DEMAND AND SUPPLYEconomics 101
Lecturer: Jack Wu
DEMAND AND SUPPLY
Demand and supply are the two words that economists use most often.
Demand and supply are the forces that make market economies work.
Modern microeconomics is about supply, demand, and market equilibrium.
MARKET
A market is a group of buyers and sellers of a particular good or service.
Buyers determine demand. Sellers determine supply
COMPETITIVE MARKET
A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.
PERFECT COMPETITION
Products are the same Numerous buyers and sellers so that each
has no influence over price Buyers and Sellers are price takers
NO COMPETITION
Monopoly: One seller, and seller controls price
Monopsony: One buyer, and buyer controls price
IMPERFECT COMPETITION
Oligopoly Few sellers Not always aggressive competition
Monopolistic Competition Many sellers Slightly differentiated products Each seller may set price for its own product
DEMAND
Quantity demanded is the amount of a good that buyers are willing and able to purchase.
Law of Demand The law of demand states that, other things
equal, the quantity demanded of a good falls when the price of the good rises.
DEMAND SCHEDULE
Demand Schedule The demand schedule is a table that shows the
relationship between the price of the good and the quantity demanded.
EXAMPLE OF DEMAND SCHEDULE
Price Quantity ($ per movie) (movies per month) 10.00 0 7.50 1 5.00 2 2.50 4 0.00 7
DEMAND CURVE
Demand Curve The demand curve is a graph of the relationship
between the price of a good and the quantity demanded.
0
2.50
5
7.50
10
1 4 72
individual demand curve
Quantity (Movies a month)
Pri
ce (
$ p
er
movie
)
INDIVIDUAL DEMAND CURVE
TWO VIEWS
for every possible price, it shows the quantity demanded
for each unit of item, it shows the maximum price that the buyer is willing to pay
ANOTHER EXAMPLE OF DEMAND SCHEDULE
Copyright © 2004 South-Western
Price ofIce-Cream Cone
0
2.50
2.00
1.50
1.00
0.50
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
1. A decrease in price ...
2. ... increases quantity of cones demanded.
ANOTHER WAY OF DEMAND CURVE
NEGATIVE PRICE?
A negative price case:
Hoover’s special promotion -- two free air tickets (worth more than £400) for purchase of appliance over £100. promotion attracted over 100,000 customers Hoover incurred £48 million loss
CETERIS PARIBUS
When a demand curve is drawn, everything but price and quantity demanded is held constant.
Definition: a Latin phrase, translated as “other things being equal”.
MARKET DEMAND
Market demand refers to the sum of all individual demands for a particular good or service.
Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
CHANGE IN QUANTITY DEMANDED
Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product.
0
D
Price of Ice-Cream Cones
Quantity of Ice-Cream Cones
A tax that raises the price of ice-cream cones results in a
movement along the demand curve.
A
B
8
1.00
$2.00
4
CHANGES IN QUANTITY DEMANDED
CHANGE IN DEMAND
Change in Demand A shift in the demand curve, either to the left or
right. Caused by any change that alters the quantity
demanded at every price.
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
Quantity ofIce-Cream Cones
Increasein demand
Decreasein demand
Demand curve, D3
Demandcurve, D1
Demandcurve, D2
0
CHANGE IN DEMAND
SHIFT IN THE DEMAND CURVE
Consumer incomePrices of related goodsTastesExpectationsNumber of buyers
DEMAND AND INCOME
Changes in incomenormal good – demand increases
with incomeinferior good – demand falls with
income -- example: potato
INFERIOR GOOD V.S. BADS
Inferior good is different from “bads”. Examples of “bads”: pollution or garbage
DEMAND AND PRICES OF RELATED GOODS Prices of Related Goods
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes.
When a fall in the price of one good increases the demand for another good, the two goods are called complements.
CASE STUDY
Two ways to reduce the quantity of smoking demanded:
-- Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on TV (shift demand curve)
-- Raising the price of cigarettes through tobacco taxes (move along demand curve)
SUMMARY
variable change Demand Shift
Income (Normal) Rise (fall) Rise (fall) Right (left)
Income (Inferior) Rise (fall) Fall (rise) Left (right)
Price of substitute Rise (fall) Rise (fall) Right (left)
Price of complement Rise (fall) Fall (rise) Left (right)
Taste Rise (fall) Rise (fall) Right (left)
Expected Price Rise (fall) Rise (fall) Right (left)
Number of buyers Rise (fall) Rise (fall) Right (left)
SUPPLY
Quantity supplied is the amount of a good that sellers are willing and able to sell.
Law of Supply The law of supply states that, other things equal,
the quantity supplied of a good rises when the price of the good rises.
SUPPLY SCHEDULE
Supply Schedule The supply schedule is a table that shows the
relationship between the price of the good and the quantity supplied.
EXAMPLE OF SUPPLY SCHEDULE
SUPPLY CURVE
Supply Curve The supply curve is the graph of the relationship
between the price of a good and the quantity supplied.
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0
2.50
2.00
1.50
1.00
1 2 3 4 5 6 7 8 9 10 11 Quantity ofIce-Cream Cones
$3.00
12
0.50
1. Anincrease in price ...
2. ... increases quantity of cones supplied.
TWO VIEWS
For every possible price, it shows the production rate
For each unit of item, it shows the minimum price that the seller is willing to accept
MARKET SUPPLY
Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.
Graphically, individual supply curves are summed horizontally to obtain the market supply curve.
CHANGE IN QUANTITY SUPPLIED
Change in Quantity Supplied Movement along the supply curve. Caused by a change in price.
1 5
Price of Ice-Cream Cone
Quantity of Ice-Cream Cones0
S
1.00A
C$3.00 A rise in the price
of ice cream cones results in a movement along the supply curve.
CHANGE IN QUANTITY SUPPLIED
CHANGE IN SUPPLY
Change in Supply A shift in the supply curve, either to the left or
right. Caused by a change in a determinant other than
price.
FIGURE 7 SHIFTS IN THE SUPPLY CURVE
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
Quantity ofIce-Cream Cones
0
Increasein supply
Decreasein supply
Supply curve, S3
curve, Supply
S1Supply
curve, S2
SHIFT IN THE SUPPLY CURVE
Input prices Technology Expectations Number of sellers
SUMMARY
variable change Supply Shift
Input (factor) price
Rise (fall)
Fall (rise) Left (right)
Technology Rise (fall)
Rise (fall) Right (left)
Expected Price
Rise (fall)
Fall (rise) Left (right)
Number of sellers
Rise (fall)
Rise (fall) Right (left)
EQUILIBRIUM
Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.
EQUILIBRIUM PRICE AND QUANTITY Equilibrium Price
The price that balances quantity supplied and quantity demanded.
On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity The quantity supplied and the quantity
demanded at the equilibrium price. On a graph it is the quantity at which the supply
and demand curves intersect.
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0 1 2 3 4 5 6 7 8 9 10 11 12Quantity of Ice-Cream Cones
13
Equilibriumquantity
Equilibrium price Equilibrium
Supply
Demand
$2.00
SURPLUS AND SHORTAGE Surplus
When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby
moving toward equilibrium. Shortage
When price < equilibrium price, then quantity demanded > the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium.
ALTERNATIVE EXAMPLE: #2 LEAD PENCILS
Price Quantity demanded Quantity supplied
0.05 1000 400
0.10 800 500
0.15 600 600
0.20 400 700
0.25 200 800
QUICK QUIZ 1
Draw demand and supply curves Find equilibrium price and quantity
QUICK QUIZ 2
How would following events shift either the demand or the supply of #2 lead pencil?
-- an increase in the use of standardized exams (using opscan forms)
-- a decrease in the price of ink pens -- a start of a school year
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0 Quantity of Ice-Cream Cones
Supply
Initialequilibrium
D
D
3. . . . and a higherquantity sold.
2. . . . resultingin a higherprice . . .
1. Hot weather increasesthe demand for ice cream . . .
2.00
7
New equilibrium$2.50
10
INCREASE IN DEMAND
Copyright©2003 Southwestern/Thomson Learning
Price ofIce-Cream
Cone
0 Quantity of Ice-Cream Cones
Demand
Newequilibrium
Initial equilibrium
S1
S2
2. . . . resultingin a higherprice of icecream . . .
1. An increase in theprice of sugar reducesthe supply of ice cream. . .
3. . . . and a lowerquantity sold.
2.00
7
$2.50
4
DECREASE IN SUPPLY
SUMMARY
DISCUSSION
Each of the events listed below has an impact on the market for bicycles.
1.An increase in the price of automobile.2.A decrease in incomes of consumers if bicycles
are a normal good.
DISCUSSION-CONTINUED
3.An increase in the price of steel used to make bicycle frames.
4.An environmental movement shifts tastes toward bicycling.
DISCUSSION-CONTINUED
5.Consumers expect the price of bicycles to fall in the future.
6.A technological advance in the manufacture of bicycles.
DISCUSSION-CONTINUED
7.A reduction in the price of bicycle helmets and shoes.
8.A decrease in incomes of consumers if bicycles are an inferior good.