Supply and Demand potx

Along a Demand Curve Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant... Shifts in Demand Versus Movemen

Chapter 4

Laugher Curve

Teach a parrot the terms of supply

and demand and you’ve got an

economist

Thomas Carlyle

 Demand means a willingness and

capacity to pay

coordinates individual desires

 Quantity demanded rises as price falls,

other things constant

other things constant

 Thus, there is an inverse relationship

between price and quantity

demanded.

The Law of Demand

for goods whose price has increased

 The demand curve is the graphic

representation of the relationship

between price and quantity demanded

and to the right

 As the price goes up, the quantity

demanded goes down.

The Demand Curve

demanded varies indirectly—in the

opposite direction—with price

 “Other things constant” in our definition

of demand means that all other factors

that affect the analysis are assumed to

remain constant, whether they actually

remain constant or not

tastes, prices of other goods, even the

Along a Demand Curve

 Demand refers to a schedule of

quantities of a good that will be bought

per unit of time at various prices, other

things constant

demand curve

Shifts in Demand

Versus Movements

Along a Demand Curve

amount that will be demanded per unit of time

at a specific price, other things constant.

 Graphically, it refers to a specific point on the demand curve.

Along a Demand Curve

the graphical representation of the

effect of a change in price on the

quantity demanded

Shifts in Demand

Versus Movements

Along a Demand Curve

other than price on demand

or to the left

D 1

Change in quantity demanded (a movement along the curve) B

 Shift factors of demand are factors that

cause shifts in the demand curve to the right or left

Shift Factors of

Demand

not limited to—the following:

 A rise in income may increase demand

for goods

you will consume less of the good

whose price has not changed

without a change in price

Shift Factors of

Demand

may consume more now

you may put off purchases today

 If there is an increase in population,

demand will increase at every price

will decrease as well

The Demand Table

following:

 As price rises, quantity demanded

declines.

 Quantity demanded has a specific

time dimension to it.

 The demand table assumes all the

following:

 All the products involved are identical

in shape, size, quality, etc.

 The schedule assumes that

everything else is held constant.

From a Demand Table

to a Demand Curve

on a graph and connect the points to

derive the demand curve

 The demand curve graphically conveys the same information that is on the

demand table

From a Demand Table

to a Demand Curve

price that you will pay for various

quantities of a good—you will happily

pay less

1.00 50 0

$0.50

1.00 2.00 3.00 4.00

9 8 6 4

2

Demand for cassettes

G

Individual and Market

Demand Goods

horizontal sum of all individual demand

curves

 This is determined by adding the

individual demand curves of all the

consumers (“demanders”).

 In reality, the sellers do not add up

individual demand curves

their product which becomes smooth

and downward sloping curve

Individual and Market

Demand Goods

for the following reasons:

 At lower prices, existing consumers

buy more.

 At lower prices, new consumers enter the market.

(3) Pierre’s demand

(2) Cathy’s demand

(3) Market demand

9 8 7 6 5 4 3 2

6 5 4 3 2 1 0 0

1 1 0 0 0 0 0 0

16 14 11 9 7 5 3 2

E F

G

$4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0

production

resources or inputs, necessary to

produce goods or services.

 Individuals supply factors of production

to intermediaries or firms

goods has two parts:

production to households and firms.

factors of production into usable goods and services.

 Quantity supplied rises as price rises,

other things constant

other things constant

between price and quantity supplied

The Law of Supply

two factors:

 In the face of rising prices, firms arrange their activities

to supply more of the good to the market, substituting production of that good for the production of other

goods.

 Assuming firms' costs are constant, a higher price

means higher profits.

 The supply curve is the graphic

representation of the law of supply

right

supplied varies positively—in the same

direction—with the price

Supply Curve

 Supply refers to a schedule of

quantities a seller is willing to sell per

unit of time at various prices, other

things constant

Shifts in Supply Versus Movements Along a

Supply Curve

 If the amount supplied is affected by anything other than a change in price, there will be a

shift in supply.

representation of the effect of a change in a

Supply Curve

 Quantity supplied refers to a specific

amount that will be supplied at a

specific price

Shifts in Supply Versus Movements Along a

Supply Curve

quantity supplied represented by a

movement along a supply curve

Change in quantity supplied (a movement along the curve)

Shift in Supply Fig 4-6b, p 92

S 1

 Shift factors of supply are those factors that cause shifts in the entire supply

curve to the left or right

Shift Factors of Supply

 Changes in the prices of inputs used in the

production of a good

 Changes in technology

 Changes in suppliers' expectations

 Changes in taxes and subsidies

 Changes in the prices of inputs used in

the production of a good

 If costs rise, then profits go down, and there is less incentive to supply.

 If costs go up substantially, the firm

may even shut down.

Shift Factors of Supply

profits go up, thus the incentive to

supply also increases

 This is especially true when new

technology replaces labor.

 If they expect prices to rise in the future, suppliers may store today's production

for an expected windfall later

suppliers may sell off more of their

inventories today

Shift Factors of Supply

profits go down, leading suppliers to

reduce output

as they reduce costs of production

 To derive a supply curve from a supply

table, you plot each point in the supply

table on a graph and connect the points

From a Supply Table to

a Supply Curve

minimum prices an individual seller will

accept for various quantities of a good

 Competing suppliers’ entry into the

market places a limit on the price any

supplier can charge

Individual and Market

Supply Curves

 The market supply curve is derived by horizontally adding the individual supply curves of each supplier

(2) Ann’s Supply

(5) Market Supply

(4) Charlie's Supply

$0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50

0 1 2 3 4 5 6 7

0 0 1 2 3 4 5 5

0 0 0 0 0 0 0 2

0 1 3 5 7 9 11 14

(3) Barry's Supply

F E

D C

Market Supply

 Supply and demand come together to

determine equilibrium quantity and

equilibrium price

Excess Supply and

Excess Demand

 Excess supply –if quantity supplied is

greater than quantity demanded, prices tend to fall

 Excess demand – prices tend to rise if quantity demanded is greater than

quantity supplied

 The larger the difference between

quantity demanded and quantity

supplied, the greater the pressure for

prices to rise (if there is excess

demand) or fall (if there is excess

supply

Price Adjusts

quantity supplied, prices have no

tendency to change

B A

S

D

Excess demand Excess supply

E

opposing dynamic forces cancel each

other out

 In supply and demand analysis,

equilibrium means that the upward

pressure on price is exactly offset by

the downward pressure on price

 Equilibrium price is the price toward

which the invisible hand drives the

market

 Equilibrium quantity is the amount

bought and sold at the equilibrium price

 Equilibrium isn’t a state of the world—

it's a characteristic of the model used to look at the world

—but simply a state in which dynamic

pressures offset each other

Characteristics of

Supply/Demand

Equilibrium

 Consumer surplus – the distance

between the demand curve and the

price the consumer pays is net benefit

to consumers

 Producer surplus - if a producer

receives more than the price she would

be willing to sell the good for, she

receives a net benefit

Characteristics of

Supply/Demand

Equilibrium

makes the combination of consumer

and producer surplus as large as it can

be

an increase in the combination of

consumer and producer surplus

Consumer and Producer

Producer Surplus

Consumer Surplus

Lost Surplus

End of Chapter 4