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ManagerialManagerialManagerialManagerial

ECONOMICSECONOMICSECONOMICSECONOMICS

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Demand & Supply Objectives

Describe a competitive market and think about aprice as an opportunity cost

Explain the influences on demand

Explain the influences on supply

Explain how demand and supply determine pricesand quantities bought and sold

Use demand and supply to make predictionsabout changes in prices and quantities

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Markets and Prices

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

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

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

The relative price of a goodthe ratio of its moneyprice to the money price of the next best alternativegoodis its opportunity cost.

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Demand

If you demand something, then you:

Want it,

Can afford it, and

Have made a definite plan to buy it.

Wants are the unlimited desires or wishes people havefor goods and services. Demand reflects a decisionabout which 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.

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What Determines Buying Plans?

The amount of any particular good or servicethat consumers plan to buy is influenced by

1. The price of the good,

2. The prices of other goods, 3. Expected future prices,

4. Income,

5. Population, and

6. Preferences.

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The Law of Demand

The law of demand states:

Other things remaining the same, the higherthe price of a good, the smaller is the

quantity demanded. The law of demand results from

a substitution effect

an income effect

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Substitution Effect and

Income Effect

Substitution effectwhen the relative price

(opportunity cost) of a good or service rises,people seek substitutes for it, so the quantitydemanded decreases.

Income effectwhen the price of a good orservice rises relative to income, people cannotafford all the things they previously bought, sothe quantity demanded decreases.

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Demand Curve and

Demand Schedule

The term demand refers to the entire

relationship between the price of the good andquantity demanded of the good.

A demand curve shows the relationshipbetween the quantity demanded of a good andits price when all other influences onconsumers planned purchases remain the same.

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Demand Curve for a Product

Price hike decreases thequantity demanded anda movement along thedemand curve.

A demand curve is a

willingness-and-ability-to-paycurve.

The smaller the quantity available,

the higher is the marginal willingness

to pay.

Willingness to pay measures

marginal benefit.

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A Change in Demand

When any factor that influences buying plans other thanthe price of the good changes, there is a change indemand for that good. The quantity of the good thatpeople plan to buy changes at each and every price, sothere is a new demand curve.

When demand increases, the quantity that people plan tobuy increases at each and every price so the demand curveshifts rightward.

When demand decreases, the quantity that people plan to

buy decreases at each and every price so the demand curveshifts leftward.

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Change in Demand: Prices of

Related GoodsA substitute is a goodthat can be used in placeof another good.

A complement is a goodthat is used in

conjunction with anothergood.

When the price ofsubstitute for CD-Rs risesor when the price of acomplement for CD-Rsfalls, the demand for CD-Rs increases. 12

Change in Demand

Expected future prices

If the price is expected to rise in the future, currentdemand increases and the demand curve shifts rightward.

Income

A normal good is one for which demand increases asincome increases. An inferior good is a good for whichdemand decreases as income increases.

Population

The larger the population, the greater is the demand.

Preferences

People with the same income may have differentpreferences.

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A Change in the Quantity Demanded

Vs. a Change in Demand.

When the price ofthe good changes andeverything elseremains the same,there is a change inthe quantitydemanded and amovement along thedemand curve.

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A Change in the Quantity Demanded

Vs. a Change in Demand

When one of theother factors that

influence buying planschanges, there is achange in demandand a shift of thedemand curve.

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Supply

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

Has the resources and the technology to produce it,

Can profit form producing it, and

Has made a definite plan to produce and sell it.

Resources and technologydetermine 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.

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What Determines Selling Plans?

The amount of any particular good or service thata firm plans to supply is influenced by

1. The price of the good,

2. The prices of resources needed to produce it,

3. The prices of related goods produced,

4. Expected future prices,

5. The number of suppliers, and

6. Available technology.

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The Law of Supply

The law of supply states:

Other things remaining the same, the higher theprice of a good, the greater is the quantity

supplied. The law of supply results from the general

tendency for the marginal cost of producing agood or service to increase as the quantityproduced increases (Chapter 2, page 35).

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

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Supply Curve and

Supply Schedule

The term supply refers to the entirerelationship between the quantity supplied andthe price of a good.

The supply curve shows the relationshipbetween the quantity supplied of a good and itsprice when all other influences on producersplanned sales remain the same.

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Supply Curve of a Product

A rise in the price, ceterisparibus, brings an increasein the quantity supplied anda movement along thesupply curve.

A supply curve is also aminimum-supply-price curve.

The greater the quantity produced,the higher is the price that a firmmust be offered to be willing toproduce that quantity.

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Change in Supply

When any factor that influences selling plans other thanthe price of the good changes, there is a change in supply

of that good. The quantity of the good that producers planto sell changes at each and every price, so there is a newsupply curve.

When supply increases, the quantity that producers planto sell increases at each and every price so the supplycurve shifts rightward.

When supply decreases, the quantity that producers planto sell decreases at each and every price so the supplycurve shifts leftward.

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Factors That Change Supply

Prices of productive resources

If the price of resource used to produce a good rises, theminimum price that a supplier is willing to accept forproducing each quantity of that good rises. So a rise in theprice of productive resources decreases supply and shifts thesupply curve leftward.

Prices of related goods produced

A substitute in production for a good is another good that canbe produced using the same resources. Goods arecomplements in production if they must be produced together.

The supply of a good increases and its supply curve shiftsrightward if the price of a substitute in production falls or if

the price of a complement in production rises.

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Factors That Change Supply

Expected future prices

If the price of a good is expected to fall in the future,current supply increases and the supply curve shiftsrightward.

The number of suppliers

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

Technology

Advances in technology create new products and lower thecost of producing existing products, so they increase supply

and shift the supply curve rightward.

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Change in Supply

An advance in thetechnology forproducing

recordable CDsincreases the supplyof CD-Rs and shiftsthe supply curve forCD-Rs rightward.

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A Change in the Quantity Supplied

Vs. a Change in Supply

When the price of thegood changes andother influences onselling plans remainthe same, there is achange in the quantitysupplied and amovement along thesupply curve.

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A Change in the Quantity Supplied

Vs. a Change in Supply

When one of theother factors thatinfluence selling planschanges, there is achange in supplyanda shift of the supplycurve.

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Market Equilibrium

Equilibrium is a situation in which opposing

forces balance each other. Equilibrium in amarket occurs when the price balances theplans of buyers and sellers.

The equilibrium price is the price at which thequantity demanded equals the quantity supplied.

The equilibrium quantity is the quantity boughtand sold at the equilibrium price.

Price regulates buying and selling plans.

Price adjusts when plans dont match.

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Market Equilibrium (Cont.)

Price as a Regulator

The figure illustratesthe equilibrium priceand equilibriumquantity in the marketfor CD-Rs.

If the price of a disc is$2, the quantitysupplied exceeds thequantity demanded andthere is a surplus of

discs.

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Market Equilibrium (Cont.)

If the price of a disc is $1,the quantity demandedexceeds the quantitysupplied and there is ashortage of discs.

If the price of a disc is$1.50, the quantitydemanded equals thequantity supplied andthere is neither ashortage nor a surplus of

discs.

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Market Equilibrium (Cont.)

Price Adjustments At prices above the

equilibrium, a surplusforces the price down.

At prices below theequilibrium, a shortageforces the price up.

At the equilibriumprice, buying plansselling plans agree andthe price doesntchange.

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Market Equilibrium (Cont.)

Because the price risesif it is below equilibrium,falls if it is above

equilibrium, and remainsconstant if it is at theequilibrium, the price ispulled toward theequilibrium and remainsthere until some eventchanges the equilibrium.

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Predicting Changes in Price and

Quantity A Change in Demand

An increase indemand shifts thedemand curverightward andcreates a shortage atthe original price.

The price rises andthe quantity suppliedincreases.

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Predicting Changes in Price and

Quantity (Cont.)A Change in Supply

An increase in supplyshifts the supply curverightward and creates asurplus at the originalprice.

The price falls andthe quantitydemanded increases.

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Predicting Changes in Price and

Quantity (Cont.)

A Change in Both Demandand Supply

A change both demandand supply changes theequilibrium price andthe equilibriumquantity but we needto know the relativemagnitudes of thechanges to predictsome of the

consequences.

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Predicting Changes in Price and

Quantity (Cont.)

Effects of a change inboth demand and supplyin the same direction

An increase in bothdemand and supplyincreases theequilibrium quantitybut has an uncertaineffect on theequilibrium price

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Predicting Changes in Price and

Quantity (Cont.)

Effects of a change in bothdemand and supply whenthey change in opposite

directions An increase in supply and

a decrease in demandlowers the equilibriumprice but has anuncertain effect on theequilibrium quantity.