Supply & Demand

using them to make decisions

Market…

• A buyer and seller coming together to exchange goods and services

Consumer-Supplier Interaction

• How market prices are determined

• How goods and services are allocated

• Not necessarily a physical space…internet

DEMAND

• Consumer:– How much a consumer will buy– Willingness to purchase– Able to buy a certain quantity

Law of Demand

(holding everything else unchanged)

the quantity demand of a g/s at a lower price will be greater than the quantity

demanded at a higher price

Demand Curve

• Negative relationship (due to incentives)

Changes in Demand Curve

1. Change in quantity demanded

…A change in price

Point moves along current demand

curve

2. Change in demand…A change in outside

factorsShifts the entire

demand curve…left or right

Change of demand determinants:

• Changes in income• Changes in consumer information• Changes in the prices of a substitute or

complementary good• Changes in consumer preferences or tastes• Changes in consumer population• Changes in consumer expectations of the

future

Types of Goods

NORMAL(constantly buy)

INFERIOR(will “upgrade” w/inc. income)

What goes together?

SUBSTITUTE(in place of other goods)

COMPLEMENTARY(goes together)

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Overall Market Demand Schedule

The sum of quantities demanded by all individuals who make up the market

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SUPPLY

Suppliers:

-must allocate scarce resources

-must decide which goods to produce/not produce

Law of Supply

(holding everything else unchanged)

As the price of a good or service increases, suppliers will offer more units for sale.

Supply Curve

• Positive relationship

(incentive to create larger profit)

Changes in Supply Curve1. Change in Quantity

Supplied…change in price, moves

along current supply curve

Points move along the supply curve

2. Change in Supply

…change in other factors

Shifts the entire supply curve…left or right

Change in supply determinants:

• Change in price of production inputs• Environmental conditions (such as

changes in weather/natural disasters)

• Technological advancements• The number of suppliers in the market• Future expectations of prices• Prices of other goods and services in

the market

Market Supply Schedule