demand and supply
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Demand and Supply
Chapter Objectives
• Explain the main influences on demand• Explain the main influences on supply• Use a model to show how prices are
determined by demand and supply• Make predictions about the price and quantity
changes using the demand and supply model
Demand and its Determinants
• If a person demands something, they– Want it,– Can afford it, and– Have made a definite plan to buy it.
• Wants are the unlimited desires or wishes that people have for goods and services.
Demand and its Determinants• The quantity demanded of a good or service is
the amount that consumers plan to buy in a given period at a particular price.
Demand• What determines buying plans?
– The price of the good– The prices of related goods– Income– Expected future prices– Population– Preferences
Demand
• The Law of Demand– Other things being equal, the higher the price of a
good, the lower is the quantity demanded.
• Reasons for the Law of Demand– Substitution effect• money price rise increases its relative price
– Income effect• cannot afford to buy as much of everything as before
rise in money price
Demand
• Demand Curve and Demand Schedule– Demand curves graphs the relationship between
the quantity demanded of a good and its price (ceteris paribus).
– Demand schedules list the quantities demanded at each different price (ceteris paribus).
Demand
a 1 9
b 2 6
c 3 4
d 4 3
e 5 2
Price Quantity(dollars per tape) (millions of tapes per week)
Demand for tapes
Demand
0 2 4 6 8 10
1
2
3
4
5
6
e
d
c
b
a
Quantity (millions of tapes per week)
Pric
e (d
olla
r pe
r ta
pe)
Demand• A Change in Demand
– When any factor that influences buying plans other than the price of the good changes, there is a change in demand.• An increase in demand causes the demand curve to
shift rightward.• A decrease in demand causes the demand curve to
shift leftward.
A Change in Demand• Prices of Related Goods
– Substitutes — goods used in the place of another good
– Complements — goods used in conjunction with another good
What Happens to Demand if the price of a What Happens to Demand if the price of a substitute good increases? A complement?substitute good increases? A complement?
A Change in Demand• Income
– Normal Goods — demand increases as income increases
– Inferior Goods — demand decreases as income increases
A Change in Demand• Expected Future Prices• Population
– Size and age structure
• Preferences
– Attitudes toward goods and services
The Demand for Tapes• The Law of Demand
– The quantity of tapes demanded• Decreases if:
– The price of a tape rises
• Increases if:– The price of a tape falls
The Demand for Tapes• Changes In Demand
– The demand for tapes• Decreases if:
– The price of a substitute falls– The price of a complement rises– Income falls (a tape is a normal good)– The price of a tape is expected to fall in the
future
– The population decreases
The Demand for Tapes• Changes In Demand
– The demand for tapes• Increases if:
– The price of a substitute rises– The price of a complement falls– Income rises (a tape is a normal good)– The price of a tape is expected to rise in the
future
– The population increases
Movement Along versus a Shift in the Demand Curve
• A movement along a demand curve, results from a change in price, shows a change in the quantity demanded.
• If some other influence on buyers’ plans changes, holding price constant, there is a shift in the demand curve.
A Change in Demand and a Shift in the Demand Curve
Original demand schedule New demand schedule Walkman $200 Walkman $50
Price Quantity Price Quantity (dollars (millions of tapes (dollars (millions of tapes
per tape) per week) per tape) per week)) a 1 9 a' 1 13b 2 6 b' 2 10c 3 4 c' 3 8d 4 3 d' 4 7e 5 2 e' 5 6
Demand
0 2 4 6 8 10 12 14
1
2
3
4
5
6
e
d
c
b
aDemand for tapes(Walkman $200)
Quantity (millions of tapes per week)
Pric
e (d
olla
r pe
r ta
pe)
e'
d'
c'
b'
a'
Demand for tapes(Walkman $50)
Decrease inquantitydemanded
Increase inquantitydemanded
A Change in the Quantity Demanded Versus a Change in Demand
Quantity
Pric
e
D0D0
D1
Increase in
demand
D2
Decrease in demand
Supply and its Determinants• If a firm supplies a good or service, the firm
– Has the resources and technology to produce it,– Can profit from producing it, and– Has made a definite plan to produce it and sell it.
Supply and its Determinants• The quantity supplied of a good or service is
the amount that producers plan to sell during a given time period at a particular price.• The quantity supplied isn’t the amount a firm
would like to sell but is the amount it plans to sell
Supply and its Determinants• What determines selling plans?
– The price of the good– The prices of resources used to produce the good– The prices of related goods produced– Expected future prices– The number of suppliers– Technology
Supply• The Law of Supply
– Other things being equal, the higher the price of a good, the greater is the quantity supplied.
Supply• Supply Curve and Supply Schedule
– Supply curves graphs the relationship between the quantity supplied and the price of a good, holding everything else constant.
– Supply schedules list the quantities supplied at each different price (ceteris paribus).
Supply
a 1 0b 2 3c 3 4 d 4 5e 5 6
Price Quantity (dollars per tape) (millions of tapes per week)
Supply
0 2 4 6 8 10
1
2
3
4
5
6
Quantity (millions of tapes per week)
Pric
e (d
olla
r pe
r ta
pe)
Supply of Tapes
a
b
c
d
e
Supply curve
Supply• A Change in Supply
– When any factor that influences selling plans other than the price of the good changes, there is a change in supply.• An increase in supply causes the supply to shift
rightward.• A decrease in supply causes the supply curve to shift
leftward.
A Change in Supply
• Price of factors of production
• Technology
• The Number of Suppliers
A Change in Supply
• Price of Related Goods Goods Produced– Substitutes in Production– Complements in Production
• Expected Future Prices
The Supply of Tapes
• Changes in Supply– The supply of tapes• Decreases if:
– The price of a factor of production used to produce tapes rises
– The price of a substitute in production rises– The price of a complement in production falls– The price of a tape is expected to rise in the future– The number of firms supplying tapes decreases
The Supply of Tapes
• Changes in Supply– The supply of tapes• Increases if:
– The price of a factor of production used to produce tapes decreases
– The price of a substitute in production falls– The price of a complement in production rises– The price of a tape is expected to fall in the future– The number of firms supplying tapes increases– More efficient technologies for producing tapes are
discovered
SupplyOriginal supply schedule New supply schedule Original technology New technology
Price Quantity Price Quantity (dollars (millions of tapes (dollars (millions of tapes per tape) per week) per tape) per week) a 1 0 a' 1 3
b 2 3 b' 2 6c 3 4 c' 3 8d 4 5 d' 4 10e 5 6 e' 5 12
A Change in Supply and a Shift in the Supply Curve
Quantity (millions of tapes per week)
Pric
e (d
olla
r pe
r ta
pe)
0 2 4 6 8 10 12 14
1
2
3
4
5
6
a
e
d
c
b
Supply of tapes(new technology)
a'
b'
c'
d'
e'
Supply of tapes(original technology)
The Supply of Tapes• The Law of Supply
– The quantity of tapes supplied• Decreases if:
– The price of a tape falls• Increases if:
– The price of a tape rises
Movement Along Versus a Shift in the Supply Curve
• A movement along a supply curve, which results from a change in price, shows a change in the quantity supplied.
• If some other influence on sellers’ plans changes, holding price constant, there is a shift in the supply curve
Increase inquantitysupplied
Decrease inquantitysupplied
A Change in the Quantity Supplied Versus a Change in Supply
Quantity
Pric
e S0S0 S2
Increase in
supply
S1
supply
Decrease in
Market Equilibrium
• Equilibrium in a market occurs when the price balances the plans of buyers and sellers.• Equilibrium price is the price at which quantity
demanded equals quantity supplied.• Equilibrium quantity is the quantity bought
and sold at the equilibrium price.
Market Equilibrium
• Price as a Regulator– If the price is too low, quantity demanded exceeds
quantity supplied.– If the price is too high, quantity supplied exceeds
quantity demanded.
Market Equilibrium Quantity Quantity Shortage(–)
Price demanded supplied or surplus(+)
(dollarsper tape) (millions of tapes per week)
1 9 0 –92 6 3 –33 4 4 04 3 5 +25 2 6 +4
Market Equilibrium
0 2 4 6 8 10
1
2
3
4
5
6
Quantity (millions of tapes per week)
Pric
e (d
olla
r pe
r ta
pe)
Supply of Tapes
Surplus of2 million tapesat $4 a tape
Shortage of 3 million tapes at $2 a tape
Demand for tapes
Equilibrium
Market Equilibrium• Price as a regulator
– A shortage forces the price up.– A surplus forces the price down.
• Such price changes are mutually beneficial to both buyers and sellers.
Predicting Changes in Price and Quantity
• A Change in Demand– What would happen to the price and quantity of
tapes if the price of a Walkman falls from $200 to $50.
The Effect of a Change in Demand
Quantity demanded Quantity supplied
Price (millions of tapes per week) millions of tapes per week
(dollars/tape) Walkman $200 Walkman $50
1 9 13 02 6 10 33 4 8 44 3 7 55 2 6 6
The Effects of a Change in Demand
Quantity (millions of tapes per week)0 2 4 6 8 10 12 14
1
2
3
4
5
6
Pric
e (d
olla
r pe
r ta
pe) Supply of tapes
Demand for tapes(Walkman $200)
Demand for tapes(Walkman $50)
A Change in Demand• Prediction
– When demand increases, both the price and quantity increase.
– When demand decreases, both the price and quantity decrease.
Predicting Changes in Price and Quantity
• A Change in Supply– What would happen to the price and quantity
of tapes if a new cost-saving production technology was developed?
– The new technology changes the supply
The Effects of a Change in Supply
Price Quantity demanded Quantity supplied
dollars/tape (millions of tapes per week) (millions of tapes/week Original New technology technology
1 9 0 32 6 3 63 4 4 84 3 5 105 2 6 12
The Effects of a Change in Supply
Quantity (millions of tapes per week)0 2 4 6 8 10 12 14
1
2
3
4
5
6
Pric
e (d
olla
r pe
r ta
pe)
Supply of tapes(original technology)
Demand for tapes
Supply of tapes(new technology)
A Change in Supply• Prediction
– When supply increases, the quantity increases and the price falls.
– When demand decreases, the quantity decreases and the price falls
Predicting Changes in Price and Quantity
• A Change in Both Demand and Supply– What would happen if both demand and supply
change together?
The Effects of an Increase in Both Demand and Supply
Original Quantities New Quantities (millions of tapes per week) (millions of tapes per
week)
Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded suppliedper tape )
Walkman original Walkman new $200 technology $50 technology
1 9 0 13 32 6 3 10 63 4 4 8 84 3 5 7 105 2 6 6 12
Supply of tapes(new technology)
The Effects of an Increase in Both Demand and Supply
Quantity (millions of tapes per week)0 2 4 6 8 10 12 14
1
2
3
4
5
6
Pric
e (d
olla
r pe
r ta
pe) Supply of tapes
(original technology)
Demand for tapes(Walkman $200)
Demand for tapes(Walkman $50)
A Change in Both Demand and Supply
• Prediction– When both demand and supply increase, the quantity
increases and the price decreases, or remains constant.
– When both demand and supply decreases, the quantity decreases and the price increases, decreases, or remains constant.
The Effects of an Decrease in Demand and an Increase in Supply
Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week)
Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded suppliedper tape ) CD player original CD player original
$400 technology $200 technology
1 13 0 9 32 10 3 6 63 8 4 4 84 7 5 3 105 6 6 2 12
Demand for tapes(CD player $400)
The Effects of an Decrease in Demand and an Increase in Supply
Quantity (millions of tapes per week)0 2 4 6 8 10 12 14
1
2
3
4
5
6
Pric
e (d
olla
r pe
r ta
pe) Supply of tapes
(original technology)
Demand for tapes(CD player $200)
Supply of tapes(new technology)
The Effects of a Decrease in Demand and an Increase in Supply
• Prediction– When demand decreases and supply increases,
the price falls and the quantity increases, decreases, or remains constant.
– When demand increases and supply decreases, the price rises and the quantity increases, decreases, or remains constant.
END