Supply and Demand

Econ Unit 2

Ceteris paribus

• The most important thing to remember for this next area of study.

• “All things being equal.”

• Don’t assume!

• Just use the facts.

The Market Economy

• Free-enterprise system–Questions of What?, How?, &

Who?

–Answered by the prices in the market

–“price-directed market economy”

The Function of Prices

2 roles of prices

• 1) they ration scarce resources– What is the price of rare items???– The higher the price, the less people will want

to buy—the rationing effect.

• 2) they motivate production– What is the goal of business?– Higher prices attract more producers

Demand

• The focus is on the CONSUMERS.

• Define:– The number of items people will buy at

various prices at given times.– Key words: number of items + various prices

• Quantity demanded (Qd)

• Price (p)

How are Qd & p related

p($)

.50

.751.001.251.501.752.00

Qd (#)

3002652351751258050

The Law of Demand

Qd

p

Buyers want more of a product at lower prices

Demand Curve

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

D

Demand Curve

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

I

D

Change in quantity demanded due to change in price

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

I

II

D

Demand curve shifts to the right

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

D

Demand curve shifts to the left

0

1

2

3

4

5

6

1 2 3 4 5

Quantity demanded

Pri

ce

D

Shifts in the Demand Curve• Tastes

• Income– Normal goods if y , D – Inferior goods if y , D

• Related goods– Substitute goods if p of sub , D– Complementary goods if p of comp , D

• Expectations of future prices

• # of consumers

Supply

• The focus is on the PRODUCERS.

• Define:– The number of items offered for sale at

various prices at given times.– Key words: number of items + various prices

• Quantity supplied (Qs)

• Price (p)

How are Qs & p related

p($)

.50

.751.001.251.501.752.00

Qs (#)

5080

125175235265300

The Law of Supply

Qs

p

Sellers offer more of a product at higher prices

The Supply Curve

Supply of Ice Cream

Price per cone

Quantity of ice cream cones

.50

.75

1.00

1.25

1.50

1.75

2.00

The Supply Curve

Supply of Ice Cream

Price per cone

Quantity of ice cream cones

.50

.75

1.00

1.25

1.50

1.75

2.00

The Supply Curve

Supply of Ice Cream

Price per cone

Quantity of ice cream cones

.50

.75

1.00

1.25

1.50

1.75

2.00

Shifts in the Supply Curve

• Technology

• Resource Prices (inputs)

• Other goods

• Government

• Expectations of price

• Number of sellers