Demand & Supply

#1. Math class tends to read the horizontal axis as the independent variable. In econ class we often use the price axis as the independent variable. Independent, you can choose any number you want. A dependent variable’s value depends on the independent variable chosen. In econ we typically pick a price and find the quantity. MathEcon

#2. Here we have an unnamed graph. But you can say a lot about how it works. What will move you along the curve? Changing the value of E (or F). What will cause the curve to shift? A change to anything except E or F. Why bring this up? It is possible the AP exam will ask about a graph you have never seen before, and you can still answer questions about it knowing the above.

E and F are known as endogenous variables. They are en (in) the model. Endogenous variables will not cause the relationship to shift, changes to an endogenous variable will move you along an existing relationship. Everything else in the world, other than E and F, is exogenous, come from the outside (ex as in exterior). Changes of exogenous variables are what can shift the relationship between E and F.

#3. Reservation price Demanders of an item are arranged in order of the maximum price they are willing and able to pay. This produces the demand curve’s shape. All the reservation prices are arranged in order from highest to lowest. This is also true for supply, where the reservation price reflects the minimum a supplier is willing to take to in exchange for supplying an item.

#4. Per Time Period This is assumed but almost never mentioned. It is important that it be identified. Any demand or supply schedule is “per time period”. The demand for hamburgers. Is it per hour, per day, per year? It makes a big difference.

#5. Perfect competition and no major externalities Once again we have two mainly unspoken aspects involving S &D. #1. We assume unless told other wise that we are operating in a situation of perfect competition, no monopoly power for setting prices or quantities. #2. We assume that all costs and benefits of producing and consuming the output is contained within the S & D curves. In real life these two aspects are seldom met.

Willing and Able. Only those who are BOTH willing and able are counted as part of demand. This is the inherent conservative basis of economics. The more money you have, the more you can shape the economy through your spending.

First on the docket…Demand

Moving from P high to P low or the reverse causes a MOVEMENT ALONG the demand curve. The ONLY thing that causes this is a CHANGE in the PRICE of the item. PQD Moving from a price of 5 to a price of 2 changes the QD

Why is demand downward sloping? Everyone agrees it slopes downward, but how do economists explain this? They give four reasons for this downward slope.

Downward slope of demand: #1. Additional buyers Remember ‘effective demand’ is the sum of all the buyers who are willing and able to make the purchase. At a lower price there will be some people who were always willing but unable who are now able. At a lower price there will be people who were always able but unwilling, but at a lower price they are now willing. Lowering the price turns some of these people from non-demanders into demanders,.

Why Demand is downward sloping: #2. Diminishing Marginal Utility Diminishing marginal utility…a pile of bite sized snickers is placed in front of you with no restrictions on eating. The first one gives you a bunch of enjoyment, the second not as much and same with the third as compared to the second. Each succeeding Snickers gives you less enjoyment. This is true with most everything. If one measures how many units of pleasure you got from each Snickers eaten during a one half-hour eating opportunity, it may look like this: 1st = 602nd = 503rd = 404th = 30 5th = 20 6th = 107th = 0 and you stop.

1st = 602nd = 503rd = 404th = 30 5th = 20 6th = 107th = 0 If in your every day life, you were accustomed to getting 20 units of enjoyment for every $1.00 spent* and these candies cost $2 each. How many of these would you buy? If the candies cost $1 each how many would you buy? If the candies cost $0.50? As the price falls the enjoyment per dollar spent increases. And that is how diminishing marginal utility helps to explain a downward sloping demand curve. *Each of us has a value attached to a dollar. And we know when to buy and when not to buy.

Why Demand is downward sloping: #3. Income Effect 5 $1 each Total spent $5 $4 $3 $1 Extra Income? $0 $1 $2 $4 A person’s caffeine demand for the workweek. If as the price of coffee falls she continued to buy the same quantity, the money left over could be used to buy other things. It is as if she got a raise in take-home pay. With some of the ‘extra income’ she buys more coffee. That little extra coffee is the income effect.

1 through 4 was a movement along the demand curve. Moving from P high to P low or the reverse causes this MOVEMENT ALONG the demand curve, a change in the quantity demanded. The ONLY thing that causes this effect is the PRICE of the item changing. Demand PQD As a graph and as a table

Shifting the Demand curve. This might sound like a trick, and I guess it is. Anything except a change in the price of the item can shift the demand curve, a change of demand.

Here is a different way to differentiate a change in quantity demanded vs a change of demand PQDQD’ Changing the price from 5 to 4 will move the Quantity Demanded from 2 to 3. This is a movement along an established relationship. This is a change in the quantity demanded. An entirely new relationship is found when you pair the price column with the QD’ column. Now at every Price there is a different QD. This is known as a change OF demand, a shift of demand.

Another view of a change of demand. PQDQD’ A demand schedule or demand curve is created by a pair of columns that match Price and QD. Here the original demand consisted of the two columns on the left. A new demand schedule, or relationship, is found using the two outside columns.

A shift of the demand schedule can be read two ways, both are correct.

What causes a demand curve to shift? As stated before, anything other than a change in the price. However, there are four commonly mentioned shifters.

Common shifters of Demand Change in household I ncome Change in N umber of consumers Change in E xpectations Change in P rice of other goods Change in T astes That gives you INEPT, the most commonly mentioned shifters.