demand and supply basic lecture (1)

8/21/2019 Demand and Supply Basic Lecture (1)

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The Market Forces of Supply and Demand


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Supply and demand are the two words that economistsuse most often.

Modern microeconomics is about supply, demand, andmarket equilibrium.


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MARKETS AND COMPETITIONA marketis a group of buyers and sellers of a particular

good or service.

The terms supply and demand refer to the behavior ofpeople . . . as they interact with one another in

markets.


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MARKETS AND COMPETITION Buyers determine demand.

Sellers determine supply


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Competitive MarketsA competitivemarketis a market in which there are

many buyers and sellers so that each has a negligibleimpact on the market price.


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Competition: Perfect and Otherwise Perfect Competition

Products are the same

Numerous buyers and sellers so that each has noinfluence over price

Buyers and Sellers are price takers

Monopoly

One seller, and seller controls price


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Competition: Perfect and Otherwise Oligopoly

Few sellers

Not always aggressive competition Monopolistic Competition

Many sellers

Slightly differentiated products

Each seller may set price for its own product


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DEMAND Quantitydemandedis the amount of a good that

buyers are willing and able to purchase.

Law of Demand The law of demandstates that, other things equal, the

quantity demanded of a good falls when the price of thegood rises.


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WHAT DETERMINES THE QUANTITY AN

INDIVIDUAL DEMANDS? Price

Income

Prices of Related Goods Tastes

Expectations


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INDIVIDUAL DEMANDS? Price

law of demand: the claim that, other things equal, the

quantity demanded of a good falls when the price of thegood rises.

Income

normal good: a good for which, other things equal, an

increase in income leads to an increase in demand.inferior good: a good for which, other things equal, an

increase in income leads to a decrease in demand.


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INDIVIDUAL DEMANDS? Prices of Related Goods

Substitutes: two goods for which an increase in the

price of one leads to an increase in the demand for theother.

Complements: two goods for which an increase in theprice of one leads to a decrease in the demand for the

other Tastes

Expectations


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The Demand Curve: The Relationship between

Price and Quantity Demanded Demand Schedule

The demand scheduleis a table that shows therelationship between the price of the good and thequantity demanded.


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Catherines Demand Schedule


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The Demand Curve: The Relationship between

Price and Quantity Demanded Demand Curve

The demand curveis a graph of the relationship betweenthe price of a good and the quantity demanded.


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Catherines Demand Schedule and Demand Curve

Copyright 2004 South-Western

Price of

Ice-Cream Cone

0

2.50

2.00

1.50

1.00

0.50

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

1. A decrease

in price

...

2. ... increases quantity

of cones demanded.


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ceteris paribus a Latin phrase, translated as otherthings being equal, used as a reminder that allvariables other than the ones being studied areassumed to be constant.


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Market Demand versus Individual Demand Market demand refers to the sum of all individual

demands for a particular good or service.

Graphically, individual demand curves are summedhorizontally to obtain the market demand curve.


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Market Demand versus Individual Demand


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Changes in Quantity Demanded

Movement along the demand curve.(caused by a change in the price of the

product)


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0

D

Price of Ice-CreamCones

Quantity of Ice-Cream Cones

A tax that raises theprice of ice-creamcones results in a

movement along thedemand curve.

A

B

8

1.00

$2.00

4

Movement along the demand curve


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Shifts in the Demand Curve Consumer income

Prices of related goods

Tastes

Expectations Number of buyers


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Shifts in the Demand Curve Change in Demand

A shift in the demand curve, either to the left or right.

Caused by any change that alters the quantity demandedat every price.


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Shifts in the Demand Curve

Copyright2003 Southwestern/Thomson Learning

Price of

Ice-CreamCone

Quantity of

Ice-Cream Cones

Increasein demand

Decreasein demand

Demand curve,D3

Demandcurve,D1

Demand

curve,D2

0


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Shifts in the Demand Curve versus Movements

along the Demand Curve

f


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Variables That Influence Buyers

Copyright2004 South-Western


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SUPPLY Quantity suppliedis the amount of a good that sellers

are willing and able to sell.

Law of Supply

The law of supplystates that, other things equal, thequantity supplied of a good rises when the price of thegood rises.


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INDIVIDUAL SUPPLIES? Price

Input prices

Technology Expectations


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The Supply Curve: The Relationship between

Price and Quantity Supplied Supply Schedule

The supply scheduleis a table that shows therelationship between the price of the good and the

quantity supplied.


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Bens Supply Schedule


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The Supply Curve: The Relationship between Price and

Quantity Supplied Supply Curve

The supply curve is the graph of the relationshipbetween the price of a good and the quantity supplied.


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Bens Supply Schedule and Supply Curve


Price of

Ice-Cream

Cone

0

2.50

2.00

1.50

1.00

1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones

$3.00

12

0.50

1. Anincrease

in price ...

2. ...

increases quantity of cones supplied.


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Market Supply versus Individual Supply Market supply refers to the sum of all individual

supplies for all sellers of a particular good or service.

Graphically, individual supply curves are summedhorizontally to obtain the market supply curve.


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Market Supply versus Individual Supply


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Changes in Quantity SupplyMovement along the supply curve.

(caused by a change in the price of the

product)


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1 5

Price of Ice-Cream

Cone

Quantity of

Ice-Cream

Cones0

S

1.00

A

C$3.00

A rise in the priceof ice creamcones results in amovement alongthe supply curve.

Movement along the supply curve


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Shifts in the Supply Curve Input prices

Technology

Expectations Number of sellers


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Shifts in the Supply Curve Change in Supply

A shift in the supply curve, either to the left or right.

Caused by a change in a determinant other than price.


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Shifts in the Supply Curve


Price of

Ice-Cream

Cone

Quantity of

Ice-Cream Cones

0

Increasein supply

Decreasein supply

Supply curve,S3

curve,Supply

S1

Supplycurve, S2

Variables That Influence Sellers


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Variables That Influence Sellers

Copyright2004 South-Western


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SUPPLY AND DEMAND TOGETHER Equilibrium:a situation in which supply and demand

have been brought into balance

Equilibriumrefers to a situation in which the price hasreached the level where quantity supplied equalsquantity demanded.


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SUPPLY AND DEMAND TOGETHER Equilibrium Price

The price that balances supply and demand. On a graph, it is the price at which the supply and demand

curves intersect.

Equilibrium Quantity the quantity supplied and the quantity demanded

when the price has adjusted to balance supply anddemand

The quantity supplied and the quantity demanded atthe equilibrium price. On a graph it is the quantity at which the supply and

demand curves intersect.


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At $2.00, the quantity demandedis equal to the quantity supplied!

SUPPLY AND DEMAND TOGETHER

Demand Schedule Supply Schedule


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The Equilibrium of Supply and Demand


Price of

Ice-Cream

Cone

0 1 2 3 4 5 6 7 8 9 10 11 12

Quantity of Ice-Cream Cones

13

Equilibrium

quantity

Equilibrium price

Equilibrium

Supply

Demand

$2.00


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Markets Not in Equilibrium


Price of

Ice-Cream

Cone

0

Supply

Demand

(a) Excess Supply

Quantity

demanded

Quantity

supplied

Surplus

Quantity of

Ice-Cream

Cones

4

$2.50

10

2.00

7


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Equilibrium Surplus

a situation in which quantity supplied is greater thanquantity demanded

When price > equilibrium price, then

quantity supplied > quantity demanded. There is excess supply or a surplus.

Suppliers will lower the price to increase sales, therebymoving toward equilibrium.


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Equilibrium Shortage

a situation in which quantity demanded is greater thanquantity supplied

When price < equilibrium price, then

quantity demanded > the quantity supplied. There is excess demand or a shortage.

Suppliers will raise the price due to too many buyers chasingtoo few goods, thereby moving toward equilibrium.


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Markets Not in Equilibrium


Price of

Ice-Cream

Cone

0 Quantity of

Ice-Cream

Cones

Supply

Demand

(b) Excess Demand

Quantity

suppliedQuantity

demanded

1.50

10

$2.00

7

4

Shortage


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Equilibrium Law of supply and demand

The claim that the price of any good adjusts to bring thequantity supplied and the quantity demanded for that

good into balance.


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Three Steps to Analyzing Changes in Equilibrium Decide whether the event shifts the supply or demand

curve (or both).

Decide whether the curve(s) shift(s) to the left or tothe right.

Use the supply-and-demand diagram to see how theshift affects equilibrium price and quantity.


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How an Increase in Demand Affects the Equilibrium


Price of

Ice-Cream

Cone

0 Quantity ofIce-Cream Cones

Supply

Initial

equilibrium

D

D

3.. . . and a higher

quantity sold.

2. . . . resulting

in a higher

price . . .

1. Hot weather increases

the demand for ice cream . . .

2.00

7

New equilibrium

$2.50

10


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Three Steps to Analyzing Changes in Equilibrium Shifts in Curves versus Movements along Curves

A shift in the supply curve is called a change in supply.

A movement along a fixed supply curve is called achange in quantity supplied.

A shift in the demand curve is called a change indemand.

A movement along a fixed demand curve is called achange in quantity demanded.


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How a Decrease in Supply Affects the Equilibrium


Price of

Ice-Cream

Cone

0 Quantity ofIce-Cream Cones

Demand

New

equilibrium

Initial equilibrium

S1

S2

2. . . . resultingin a higherprice of ice

cream . . .

1. An earthquake reduces

the supply of ice cream. . .

3.. . . and a lower

quantity sold.

2.00

7

$2.50

4


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A Shift in Both Supply and Demand


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Summary Economists use the model of supply and demand to

analyze competitive markets.

In a competitive market, there are many buyers andsellers, each of whom has little or no influence on themarket price.


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Summary The demand curve shows how the quantity of a good

depends upon the price.

According to the law of demand, as the price of a good

falls, the quantity demanded rises. Therefore, thedemand curve slopes downward.

In addition to price, other determinants of how muchconsumers want to buy include income, the prices of

complements and substitutes, tastes, expectations, andthe number of buyers.

If one of these factors changes, the demand curve shifts.


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Summary The supply curve shows how the quantity of a good

supplied depends upon the price.

According to the law of supply, as the price of a good

rises, the quantity supplied rises. Therefore, the supplycurve slopes upward.

In addition to price, other determinants of how muchproducers want to sell include input prices, technology,

expectations, and the number of sellers. If one of these factors changes, the supply curve shifts.


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Summary Market equilibrium is determined by the intersection

of the supply and demand curves.

At the equilibrium price, the quantity demandedequals the quantity supplied.

The behavior of buyers and sellers naturally drivesmarkets toward their equilibrium.

demand and supply basic lecture (1)

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