Demand Supply Markets in Action

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Objectives

After studying this section you will be able to:

Describe a competitive market and think about a price asan opportunity cost

Explain the influences on demand

Explain the influences on supply

Explain how demand and supply determine prices and

quantities bought and sold Use demand and supply to make predictions about

changes in prices and quantities


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Slide, Rocket, Roller Coaster

Some prices slide, some rocket, and some roller coaster.

This section explains how prices are determined and how

markets guide and coordinate choices.


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Markets and Prices

A marketis any arrangement that enables buyers andsellers to get information and do business with each other.

A competitive market is a market that has many buyers

and many sellers so no single buyer or seller can influencethe price.


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Demand

If you demand something, then you:

Want it,

Can afford it, and

Have made a definite plan to buy it.

Wants are the unlimited desires or wishes people have forgoods and services. Demand reflects a decision about

which wants to satisfy.The quantity demanded of a good or service is theamount that consumers plan to buy during a particulartime period, and at a particular price.


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Demand

What Determines Buying Plans?

The amount of any particular good or service thatconsumers plan to buy is influenced by

1. The price of the good,

2. The prices of other goods,

3. Expected future prices,

4. Income,

5. Population, and

6. Preferences.


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Demand

The Law of Demand

The law of demand states:

Other things remaining the same, the higher the price of a

good, the smaller is the quantity demanded.

The law of demand results from

a substitution effect

an income effect


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Demand

Substitution effectwhen the relative price(opportunity cost) of a good or service rises, people

seek substitutes for it, so the quantity demandeddecreases.

Income effectwhen the price of a good or servicerises relative to income, people cannot afford all the

things they previously bought, so the quantitydemanded decreases.


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Demand

Demand Curve and Demand Schedule

The term demand refers to the entire relationship betweenthe price of the good and quantity demanded of the good.

A demand curve shows the relationship between thequantity demanded of a good and its price when all otherinfluences on consumers planned purchases remain the

same.


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Demand

Figure 3.1 shows ademand curve forrecordable compact discs(CD-Rs).

A rise in the price, otherthings remaining the same,brings a decrease in thequantity demanded and a

movement along thedemand curve.


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Demand

A demand curve is alsoa willingness-and-ability-to-paycurve.

The smaller the quantityavailable, the higher isthe price that someoneis willing to pay foranother unit.

Willingness to paymeasures marginalbenefit.


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Demand

A Change in Demand

When any factor that influences buying plans other thanthe price of the good changes, there is a change in

demand for that good. The quantity of the good thatpeople plan to buy changes at each and every price, sothere is a new demand curve.

When demand increases, the quantity that people plan to

buy increases at each and every price so the demandcurve shifts rightward.

When demand decreases, the quantity that people plan tobuy decreases at each and every price so the demand

curve shifts leftward.


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Demand

Table 3.1 (page 62) summarizes the factors that changedemand. They are:

Prices of related goods

A substitute is a good that can be used in place ofanother good.

A complement is a good that is used in conjunction withanother good.

When the price of substitute for CD-Rs rises or when theprice of a complement for CD-Rs falls, the demand for CD-Rs increases.


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Demand

Figure 3.2 shows theshift in the demand

curve for CD-Rs whenthe price of CD burnerfalls.

Because a CD burner

is a complement of aCD-R, the demand forCD-Rs increases.


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Demand

Expected future prices

If the price of a good is expected to rise in the future,current demand increases and the demand curve shifts

rightward.Income

When income increases, consumers buy more ofmostgoods and the demand curve shifts rightward. A normalgood is one for which demand increases as incomeincreases. An inferior good is a good for which demanddecreases as income increases.


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Demand

Population

The larger the population, the greater is the demand forall goods.

Preferences

People with the same income have different demands ifthey have different preferences.


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Demand

A Change in the Quantity

Demanded Versus a

Change in Demand

Figure 3.3 illustrates thedistinction between achange in demand and achange in the quantitydemanded.


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Demand

When the price of thegood changes and

everything else remainsthe same, there is achange in the quantitydemanded and amovement along the

demand curve.


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Demand

When one of the otherfactors that influence

buying plans changes,there is a change indemand and a shift of thedemand curve.


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Supply

If a firm supplies a good or service, then the firm:

Has the resources and the technology to produce it,

Can profit form producing it, and

Has made a definite plan to produce and sell it.

Resourcesand technology determine what it is possibleto produce. Supply reflects a decision about which

technologically feasible items to produce.The quantity supplied of a good or service is the amountthat producers plan to sell during a given time period at aparticular price.


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Supply

What Determines Selling Plans?

The amount of any particular good or service that a firmplans to supply is influenced by

1. The price of the good,

2. The prices of resources needed to produce it,

3. The prices of related goods produced,

4. Expected future prices,

5. The number of suppliers, and

6. Available technology.


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Supply

The Law of Supply

The law of supply states:

Other things remaining the same, the higher the price of a

good, the greater is the quantity supplied.

The law of supply results from the general tendency for themarginal cost of producing a good or service to increaseas the quantity produced increases (Chapter2, page 35).

Producers are willing to supply only if they at least covertheir marginal cost of production.


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Supply

Supply Curve and Supply Schedule

The term supply refers to the entire relationship betweenthe quantity supplied and the price of a good.

The supply curve shows the relationship between thequantity supplied of a good and its price when all otherinfluences on producers planned sales remain the same.


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Supply

Figure 3.4 shows a supplycurve of recordablecompact discs (CD-Rs).

A rise in the price, otherthings remaining the same,brings an increase in thequantity supplied and amovement along the

supply curve.


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Supply

A supply curve is also aminimum-supply-pricecurve.

The greater the quantityproduced, the higher is theprice that a firm mustoffered to be willing toproduce that quantity.


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Supply

A Change in Supply

When any factor that influences selling plans other thanthe price of the good changes, there is a change insupply of that good. The quantity of the good thatproducers plan to sell changes at each and every price, sothere is a new supply curve.

When supply increases, the quantity that producers plan

to sell increases at each and every price so the supplycurve shifts rightward.

When supply decreases, the quantity that producers planto sell decreases at each and every price so the supply

curve shifts leftward.


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Supply

Table 3.2 (page 67) summarizes the factors that changesupply. They are:

Prices of productive resources

If the price of resource used to produce a good rises, theminimum price that a supplier is willing to accept forproducing each quantity of that good rises. So a rise in theprice of productive resources decreases supply and shifts

the supply curve leftward.


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Supply

Prices of related goods produced

A substitute in production for a good is another goodthat can be produced using the same resources. Goods

are compliments in production if they must be producedtogether.

The supply of a good increases and its supply curveshifts rightward if the price of a substitute in production

falls or if the price of a complement in production rises.


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Supply

Expected future prices

If the price of a good is expected to fall in the future,current supply increases and the supply curve shifts

rightward.The number of suppliers

The larger the number of suppliers of a good, thegreater is the supply of the good. An increase in the

number of suppliers shifts the supply curve rightward.


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Supply

Technology

Advances in technology create new products and lowerthe cost of producing existing products, so they

increase supply and shift the supply curve rightward.


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Supply

Figure 3.5 shows how anadvance in the technologyfor producing recordable

CDs increases the supplyof CD-Rs and shifts thesupply curve for CD-Rsrightward.


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Supply

A Change in the Quantity

Supplied Versus a

Change in Supply

Figure 3.6 illustrates thedistinction between achange in supply and achange in the quantitysupplied.


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Supply

When the price of thegood changes and other

influences on sellingplans remain the same,there is a change in thequantity supplied and amovement along the

supply curve.


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Supply

When one of the otherfactors that influence

selling plans changes,there is a change insupplyand a shift of thesupply curve.


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Market Equilibrium

Price as a Regulator

Figure 3.7 illustrates theequilibrium price andequilibrium quantity in themarket for CD-Rs.

If the price of a disc is $2,the quantity suppliedexceeds the quantitydemanded and there is asurplus of discs.


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Market Equilibrium

If the price of a disc is $1,the quantity demandedexceeds the quantitysupplied and there is a

shortage of discs.

If the price of a disc is$1.50, the quantitydemanded equals the

quantity supplied andthere is neither a shortagenor a surplus of discs.


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Market Equilibrium

Price Adjustments

At prices above theequilibrium, a surplusforces the price down.

At prices below theequilibrium, a shortageforces the price up.

At the equilibrium price,buying plans selling plansagree and the pricedoesnt change.


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Market Equilibrium

Because the price rises if itis below equilibrium, falls ifit is above equilibrium, andremains constant if it is atthe equilibrium, the price ispulled toward theequilibrium and remains

there until some eventchanges the equilibrium.


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Predicting Changes in Price and Quantity

A Change in Demand

Figure 3.8 shows the effectof a change in demand.

An increase in demandshifts the demand curverightward and creates ashortage at the originalprice.

The price rises and thequantity suppliedincreases.


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A Change in Supply

Figure 3.9 shows theeffect of a change insupply.

An increase in supplyshifts the supply curverightward and creates asurplus at the originalprice.

The price falls and thequantity demandedincreases.


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A Change in Both

Demand and Supply

A change both demandand supply changes theequilibrium price and theequilibrium quantity but weneed to know the relativemagnitudes of the changes

to predict some of theconsequences.


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Figure 3.10 shows theeffects of a change in bothdemand and supply in thesame direction. Anincrease in both demandand supply increases theequilibrium quantity but

has an uncertain effect onthe equilibrium price.


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Figure 3.11 shows theeffects of a change in bothdemand and supply when

they change in oppositedirections. An increase insupply and a decrease indemand lowers theequilibrium price but has

an uncertain effect on theequilibrium quantity.


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THE END

Demand Supply Markets in Action

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