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Chapter 2Demand and Supply

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Demand - the relationship between the various possible prices of a product and the quantities of that product consumers are willing to buy. Price is the independent variable.

Quantity demanded is the amount of a product consumers are willing to buy at each price. Quantity demanded is the dependent variable.

What is Demand?

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States that there is an inverse relationship between a product’s quantity demanded and its price.

Ceteris paribus is the assumption here

When the price of a product falls, people are willing to purchase more of that product i.e.. strawberries

The Law of Demand

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Graph that expresses the possible combination of prices and quantities demanded of a product

Independent variable (Price) is on the y-axis

Dependent variable (Quantity) is on the x-axis

The demand curve’s negative (downward) slope reflects the law of demand; an increase in price leads to a decrease in quantity demanded and vice versa

The Demand Curve

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The Law of Demand

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In rare situations the relationship between price and quantity demanded can be direct – the demand curve has a positive (upward) slope

Happens when a product’s price is seen as a status symbol

Consumers who can afford the product are attracted to it because its high price makes it more fashionable/attractive than before

The Veblen Effect

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The sum of all consumers’ purchases (quantity demanded) for a product at each price

See Figure 2.2 in text book on page 31

Market Demand

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Demand Determinants

Factors that can cause an increase or decrease in a product’s demand (other than price)

Cause the entire curve to shift

Changes in Demand – Demand Determinants

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1. Number of Buyers

When the number of buyers for a certain product increases, more purchases are made

Thus the product’s quantity demanded increases whatever its price – this is called an increase in demand

When the number of buyers decreases, demand also decreases at every price – this is called a decrease in demand

See figure 2.3 in textbook

Demand Determinants

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Effect of Demand Determinants on Demand

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2. Income When consumers’ incomes increase, demand

for luxury items and necessities also increases

This results in a shift of the demand curve to the right

Normal products – products whose demand changes directly with income i.e.. luxury products and/or necessities (shift to the right)

Inferior products – products whose demand changes inversely with income i.e.. second hand clothing, Kraft dinner, no-name products (shift to the left)

Demand Determinants cont’d

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3. Prices of Other Products

Substitute products – products that can be consumed in place of one another i.e. butter and margarine

i.e.. if the price of butter rises, people will choose to buy more margarine (shift in the demand curve of margarine to the right)

Complementary products – products that are consumed together i.e. cars and gas

i.e.. if the price of cars rises, the demand for gas falls (shift in the demand curve of gas to the left)

Demand Determinants cont’d

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4. Consumer Preferences

People’s preferences, current trends, fads and advertising affect people’s buying patterns

i.e. if consumers view MacBook laptops as superior to HP laptops than the demand curve for the MacBook will shift to the right

Demand Determinants Cont’d

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5. Consumer Expectations the expectations that consumers have about

future changes in prices and their own income affect their current purchases

i.e. if people expect the price of TV’s to fall, the current demand for TV’s falls (shift in demand curve to the left)

Also, if people expect their incomes to grow, their current demand for normal products will increase (shift to the right) and for inferior products will decrease (shift to the left)

Demand Determinants cont’d

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Change in quantity demanded Caused by a change in price Movement along a product’s demand curve i.e. if the price of a product rises, demand

for that product fallsChange in demand Caused by a change in a demand

determinant Shift in the entire demand curve (to the left

or right)

Change in Quantity Demanded vs. Change in Demand

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Change in Quantity Demanded vs. Change in Demand

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Supply – the relationship between the various possible prices of a product and the quantities of the product that businesses are willing to supply. Price is the independent variable.

Quantity Supplied – the amount of a product businesses are willing to supply at each price. Quantity supplied is the dependent variable.

Market Supply – the sum of all producers’ quantities supplied at each price.

What is Supply?

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When price changes, quantity supplied changes in the same direction

Direct relationship between price and quantity supplied

i.e.. if the price of strawberries rises, farmers will increase the quantity of strawberries they supply because the higher the price, the higher the revenue for farmers.

The Law of Supply

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The Supply Curve

Graph that expresses the possible combination of prices and quantities supplied of a product

Independent variable (Price) is on the y-axis

Dependent variable (Quantity) is on the x-axis

The supply curve’s positive (upward) slope reflects the law of supply; an increase in price leads to an increase in quantity supplied and vice versa

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The Law of Supply

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Supply Determinants

Factors that can cause an increase or a decrease in a product’s supply (other than price)

Cause the entire supply curve to shift

Changes in Supply – Supply Determinants

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1. Number of Producers

An increase in the number of businesses in an industry causes an increase in supply. This leads to a higher quantity supplied at each price (shift in the supply curve to the right)

A decrease in the number of businesses in an industry has the opposite effect (shift in the supply curve to the left)

Supply Determinants

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Shifts in the Supply Curve

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2. Resource Prices

If there is a price increase for a resource used to make a product, the costs for the business increase

As a result, fewer products can be produced for the same cost resulting in a cutback in production.

Causes the supply curve to shift to the left i.e.. an increase in worker’s wages causes a

decrease in supply

Supply Determinants – cont’d

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3. State of Technology

Modern/new technology allows businesses to use more efficient production methods.

As a result, more products can be produced at every price so supply will increase

Causes a shift of the supply curve to the right

Supply Determinants – cont’d

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A shift in the Supply Curve

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4. Changes in Nature

An early frost, record high temps, a flood or an earthquake can affect the supply of many products (especially agricultural products)

i.e.. a cold, rainy summer in Canada’s prairies will decrease the supply of wheat. The market supply for wheat will shift to the left as a result.

Supply Determinants – cont’d

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5. Prices of Related Products

A product’s supply can be influenced by changes in the prices of other products

i.e. farmers switching crops to grow (for example corn to barley) if price of corn falls

Supply Determinants Cont’d

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6.Producer Expectations If producers expect the price of the item they

sell to change in the near future, this affects the product’s current supply

i.e. if barley farmers expect the price of barley to fall, they may decide to provide as much barley as possible now raising its current supply

i.e. if beef farmers expect that the price of beef will rise, they may hold back on the amount they make available, immediately reducing the supply of beef

Supply Determinants Cont’d

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Change in Quantity Supplied Caused by a change in price Movement along the supply curve Increase in price causes an increase in

supply/decrease in price causes a decrease in supply

Change in Supply Caused by a change in a supply determinant Shift of the entire supply curve (to the left or to

the right)

Change in Quantity Supplied vs. Change in Supply