Supply and Demand

The model that illustrates how a competitive markets works

Basic Concepts

• Quantity demanded- the amount of a good or service consumer are willing and able to buy at different prices.

• Demand Curve- Shows the relationship between quantity demanded and price.

• Quantity Supplied- The actual amount of a good or service producers are willing to sell at some specific price.

• Supply Curve- Shows the relationship between quantity supplied and price.

Key Concepts• A shift of the demand or

supply curve is different from a movement ALONG the demand or supply curve.

Price

Quantity

A shift of the demand curve..Is not the same as a movement along the demand curve

P1

P2

As Price Decreases

Quantity Demanded Increases

Q1Q2

• A change in quantity demanded or supplied is due to a change in price.

• Depending on the price, the quantity demanded or quantity supplied will be different.

Changes in Demand and Supply

• An increase in demand or supply is shown by a rightward shift of the curve. While a decrease in demand or supply is shown by a leftward shift of the curve.

• When either demand or supply increases (either curve shifts) the price remains the same but quantity demanded or supplied changes.

Increase in demandDecrease in demand

Q1 Q3 Q2Q1Q3 Q2

Decrease in supply Increase in supply

Factors that Shift the Demand Curve

• Five Principle Factors1. Changes in the price of related

goods or services.2. Changes in income.3. Changes in taste.4. Changes in expectations.5. Changes in the number of

consumers.

Demand *NEGATIVE SLOPE*

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Factors that Shift the Supply Curve

• Five factors1. Changes in input prices2. Changes in technology3. Changes in the number of

producers 4. Changes in the price of

related goods or services5. Changes in expectations

Supply*POSITIVE SLOPE*

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Substitutes vs. Compliments

• There are substitute and complimentary goods.

• Two goods are substitutes if a rise in the price of one of the goods leads to an increase in the demand for the other good.

• Two goods are compliments if a rise in the price of one good leads to a decrease in the demand for the other good or service.

Penut butter and Jelly

Normal Goods and Inferior Goods• Income change

– Normal goods and Inferior goods

• When individuals have more income they are normally more likely to purchase a good at any given price

• The demand for Normal Goods increases as income increases. (a Rightward shift of the demand curve)

• Goods for which demand decreased when income rises are know as Inferior goods.

Normal Good

or

Taste and Preferences • People have certain preferences and tastes that determine what they

want to consume.• When taste change in favor of a good, more people want to buy it at any

given price, so the demand curve shifts to the right.• In the other case when taste change against a good, fewer people want to

buy something at a given price, so the demand curve shifts to the left

Changes in Expectations and in Number of Consumers

• Expectations of a future drop in price will lead to a decrease in demand today. On the other hand, expectations of a future rise in price are likely to cause an increase in demand today

• Expected changes in income can also lead to changes in demand– If an individual expects his income to rise in the future, he will most

likely borrow money today and increase his demand for certain goods.– If an individual expects his income to fall in the future, he will instead

save today and reduce your demand for goods.

• The change in Number of Consumers is quite simple. – If the number of consumers of a certain good rises then the demand for

that good or service increases– If the number of consumers of a certain good falls then the demand for

that good or service decreases

Factors that Shift the Supply Curve

• Five factors1. Changes in input prices2. Changes in technology3. Changes in the number of producers 4. Changes in the price of related goods or services5. Changes in expectations

Supply*POSITIVE SLOPE*

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• SUPPLY DECREASES IF…• If the price to of an input to produce

a good raises• If the price of a substitute used to

produce a good raises• If the price of a compliment in

production decreases • If the price of an good supplied is

expected to raise in the future• If the number of producers falls

• SUPPLY INCREASES IF…• If the price of an input to produce

a good decreases• If the price of a substitute in

production falls • If the price of a compliment in

production raises• If the technology used to produce

a good improves• If the price of a good supplied is

expected to fall in the future• If the number of produces rises

S2

S1

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$S1

#

$S2

Supply and Demand at Equilibrium

Price

Quantity

Supply

Demand

Equilibrium Price

Equilibrium Quantity

Equilibrium

At equilibrium no individual is better off doing somethingdifferent.

The price at whichthe quantity demanded of a good equals the quantitysupplied of that good

The quantity of that good bought and sold at Eprice

QuestionWhich of the following could most likely cause the leftward shift of an industry's supply curve?

A) One of the industry's firms discovers a new technology that aids in Production.B) The price of a necessary input declines for some firms in the industry.C) Consumer purchasing power rises considerably.

E) The government levies a new tax on consumers

Correct answer is: choice D

D) Several of the industry's firms shut down operations

This answer is correct because after the industry’s firms shut down, supply will decreaseWhich is represented by a leftward shift of the supply curve

QuestionWhich of the following would most likely shift the demand curve for a good to the right?

A) The government grants a subsidy to producers of the product.B) New technology makes production quicker and easier.C) The wage rate for the producer’s manufactures increases.D) The company selling the product cuts the price by 25%E) Consumers expect the price of the good to raise soon.

Correct answer: Choice E

This is the correct answer because it’s the only choice that guaranties a shift of the demand curve. All the other choices would cause a shift in the supply curve.

QuestionIn general, technological improvements and industrial innovation will cause

A) The productivity of workers to decreaseB) The supply curve for the industry to shiftC) The demand curve for the industry to shiftD) A movement along the industry supply curveE) A movement along the industry demand curve

Correct answer is: choice B

This is correct because a change in technology is one of the non price factors that shift a firm’s supply curve.

Other Concepts

• The supply and demand curves are seen everywhere. • It’s also a common concept that determines the optimal point

of where markets should produce a good. And also inefficiencies within a market.

Price

Quantity

Supply Consumer Surplus

ProducerSurplus

Efficiency of Markets

Price

Quantity

Supply

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Negative Externalities

Videos and Links

• http://www.youtube.com/watch?v=XNtjkN-FYBw

• Drug Shortages• Consumer Demand for iPhone 4S • AP Central Question