Demand and supply

Demand and Supply

Chapter Objectives

• Explain the main influences on demand• Explain the main influences on supply• Use a model to show how prices are

determined by demand and supply• Make predictions about the price and quantity

changes using the demand and supply model

Demand and its Determinants

• If a person demands something, they– Want it,– Can afford it, and– Have made a definite plan to buy it.

• Wants are the unlimited desires or wishes that people have for goods and services.

Demand and its Determinants• The quantity demanded of a good or service is

the amount that consumers plan to buy in a given period at a particular price.

Demand• What determines buying plans?

– The price of the good– The prices of related goods– Income– Expected future prices– Population– Preferences

Demand

• The Law of Demand– Other things being equal, the higher the price of a

good, the lower is the quantity demanded.

• Reasons for the Law of Demand– Substitution effect• money price rise increases its relative price

– Income effect• cannot afford to buy as much of everything as before

rise in money price

Demand

• Demand Curve and Demand Schedule– Demand curves graphs the relationship between

the quantity demanded of a good and its price (ceteris paribus).

– Demand schedules list the quantities demanded at each different price (ceteris paribus).

Demand

a 1 9

b 2 6

c 3 4

d 4 3

e 5 2

Price Quantity(dollars per tape) (millions of tapes per week)

Demand for tapes

Demand

0 2 4 6 8 10

1

2

3

4

5

6

e

d

c

b

a

Quantity (millions of tapes per week)

Pric

e (d

olla

r pe

r ta

pe)

Demand• A Change in Demand

– When any factor that influences buying plans other than the price of the good changes, there is a change in demand.• An increase in demand causes the demand curve to

shift rightward.• A decrease in demand causes the demand curve to

shift leftward.

A Change in Demand• Prices of Related Goods

– Substitutes — goods used in the place of another good

– Complements — goods used in conjunction with another good

What Happens to Demand if the price of a What Happens to Demand if the price of a substitute good increases? A complement?substitute good increases? A complement?

A Change in Demand• Income

– Normal Goods — demand increases as income increases

– Inferior Goods — demand decreases as income increases

A Change in Demand• Expected Future Prices• Population

– Size and age structure

• Preferences

– Attitudes toward goods and services

The Demand for Tapes• The Law of Demand

– The quantity of tapes demanded• Decreases if:

– The price of a tape rises

• Increases if:– The price of a tape falls

The Demand for Tapes• Changes In Demand

– The demand for tapes• Decreases if:

– The price of a substitute falls– The price of a complement rises– Income falls (a tape is a normal good)– The price of a tape is expected to fall in the

future

– The population decreases

The Demand for Tapes• Changes In Demand

– The demand for tapes• Increases if:

– The price of a substitute rises– The price of a complement falls– Income rises (a tape is a normal good)– The price of a tape is expected to rise in the

future

– The population increases

Movement Along versus a Shift in the Demand Curve

• A movement along a demand curve, results from a change in price, shows a change in the quantity demanded.

• If some other influence on buyers’ plans changes, holding price constant, there is a shift in the demand curve.

A Change in Demand and a Shift in the Demand Curve

Original demand schedule New demand schedule Walkman $200 Walkman $50

Price Quantity Price Quantity (dollars (millions of tapes (dollars (millions of tapes

per tape) per week) per tape) per week)) a 1 9 a' 1 13b 2 6 b' 2 10c 3 4 c' 3 8d 4 3 d' 4 7e 5 2 e' 5 6

Demand

0 2 4 6 8 10 12 14

1

2

3

4

5

6

e

d

c

b

aDemand for tapes(Walkman $200)

Quantity (millions of tapes per week)

Pric

e (d

olla

r pe

r ta

pe)

e'

d'

c'

b'

a'

Demand for tapes(Walkman $50)

Decrease inquantitydemanded

Increase inquantitydemanded

A Change in the Quantity Demanded Versus a Change in Demand

Quantity

Pric

e

D0D0

D1

Increase in

demand

D2

Decrease in demand

Supply and its Determinants• If a firm supplies a good or service, the firm

– Has the resources and technology to produce it,– Can profit from producing it, and– Has made a definite plan to produce it and sell it.

Supply and its Determinants• The quantity supplied of a good or service is

the amount that producers plan to sell during a given time period at a particular price.• The quantity supplied isn’t the amount a firm

would like to sell but is the amount it plans to sell

Supply and its Determinants• What determines selling plans?

– The price of the good– The prices of resources used to produce the good– The prices of related goods produced– Expected future prices– The number of suppliers– Technology

Supply• The Law of Supply

– Other things being equal, the higher the price of a good, the greater is the quantity supplied.

Supply• Supply Curve and Supply Schedule

– Supply curves graphs the relationship between the quantity supplied and the price of a good, holding everything else constant.

– Supply schedules list the quantities supplied at each different price (ceteris paribus).

Supply

a 1 0b 2 3c 3 4 d 4 5e 5 6

Price Quantity (dollars per tape) (millions of tapes per week)

Supply

0 2 4 6 8 10

1

2

3

4

5

6

Quantity (millions of tapes per week)

Pric

e (d

olla

r pe

r ta

pe)

Supply of Tapes

a

b

c

d

e

Supply curve

Supply• A Change in Supply

– When any factor that influences selling plans other than the price of the good changes, there is a change in supply.• An increase in supply causes the supply to shift

rightward.• A decrease in supply causes the supply curve to shift

leftward.

A Change in Supply

• Price of factors of production

• Technology

• The Number of Suppliers

A Change in Supply

• Price of Related Goods Goods Produced– Substitutes in Production– Complements in Production

• Expected Future Prices

The Supply of Tapes

• Changes in Supply– The supply of tapes• Decreases if:

– The price of a factor of production used to produce tapes rises

– The price of a substitute in production rises– The price of a complement in production falls– The price of a tape is expected to rise in the future– The number of firms supplying tapes decreases

The Supply of Tapes

• Changes in Supply– The supply of tapes• Increases if:

– The price of a factor of production used to produce tapes decreases

– The price of a substitute in production falls– The price of a complement in production rises– The price of a tape is expected to fall in the future– The number of firms supplying tapes increases– More efficient technologies for producing tapes are

discovered

SupplyOriginal supply schedule New supply schedule Original technology New technology

Price Quantity Price Quantity (dollars (millions of tapes (dollars (millions of tapes per tape) per week) per tape) per week) a 1 0 a' 1 3

b 2 3 b' 2 6c 3 4 c' 3 8d 4 5 d' 4 10e 5 6 e' 5 12

A Change in Supply and a Shift in the Supply Curve

Quantity (millions of tapes per week)

Pric

e (d

olla

r pe

r ta

pe)

0 2 4 6 8 10 12 14

1

2

3

4

5

6

a

e

d

c

b

Supply of tapes(new technology)

a'

b'

c'

d'

e'

Supply of tapes(original technology)

The Supply of Tapes• The Law of Supply

– The quantity of tapes supplied• Decreases if:

– The price of a tape falls• Increases if:

– The price of a tape rises

Movement Along Versus a Shift in the Supply Curve

• A movement along a supply curve, which results from a change in price, shows a change in the quantity supplied.

• If some other influence on sellers’ plans changes, holding price constant, there is a shift in the supply curve

Increase inquantitysupplied

Decrease inquantitysupplied

A Change in the Quantity Supplied Versus a Change in Supply

Quantity

Pric

e S0S0 S2

Increase in

supply

S1

supply

Decrease in

Market Equilibrium

• Equilibrium in a market occurs when the price balances the plans of buyers and sellers.• Equilibrium price is the price at which quantity

demanded equals quantity supplied.• Equilibrium quantity is the quantity bought

and sold at the equilibrium price.

Market Equilibrium

• Price as a Regulator– If the price is too low, quantity demanded exceeds

quantity supplied.– If the price is too high, quantity supplied exceeds

quantity demanded.

Market Equilibrium Quantity Quantity Shortage(–)

Price demanded supplied or surplus(+)

(dollarsper tape) (millions of tapes per week)

1 9 0 –92 6 3 –33 4 4 04 3 5 +25 2 6 +4

Market Equilibrium

0 2 4 6 8 10

1

2

3

4

5

6

Quantity (millions of tapes per week)

Pric

e (d

olla

r pe

r ta

pe)

Supply of Tapes

Surplus of2 million tapesat $4 a tape

Shortage of 3 million tapes at $2 a tape

Demand for tapes

Equilibrium

Market Equilibrium• Price as a regulator

– A shortage forces the price up.– A surplus forces the price down.

• Such price changes are mutually beneficial to both buyers and sellers.

Predicting Changes in Price and Quantity

• A Change in Demand– What would happen to the price and quantity of

tapes if the price of a Walkman falls from $200 to $50.

The Effect of a Change in Demand

Quantity demanded Quantity supplied

Price (millions of tapes per week) millions of tapes per week

(dollars/tape) Walkman $200 Walkman $50

1 9 13 02 6 10 33 4 8 44 3 7 55 2 6 6

The Effects of a Change in Demand

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6

Pric

e (d

olla

r pe

r ta

pe) Supply of tapes

Demand for tapes(Walkman $200)

Demand for tapes(Walkman $50)

A Change in Demand• Prediction

– When demand increases, both the price and quantity increase.

– When demand decreases, both the price and quantity decrease.

Predicting Changes in Price and Quantity

• A Change in Supply– What would happen to the price and quantity

of tapes if a new cost-saving production technology was developed?

– The new technology changes the supply

The Effects of a Change in Supply

Price Quantity demanded Quantity supplied

dollars/tape (millions of tapes per week) (millions of tapes/week Original New technology technology

1 9 0 32 6 3 63 4 4 84 3 5 105 2 6 12

The Effects of a Change in Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6

Pric

e (d

olla

r pe

r ta

pe)

Supply of tapes(original technology)

Demand for tapes

Supply of tapes(new technology)

A Change in Supply• Prediction

– When supply increases, the quantity increases and the price falls.

– When demand decreases, the quantity decreases and the price falls

Predicting Changes in Price and Quantity

• A Change in Both Demand and Supply– What would happen if both demand and supply

change together?

The Effects of an Increase in Both Demand and Supply

Original Quantities New Quantities (millions of tapes per week) (millions of tapes per

week)

Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded suppliedper tape )

Walkman original Walkman new $200 technology $50 technology

1 9 0 13 32 6 3 10 63 4 4 8 84 3 5 7 105 2 6 6 12

Supply of tapes(new technology)

The Effects of an Increase in Both Demand and Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6

Pric

e (d

olla

r pe

r ta

pe) Supply of tapes

(original technology)

Demand for tapes(Walkman $200)

Demand for tapes(Walkman $50)

A Change in Both Demand and Supply

• Prediction– When both demand and supply increase, the quantity

increases and the price decreases, or remains constant.

– When both demand and supply decreases, the quantity decreases and the price increases, decreases, or remains constant.

The Effects of an Decrease in Demand and an Increase in Supply

Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week)

Price Quantity Quantity Quantity Quantity (dollars demanded supplied demanded suppliedper tape ) CD player original CD player original

$400 technology $200 technology

1 13 0 9 32 10 3 6 63 8 4 4 84 7 5 3 105 6 6 2 12

Demand for tapes(CD player $400)

The Effects of an Decrease in Demand and an Increase in Supply

Quantity (millions of tapes per week)0 2 4 6 8 10 12 14

1

2

3

4

5

6

Pric

e (d

olla

r pe

r ta

pe) Supply of tapes

(original technology)

Demand for tapes(CD player $200)

Supply of tapes(new technology)

The Effects of a Decrease in Demand and an Increase in Supply

• Prediction– When demand decreases and supply increases,

the price falls and the quantity increases, decreases, or remains constant.

– When demand increases and supply decreases, the price rises and the quantity increases, decreases, or remains constant.

END