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Touro University International 1
Supply and Demand Issues
Supply and Demand Issues
Supply and demand are the starting point of all economic analysis
The essence of choice is being able to balance the two
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S U P P L YS U P P L Y
The different quantities that a producer or producers will make available to the market at different prices over a given period of time.
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LAW OF SUPPLYLAW OF SUPPLY
As price increases, producers are willing to produce and sell more
As price decreases, producers are willing to produce and sell less
Price and Quantity Supplied are directly related
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Supply Table
Price Quantity
$4.00 1500
$5.00 1800
$6.00 2000
$7.00 2500
$8.00 3000
Widgets Per Week
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Quantity
Pri
ce
$3
$4
$5
$6
$7
$8
1500 1800 2000 2500 3000
Supply GraphSupply Graph
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Producer CostsProducer Costs
Fixed Costs:Costs that don't change as production levels change
Ex: Rent, Insurance, Loan Payments, TaxesVariable Costs:
Costs that increase and decrease with changes in the production levels
Ex: Labor costs, Materials, UtilitiesTotal Costs = Fixed Costs + Variable Costs
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Changes in SupplyChanges in Supply
Production CostsEx: Materials, Labor, Technology, Taxes
Number of Producers in the Market
Profitability of other production options
Expectation of future market price
Supply in the market will change if there is a change in:
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Increase in SupplyIncrease in Supply
Q
P
P1
Q1
S1
Q2
S2
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DEMANDDEMAND
The various quantities that a person or group is willing to buy
at various prices
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Law of DemandAs prices increase, the quantity people are willing to buy decreases
As prices decrease, the quantity people are willing to buy increases
Indirect price/quantity relationship
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DEMAND TABLE
(Coca-Colas per week)
Price Quantity $.25 20$.50 10$.75 7$1.00 5
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Demand Graph
Quantity
Pri
ce
$0.00
$0.25
$0.50
$0.75
$1.00
5 7 10 20
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REASONS FOR DEMAND
Income Effect (Price Effect)
When price rises, a consumer cannot afford to buy as much. But, when price declines, a consumer can afford to buy more. Price changes affect “purchasing power” of income
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REASONS FOR DEMANDREASONS FOR DEMAND
Substitution EffectSubstitution Effect
When prices increase on one product, When prices increase on one product,
consumers will buy a substitute product consumers will buy a substitute product
instead. But when prices decrease on a instead. But when prices decrease on a
product, consumers will switch to that product, consumers will switch to that
product from other substitutes.product from other substitutes.
SubstitutesSubstitutes are products that can be used in are products that can be used in place of each other. place of each other. ComplementsComplements are are products that are used togetherproducts that are used together
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REASONS FOR DEMANDREASONS FOR DEMAND
Law of Diminishing Marginal Utility
As we have more and more units of a product, the
satisfaction we get from each additional unit
decreases.
Marginal = additional, next, or lastMarginal = additional, next, or last
Utility = satisfactionUtility = satisfaction
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Changes in Demand
If Demand changes, then people want more or less of the product even when the price remains constant
There are several reasons why Demand might change…...
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Changes in Demand
A change in people’s income...
When people have more money, they buy more of everything, and when they have less, they buy less.
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Change in Demand
People’s tastes and preferences change…..
Advertising changes people’s attitudes, desires, etc. Styles change, fads come and go.
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Change in Demand
Situation and needs change...
Get a new job? You might need different clothes. Move? A baby on the way? A new product get invented?
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Changes in Demand
There’s a change in the number of consumers in the market...
When there are more consumers, Demand goes up, and visa-versa
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Changes in Demand
Expectations of future price...
If we expect the price to go down soon, we will have reduced Demand now, and visa-versa
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Changes in Demand
The prices of substitutes or complements change….
If apples go up in price, the Demand for pears might increase because people will substitute pears for apples.
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Increase in DemandIncrease in Demand
D1
Q
P
P1
Q1
D2
Q2
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Decrease in DemandDecrease in Demand
Q2
D2
Q
P
P1
Q1
D1
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CHANGES IN DEMAND
Demand will change if there are changes in:
•Income, Wealth, Credit•Personal Tastes and Preferences•Situation•Number of Consumers in the Market•Expectation of Future Price•The prices of Complements or Substitutes
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Putting Demandand Supply Together
EquilibriumThe situation when quantity supplied equals quantity
demanded at a particular price
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Putting Demandand Supply Together
ShortagesThe situation when quantity demanded
is greater than quantity suppliedExists at any price below the equilibrium priceIs not the same as scarcity
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Putting Demandand Supply Together
SurplusesThe situation when quantity supplied
is greater than quantity demandedExists at any price above the equilibrium price
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Summary
The law of demand says that prices and quantity demanded are inversely related.
Relative prices must be distinguished from money, since people respond to changes in relative prices.
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Summary
A change in quantity demanded versus a change in demand
A change in quantity demanded is a movement along a demand curve
A change in demand is a shift of the demand curve
The law of supply states that price and quantity supplied are directly related.
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Summary
A change in quantity supplied versus a change in supply
A change in quantity supplied is a movement along a supply curve
A change in supply is a shift of the supply curve
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Summary
Determining market price and equilibrium quantity
The demand and supply curves intersect at the equilibrium point.
Shortages exist when the price of a good is below the market price.
Surpluses exist if the price of the good is greater than the market price.
