SUPPLY & DEMAND

Interaction between buyers and sellers Markets may be Local National International Price is discovered in the interactions of buyers and sellers LO1 3-2

Demand Demand is the combination of desire, willingness and ability to buy a product. It is how much consumers are willing to purchase at specific prices. The Law of Demand is the rule stating that more will be demanded at lower prices and less at higher prices.

Demand Curve Demand can either be shown on a Demand Schedule or a Demand Curve. It shows an inverse relationship between price and quantity demanded.

Supply Supply is the schedule of quantities offered for sale at all possible prices in a market. It is how much producers are willing to supply at specific prices. The Law of Supply is the rule stating that more will be offered for sale at high prices than at lower prices.

Supply Curve Supply can either be shown on a Supply Schedule or a Supply Curve.

Equilibrium Point The Equilibrium Point is where Supply & Demand intersect. That is considered the Market Price. Any price above the equilibrium price creates a surplus. A price below the equilibrium price creates a shortage.

Non-price Factors Affecting Demand There are also “non-price factors that affect the demand for a good. These cause changes in demand, rather than changes in quantity demanded. Changes in Demand (shifts of the curve) are caused by: Change in income Change in tastes, preferences Price of complementary goods Price of substitute goods People’s expectations for the future and the number of consumers in the marketplace.

Determinants of Demand Determinants of Demand: Factors That Shift the Demand Curve Determinant Examples Change in buyers’ tastes Physical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for land-line phones. Change in the number of buyers A decline in the birthrate reduces the demand for children’s toys. Change in income A rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and necklaces while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine. Change in the prices of related goods A reduction in airfares reduces the demand for bus transportation (substitute goods); a decline in the price of DVD players increases the demand for DVD movies (complementary goods). Change in consumer expectations Inclement weather in South America creates an expectation of higher future coffee bean prices, thereby increasing today’s demand for coffee beans. LO1 3-9

Increase in Demand

Decrease in Demand

Changes in Demand and Equilibrium ` Changes in Demand and Equilibrium Changes in Demand and Equilibrium ` D increase: P, Q D decrease: P, Q P P S S D2 D3 D1 D4 Increase in demand Decrease in demand LO4 LO4 3-12

Non-price Factors Affecting Supply There are also “non-price factors that affect the supply of a good. These cause changes in supply, rather than changes in quantity supplied. Changes in Supply (shifts of the curve) are caused by: Change in production Change in the cost of resources Producer’s expectations Competition

Determinants of Supply Determinants of Supply: Factors That Shift the Supply Curve Determinant Examples Change in resource prices A decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline. Change in technology The development of more effective wireless technology increases the supply of cell phones. Change in taxes and subsidies An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education. Change in prices of other goods An increase in the price of cucumbers decreases the supply of watermelons. Change in producer expectations An expectation of a substantial rise in future log prices decreases the supply of logs today. Change in the number of suppliers An increase in the number of tattoo parlors increases the supply of tattoos; the formation of women’s professional basketball leagues increases the supply of women’s professional basketball games. LO2 3-14

Increase in Supply

Decrease in Supply

Changes in Demand and Equilibrium Changes in Supply and Equilibrium ` Changes in Demand and Equilibrium ` S increase: P, Q S decrease: P, Q P P S1 S2 S4 S3 D D Increase in supply Decrease in supply LO4 LO4 3-17

Government-Set Prices Price Ceilings Set below equilibrium price Rationing problem Black markets Example: Rent control LO5 3-18

Government-Set Prices $3.50 P0 Ceiling 3.00 PC D Shortage Q Qs Q0 Qd LO5 3-19

Government-Set Prices Price Floors Prices are set above the market price Chronic surpluses Example: Minimum wage laws LO5 3-20

Government-Set Prices Surplus Floor $3.00 Pf 2.00 P0 D Q Qd Q0 Qs LO5 3-21