Demand and Demand and SupplySupply

Krugman Section 2Krugman Section 2

Modules 5-7Modules 5-7

DemandDemand

demand is a schedule that demand is a schedule that shows the various amounts of a shows the various amounts of a product product consumers are consumers are WILLINGWILLING and and ABLEABLE to to BUYBUY at each specific at each specific price at a specific time.price at a specific time.

Demand ScheduleDemand Schedule: listing that : listing that shows the # demanded at different shows the # demanded at different pricesprices Demand Schedule for Donuts Price Quantity

$2 1

$1.50 5

$1.00 8

$.75 12

$.50 15

$.25 25

Law of DemandLaw of Demand

There is an inverse relationship There is an inverse relationship between P & Q demandedbetween P & Q demanded– If p If p , D , D – If p If p , D , D

Substitution EffectSubstitution Effect: a lower price : a lower price gives an incentive to substitute gives an incentive to substitute the lower-priced good for the the lower-priced good for the higher priced goodhigher priced good

Marginal UtilityMarginal Utility: : Extra satisfaction from getting one more unit of a product

Diminishing marginal utilityDiminishing marginal utility: : the extra satisfaction we get the extra satisfaction we get from one more unit begins to from one more unit begins to diminishdiminish

DDemand Curveemand Curve

Always Always DDownward sloping—ownward sloping—indicating lower quantity indicating lower quantity demanded at higher prices, demanded at higher prices, higher quantities at lower prices higher quantities at lower prices

Change in Change in PRICEPRICE reflects reflects movement along the curve = movement along the curve = change in change in quantityquantity demanded demanded

If a change in demand is If a change in demand is NOTNOT caused by a change in caused by a change in PRICEPRICE, , the entire curve will shift = the entire curve will shift = change in demandchange in demand

Determinants that affect Determinants that affect demand (other than price)demand (other than price)

Consumer tastesConsumer tastes # of buyers# of buyers IncomeIncome Prices of related goodsPrices of related goods

– Substitute goodsSubstitute goods– Complementary goodsComplementary goods

ExpectationsExpectations

Demand Schedule for Donuts

Price Quantity1 Quantity2$2 1 3

$1.50 5 7

$1.00 8 12

$.75 12 20

$.50 15 25

$.25 25 35

Demand has increased so the curve hasshifted to the right.

SupplySupply

Supply is a schedule that shows Supply is a schedule that shows the amount of a product a the amount of a product a producer is producer is WILLINGWILLING and and ABLEABLE to to produce produce and and SELLSELL at each at each specific price at a specific time.specific price at a specific time.

Law of supplyLaw of supply

Producers will produce & sell Producers will produce & sell more of their product at a high P more of their product at a high P than at a low P.than at a low P.

There is a direct relationship in P There is a direct relationship in P & Q supplied& Q supplied– If P If P , S will , S will – If P If P , S will , S will

SSupupply Curveply Curve

UpUpward ward sloping—sloping—indicating indicating higher Qs higher Qs supplied at supplied at higher P, lower higher P, lower Qs at lower PQs at lower P

Supply Schedule for cakes

P P (Price)(Price)

Q Q (Quantity)(Quantity)

$30$30 2525$25$25 2020$20$20 1818$15$15 1414$10$10 1010$5$5 11

Change in Change in PRICEPRICE reflects reflects movement along the curve movement along the curve = = change in quantity suppliedchange in quantity supplied

If a change in supply is If a change in supply is NOTNOT caused by a change in caused by a change in PRICEPRICE, the , the entire curve will shift entire curve will shift = change in = change in supplysupply

Determinants that affect Determinants that affect supply (other than price)supply (other than price)

Resource prices***Resource prices*** TechnologyTechnology Taxes (-) or subsidies (+)Taxes (-) or subsidies (+) Price of related goodsPrice of related goods ExpectationsExpectations Number of sellersNumber of sellers

Supply Schedule for cakes

PricePrice Q1Q1 Q2Q2

$30$30 2525 2020

$25$25 2020 1515$20$20 1818 1010

$15$15 1414 88

$10$10 1010 55$5$5 11 00

Market EquilibriumMarket Equilibrium Quantity supplied = quantity Quantity supplied = quantity

demandeddemanded Prices above equilibrium = surplus Prices above equilibrium = surplus

of supplyof supply Prices below equilibrium = Prices below equilibrium =

shortage of supplyshortage of supply Market Clearing or Market Price is Market Clearing or Market Price is

another name for equilibriumanother name for equilibrium

Graphson Document Camera or Board

Surplus Shortage Price ceiling Price floor Shifts