# CH 4: Supply and Demand

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1 CH 4: Supply and Demand

2 Demand The law of demand states that the quantity of a good demanded is inversely related to the good s price In other words: Quantity demanded rises as price falls Quantity demanded falls as price rises

3 Demand Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices

4 P The Demand Curve A demand curve is the graphic representation of the relationship between price and quantity demanded The demand curve is downward sloping D Q As price increases, quantity demanded decreases

5 Demand vs. Quantity Demanded Demand refers to the entire demand curve Quantity demanded tells us how much will be bought at a specific price

6 Demand vs. Quantity Demanded A change in price changes quantity demanded this refers to a movement along the demand curve A change in anything other than price changes the entire demand curve this causes a shift in demand (a new demand curve)

7 Shifts in Demand vs. Movement Along a Demand Curve P \$12 \$8 B A A change in price causes a movement along the demand curve D 1 Q

8 Demand Shift Factors 1. Consumer income: an increase in income leads to buying more normal goods and buying fewer inferior goods When consumer income increases, they demand more normal goods Examples: new car, LCD TV, etc.

9 Demand Shift Factors When consumer income increases, they demand less inferior goods Possible examples: used books, offbrands, potatoes, corn

10 Demand Shift Factors 2. Market size/population: if the number of consumers increases, or decreases, it also affects the market size Example: a significant increase in population in the Southwest will increase demand for housing Example: A decrease in population in a city would decrease demand for housing

11 Demand Shift Factors 3. Consumer tastes and preferences: when a good/service is popular, consumers demand more of it at all prices When the product becomes less popular, consumers demand less of it

12 Demand Shift Factors Example: If turkey burgers become more popular because they are healthier, demand for turkey burgers will increase Example: If skateboarding becomes less popular, the demand for skateboards will decrease

13 Demand Shift Factors 4. Consumer expectation of price: If consumers believe the price of a good will increase in the future, they consume it now If consumers believe the price of the good will be decrease in the future they will wait to consume it

14 Demand Shift Factors Example: If you believe the price of a DVD will increase in the future, you will buy it now shifting demand to the right (an increase in demand) Example: If you believe the price of shoes will decrease in the future, you will buy them later shifting demand to the left (a decrease in demand)

15 Demand Shift Factors 5. Substitute goods: goods and services that can be used in place of each other If the price of a substitute good drops, people will buy that good and not the original item

16 Demand Shift Factors Example: The price of Kroger brand cereal drops so we consume that rather than the higher priced name brand The demand for Kroger cereal increases and the demand for name brand cereal decreases

17 Demand Shift Factors 6. Complementary goods: goods that are used together An increase in the demand for one good increases the demand for the complementary good Example: An increase in the demand for hamburgers increases the demand for ketchup

18 Drawing the Graph: An Increase in Demand P S 1 P P 2 P 1 Q D 1 D 2 Q 1 Q 2 Q

19 Drawing the Graph: A Decrease in Demand P S 1 P P 1 P 2 Q D 2 D 1 Q 2 Q 1 Q

20 Individual and Market Demand Schedule Price per DVD Alice s demand + Bruce s demand + Carmen s demand = Market demand \$ \$ \$ \$

21 Individual and Market Demand Curves Market demand curve for DVDs per week P \$4.00 The market demand curve is the summation of all individual demand curves \$3.00 \$2.00 Market demand for DVDs \$1.00 CARMENBRUC E 2 ALICE Q

22 Supply

23 Supply The law of supply states that the quantity of a good supplied is directly related to the good s price In other words: Quantity supplied rises as price rises Quantity supplied falls as price falls

24 Supply The law of supply occurs because: When prices rise, firms substitute production of one good for another Assuming firm s costs are constant, a higher price means higher profit

25 The Supply Curve A supply curve is the graphic representation of the relationship between price and quantity supplied P S The supply curve is upward sloping Q As price increases, quantity supplied increases

26 Shifts in Supply vs. Movement Along a Supply Curve Supply: schedule of quantities a seller is willing to sell at various prices Quantity supplied: specific amount that will be supplied at a specific price (a point on the supply curve)

27 Shifts in Supply vs. Movements Along a Supply Curve A change in price changes quantity supplied this is represented by the movement along the supply curve A change in anything other than price changes the entire supply curve this causes a shift in supply (a new supply curve)

28 Shifts in Supply vs. Movement Along a Supply Curve P S A B A change in price causes a movement along the supply curve Q

29 Supply Shift Factors 1. Input costs: the price of the resources used to make products If the price of an input increases, supply decreases If the price of an input decreases, supply increases Example: If the price of peanuts, an input in cereal bars, goes up, supply of cereal bars decreases

30 Supply Shift Factors 2. Labor productivity: the amount of goods or services that a person can produce in a given time Specialized division of labor can allow more goods to be produced at a lower price Better-trained workers can produce more goods in less time Increased labor productivity results in an increase in supply

31 Supply Shift Factors 3. Technology: applying innovations to production Increases in technology/more efficient ways of producing goods always increase supply

32 Supply Shift Factors 4. Government action: can affect the costs of production positively and negatively Can be in the form of a tax or subsidy Taxes always decrease supply Example: An excise tax can be placed on goods to discourage the use of specific goods (such as alcohol and tobacco)

33 Supply Shift Factors Governments can also use subsidies Subsides always increase supply Example: If the government subsidies the cost of vaccines it makes them less expensive and increases supply

34 Supply Shift Factors 5. Producer expectation of price: based on if the producer expects the price of a product to rise or fall in the future If the producer expects the price to rise in the future, they will supply less now (this decreases supply) If the producer expects the price to be lower in the future, they will supply more now (this increases supply)

35 Supply Shift Factors 6. Number of producers/suppliers: an increase in the number of producers means more competition An increase in the number of producers in a market increases supply If a supplier leaves the market this decreases supply

36 Drawing the Graph: An Increase in Supply P S 1 S 2 P P 1 P 2 Q Q 1 Q 2 D 1 Q

37 Drawing the Graph: A Decrease in Supply P S 2 S 1 P P 2 P 1 Q Q 2 Q 1 D 1 Q

38 Individual and Market Supply Schedule Price per DVD Ann s Supply + Barry s supply + Charlie s supply = Market supply \$ \$ \$ \$

39 Individual and Market Demand Curves \$4.00 P Market supply curve for DVDs per week CHARLIE BARRY The market supply curve is the summation of all individual supply curves ANN \$3.00 \$2.00 Market supply for DVDs \$ Q

40 Equilibrium Equilibrium is a concept in which opposing dynamic forces cancel each other out Simply put, it is where supply equals demand (and vice versa)

41 The Interaction of Supply and Demand If there is an excess supply (surplus), quantity supplied is greater than quantity demanded If there is an excess demand (shortage), quantity demanded is greater than quantity supplied Prices adjust and tend to rise when there is excess demand and fall when there is excess supply to reach an equilibrium

42 Chapter Summary The law of demand states that the quantity demanded rises as price falls, other things constant The law of supply states that the quantity supplied rises as price rises, other things constant The laws of demand and supply hold true because people can substitute A change in quantity demanded (supplied), caused by only a change in the good s own price, is a movement along the demand (supply) curve A change in demand (supply) is a shift of the entire demand (supply) curve

43 Chapter Summary Factors that affect supply and demand other than price are called shift factors Important supply shift factors include price of inputs, technology, expectations, and taxes and subsidies Important demand shift factors include society s income, the price of other goods, tastes, expectations, and taxes and subsidies to consumers A market demand (supply) curve is the horizontal sum of all individual demand (supply) curves When quantity demanded equals quantity supplied at equilibrium, prices have no tendency to change

44 Chapter Summary When quantity demanded is greater than quantity supplied, prices tend to rise When quantity supplied is greater than quantity demanded, prices tend to fall When the demand curve shifts to the right (left), equilibrium price rises (declines) and equilibrium quantity rises (falls) When the supply curve shifts to the right (left), equilibrium price decline (rises) and equilibrium quantity rises (falls)