Demand, Supply & Market Equilibrium

P

Q

D

S

Demand A relation between the price of a good and the

quantity that consumers are willing and able to buy during a given period, other things constant. Willing: you want to buy the product Able: you can afford the buy the product

Demand Schedule and Curve Demand curve:

a curve showing the relation between the price of a good and quantity demanded during a given period, other things constant.

Suppose we are making pizza.

Price of Good

Quantity Demand

ed

$3 200

$4 150

$5 100

$6 75

$7 50

Law of Demand States that a quantity of a good demanded

during a given period relates inversely to its price, other things constant.

Price increases Quantity Demanded decreases

Price decreases Quantity demanded increases

Creates a downward sloping demand curve

Demand Curve

Price

Quantity0

$3

$4

$5

$6

50 75 100 150 200

Demand

Point on the line that matches the schedule Every point on the line matches the schedule. It is a price/quantity demanded that consumers are willing and able to buy.

A curve showing the relation between the price of a good and the quantity demanded.

Chief Characteristics of law of Demand Inverse relationship Other factors remain constant

Movement Along the Demand Curve Caused by a change in price

Only a change in priceOnly a change in price Move from one point to another on the same

graph Called a

Change in quantity demanded.

Quantity

Price

0

$5

100

Demand

$6

75

Movement along the Demand Curve

A

B

Why? Substitution Effect

Unlimited wants/scarce resources When the price of a good falls, consumers

substitute that good for other goods, which become relatively more expensive.

Reverse also holds true

Why? Income Effect

Money income: is simply the number of dollars received per period

Real income: your income measured in terms of what it can buy.

A fall in the price of a good increases consumers’ real income making consumers more able to purchase goods; for a normal good, the quantity demanded increases.

Exceptions Veblen Goods/ Snob appeal Speculative market The Giffen case

Demand Individual demand

The demand of an individual consumer Market demand

Sum of individual demands of all consumers in the market

Shifts in the Demand Curve A demand curve isolates the relation between

prices of a good and quantities demanded when other factors that could affect demand remain unchanged.

Factors called assumptions or determinants

Determinants of Demand Changes in consumer income Changes in prices of related goods Changes in consumer expectations Changes in the number or composition of

consumers Changes in consumer tastes

Changes in determinants Results in changes to the RELATIONSHIP

BETWEEN PRICE AND QUANTITY DEMANDED.

At each and every price a DIFFERENT DIFFERENT quantity is demanded.

Results in a shift in the demand curve New curve must be drawn

Changes in Demand Increase in demand

At each and every price MOREMORE of the good is demanded

Shifts to the right

D1

$5

D2

A B

Price

Quantity100 150

P Qd1 Qd2

$4 150 200

$5 100 150

$6 75 100

Causes of Increase in Demand Increase in consumer

income Causes consumers to

buy more of the product at each and every price.

Normal goods Inferior goods

Change in consumer income Normal goods

A good for which demand increases as consumer income rise

Inferior goods A good which demand

increases as consumer income falls

Changes in Price of Related Goods Substitutes

Goods that are not consumed jointly

Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward.

Increase in price of Coke Increase in price of Coke leads to increase in leads to increase in demand for Pepsidemand for Pepsi

Changes in Price of Related Goods Substitutes

Suppose that the price of Coke rises from $1 to $1.50, then the demand for Pepsi will decrease from 75 to 100.

D2

$1

100

D1

75

Changes in the price of related goods Complements

Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward

Two goods that are consumed jointly.

An decrease in the An decrease in the price of one will price of one will increase demand increase demand for the otherfor the other

Changes in Price of Related Goods Complements

An decrease in the price of DVD players, increases the demand for DVDs

Suppose that DVD players decrease in price from $145 to $100, now the demand for DVDs will decrease from 750 at $20 to 900.

D

$20

750 900

D2

Changes in Consumer Expectations Such as expectations in

Prices and income Affect how consumers

spend their money and their demand

If product cheaper today than tomorrow, then increase in demand

Changes in consumer tastes Consumer preferences

likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve

Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.

Changes in taste Consumers

prefer platform shoes.

At $50, demand increases from 100 to 200. D

$50

100

D2

200

Change in the number and composition of consumers The market demand curve is the sum of the

individual demand curves. If the number of consumers falls then the sum

will be smaller thus shifting the demand curve

Changes in Demand Decrease in demand

At each and every price LessLess of the good is demanded

Shifts to the Left

D2

$5

D1

A

B

Price

Quantity90 100

P Qd1 Qd2

$4 150 110

$5 100 90

$6 75 60

Causes of Decrease in Demand Decrease in consumer

income Causes consumers to

buy less of the product at each and every price.

Changes in Price of Related Goods Substitutes

Goods that are not consumed jointly

Goods that are related in such a way that an increase in the price of one shifts the demand curve for the other rightward.

Decrease in price of Coke Decrease in price of Coke leads to Decrease in leads to Decrease in demand for Pepsidemand for Pepsi

Changes in Price of Related Goods Substitutes

Suppose that the price of Coke drops from $1 to $0.50, then the demand for Pepsi will decrease from 100 to 75.

D

$1

100

D2

75

Changes in the price of related goods Complements

Goods that are related in a such a way that an increase in the price of one shifts the demand of the other leftward

Two goods that are consumed jointly.

An increase in the An increase in the price of one will price of one will decrease demand decrease demand for the otherfor the other

Changes in Price of Related Goods Complements

An decrease in the price of DVD players, increases the demand for DVDs

Suppose that DVD players increase in price from $100 to $145, now the demand for DVDs will decrease from 900 at $20 to 750.

D2

$20

750 900

D1

Changes in Consumer Expectations Such as expectations in

Prices and income Affect how consumers

spend their money and their demand

If product more expensive today than tomorrow, then decrease in demand

Changes in consumer tastes Consumer preferences

likes and dislikes in consumption assumed to be constant along a given demand curve assumed constant along a given demand curve

Changes in taste will cause a shift in the demand curve as different quantities are demanded at each and every price.

Change in the number and composition of consumers The market demand curve is the sum of the

individual demand curves. If the number of consumers falls then the sum

will be smaller thus shifting the demand curve

Review of Demand A change in quantity demanded is not a change in

demand Change in quantity demanded is caused by a change

in price Change in quantity demanded is a movement along

the demand curve Change is demand is caused by a change in the

determinants Change in demand shifts the demand curve