Supply and Demand

Supply Supply andand

DemandDemand

$5$544332211

…a specifiedspecified time periodtime period……other things being equalother things being equal

P QQDD

10102020353555558080

Price decreasesPrice decreases;; QD increasesQD increasesConsumersConsumers “willingness to buy”“willingness to buy”

$5

$4

$3

$2

$1

D

0 10 20 35 55 80Quantity DemandedQuantity Demanded

To

MMarketarket D Demandemand““JO”JO”

$3$3 $3$3 $3$3++ ++

3535 3939 2626

$3$3

100100

FromFrom “individual”“individual” demand todemand to “market”“market” demanddemand

[Total][Total]

““Bo”Bo” ““Mo”Mo”

DD DD DD DD

==

And, what if the price of this product drops from $3 to $2?And, what if the price of this product drops from $3 to $2?

Individual DemandIndividual Demand

$2$2

4040

$2$2

4545

$2$2

3030

$2$2

115115

..

As price decreasesdecreases …QD increasesincreases

..5050

.10.10

$1$1

IInnvveerrssee

QDQD1 1 QIDQID22 QDQD33

“Let’s also buy coke forjust .10.”

PricePrice QDQD

.50.50

Law of Demand for Coca ColaLaw of Demand for Coca Cola

If Coke, Pepsi, Dr. Pepper, 7-Up, Sprite, Root Beer, & Mountain If Coke, Pepsi, Dr. Pepper, 7-Up, Sprite, Root Beer, & Mountain Dew were all selling for $1, who would buy Coke?Dew were all selling for $1, who would buy Coke?

OK, Here you are.OK, Here you are.How many of you non-Coke drinkers would buy Coke for just .50?

OK, HOK, Here you areere you are, the “added buyer” coke drinkers., the “added buyer” coke drinkers.Now, how many of you non-Coke drinkers would buy Coke for just .10?

And,And, here are even morehere are even more “added buyer” coke drinkers.“added buyer” coke drinkers.We have demonstrated the We have demonstrated the “income effect”“income effect”. Lower prices increased . Lower prices increased income income so more was so more was consumed. Aconsumed. And – nd – the the “substitution effect”,“substitution effect”, consumers consumers of higher priced soft drinks bought the lower priced Coke.of higher priced soft drinks bought the lower priced Coke.

QDQD22QDQD11

PricePrice QDQD

InverseInverse relationshirelationshipp

$499.00$499.00[[withwith 2 yr contract] 2 yr contract]

D Reasons For Reasons For Downsloping “D”Downsloping “D” Curve Curve1. Income EffectIncome Effect –current buyers buy more.2. Substitution EffectSubstitution Effect– new buyers now purchase.3. Diminishing MarginalDiminishing Marginal UtilityUtility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered.

Change in QDChange in QD1. Price changePrice change2. MovementMovement [up/down the demand curve]3. Point to pointPoint to point [along the curve]

““D”D” refers to the “whole curve”.“whole curve”. [“all prices”“all prices”]““QD”QD” refers to a “point on the curve”“point on the curve”

based on a “particular price.”“particular price.”

$350.00$350.00

iPhoneiPhone

““Demand Shifters” [TIMER]Demand Shifters” [TIMER]1. 1. TTaste [aste [directdirect]]2. 2. IIncome [normal-ncome [normal-directdirect] [inferior-] [inferior-iinnvveerrssee]]3. 3. MMarket Size [number of consumers-arket Size [number of consumers-directdirect]]4. 4. EExpectations [of consumers about future xpectations [of consumers about future *price*price--directdirect, , about future availability-about future availability-iinnvveerrssee, or about future income–, or about future income–directdirect..5. 5. RRelated Good elated Good *Prices*Prices [substitutes- [substitutes-directdirect] [complements-] [complements-iinnvveerrssee]]

Changes in “D” [curve]Changes in “D” [curve]1. Non price change [“TIMER”]2. Whole “D” curve shifts[There is a change in “QD” but it isnot caused by a change in “price.”[QD-”single price”QD-”single price”; D-”all prices”D-”all prices”]

ComplementComplement[[iinnvveerrssee]]

SubstituteSubstitute

[[DirectDirect]]ButterButter BreadBread BagelsBagels

PP

DD33 DD11 DD33

QDQD33 QDQD11 QDQD22

DD11 DD22

PPPP11

QDQD11 QDQD22

PP22

DD11

DD22

DD

PP

[DecreaseDecrease in price of one; increaseincrease in the “D” for the other]

Car PricesCar Prices

Gasoline DemandGasoline Demand

PP

QD QD QDQD

DD11

They are so cheap that They are so cheap that even dogs are buying carseven dogs are buying cars

P1P2

QD1 QD2

No chgNo chgin pricein price

I’m making more money without dropping my prices.

DD22

.

QSQS22

DirectDirect

Reasons For Upsloping “S” CurveReasons For Upsloping “S” Curve1. There is increasing opportunity cost if you don’t produce.2. Current producers produce more [overtime/more shifts]3. New producers are attracted to the market.

““S”S” refers to the refers to the “whole supply curve”“whole supply curve” and refers to what and refers to what producers will supply at producers will supply at “different prices”“different prices”““QS”QS” refers to a refers to a “point on the curve”“point on the curve” and refers to what and refers to what

producers will supply at a producers will supply at a “particular price”“particular price”

Change in “QS”Change in “QS”1. Price change2. Movement (up/down “S” curve)

3. Point to point (along “S” curve)

SS

QSQS11

PP22

PP11

Price increasesincreases; QS increasesincreasesPrice decreasesdecreases; QS decreasesdecreases

Producers want theProducers want thehighest price possible.highest price possible.

$90$90Why do the Ags have a scoreboard on the outside of the stadium?

Aggieland Football Season TicketsAggieland Football Season Tickets

The Aggies have a scoreboard outside so that the 5 ReveillesThe Aggies have a scoreboard outside so that the 5 Reveilleswho are buried outside the stadium can see the scoreboard.who are buried outside the stadium can see the scoreboard.

The 5 mascots5 mascots are ranked as5-Star generals5-Star generals and are buriedburiedfacing the scoreboardfacing the scoreboard.

The PlaquePlaque says this:“Reveille 1st, and the other Reveillesthat follow her, will always have aspecial place in an Aggie’s heart andsymbolize the undying undying spiritspirit of

Texas A&MTexas A&M.”

The Aggie War HymnThe Aggie War HymnHullabaloo, Caneck, CaneckHullabaloo, Caneck, CaneckHullabaloo, Caneck, CaneckHullabaloo, Caneck, CaneckGood bye to texas universityGood bye to texas university

So long to the orange and the whiteSo long to the orange and the whiteGood luck to dear old Texas AggiesGood luck to dear old Texas AggiesTThey are the boys who show the real old fighthey are the boys who show the real old fight

‘‘the eyes of Texas are upon you’the eyes of Texas are upon you’That is the song they sing so wellThat is the song they sing so well

Sounds Like hellSounds Like hellSo good bye to texas universitySo good bye to texas university

We’re gonna beat you all toWe’re gonna beat you all toChigaroogaremChigaroogaremChigaroogaremChigaroogarem

Rough, Tough, Real stuff, Texas A&MRough, Tough, Real stuff, Texas A&M

Southern California at Southern California at LA Memorial ColiseumLA Memorial ColiseumNational Champs 2003-2004National Champs 2003-2004

Southern Cal Football Season Southern Cal Football Season TicketsTickets

$90$90

The EndThe EndGo to Go to

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