Supply and Demand

The Basics

Demand and Supply Curves

• Demand Schedule

• Price QTY

• $3.50 320

• $3.70 300

• $3.90 280

• $4.10 260

• $4.30 240

• $4.50 200

• $4.70 160

• $4.90 120

• $5.10 80

• $5.30 40

Supply schedule. Price QTY

$3.50 40

$3.70 100

$3.90 160

$4.10 200

$4.30 240

$4.50 260

$4.70 280

$4.90 300

$5.10 320

What are three tasks that the price system performs for our economy?

1. Rationing of goods and services

2. Determination of wages.

3. Allocation of limited resources.

Laws of Supply and Demand

• What is Demand?• The willingness to buy a

good or service at all prices

• What is the law of Demand?

• If nothing else changes, the quantity demand of a good or service is greater at lower prices than higher.

• What is Supply?• Supply is the quantity of a

good or service a firm is willing to produce at all prices.

• What is the law of Supply?

• If nothing else changes, firms are willing to supply a greater quantity of good or service at higher prices than lower.

Demand Curve for Xbox 360

Pri

ce p

er X

Bo

x

H

G

F

E

C

D

D

B

A

Quantity Demanded in Billions of Xboxes per Year

75 70 65 60 55 50 45 0

200

250

300

350

400

$450

$500

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

P

ric

e p

er

Xb

ox

Quantity Demanded in Billions of Xboxes per year

F 250

$350

D0

D0

C

D1

D1

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Movement along the curve versus shifts in the Demand curve

Determinants of Demand

• Price of other goods ( substitute or complementary)

• Outlook (consumer expectation of future income and prices)

• Income (normal goods versus inferior goods)• Number of potential customers (pop.of market)• Taste (fads or fashions)

Supply Curve for Xbox 360

S

S

a

b

c

e

f

g

h

90 80 70 60 50 40

$500

450

400

350

300

250

Pri

ce

pe

r X

bo

x

Quantity Supplied in Billions of Xboxes per Year

30 0

200

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Movements along versus shifts of a Supply Curve

S0

S0

Pri

ce p

er X

Bo

x

Quantity Supplied in Billions of XBox per Year

c

f

S1

S1

310

$400

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Determinants of Supply

• Productivity (Improvements in machines and production processes of a good or service)

• Inputs ( Change in the price of inputs required to produce the good or service.)

• Government Actions (Subsidies, Taxes and Regulations)

• Technology (Improvements in machines and production processes of a good or service)

• Outputs ( Price changes in other products produced by the firm)

• Expectations (outlook of future prices and profits)• Size of Industry (Number of firms in the industry)

Equilibrium

• Equilibrium: The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.

• Shortage or excess demand: The condition that exists when quantity demanded exceeds quantity supplied at the current price.

• Surplus or excess supply: The condition that exists when quantity supplied exceeds quantity demanded at the current price.

Supply-Demand Market Equilibrium

D

D

G

A S

S

90 80 70 60 50 40

$500

450

400

350

300

250

Pri

ce p

er x

bo

x 36

0

Quantity in Billions of Xbox 360 per Year

30 0

200

E

g

a

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Excess Demand

• Excess demand, or shortage, is the condition that exists when quantity demanded exceeds quantity supplied at the current price.

• When quantity demanded exceeds quantity supplied, price tends to rise until equilibrium is restored.

Excess Supply

• Excess supply, or surplus, is the condition that exists when quantity supplied exceeds quantity demanded at the current price.

• When quantity supplied exceeds quantity demanded, price tends to fall until equilibrium is restored.

Changes in Equilibrium

• Increase in demand leads to higher equilibrium price and higher equilibrium quantity.

• Increase in supply leads to lower equilibrium price and higher equilibrium quantity.

Changes in Equilibrium

• Decrease in demand demand leads to lower price and lower quantity exchanged.

• Decrease in supply leads to higher price and lower quantity exchanged.