Chapter 3 Demand and Supply The Basics

Chapter 3Demand and Supply The Basics

Markets are the institutions that bring together buyers and sellers.

◦ Examples include: farmer’s markets, eBay, Amazon.com, and retail outlets.

Demand and Supply

Demand is the amount of a product that consumers are willing and able to purchase at each possible price during a given period of time, everything else (but price) held constant. (ceteris paribus)

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Demand vs. Quantity Demanded

◦It is a relationship between prices and quantities.

Law of Demand: There is an inverse relationship between the price of a good and the quantity consumers are willing and able to purchase during a particular period of time.◦ As price of a good rises, consumers buy less.◦ Demand depicts the quantity-price relationship

ceteris paribus.

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Law of Demand

The quantity demanded is the amount of a product that people are willing and able to purchase at one, specific price.

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Demand vs. Quantity Demanded

• It is a specific quantity tied to a specific price.

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Demand Curve

A graphical representation of Demand

Change in Quantity Demanded - movement along the same demand curve in response to a price change.◦ Results from a price change◦ A movement along a curve

Change in Demand - shift in entire demand curve.◦ Results from a change in a determinant of

demand (a ceteris paribus variable)◦ A whole new curve

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Changes in Demand and Quantity Demanded

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Change in Demand vs. Change in the Quantity Demanded

Δ delta

Δ stands for CHANGE

Important mathematical/scientific symbol

The Demand Shifters are factors other than price that influence demand: income, tastes, prices of related goods, expectations, and numbers of buyers.

Δ Demand Shifters leads to Δ DEMAND itself – ie a whole new demand curve

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Law of Demand

Changes in Consumer Income◦ Normal goods: goods for which demand

increases as income increases.◦ Inferior goods: goods for which demand

decreases as income increases.

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Demand Shifters

Δ the Number of Buyers

Δ Demographic Characteristics

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Demand Shifters

Δ Price of Related Goods◦ Substitute goods: goods that can be used in

place of each other.◦ Complementary goods: goods that are used

together.

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Demand Shifters

Δ Consumer Expectations

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Demand Shifters

New!Faster!

Cheaper!

Should I

Buy Now???

Δ Consumer Tastes and Preferences

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Demand Shifters

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Supply and Quantity Supplied Supply is the amount of a good or service that

producers are willing and able to offer for sale at each possible price during a period of time, ceteris paribus.◦ It is a price-quantity relationship.

The quantity supplied is the amount sellers are willing and able to offer for sale during a period of time at a specific price, ceteris paribus.◦ It is a specific quantity tied to a specific price

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Law of Supply Law of Supply - there is a positive

relationship between the price of a product and the amount of it that will be supplied.◦ As the price of a product rises, producers will be

willing to supply more. ◦ The height of the supply curve at any quantity

also shows the opportunity cost of producing the next unit of the good.

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Supply Curve

A graphical representation of Demand

The Supply Curve and the PPF The production possibility frontier provides one

explanation of why the supply curve has a positive slope As the quantity of chicken produced increases, the

opportunity cost of producing it increases, as shown by the increasing slope of the PPF

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Changes in Supply Δ Quantity Supplied - movement along the

same supply curve in response to a price change.◦ Results from Δ price◦ Movement along a curve

Δ Supply - shift in entire supply curve.◦ Results from Δ some other variables besides

price. (Δ a ceteris paribus variable)◦ Whole new curve

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Change in Supply vs. a Change in the Quantity Supplied

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Supply Shifters Δ Resource Prices

Oil Prices

Falling Wages

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Δ Technology and Productivity

Supply Shifters

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Δ Expectations of Producers

Supply Shifters

The TIMES

Mideast War Likely

Future oil supplies uncertain

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Δ Number of Producers Δ Prices of Related Goods

or Services◦ the opportunity cost of

producing any good is the lost production of some other good

Supply Shifters

Wheat

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Supply NEVER goes UP or DOWN!!! Supply Increases or Decreases

Supply shifts right or left

Supply NEVER, NEVER, NEVER goes UP or DOWN!! – not ever.

Note: The textbook uses the Up/Down language in an example in CH 3. It may be “technically” OK, but it WILL confuse you if you use it!!!

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Decrease in Supply

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Increase in Supply

Equilibrium When the plans of buyers

and sellers mesh when tested in the market place, the market is in equilibrium

If the price is too high, there will be a surplus

If the price is too low, there will be a shortage

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Equilibrium The just right Price where qD = qS

◦ Markets tend towards equilibrium unless something prevents price adjustments

Clicker Which diagram best represents the effect on the market for beef

of an increase in the cost of corn used as feed for beef cattle?A: A B: B C: Can’t tell

A B

Clicker Which of the charts represents what might happen if a report that eating beef

will increase the likelihood of a fatal heart attacks was newly released.A: A B: B C: Can’t tell

A B

ClickerThe Graph labeled A would be described asA. A decrease in DemandB. A decrease in quantity demandedC. A decrease in supply D. A decrease in quantity supplied

A B

ClickerThe Graph labeled B would be described asA. A decrease in DemandB. A decrease in quantity demandedC. A decrease in supply D. A decrease in quantity supplied

A B

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Disequilibrium A surplus occurs whenever qS>qD. A shortage occurs whenever qD>qS. Surpluses and shortages can be resolved

with price changes.

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The Effects of a Shift of the Demand Curve

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The Effects of a Shift of the Supply Curve

Simultaneous Decreases in Demand and Supply:

countervailing pressures

SimultaneousShifts

Group Project

1. Price of Passenger cars goes up dramatically:2. A public campaign encouraging conservation of fuel by using public

transportation and small cars whenever possible creates a change in preferences:

3. The price of tires quadruples:4. A huge strike hits truck manufacturers, shutting down many plants:5. Gasoline prices plummet to $0.02 per gallon:6. The price of steel is cut in half:7. A major recession strikes and income levels drop:8. The price of camp trailers drops by 90%:

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The Market for Pickup Trucks is in equilibrium. What happens in this market with each of the following changes? Draw a graphical representation and identify what happens in the market for Pickup Trucks to (A) Supply, (B) Demand, (C) Price in the market for pickup trucks, ceteris paribus, (D) Equilibrium Quantity Demanded and Quantity Supplied?

A B C DMarket for Pick up trucks