demand and supply. institutions or mechanisms that bring together buyers (demanders) and seller...
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Demand and Supply
Institutions or mechanisms that bring together buyers (demanders) and seller (suppliers) of particular goods, services, or resources.
A schedule or a curve that shows the various amounts of a product that consumers are “willing and able” to purchase at each of a series of possible prices during a specified period of time.
Demand schedule – table Demand curve – graph
sloping downward
Price Quantity Demanded
Price
Quantity Demanded
All else equal, as price falls, the quantity demanded rises, and as price rises, the quantity demanded falls.
There is a negative or inverse relationship.
1. Consistent with common sense.2. Diminishing marginal utility: successive units
of a particular product yield less & less satisfaction
INCOME EFFECT SUBSTITUTION EFFECT
A lower price increases the purchasing power of a buyer’s money income, enabling the buyer to purchase more of the product than they could buy before.
Higher prices has the opposite effect.
At a lower price buyers have the incentive to substitute what is now a less expensive product for similar products that are now relatively more expensive.
The product whose price has fallen is not “a better deal” relative to the other products.
This will include the quantities demanded by all consumers at each of the various possible prices.
You can have a market demand schedule and a market demand curve.
Determinants of demand:
Factors that can and do affect purchases
When these determinants change the demand curve will “SHIFT” to either the right or left.
A shift in the demand curve is called a change in demand
A change in quantity demanded is just a movement from one point to another point caused by a change in
Price only.A
B
Preferences (Taste)A favorable change in
consumer tastes for a product ---- a change that makes the product more desirable --- means that more of it will be demanded at each price.
Income For most products, a rise
in income causes an increase in demand --- Normal Good
Rising income can cause the demand of some goods to behave inversely---Inferior Goods
Neutral goods do not change with a change in income.
Normal goods
Inferior goods
Neutral Goods
Prices of Related Goods A change in the price of a
related good may either increase or decrease the demand for a product
Substitutes - Similar goods; when the price of one & the demand for the other move in the same direction
Complements - goods that are consumed together; when the price of one good & the demand for the other good move in opposite directions
substitutes
complements
Expectations Changes in consumer
expectations may shift demand
Freezing weather destroys much of Florida’s citrus crop
Workers fearful of losing their jobs may reduce their demand for vacation time.
1st round draft picks may splurge on houses & cars
Number of Buyers An increase in the number
of buyers in a market increases demand
A decrease in the number of buyers in a market decreases demand
Increase in life expectancy has increased the demand for medical care; retirement communities, and nursing homes
Baby boomers, etc.
Change in Demand is a shift of the entire demand curve to the right (increase) or to the left (decrease).
Occurs when there is a response to one of the determinants (pipen).
Change in Quantity Demanded is a movement along the curve due to a change in the price of the good demanded.
A schedule or curve showing the amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period.
Supply schedule is the table of a individual producer.
Law of supply: as price rises, the quantity supplied rises; as price falls, the quantity supplied falls.
Graphical representation of the law of supply.
Price
Quantity Supplied
Resource PricesPrice of the resources
used to make the product
Higher Resource price raises production costs & the firm will supply LESS.
Lower resource price decreases production costs & the firm will supply MORE.
Prices of OTHER goods
Some suppliers can easily switch production lines to make other similar goods that may have found a better price.
TechnologyImprovements in
technology enable firms to produce goods with fewer resources.
Recent improvements in the fuel efficiency of aircraft engines have reduced the cost of providing passenger air service.
Taxes and Subsidies
Increase in a tax will increase production costs and reduce supply.
If gov’t subsidizes the production of a good, it in effect lowers the producers’ costs & increases supply.
ExpectationsChanges in expectations
about the future price of a product may affect the producer’s current willingness to supply that product.
Number of SellersAs more firms enter an
industry, the greater the market supply.
Conversely, the smaller the number of firms in the industry, the less the market supply.
Canada & U.S. have imposed restrictions on haddock fishing to replenish dwindling numbers.
Change in Supply
A change in the entire schedule and a shift of the entire curve.
Caused by a change in Rotten – the determinants of supply
Change in Quantity Supplied
A movement from one point to another point on the curve.
Caused by a change in the price of the product.
The place where supply and demand are equal.
Graphically, where the supply & demand curves intersect.
Surplus or excess supply: The amount by which the quantity supplied of a product exceeds the quantity demanded at a specific price.
Supply
Demand
Surplus
Qs > Qd = surplus
Shortage or excess demand: The amount by which the quantity demanded of a product exceeds the quantity supplied at a particular price.
Shortage
Qd > Qs = shortage
Price
Bushels of corn (thousands)
Demand
Supply$6
$5
$4
$3
$2
$10
2 3 4 5 6 7 8 9
---------------------------Equilibriumprice
Equilibrium quantity
Equilibrium Price is sometimes referred as market-clearing price.
The ability of the competitive forces of supply and demand to establish a price at which selling and buying decisions are consistent.
Changes in Demand Suppose that supply is
constant and demand increases
Raises equilibrium price and quantity
Suppose supply is constant & demand decreases
decreases equilibrium price and decreases quantity
Changes in Supply Suppose that demand is
constant & supply increases
Lower equilibrium price; greater quantity
Suppose that demand is constant & supply decreases
Higher price; less quantity
Change in Supply
Change in Demand
Effect on Equilibrium Price
Effect on Equilibrium Quantity
Increase Decrease Decrease Indeterminate
Decrease Increase Increase Indeterminate
Increase Increase Indeterminate Increase
Decrease Decrease Indeterminate Decrease