Supply and Demand 4 Teach a parrot the terms supply and demand and youve got an economist. Thomas Carlyle CHAPTER 4 Copyright © 2010 by the McGraw-Hill.

Supply and Demand4

Supply and Demand

Teach a parrot the terms supply and demand and you’ve got an economist.

— Thomas Carlyle

CHAPTER

4

Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Supply and Demand4

Demand

• The law of demand states that the quantity of a good demanded is inversely related to the good’s price

• As prices change, people change how much they’re willing to buy

• In other words, other things equal,• Quantity demanded rises as price falls• Quantity demanded falls as price rises

• The law of demand is based on the fact that when prices for a good rise, people substitute away from that good to other goods

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Supply and Demand4

The Demand Curve

A demand curve is the graphic representation of the relationship between price and quantity demanded

Demand

P

Q

The demand curve is downward sloping

As price increases, quantity demanded

decreasesP0

Q1

P1

Q0

4-3

Supply and Demand4

Shifts in Demand versus Movements Along a Demand Curve

Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price, other things constant

• A change in price changes quantity demanded

• A change in price causes a movement along the demand curve

Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant

• A change in anything other than price that affects the demand curve changes the entire demand curve

• A change in the entire demand curve is a shift in demand

4-4

Supply and Demand4

Shifts in Demand versus Movements Along a Demand Curve

Demand0

P

Q

A change in a shift factor causes a shift in demand

$1

150 200

Shift in demand

B A

Demand1

4-5

Supply and Demand4

Shift Factors in Demand

Important demand shift factors include:

1. Society’s income

2. The prices of other goods

3. Tastes

4. Expectations

5. Taxes and subsidies to consumers

4-6

Supply and Demand4

From a Demand Table to a Demand Curve

Demand for DVDs

P

Q

$3.00

10

$4.00

2

BA

$2.00

$1.00

Price per DVD

DVD rentals demanded per

week

A $0.50 9

B $1.00 8

C $2.00 6

D $3.00 4

E $4.00 2

864

C

D

E

4-7

Supply and Demand4

Individual and Market Demand Curves

Market demand for DVDs

P

Q

$3.00

10

$4.00

2

$2.00

$1.00

864 11 12 13 14

Market demand curve for DVDs per week

ALICEBRUCECARMEN

The market demand curve is the summation of all

individual demand curves

4-8

Supply and Demand4

Supply

• The law of supply states that the quantity of a good supplied is directly related to the good’s price

• The law of supply occurs because:• When prices rise, firms substitute production

of one good for another• Assuming firm’s costs are constant, a higher

price means higher profit

• In other words, other things equal,• Quantity supplied rises as price rises• Quantity supplied falls as price falls

4-9

Supply and Demand4

The Supply Curve

A supply curve is the graphic representation of the relationship between price and quantity supplied

Supply

P

Q

The supply curve is upward sloping

As price increases, quantity supplied

increasesP0

Q1

P1

Q04-10

Supply and Demand4

Shifts in Supply versus Movements Along a Supply Curve

Quantity supplied refers to a specific amount that will be supplied per unit of time at a specific price, other things constant

• A change in price changes quantity supplied

• A change in price causes a movement along the supply curve

Supply refers to a schedule of quantities of a good a seller is willing to sell per unit of time at various prices, other things constant

• A change in anything other than price that affects the supply curve changes the entire supply curve

• A change in the entire supply curve is a shift in supply

4-11

Supply and Demand4

Shifts in Supply versus Movements Along a Supply Curve

A change in a shift factor causes a shift in supply

Shift in Supply

S0

P

Q

S1

4-12

Supply and Demand4

Individual and Market Demand Curves

P

Q

$3.00

10

$4.00

2

$2.00

$1.00

864 11 12 13 14

Market supply curve for DVDs per week

The market supply curve is the summation of all individual supply curves

BARRY ANN

15

Market supply for DVDs

CHARLIE

4-13

Supply and Demand4

The Interaction of Supply and Demand

• Equilibrium is a concept in which opposing dynamic forces cancel each other out

• Equilibrium quantity is the amount bought and sold at equilibrium price

• Equilibrium price is the price toward which the invisible hand drives the market

In the free market, the forces of supply and demand interact to determine:

4-14

Supply and Demand4

The Interaction of Supply and Demand

Supply

P

Q

P0

P1

Demand

Excess demand causes upward

pressure on price

Excess supply

Excess supply causes downward pressure on price

Excess demand

P*

4-15