Chp 4 Demand & Supply

8/14/2019 Chp 4 Demand & Supply

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The English historian Thomas Carlyleonce said:

Teach any parrot thewords supplyand demand

and youve got an

economist.


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Demandmeans the willingness andcapacity to pay.

Prices are the tools by which the marketcoordinates individual desires.


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Demand is the amount of a product thatpeople are willing and able to purchase ateach possible price during a given period

of time.

The quantity demand is the amount of aproduct that people are willing and able topurchase at one, specific price.


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Law of demand there is an inverserelationship between price and quantitydemanded. Quantity demanded rises as price falls, other

things constant. Quantity demanded falls as prices rise, other

things constant.


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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 demand table assumes all thefollowing:

As price rises, quantity demanded declines. Quantity demanded has a specific time

dimension to it.

All the products involved are identical in shape,size, quality, etc.


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The schedule assumes that everything else isheld constant.

You plot each point in the demand table on agraph and connect the points to derive thedemand curve.

The demand curve graphically conveys thesame information that is on the demand table.


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Pri

ce

perDVD

s(in

dollars

)

A Demand

Curve

Quantity of DVDs 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

ABC

DE

A Demand Table

DVD rentals

demandedper week

$0.50

1.00

2.003.004.00

986

42

Demandfor

DVDs

G


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D

Price( p

eru

nit)

0

Quantity demanded (per unit of time)

PA

QA

A


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Other things constantplaces a limitationon the application of the law of demand. All other factors that affect quantity demanded

are assumed to remain constant, whether theyactually remain constant or not.

Other things constantplaces a limitation on theapplication of the law of demand.

These factors may include changing tastes,prices of other goods, income, even the

weather.


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Demand refers to a schedule ofquantities of a good that will be boughtper unit of time at various prices, otherthings constant.

Graphically, it refers to the entire

demand curve.

Shifts in Demand VersusMovements Along a DemandCurve


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Quantity demandedrefers to a specific

amount that will be demand per unit oftime at a specific price.

Graphically, it refers to a specificpoint on the demand curve.



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A movement along a demand curve isthe graphical representation of theeffect of a change in price on thequantity demanded.



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A shift in demandis the graphical

representation of the effect of anythingother than price on demand.



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D1

Change in quantity demanded(a movement along the curve)

B

0

Price(

peru

nit)

Quantity demanded (per unit of time)100

$2

$1

200

A


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D0

D1

Price(

peru

nit)

Quantity demanded (per unit of time)100

$2

$1

200

B A

Change in demand(a shift of the curve)

250


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TastesTastes

IncomeIncomeNumber of buyersNumber of buyers

ExpectationsExpectationsPrices of related goodsPrices of related goods


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Shift factors of demand are factors thatcause shifts in the demand curve: Society's income.

The prices of other goods.

Tastes. Expectations.

Number of Buyers

Taxes on subsidies to consumers.


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An increase in income will increasedemand for normal goods.

Normal goods: Goods for which demandgoes up when income is higher and forwhich demand goes down when income is

lower.An increase in income will decrease

demand for inferior goods. Inferior goods: Goods for which demand

tends to fall when income rises.


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When the price of a substitute good falls,

demand falls for the good whose pricehas not changed.

Substitutes: Goods that can serve asreplacements for one another:

When the price of a complement goodfalls, demand rises for the good whoseprice has not changed.

Complements, complementary goods:Goods that go together:


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A market demand curve is the horizontalsum of all individual demand curves. This is determined by adding the individual

demand curves of all the demanders. Sellers estimate total market demand for their

product which becomes smooth and downwardsloping curve.


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Taxes levied on consumers increase thecost of goods to consumers, therebyreducing demand.

Subsidies have an opposite effect.


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There is a direct relationship betweenprice and quantity supplied. Quantity supplied rises as price rises, other

things constant.

Quantity supplied falls as price falls, otherthings constant.


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The law of supply is accounted for by twofactors:

When prices rise, firms substituteproduction of one good for another.

Assuming firms costs are constant, ahigher price means higher profits.

Not in your book but something to think about!


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

The supply curve slopes upward to theright.

The slope tells us that the quantity

supplied varies directly in the samedirection with the price.


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S

A

Quantity supplied (per unit of time)

0

Price(per

unit)

PA

QA


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Movement along a supply curve

Shift of a supply curve


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Change in quantitysupplied (a movementalong the curve)

Price

(per

unit)


S0

$15A

1,250 1,500

B


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Price

(per

unit)


S0

Shift in Supply

(a shift of the curve)

S1

$15A B

1,250 1,500


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Other factors besides price affect howmuch will be supplied: Prices of inputs used in the production of a

good.

Technology.

Suppliers expectations.

Taxes and subsidies.


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Prices of RelatedGoods and Services

Number

Of

Producers

Expectations

Of

Producers

Technology

And

Productivity

Resource

Prices

Supply


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The market supply curve is derived byhorizontally adding the individual supplycurves of each supplier.


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When taxes go up, costs go up, andprofits go down, leading suppliers toreduce output.

When government subsidies go up, costs

go down, and profits go up, leadingsuppliers to increase output.


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Equilibrium is a concept in whichopposing dynamic forces cancel eachother out.

Equilibrium The condition that existswhen quantity supplied and quantitydemanded are equal. At equilibrium,

there is no tendency for price to change.


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Equilibrium price the price towardwhich the invisible hand drives themarket.

Equilibrium quantity the amount

bought and sold at the equilibriumprice.


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When the market is not in equilibrium,

you get either excess supply or excessdemand, and a tendency for price tochange.


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Excess demand a shortage, thequantity demanded is greater thanquantity supplied

Prices tend to rise. Excess supply a surplus, the quantity

supplied is greater than quantity

demanded Prices tend to fall.


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A

PriceperD

VD

$5.00

4.00

3.50

3.00

2.50

2.00

1.50

1.00

S

D

Quantity of DVDs supplied and demanded

C

Excess demand

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

Excess supply

E


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P

rice

(perD V

Ds

)

A

S0

Quantity of DVDs (per week)

$2.50

2.25

0 98 10

Excess demand

D1D0

B


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A

Pr i

ce(p

erD

VDs

)

Quantity of DVDs (per week)

$2.50

2.25

0 98 10

D0

S1S0

C

B Excess demand


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If both the demand curve and supply curvemove to the left, we can predict:

1. price will fall, but we cannot predictquantity.

2. price will rise, but we cannot predictquantity.

3. quantity will rise, but we cannot predict

price.4. quantity will fall, but we cannot predict

price.


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Price

QuantityQ1Q2 Q3


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Suppose that both the price of gasoline andthe amount of gasoline sold decline. Whichof the following would account for this?

1. Ashift left of the demand curve, but no

change in the supply curve2. A shift right of the demand curve, but no

change in the supply curve

3. A shift left of the supply curve, but no

change in the demand curve4. A shift right of the supply curve, but no

change in the demand curve


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Price

QuantityQ1Q2

P2

P1

Chp 4 Demand & Supply

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