Demand & Supply (Chapter -03)

7/28/2019 Demand & Supply (Chapter -03)

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Demand and Demand Curves (a)

Demand is the quantity of a good or service purchased at a given price.

The demand curve shows the quantity of the good demanded at each

price.


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Demand and Demand Curves (c)

Demand curves are downward sloping.

As price falls, consumers buy more of the good.

The position of an individuals demand curve (but not its slope) alsodepends on:

Income

Social trends

The price of related goods

Expectations about the future


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Demand and Demand Curves (d)


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Shifts in a Demand Curve versus Movements along a Demand Curve

A change in price is represented by a movement along the demand curve.

All other changes that affect demand will shift the demand curve.


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Sources of Shifts in the Demand Curves (a)

Tastes

Prices of related goods

Income

Demographics

Information

Availability of credit

Changes in expectations


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Sources of Shifts in Demand Curves (b)


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Sources of Shifts in Demand Curves (c)


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Sources of Shifts in Demand Curves (d)


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Sources of Shifts in Demand Curves (e)


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Sources of Shift in Demand Curves (f)


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Sources of Shift in Demand Curves (f) (cont.)


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Supply and Supply Curves

Supply is the quantity of goods and services offered in the market at a

given price. The supply curve shows the quantity of the good offered for sale at

each price.


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The Slope of the Supply Curve


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Market Supply


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Shifts in a Supply Curve versus Movements along a Supply Curve

A change in price is represented by a movement along the supply curve.

All other changes that affect supply shift the supply curve.

Sources of Shifts in Supply Curves (a)

A change in the price of inputs

A change in technology

A change in the natural environment

A change in the availability of credit

A change in expectations


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Sources of Shifts in Supply Curves (b)


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Sources of Shifts in Supply Curves (c)

If a new technology improves coffee bean harvesting, the costs ofproducing coffee fall.

This increases the suppliers desire to sell at each price.

The supply increases and the supply curve shifts right.

In equilibrium, there are no forces or reasons for change.

A marble in a bowl is in stable equilibrium.

It remains at the bottom if there are no external changes to thesystem.

In a market in equilibrium, neither demanders nor suppliers have anincentive to change their actions.

Law of Supply and Demand (a)


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Law of Supply and Demand (b)


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Excess Supply

The law of supply and demand predicts that prices will move toequilibrium values.

Excess supply causes prices to fall. Suppliers cannot sell all they wish, so they the cut price.

Quantity demanded increases along the demand curve to point E0.

Quantity supplied decreases along the supply curve to point E0.


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Excess Demand


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Using Demand and Supply Curves (a)


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Using Demand and Supply Curves (b)


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Marginal Value

Price is related to marginal value not to total value.

The price of water can be very low, even though its initial value isimmense.

The marginal value is why the price of water is relatively low in Alaskaand relatively high in New Mexico.


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What Determines Price?


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Price and Cost (a)

Price is not identical to cost but they are related. Price is what an itemsells for.

Cost is the expense of making an item.

When the cost of producing an item increases, the equilibrium price willrise.

Why?

When cost rises, suppliers will supply less at any price; the supplycurve will shift to the left or up.


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Price and Cost (b)

Demand & Supply (Chapter -03)

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