Demand and Supply

Demand and SupplyWhy do roses cost more on Valentines Day?

Why do TV ads cost more during the Super Bowl ($2.7 million for 30 sec.) than during Nick at Nite reruns?

Why do hotel rooms in Sun Valley, Idaho cost more in the winter than in the summer?

Why do surgeons earn more than butchers?

Why do pro basketball players earn more than pro hockey players?

Why do economics majors earn more than most other majors?

Why are some of you going to major in economics in college?

The answer to these and other economics questions boil down to the workings of supply and demand the subject of this chapter.

Econ, Econ

$54321a specified time periodother things being equalPQD1020355580Price decreases; QD increasesConsumers willingness to buy$5

$4

$3

$2

$1D0 10 20 35 55 80Quantity Demanded

DEMAND SCHEDULE

QD how much will be purchased at a specific price [& date].Income EffectWhen things are expensive, money buys lessWhen things are cheap, money buys more

Substitution EffectWhen apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears

Diminishing Marginal UtilityEach additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower.Ex. When Im hungry, I typically will buy 2 breakfast tacos. The reason I dont buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third taco

Three Reasons Why the Law of Demand ExistsDP1P2QD1QD1

QD2QD1PriceQDInverse relationship$399.00

DReasons For Downsloping D Curve1. Income Effect current buyers buy more.2. Substitution Effect new buyers now purchase.3. Diminishing Marginal Utility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered. Change in QD1. Price change2. Movement [up/down the demand curve]3. Point to point [along the curve]

D refers to the whole curve. [all prices]QD refers to a point on the curvebased on a particular price.Law of Demand [Change in QD]

$250.00iPhone

Picture of Law ofDemandGraphing The Demand Curve[Price Change, Point to Point Movement]

Elasticity of D the way price affects QD.Elastic - QD that is very responsive to price.Inelastic - a chg in price has little impact on QD.Elastic (flexible) DemandSubstitutes (butter)Luxury (mink coat)Expensive (car)Has durability (refrigerator)Lasts a long time (gas-guzzling car)

Inelastic (inflexible) DemandNo substitutes (milk)Necessity (insulin)Inexpensive (safety pin)No durability (pencil)Lasts only a short time (bread)

Elastic or Inelastic(Total Receipts Test)Total Receipts Test20 x $2 = $40.00

Total Receipts Test20 x $2 = $40

20 30 40 50$2$1InelasticElastic

30 x $1 = $30.0050 x $1 = $50Quantity Demanded vs. DemandQuantity Demanded [QD] is triggered by a price chg.The quantities of a good or service that people will purchase at a specific price at a given time.

Demand [D] is triggered by TIMER [non-price].A schedule of the total quantities of a good or service that purchasers will buy at different prices at a given time.Demand is a bunch of QDs strung together.Demand Shifters [TIMER]1. Taste [direct]2. Income [normal-direct] [inferior-inverse]3. Market Size [number of consumers-direct]4. Expectations [of consumers about future *price-direct, about future availability-inverse, or about future incomedirect.5. Related Good *Prices [substitutes-direct] [complements-inverse]

Change in D [curve]1. Non price change [TIMER]2. Whole D curve shifts[There is a change in QD but it isnot caused by a change in price.[QD-single price; D-all prices]Complement[inverse]Substitute[Direct]ButterBreadBagelsP

D3D1D2QD3QD1QD2D1D2PP1QD1P2D1D2D

P

QD2 Tastes [direct] Incomes -Normal [direct] & Inferior[inverse] Market Size(# of consumers) [direct] Expectations of consumers about [future price-direct; future income [direct]; and availability [inverse] Related Good Price Changes [substitutes-direct; complements-inverse]

Helmets

TIMERIncrease in SDecrease in QS[caused by a decrease in price]Increase in QS[caused by an increase in price]1. Price change2. Movement3. Point to point[Snap shot of 1 pt in time]

Change in S [RATNEST]1. Non-price2. Whole curve3. Shift[Time passes]What could cause an increase in supply? 4. Increase in number of producers1. Decrease in resource cost [wages/raw materials] 5. Increase in technology2. Decrease in the price of an alternative output for X 6. Increase in subsidies3. Producer expectations of a price decrease 7. Decrease in taxes

P1P2QS1P1P2QS1

SSS1S2S1S2

PPDecrease in S

Change in QS [Change in price]QS2QS2

Quantity Supplied vs. SupplyQuantity Supplied [QS] is triggered by a price change.QS means quantity of a good/service that producers are willing & able to supply on a given time.

Supply [S]: [triggered by RATNEST]A schedule of the total quantities of a good or service that producers will supply at different prices at a given time. Supply is not an amount but a behavior. Supply is a bunch of QSs strung together. Price can not cause a change in S [shift]Price can only cause a change in QS [movement]. Consumers and Producers Feel Differently About High & Low prices

Producers supply more at the higher price becausethe opportunity cost increases if they dont.

Consumers consume less at the higher price because they now have less money to spend.Producers supply less at the lower prices becausethe opportunity cost decreases if they dont.

Consumers consume more at the lower price because they now have more money to spend.I was going to buy a Honda but this car is $4,000 cheaper. Im saving moneyat the lower price.I normally eat one, but at this low price, Im having two.

.QS2DirectReasons For Upsloping S Curve1. There is increasing opportunity cost if you dont produce.2. Current producers produce more [overtime/more shifts]3. New producers are attracted to the market.S refers to the whole supply curve and refers to what producers will supply at different prices.QS refers to a point on the curve and refers to what producers will supply at a particular price.Change in QS1. Price change2. Movement (up/down S curve)3. Point to point (along S curve)S QS1 P2P1Price increases; QS increasesPrice decreases; QS decreases

Producers want thehighest price possible.

Law of Supply

More of you wouldsupply your laborfor $12 than if laborwere getting just $6an hour.Elastic Supply a small increase/decrease in price causes significant change in QS. Elastic supply is very responsiveto price changes.

Elastic (Flexible) SupplyInelastic (Inflexible) Supply Can be made quickly1. Cannot be made quicklyLittle expense (few2. Great Expense (large capital capital resources required) resources required)3. Unskilled workers3. Skilled workers4. Long time4. Short time5. Dont need scarce 5. Scarcity of natural resources natural resourcesExamples: T-shirts, hats, Examples: Gold, diamonds, shot glasses, and postersand computers

Inelastic Supply - regardless of price, producers are unwilling/unable to increase/decrease QS. (QS is inflexibleand unresponsive to price changes)

Elastic supply results in a more horizontal line & inelastic supply results in a more vertical line.0 1000 2000 3000 400 5000

Elastic supply is very responsive to price & inelastic supply is unresponsive to price.

Quantity SuppliedQuantity Supplied

Elastic/Inelastic Supply CurvesThink of responsiveness as flatness.Resource Cost[wages & raw materials] [inverse]Alternative Output price changes [inverse]Technology [direct]Number of Suppliers [direct]Expectation(Suppliers) about future price [inverse]Subsidies [direct] Taxes [inverse]

Bigger supply of games

Take this money.

Decr in S of broccoli

downUp

Supply Shifters [RATNEST]Individual Supply Can Increase or Decrease 6

5

4

3

2

1

0Quantity Supplied (bushels per week)Price (per bushel)PQs$54321605035205IndividualSupplyPQS1S2S32 4 6 8 10 12 14 Change in Supply [RATNEST]1. Decrease in resource cost2. Alt. output price decrease 3. Technological change4. Increase in # of suppliers5. Producer exp. of price decrease6. Increase in subsidies7. Decrease in taxes1. Increase in resource cost2. Alt. output price increase 3. Technological decrease4. Decrease in # of suppliers5. Producer exp. of price increase6. Decrease in subsidies7. Increase in taxesS is a whole bunch ofQSs strung together.

Four Possibilities

D1D1SABCDIncrease insupply of gasSlide RuleAfter introductionof calculator

SD1D2

[TIMER][RATNEST]D for flagafter 9/11Increase in DemandDecrease in DemandIncrease in SupplyDecrease in SuppyDecrease inS of gasDPQDPQSQPPSQDS1DS1S2$1.85$1.00 Q1 Q2Q2 Q1$1.85S1$1.00

P2P1P1P2Q1 Q2Q2 Q1

After LookingFor Nemo

MARKET DEMAND & SUPPLY

7SQo$5

4

$3

2

1 2 4 6 8 10 12 14 16PQD$5$4$3$2$12,0004,0007,00011,00016,000$5$4$3$2$112,00010,0007,0004,0001,000DPQSPrice of CornQuantity of CornCORNMARKETCORNMARKETMarket Clearing Equilibrium

___7. Increase in the price of Apples iPod Video on the market for Microsofts Zune. ___8. Increase in the price of tea on the market for lemon.___9. Increase in business taxes on the market for SUVs.___10. Consumers expect a shortage of cell phones.TIMER[D] or RATNEST[S]___1. Increase in income on the market for camcorders. ___2. Increase in # of consumers on market for computers.___3. Producer expectations about a price increase.___4. Consumer expectations about a price increase.___5. Increase in # of producers on market for digital cameras.___6. Increase in resource cost on the market for bagels.AADACDABDA

An increase in income if Microsofts Zune is a normal good would: a. increase D, increase P, & increase Q.b. increase D, increase P, & decrease Q. c. increase S, increase P, & increase Q.d. decrease D, increase P, & increase Q.2. A decrease in the price of resources used to produce laptops will: a. increase S, increase P, & increase Q.b. increase D, increase P, & increase Q. c. decrease S, decrease P, & decrease Q.d. do none of the above3. Decrease in price of butter on the market for the substitute margarine: a. increase D, increase P, & decrease Q.b. decrease D, decrease P, & increase Q. c. decrease D, increase P, & decrease Q.d. do none of the above4. An improvement in technology used to produce DVDs will: a. decrease S, increase P, & decrease Q.b. decrease S, increase P, & increase Q. c. increase S, decrease P, & increase Q.d. decrease D, decrease P, & decrease Q.5. A decrease in the number of consumers for Fuzzy Wuzzies: a. decrease S, decrease P, & decrease Q.b. increase D, increase P, & increase Q. c. decrease D, decrease P, & decrease Q.d. decrease D, decrease P, & increase Q.

Effect of Changes in D or S on Price and Quantity

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6. A decrease in taste for Fuzzy Wuzzies would: a. increase D, increase P, & increase Q.b. decrease D, increase P, & decrease Q. c. increase S, increase P, & increase Q.d. decrease D, decrease P, & decrease Q.7. A reduction in the number of firms producing laptops: a. increase S, increase P, & increase Q.b. increase D, increase P, & increase Q. c. decrease S, increase P, & decrease Q.d. decrease S, decrease P, decrease Q.8. An increase in the price of pancakes, a complement for syrup would: a. increase D, increase P, & decrease Q.b. decrease D, decrease P, & increase Q. c. decrease D, decrease P, & decrease Q.d. do none of the above9. A decrease in income upon the market for spam would: a. decrease S, increase P, & decrease Q.b. decrease S, increase P, & increase Q. c. increase D, decrease P, & increase Q.d. increase D, increase P, & increase Q.10. Consumer expectations that the price of PSP will increase by 50% in the future will: a. decrease S, decrease P, & decrease Q.b. increase D, increase P, & increase Q. c. decrease D, decrease P, & decrease Q.d. decrease D, decrease P, & increase Q.

Effect of Changes in D or S on Price and Quantity

[D TIMER; QD price change of product (inverse)] ___1. Which of the following will cause an "Increase in Demand" for computers? a. decrease in price of computers b. decrease in income c. increase in income d. increase in the price of computers ___2. Which of the following will cause an "Increase in QD" for computers? a. decrease in price of computers b. decrease in income c. increase in income d. increase in price of computers ___3. Which of the following will cause a "Decrease in Demand" for plasma TVs? a. increase in price of plasma TVs b. decrease in price of plasma TVs c. decrease in # of consumers(marketsize) ___4. Which of the following will cause a "Decrease in QD" for plasma TVs? a. increase in price of plasma TVs b. decrease in price of plasma TVs c. decrease in # of consumers (market size) [S RATNEST; QS price change of product (direct)] ___5. Which of the following will cause an "Increase in Supply" for DVDs? a. decrease in price of DVDs c. decrease in resource cost b. increase in price of DVDs d. expectations of price increase ___6. Which of the following will cause an "Increase in QS" for DVDs? a. decrease in price of DVDs c. decrease in resource price b. increase in price of DVDs d. expectations of price increase ___7. Which of the following will cause a "Decrease in Supply" for DVDs? a. increase in price of DVDs c. subsidies to suppliers of DVDs b. decrease in price of DVDs d. expectations of price increase ___8. Which of the following will cause a "Decrease in QS" for digital cameras? a. increase in price of cameras c. subsidies to suppliers of cameras b. decrease in price of cameras d. expectations of digital camera price increase CACACBDBd. increase in price of computersc. decrease in # of consumers