Supply and Demand: Demand Increase and Decrease

Time to get slapped upside the head with “The Invisible

Hand”

Supply AND Demand Together

NOTE: If during the power-point transitions the slides appear “Jumpy” well…they Are…My PPT skills are very average …it is the best I can do…Bear with me…

Price of

___

Quantity of _________

Demand*

Supply*

Pe

Qe

Market for _______________

Supply and DemandDemand INCREASES

Price of

___


Demand*

Supply*

100

$1.00

NOW: Something in thisMarket causes DEMANDTo INCREASE by 50%.

Qd=Qs


Price of

___


Supply*

100

$1.00

This means that at EVERY GIVEN PRICE the Quantity Demanded is Going to be 50% more.

Qd=Qs

Demand*


Price of

___


Supply*

100

$1.00

150Qd=Qs

This means that at EVERY GIVEN PRICE relative to Demand* the

Quantity Demanded is going to be 50% more.

$2.00

$.50

50 75 225

+50%

+50%

+50%

Demand 1Demand*


Price of

___


Supply*

100

$1.00

150Qd=Qs

Now we have a NEW Demand CurveDemand 1

The Demand Curve has shifted to the RIGHT

$2.00

$.50

50 75 225

Demand 1Demand*


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Let’s assume for the moment that the PRICE does NOT change in reaction to this INCREASE in DEMAND


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

At a price of $1.00 the Quantity Demanded is going to be 150 BUT at a price of $1.00 there is still going to be a Quantity Supplied of 100. OUR MARKET IS IN DIS-EQUILIBRIUM!!


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Qd=150Qs-100 Notice: Quantity DemandedIs greater than Quantity SuppliedAt this price

At this Price and Quantity DemandedThere is no market---The Market Suppliers are NOT going to Supply thatQuantity at that price. Quantity Demanded is GREATER than QuantitySupplied


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1


Why are Producers NOT going to supply 150 units at $1.00? Because to produce that additional 50 units it is going to cost them more in labor, materials, etc…To produce the additional 50 units they are going to have to get a higher price!!!


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1


We have a SHORTAGE in the Market!

ShortageShortage


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1


How do we eliminate this SHORTAGE?Adam Smith said “the Invisible Hand” Of the market will work to shrink the Shortage.

ShortageShortage


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1


This is where it is crucial to understand the difference between a CHANGE in DEMAND or Supply vs a CHANGE in Quantity Demanded or Quantity Supplied


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1


With our change in DEMAND finished we now turn the focus to MOVEMENTS along our new DEMAND CURVE Relative to MOVEMENTS along our SUPPLY CURVE…PRICE is going to dictate our changes in Quantity Demanded AND changes in Quantity Supplied


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Qd=150Qs-100

Because there is a SHORTAGE in this market, the pressure on the price of the good is going to be UPWARD.Let’s assume the Price INCREASES to $1.20.


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Qd=150Qs-100

At $1.20 the Quantity Demanded (dictated by DEMAND 1) is 135 AND the Quantity Supplied (Dictated by Supply*) in 115.

$1.20

135115


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Qd=150Qs-100

We are STILL not in Market Equilibrium…Quantity Demanded (135) is GREATER than Quantity Supplied (115)…A Shortage STILL exists in this market. The gap has closed some, but we are not in Market Equilibrium yet where Qd=Qs.

$1.20

135

Shortage

115


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Qd=150Qs-100

The pressure on the price is going to continue...Can you see where we are heading???? The SHORTAGE will only be cleared when we reach the intersection of Demand and Supply!!

$1.20

135115


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Qd=150Qs-100

Some Demanders are falling by the wayside because as the price increases the quantity demanded decreases (Law of Demand).

$1.20

135115


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Qd=150Qs-100

Current suppliers (producers) are INCREASING production (Quantity Supplied) in response to the higher price they are receiving (The Law of Supply) $1.20

135115


Price of

___


Demand*

Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1

Qd=150Qs-100

At a Price of $1.40 (roughly) Qd = Qs at 120 Units.

The market is back in Equilibrium.$1.20

135115

$1.40

120


Price of

___


D*

Supply*

Pe

D1

This is a correctly labeled Supply and Demand graph showing an INCREASE in DEMAND…Notice I have replaced the numerical price and quantity with alphabetical designations and abbreviated the Demand and Supply Curves. This makes this is the way I would like you to draw and label your supply and demand graphs from now on.

P1

Q1Qe

DECREASE IN DEMAND

Supply and DemandDemand DECREASES

Price of

___


Demand*

Supply*

100

$1.00

ASSUMPTIONS:1. The Demand and Supply CurvesAre rigid (they keep the same Shape/slope)2. The market equilibrium price is $1.00 and the equilibrium quantity (Qd=Qs) is 100 units.

Qd=Qs


Price of

___


Demand*

Supply*

100

$1.00

NOW: Something in thisMarket causes DEMANDTo DECREASE by 50%.

Qd=Qs


Price of

___


Supply*

100

$1.00

This means that at EVERY GIVEN PRICE the Quantity Demanded is Going to be 50% LESS.

Qd=Qs

Demand*


Price of

___


Supply*

100

$1.00

150Qd=Qs


Quantity Demanded is going to be 50% LESS.

$2.00

$.50

50 75 225

-50%

-50%

-50%

Demand 1Demand*

25


Price of

___


Supply*

100

$1.00

150Qd=Qs


Quantity Demanded is going to be 50% LESS.

$2.00

$.50

50 75 225

-50%

-50%

-50%

Demand 1Demand*

25


Price of

___


Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

-50%

-50%

-50%

Demand 1 Demand*

25


The Demand Curve has shifted to the LEFT


Price of

___


Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1 Demand*

25


The Demand Curve has shifted to the LEFT


Price of

___


Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1 Demand*

25

Let’s assume for the moment that the PRICE does NOT change in reaction to this INCREASE in DEMAND


Price of

___


Supply*

100

$1.00

150Qd=Qs

$2.00

$.50

50 75 225

Demand 1 Demand*

25

At a price of $1.00 the Quantity Demanded is going to be 50 BUT at a price of $1.00 there is still going to be a Quantity Supplied of 100. OUR MARKET IS IN DIS-EQUILIBRIUM!!


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*

25

At this Price and Quantity DemandedThere is no market---The Market Demanders are NOT going to Demand that Quantity at that price. Quantity Supplied is GREATER than Quantity Demanded

Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price

Qd=50


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*

25Notice: Quantity DemandedIs LESS than Quantity SuppliedAt this price

Qd=50

We have a SURPLUS in the Market!

SurplusSurplus


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

This is where it is crucial to understand the difference between a CHANGE in DEMAND or Supply vs a CHANGE in Quantity Demanded or Quantity Supplied


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

With our change in DEMAND finished we now turn the focus to MOVEMENTS along our new DEMAND CURVE Relative to MOVEMENTS along our SUPPLY CURVE…PRICE is going to dictate our changes in Quantity Demanded AND changes in Quantity Supplied


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

Because there is a SURPLUS in this market, the pressure on the price of the good is going to be DOWNWARD. Let’s assume the Price DECREASES to $.85


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

At $.85 the Quantity Demanded (dictated by DEMAND 1) is 60 AND the Quantity Supplied (Dictated by Supply*) in 85.

$.85

60 85


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

$.85

60 85

We are STILL not in Market Equilibrium…Quantity Demanded (60 ) is LESS than Quantity Supplied (85)…A SURPLUS STILL exists in this market. The gap has closed some, but we are not in Market Equilibrium yet where Qd=Qs.

Surplus


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

$.85

60 85

The pressure on the price is going to continue...Can you see where we are heading???? The SURPLUS will only be cleared when we reach the intersection of Demand and Supply!!


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

$.85

60 85

As the price decreases Demanders are increasing their Quantity Demanded because as the price Decreases the quantity demanded Increases (Law of Demand).


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

$.85

60 85

Current suppliers (producers) are DECREASING production (Quantity Supplied) in response to the LOWER price they are receiving (The Law of Supply)


Price of

___


Supply*

100

$1.00

150Qs=100

$2.00

$.50

50 75 225

Demand 1 Demand*


Qd=50

$.85

60 85

At a Price of $.60 (roughly) Qd = Qs at 75 Units.

The market is back in Equilibrium.

$.60


Price of

___


S*

Pe

Q1

D 1 D*

P1

This is a correctly labeled Supply and Demand graph showing an DECREASE in DEMAND…Notice I have replaced the numerical price and quantity with alphabetical designations and abbreviated the Demand and Supply Curves. This is the way I would like you to draw and label your supply and demand graphs from now on.

Qe

Supply and Demand: Demand Increase and Decrease

Education

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