Supply and Demand Model

AP EconomicsMs. LaRosa

What would you be willing to buy?

• How many bags of your favorite candy would you be willing to buy at each of the following prices over one-week?– $1– $2.50– $5

What is Demand?

• A schedule or 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 specific time.

Law of Demand

If all other things remain equal, the higher the price of a good, the less people will demand that good.

Is the Law of Demand a direct or inverse relationship?

Change in Quantity Demand (ΔQd)

• A movement along a given demand curve caused by a change in demand price.

• Can only be caused by price

Change in Demand (ΔD)

• A shift of the demand curve caused by a change in one of the “demand determinants.”

Factors that Shift the Demand Curve

Demand Determinants:• Change in consumer tastes• Change in the number of buyers• Change in consumer incomes• Change in the prices of complementary and

substitute goods• Change in consumer expectations

Change in Quantity Demand vs. Change in Demand

Change in Quantity Demand (ΔQd)

• Change in price of good

• A single movement along the curve

• Is the result of a change in price

Change in Demand (ΔD)• Change in a factor other

than price

• A shift of the entire curve

• Results in a change of price

What would you do?

If you are selling a product and the sale price of the item increases, will you want to put more or less of the product on the market? Why?

What is Supply?

• A schedule or curve showing the various 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 time period

Law of Supply

As prices rises, the quantity supplied rises; as prices fall, the quantity supplied falls.

Does the law of supply have a direct or inverse relationship?

Change in Quantity Supply (ΔQs)

• A movement along a given supply curve caused by a change in supply price.

• Can only be caused by price

Change in Supply (ΔS)

• A shift of the supply curve caused by a change in one of the “supply determinants.”

Factors that Shift the Supply Curve

Supply Determinants:• Change in resource prices or input prices• Change in technology• Change in taxes and subsidies• Change in the prices of other goods• Change in producer expectations• Change in the number of supplies

Any factor that increases the cost of production decreases supply.

Any factor that decreases the cost of production increases supply.

Change in Quantity Supply vs. Change in Supply

Change in Quantity Supply (ΔQs)

• Change in price of good

• A single movement along the curve

• Is the result of a change in price

Change in Supply (ΔS)• Change in a factor other

than price

• A shift of the entire curve

• Results in a change of price

Which Curve Shifts?

• Market: hot dog buns– The price of flour rises.

• Which direction will the curve move?– The price of hot dogs drop.

• Which direction will the curve move?– There is a new technology that makes hot dog buns

faster.• Which direction will the curve move?

– Independence Day is approaching, and people want to have hot dogs at their BBQs.• Which direction will the curve move?

Equilibrium

Things to note:

• Qs= Quantity supplied• Qd= Quantity demanded

What is Equilibrium?

• Also known as “market equilibrium”

• Where the supply and demand curves meet.

• It is where the amount of goods are equal for both supply and demand

Qd=Qs

What does it mean to be in Equilibrium?

An economic situation is in equilibrium when no individual would be better off doing something

different.

What is Equilibrium Price?• Also known as “market-

clearing price”– Why?

• The price where the intentions of buyers and sellers meet

• What is the equilibrium price for the graph to the right?

What is Equilibrium Quantity?

• The quantity where the intentions of buyers and sellers meet

• What is the equilibrium quantity for the graph to the right?

What is Equilibrium?

Compare the supply and demand curves at P1. What can you tell me about the quantity of the good?

Surplus

• Also known as “excess supply”

• Occurs when Qs > Qd

• Occurs when the price is above its equilibrium level

Compare the supply and demand curves at P1. What can you tell me about the quantity of the good?

Shortage

• Also known as “excess demand”

• Occurs when Qs < Qd

• Occurs when the price is below its equilibrium level

What is it a shortage or a surplus if the price of the good is $4?

What is it a shortage or a surplus if the price of the good is $2?

What about $1?

Bringing back down (or up!) the market price!

• Buyers and sellers naturally will reset the price back at equilibrium.

• Surplus: Price willing to accept is decreased on the sellers’ side

• Shortage: Price willing to pay is increased on the buyers’ side

So, what happens to equilibrium when we move the curves?

Increase in Demand

• Demand:

• Price:

• Quanity:

Decrease in Demand

• Demand:

• Price:

• Quanity:

Increase in Supply

• Supply:

• Price:

• Quanity:

Decrease in Supply

• Supply:

• Price:

• Quanity:

What happens if both curves move?

Both Curves Move in the Same Direction

• Supply increases; Demand increases– Equilibrium price indeterminant– Equilibrium quantity increases

• Supply decreases; Demand decreases– Equilibrium price indeterminant– Equilibrium quantity decreases

Curves Move in Opposite Directions

• Supply increases; Demand decreases– Equilibrium price decreases– Equilibrium quantity indeterminant

• Supply decreases; Demand increases– Equilibrium price increases– Equilibrium quantity indeterminant