Chapter 3
Supply and Demand: In Introduction
Basic Economic Questions to Answer
What: variety and quantity How: technology For whom: distribution
To answer the questions:
Economic Systems:– Centrally Planned Economy– Free Market Economy– Mixed Economy
Market Economy
the allocation for resources is determined by supply and demand
Demand: the buying force Supply: the selling force
Demand: the definition
The quantity of a good or service consumers’ are willing and able to buy at various prices
willingness and ability to buy – willingness: need - necessity– want – desire– ability: purchasing power
Demand: the model
Variables: prices, quantity demanded Assumption: other things equal Hypothesis: (the law of demand)
– Other things equal, a higher price leads to a smaller quantity demanded and a lower price results in a larger quantity demanded
Forecast / test / accept – the law
Demand: key points
Demand is a relationship between quantity demanded and product price
Qd = f (P) – quantity demanded is a function of price – quantity demanded is determined by price
The law of demand: – Qd and P are negatively related
Demand Curve: downward sloping Market demand: the sum of individual
demand
Demand Curve:Change in Qd and The Law of Demand
Other things equal, higher price for a good leads people to demand a smaller quantity of the good.
Assumption: Other Things Equal
the other things: factors affecting D
– --price of related goods • complements vs. substitutes
– --income: normal vs. inferior– --preference– --expectations (prices, income, …)– --population– --others
Qd vs. D
Qd: a number, a corresponding point on the curve
Change in Qd: movement along a curve, caused by change in price only
D: a relationship, a curve Change in D: a shift of the entire curve,
caused by change in other things
An Increase in Demand
Movement Along the Demand Curve
vs. Shift of the Demand Curve
Shifts of the Demand Curve
Supply: the definition
The quantity of a good or service producers are willing and able to sell at various prices
willingness and ability to sell
willingness: profitability
ability: production capacity
Supply: the model
Variables: prices, quantity supplied Assumption: other things equal Hypothesis: (the law of supply)
– Other things equal, a higher price leads to a larger quantity supplied and a lower price results in a smaller quantity supplied
Forecast / test / accept the law
Supply: Key Points
Supply is a relationship between price and quantity supplied
Qs = f (P) – Quantity supplied is a function of price– quantity supplied is determined by price
The Law of Supply: Qs and P are positively related
Supply Curve: upward sloping Market supply: the sum of individual supply
The Supply Curve: change in Qs and the law of supply
Assumption: Other Things Equal
the other things:
factors affecting S
--prices of inputs
goods used to produce other goods
--price of related goods
goods that use the same resources
--technology
--expectations
--others
Qs vs. S
Qs: a number, a corresponding point on the curve
Change in Qs: movement along a curve, caused by change in price only
S: a relationship, a curve
Change in S: a shift of the entire curve, caused by change in other things
Movement Along the Supply Curve vs.
Shift of the Supply Curve
A Decrease in Supply
Shifts of the Supply Curve
The Market:
Equilibrium Change in D and impacts on Pe and Qe
Change in S and impacts on Pe and Qe
Market Equilibrium
Surplus
Shortage
Equilibrium and Shifts of the Demand Curve
Equilibrium and Shifts of the Supply Curve
Simultaneous Shifts of the Demand and Supply Curves
Effects of the “War on Drugs”
Change in D & S--price of related goods
complements vs. substitutes
--income: normal vs. inferior
--preference--expectations (prices,
income, …)--population--others
--prices of inputs (goods used to produce other goods)
--price of related goods (goods that use the same resources)
--technology
--expectations
--others