Unit 2. The law of demand states that as price decreases, quantity demanded increases. An inverse relationship exists. The law of demand is dependent

Unit 2

Demand, Supply, & Equilibrium

Section 1: Demand

• The law of demand states that as price decreases, quantity demanded increases. • An inverse relationship exists.

• The law of demand is dependent on ceteris paribus- all other factors remaining unchanged.

Law of Demand

• A change in quantity demanded caused ONLY by a change in the PRICE of the product. On a graph it is represented by a movement ALONG a SINGLE demand curve.

A Change in Quantity Demanded

• Sometimes, factors other than price affect people’s desire to purchase a good or service.

• When something other than the price of a good affects people’s willingness to buy, there is a CHANGE IN DEMAND

Changes in demand

Increase in Demand Decrease in Demand

• Quantity Demanded decreases at every price

• Entire curve moves left.

• Quantity Demanded increases at every price

• Entire curve moves right

Changes in Demand

• These factors will cause a CHANGE IN DEMAND• QUANTITY

DEMANDED will change (increase or decrease) at every possible price

• The curve will shift to the left or right

Determinants

Changes in Consumer

Tastes

Change in the # of Buyers

Change in Consumer incomes

Change in consumer

expectations

Changes in the price of Complemen

ts and Substitutes

Determinants of Demand (Cause Shifts)

Changes in Customer tastes• If an item is currently “popular”

demand will increase

• Celebrity endorsements can also effect demand

Determinants of Demand

Changes in Consumer Income • An increase in income shifts the demand curve of normal

goods to the right. Inferior goods to the left.

• A decrease in income shifts the demand curve for normal goods to the left. Inferior goods to the right.


Inferior goods

Prices of related goods• Complements - an increase in the price of a complement reduces

demand, shifting the demand curve to the left.

• Substitutes - an increase in the price of a substitute product increases demand, shifting the demand curve to the right.


Number of potential buyers• an increase in population or market size shifts the demand curve to

the right.


Changes in Consumer Expectations (of a price change) • a news report predicting higher prices in the future can increase

the current demand as customers increase the quantity they purchase in anticipation of the price change.


Section 2: Supply

• The law of Supply states that as price decreases, quantity supplied decreases. • A DIRECT relationship exists.

• The law of supply is also dependent on ceteris paribus- all other factors remaining unchanged.

Law of Supply

• Direct relationship between price and quantity

• Curve ALWAYS has a positive slope

Supply Schedule and Curve

• A change in quantity Supplied is caused ONLY by a change in the PRICE of the product. On a graph it is represented by a movement ALONG a SINGLE Supply curve.

A Change in Quantity Supplied

• Sometimes, factors other than price affect a businesses desire to produce a good or service.

• When something other than the price of a good affects businesses willingness to produce, there is a CHANGE IN SUPPLY

Changes in Supply

Increase in Supply Decrease in Supply

• Quantity Supplied decreases at every price

• Suppliers will offer goods at higher prices

• Entire curve moves left.

• Quantity Supplied increases at every price

• Suppliers will offer goods at lower price

• Entire curve moves right

Changes in Supply

• These factors will cause a CHANGE IN SUPPLY• QUANTITY SUPPLIED

will change (increase or decrease) at every possible price

• The curve will shift to the left or right

Determinants

Changes in

Technology

Change in the # of Sellers

Change in input costs

Change in Supplier

expectations

Determinants of Supply (Cause Shifts)

Determinants of SupplyPrices of inputs• If the price of resources used to make goods increases, sellers will be less

inclined to make the same quantity at a given price, and the supply curve will shift left

• Inputs include• Raw materials• Cost of labor• Rent

Government can Influence

• Subsidies (payments made for production)• Increases supply

• Regulation (increase cost of production)• Decrease supply

• Taxes• Increase = suppliers produce less• Decrease = suppliers produce more

Determinants of SupplyTechnology• If technology increases efficiency, it will cost producers less to make an

item, and they will provide more

• (shift right)

Determinants of SupplyNumber of Sellers• More sellers = More supply (shift right)

• Less sellers = Less supply (shift left)

Determinants of SupplyProducer Expectations• If sellers expect prices to increase they will decrease supply now so

that they can increase supply after prices change.

• (shift left)

• For example, if farmers expect the future of the price of corn to decline, they will increase their present supply of corn, in the hopes of making more money now.

EquilibriumSection 3

Equilibrium• Equilibrium price refers to the price that makes the

quantity demanded equal to the quantity supplied. • Equilibrium in a market occurs when the price balances the plans of

buyers and sellers. It sets the value of the product.

• On a supply and demand curve, equilibrium price is represented by the point where the demand and supply curves intersect.

equilibrium

equilibriumprice

equilibriumquantity

• A surplus is a situation where there is an excess at some price of quantity supplied over quantity demanded.

• On a supply and demand curve a surplus is represented by points above the equilibrium price.

• When a surplus exists buyers have an oversupply of product to choose from and will probably pay less for goods and services.

• For sellers, they will be forced to lower prices, but will sell more.

Surplus

• A shortage is a situation where there is an excess at some price of quantity demanded over quantity supplied.

• On a supply and demand curve a shortage is represented by points below the equilibrium price.

• When a shortage exists buyers are competing with one another for limited quantities of goods.

• For sellers, it is an opportunity to raise prices and increase sales.

Shortage

Price FloorA price floor set above the market equilibrium price

Consumers find they must now pay a higher price for the same product.

• As a result, they reduce their purchases or drop out of the market entirely.

Suppliers find they are guaranteed a new, higher price than they were charging before.

• As a result, they increase production.

Example

Minimum Wage•Sets lowest wage that can be paid for an hour of work.•Allows people to maintain a standard of living, but creates a surplus of workers (unemployment) if set too high

Price Ceiling

A price ceiling is a government-imposed limit on the price charged for a product.

Governments intend price ceilings to protect consumers from conditions that could make necessary commodities unattainable. • However, a price ceiling

can cause problems if imposed for a long period without controlled rationing.

Example

Rent Control•When soldiers returned from World War II and started families (which increased demand for apartments), but stopped receiving military pay, many could not deal with the jumping rent. • The government put in price controls, so soldiers and their families could pay the rent and keep their homes. • This increased the quantity demanded for apartments and lowered the quantity supplied, meaning that available apartments were rapidly taken until none left were for late-comers.

• When there is a change in Supply or Demand, equilibrium price and equilibrium quantity are affected.

Shifts

Shifts in Demand and Supply

AP Microeconomics Visual Visual 2.6National Council on Economic Education http://apeconomics.ncee.net

Simultaneous Shifts of Supply and Demand

• When demand increases and supply decreases the equilibrium price definitely increases, but quantity is ambiguous


• When demand decreases and supply increases the equilibrium price definitely decreases, but quantity is ambiguous


• When demand and supply increase, the change in equilibrium price is ambiguous, but equilibrium quantity definitely increases


• When demand and supply decrease, the change in equilibrium price is ambiguous, but equilibrium quantity definitely decreases

Documents

Unit 2. The law of demand states that as price decreases, quantity demanded increases. An inverse relationship exists. The law of demand is dependent