementalong the curve)

Price

(perunit)


S0

$15A

1,250 1,500

B


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Shift factors of supply are those

factors that cause shifts in the entire

supply curve to the left or right.


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The following are shift factors of supply:

Changes in the prices of inputs used in

the production of a good Changes in technology

Changes in suppliers' expectations

Changes in taxes and subsidies


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Changes in the prices of inputs used in the

production of a good.

If costs go up, then profits go down,and the incentive to supply also goesdown.

If costs go up substantially, the firmmay even shut down.


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Technology makes costs go down, profits go up,

thus the incentive to supply also goes up.

This is especially true when technologyreplaces labor.


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If they expect prices to rise in the future,

suppliers may store today's production for an

expected windfall later.

If they expect prices to fall in thefuture, suppliers may sell off more

of their inventories today.


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If taxes go up, costs also go up, and profits go

down, leading suppliers to reduce output.

If government subsidies go up,costs go down, and profits go up,

leading suppliers to increaseoutput.


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To derive a supply curve from a supplytable, you plot each point in the supplytable on a graph and connect the

points.The supply curve represents the set of

minimum prices an individual seller

will accept for various quantities of agood.Competing suppliers entry into the

market places a limit on the price any

supplier can charge.


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Competing suppliers entry intothe market places a limit on the

price any supplier can charge.


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The market supply curve isderived by horizontally adding

the individual supply curves of

each supplier.


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QuantitiesSupplied

AB

C

D

E

FG

H

I

(1)

Price(in dollars)

(2)

Ann'sSupply

(5)

MarketSupply

(4)

Charlie'sSupply

$0.000.501.001.502.00

2.503.003.504.00

01

2

3

4

56

7

8

00

1

2

3

45

5

5

00

0

0

0

00

2

2

01

3

5

7

911

14

15

(3)

Barry'sSupply


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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Price

percassette(in

dollars)

Charlie Barry Ann

Quantity of cassettes supplied (per week)

$4.00

3.50

3.002.50

2.00

1.50

1.000.50

0

I

H

GF

E

D

CB

A

Market Supply

CA


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Supply and demand come

together to determineequilibrium quantity and

equilibrium price.


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Excess supply prices tend to fall if

quantity supplied is greater thanquantity demanded.

Excess demand prices tend to rise

if quantity demanded is greater thanquantity supplied.


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The larger the difference betweenquantity demanded and quantitysupplied, the greater the pressure for

prices to rise (if there is excessdemand) or fall (if there is excesssupply.

When quantity demanded equalsquantity supplied, prices have notendency to change.


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A

Price

percassette

(in

dollars) $5.00

4.00

3.50

3.00

2.50

2.00

1.50

1.00

S

D

Quantity of cassettes supplied and demanded(per week)

C

Excess demand

1 2 3 4 5 6 7 8 9 10 11 12

Excess supply

Excess supply

BE


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Equilibrium is a concept in which

opposing dynamic forces pushing

cancel each other out.

In supply and demand analysis,

equilibrium means that the

upward pressure on price is

exactly offset by the downward

pressure on price.


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Equilibrium price is the price towardwhich the invisible hand drives the

market. Equilibrium quantity is the amount

bought and sold at the equilibrium

price.


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A state of the worldit is acharacteristic of the staticmodel we use to examine the

world.Neither good or badbutsimply a state in whichdynamic pressures offset eachother.Equilibrium exists at a


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Consumer surplus the distance between

the demand curve and the price thedemander pays is net benefit to consumers.

Producer surplus if a producer receivesmore than the price he would be willing to

sell it for, he receives a net benefit


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What's good about equilibrium is

that it makes the combination ofconsumer and producer surplus as

large as it can be.

Markets allow trade, therebyleading to an increase in the

combination of consumer and

producer surplus.


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Price

Supply

Demand

Quantity

0

$1098

76543

21

10987654321

ProducerSurplus

Consumer Surplus

LostSurplus


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End of Chapter 2

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Demand Chapter 2 Finals