objectives explain the law of demand change in quantity demanded change in demand

Objectives Explain the law of demand

Change in quantity demanded Change in demand

Markets

MarketsRepresent the interaction of buyers and

sellers

Markets

MarketsMarkets set the prices we pay and receive

The Law of Demand Demand

Quantities of specific goods or services that individuals or groups will purchase at various possible prices, ceteris paribus.

The Law of Demand Law of Demand

Quantity demanded is inversely related to price, all things equal

The Law of Demand

What are we holding constant?

Income Income Effect

Price of other goodsSubstitution Effect

Many other factors

The Demand Schedule

The demand schedule is a table relating prices to quantity demanded.

We must consider:The time dimensionConstant-quality units

The Market DemandSchedule for Minidisks

The Market DemandCurve for Minidisks

Shifts in Demand

Determinants of demand

Income

Tastes and preferences

The price of related goodsComplementsSubstitutes

Shifts in Demand

Determinants of demand

ExpectationsFuture pricesIncomeProduct availability

Market size (number of buyers)

Shifts in Demand

The Determinants of DemandIncome: Normal Good

D1

Q/Units

D2D3

Price

Decrease in incomedecreases demand

Increase in incomeincreases demand

Shifts in Demand

The Determinants of DemandIncome: Inferior Good

D1

Q/Units

Decrease in incomeincreases demand

Increase in incomedecreases demand

Price

D2D3

Shifts in Demand

The Determinants of DemandIncome: Tastes and Preferences

D1

Q/Units

Price

Sport Utility Vehicle• Increase in demand

D2

Smoking• Decrease in demand D3

Shifts in Demand

The Determinants of DemandPrice of Related Goods: Substitutes

D1

Q/Butter

Butter and Margarine• Price of both = $2/lb.• Price of margarine

increases to $3/lb.

• Demand for butter increases

D2

Price

Shifts in Demand

The Determinants of DemandPrice of Related Goods: Complements

D1

Q/Speakers

Speakers and Amplifiers• Decrease the relative

price of amplifiers• Demand for speakers

increases

D2D3

Speakers and Amplifiers• Increase the relative

price of amplifiers• Demand for speakers

decreases

Price

Shifts in Demand

The Determinants of DemandExpectations

D1

Q/Units

A higher income or expectations of a higher future price will increase demand

D2D3

A lower income or expectations of a lower future price will decrease demand

Price

Shifts in Demand

The Determinants of DemandPopulation

D1

Q/Units

Increase in the population increases demand

D2D3

Decrease in population decreases demand

Price

Shifts in Demand

• Changes in demand versus changes in quantity demanded– A change in one or more of the non-price

determinants (income, tastes, etc.) will lead to a change in demand.

– This is a movement of the whole curve.

Shifts in Demand

• Changes in demand versus changes in quantity demanded– A change in a good’s own price leads to a

change in quantity demanded.– This is a movement on the same curve.

Movement Along a Given Demand Curve

Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)

Pric

e of

Rew

ritab

le C

Ds(

$)

2 4 6 80

1

2

3

4

5

10 12

A change in the price changes the quantity of a good demanded

Movement Along a Given Demand Curve

Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)

Pric

e of

Rew

ritab

le C

Ds(

$)

2 4 6 80

1

2

3

4

5

10 12

D

D

A change in the price changes the quantity

of a good demanded

Movement Along a Given Demand Curve

Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)

Pric

e of

Rew

ritab

le C

Ds(

$)

2 4 6 80

1

2

3

4

5

10 12

Movement Along a Given Demand Curve

Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)

Pric

e of

Rew

ritab

le C

Ds(

$)

2 4 6 80

1

2

3

4

5

10 12

D

A change in the price changes the quantity

of a good demanded

Objectives Explain the law of supply

Distinguish between changes in supply and changes in quantity supplied

Explain how supply and demand interact to determine equilibrium price and quantity

The Law of Supply

• Supply– The amount of a product or service that firms

are willing to sell at alternative prices

– Chicago Burgerwurks8819 Ogden AveBrookfield, IL 60513-2115

The Law of Supply

• Law of Supply– The price of a product or service and the

quantity supplied are directly related

The Market Supply Schedulefor Rewritable CDs

The Market Supply Curvefor Rewritable CDs

Shifts in Supply

Determinants of supplyCost of inputsTechnology and productivityTaxes and subsidiesPrice of other goodsPrice expectationsNumber of firms in industry

Shifts in Supply

The Determinants of SupplyCost of Inputs

S1

Q/Units

Decrease in cost increases supply

S2Increase in costdecreases supply

S3

Price

Shifts in Supply

The Determinants of SupplyTechnology and Productivity

S1

Q/Units

Improvements in technology or increases in productivity increase supply

S2

Decreases in productivity decrease supply

S3

Price

Shifts in Supply

The Determinants of SupplyTaxes and Subsidies

S1

Q/Units

Decreases in taxes or increases in subsidies increase supply

S2

Increases in taxes or decreases in subsidies decrease supply

S3

Price

Shifts in Supply

The Determinants of SupplyPrice Expectations

S1

Q/Units

Expectations of lower future prices increase supply

S2Expectations of higher future prices decrease supply

S3

Price

Shifts in Supply

The Determinants of SupplyNumber of Firms in Industry

S1

Q/Units

Increase in the number of firms increases supply

S2Decrease in the number of firms decreases supply

S3

Price

Shifts in Supply

Changes in supply versus changes in quantity suppliedA change in one or more of the non-price

determinants will lead to a change in supply.

This is a movement of the whole curve.

Shifts in Supply

Changes in supply versus changes in quantity suppliedA change in a good’s own price leads to a

change in quantity supplied.This is a movement on the same curve.

Your 3 Step ProgramYour 3 Step Program

Decide if event shifts supply or Decide if event shifts supply or demanddemand

Decide direction the curve shiftsDecide direction the curve shifts

Identify new equilibriumIdentify new equilibrium

Putting Demandand Supply Together

Putting Demandand Supply Together

Quantity of Rewritable CDs(millions of constant-quality units per year)

Pric

e pe

r Rew

ritab

le C

D($

)

2 4 6 80

1

2

3

4

5

10 12

S

D

A B

Excess quantity demanded at price $1

Shortage• At P = $1: Qs (A) = 2 < Qd (B) = 10• All prices below $3 Qd > Qs

• Price will be pushed up

Putting Demandand Supply Together

Quantity of Rewritable CDs(millions of constant-quality units per year)

Pric

e pe

r Rew

ritab

le C

D($

)

2 4 6 80

1

2

3

4

5

10 12

S

D

D C

Excess quantity demanded at price $5

Surplus• At P = $5: Qd (D) = 2 < Qs (C) = 10• All prices above $3 Qd < Qs

• Price will be pushed down

Putting Demandand Supply Together

Quantity of Rewritable CDs(millions of constant-quality units per year)

Pric

e pe

r Rew

ritab

le C

D($

)

2 4 6 80

1

2

3

4

5

10 12

S

D

D C

Excess quantity demanded at price $5

A B

Excess quantity demanded at price $1

EquilibriumMarket clearing, or equilibrium price

E

Putting Demandand Supply Together

EquilibriumThe situation when quantity supplied

equals quantity demanded at a particular price

Putting Demandand Supply Together

ShortagesThe situation when quantity demanded is

greater than quantity suppliedExists at any price below the equilibrium

price Is not the same as scarcity

Putting Demandand Supply Together

SurplusesThe situation when quantity supplied is

greater than quantity demandedExists at any price above the equilibrium

price

Why Online Auctions Aren’t Why Online Auctions Aren’t So Lucrative AnymoreSo Lucrative Anymore

• Selling prices of auctioned items have fallen in the past two years– More items are for sale– The supply of items has increased more

rapidly than has the demand, causing a drop in equilibrium prices

Why Online Auctions Aren’t So Lucrative Anymore

Summary The law of demand says that prices and

quantity demanded are inversely related. A change in quantity demanded versus a

change in demand A change in quantity demanded is a movement

along the same demand curve A change in demand is a shift of the whole

demand curve

Summary The law of supply states that price and

quantity supplied are directly related. A change in quantity supplied versus a

change in supply A change in quantity supplied is a movement

along the same supply curve A change in supply is a shift of the whole supply

curve

Summary Determining market price and equilibrium

quantity The demand and supply curves intersect at the

equilibrium point. Shortages exist when the price of a good is below

the market price. Surpluses exist if the price of the good is greater

than the market price.

Conclusion Market economies harness the forces of

supply and demand. Supply and demand together determine the

prices of the economy’s goods and services. Prices are the signals that guide the allocation

of resources.