Prepared by Anton Ljutic Lecture notes Prepared by Anton Ljutic

Demand and Supply: An Introduction CHAPTER TWO Demand and Supply: An Introduction

This Chapter Will Enable You to Understand and Explain: the concept of demand the concept of supply the term “market” the concept of “equilibrium” price and quantity the causes and effects of a change in demand or a change in supply why demand and supply determine price, not the reverse

Demand Refers to both the desire and the ability to purchase something Is the relationship between price and quantities demanded, “other things remaining the same” Refers to a range of prices Measures quantities over time

Other things remaining the same: Demand Other things remaining the same: The higher the price, the lower the quantity demanded The lower the price, the higher the quantity demanded

Demand Curve And Demand Schedule A table showing the various quantities demanded per period of time at different prices It is assumed that all other factors that might influence demand do not change Demand Curve A graphic representation of a demand schedule

Individual Demand Schedule: Number of Cases Per Week Price Per Case (In Dollars) Quantity Demanded 12 6 13 5 14 4 15 3 16 2 17 1 18

An increase in quantity Demand Curve $/case An increase in quantity demanded 15 12 D 3 6 Q (cases/week)

Demand Curve $/case 15 A decrease in quantity demanded 12 D 3 6 Q (cases/week)

Why The Demand Curve Slopes Downward? Income effect The effect that a price change has on real income, and therefore on the quantity demanded of a product Substitution effect The substitution of one product for another as a result of a change in their relative prices Real income, measured in terms of the amount of goods and services that it will buy, will increase if prices fall

Market Demand Curve Total consumer demand for a product The horizontal summation of the individual demand curves Consumers do not set prices; they react to different prices by altering their quantity demanded. Market: A mechanism that allows buyers and sellers to negotiate the exchange of products

Market Demand Schedule: Number of Cases per Week Quantity demanded (cases/week) $/case Tomiko Jan Market demand $12 6 9 13 $14 4 10 $16 2 1 3 $18

Market Demand Curve: Number of Cases per Week Tomiko P Jan Market 4 6 8 10 12 14 16 18 D 0 2 4 6 8 10 12 14 16 Q

Individual Supply Schedule: Number of Cases per Week Price Per Case (In Dollars) Quantity Supplied 12 2 13 3 14 4 15 5 16 6 17 7 18 8

Supply Supply Supply Schedule Supply Curve The quantities that producers are willing and able to sell per period of time at different prices Supply Schedule A table showing the various quantities supplied per period of time at different prices Supply Curve A graphic representation of the supply schedule

Supply Curve $/case S 16 Increase in quantity supplied 12 3 6 Q (cases/week)

Supply Curve $/case S 16 Decrease in quantity supplied 12 3 6 Q (cases/week)

Market Supply Curve Total producer supply of a product The horizontal summation of each individual producer’s supply curve Assumptions: producers are all making a similar product consumers have no preference as to which supplier or product they use

Market Supply Schedule: Number of Cases per Week Quantity supplied (cases/week) $/case Bobbie Other brewers Market supply $12 2 6 8 $14 3 9 12 $16 4 16 $18 5 15 20

Market Equilibrium Equilibrium Price Equilibrium Quantity Surplus The price at which quantity demanded equals quantity supplied, and there is neither a shortage nor a surplus Equilibrium Quantity Quantity that corresponds to the equilibrium price Surplus The amount by which quantity supplied is greater than quantity demanded; occurs at prices above equilibrium Shortage The amount by which quantity supplied is less than quantity demanded; occurs at prices below equilibrium

Market Demand and Supply Price per Case Market Demand Market Supply Surplus + Shortage - $12 22 8 -14 13 18 12 -6 14 16 15 9 20 +11 6 24 +18 17 3 28 +25 2 32 +30 Table 2.5

Market Equilibrium P S 14 D 16 Q

Market Shortage D S P1 P2 Shortage Qs Q1 Qd

Market Surplus S D Surplus P2 P1 Qd Q Qs

Change In Demand A change in quantity demanded at every price, caused by a change in the determinants of demand P Increase in demand Decrease in demand D2 D D1 Q

Determinants of a Change in Demand (I) Consumer preferences If tastes change, demand changes Expectations of future prices, income, availability If prices expected to rise, consumers buy more If income expected to rise, consumers buy more If goods expected to be scarcer, buy more now Population size, income, and age distribution An increase in population will cause an increase in demand

Determinants (II): Income A change in income will have a different effect on the demand for normal vs. inferior products Normal Products You buy more of it when your income increases and less when your income decreases Inferior Products You buy more when your income falls and less when your income rises

Determinants (III): Related Prices Product prices are related if a change in the price of one product causes a change in the demand for the other product Substitute Products A product whose demand varies directly with a change in the price of a similar product Complementary Products Products that tend to be purchased jointly, and whose demands are directly related

Effects of an Increase in Demand P2 P1 D2 D1 Q1 Q2

Effects of a Decrease in Demand P1 P2 D2 D1 Q2 Q1

Change in Supply S2 P S A change in the quantity supplied at every price, caused by a change in the determinants of supply Decrease in S S1 Increase in S Q

Determinants of a Change in Supply (I) Prices of Productive Resources If the price of a productive resource increases, firms will supply less Business Taxes If business taxes rise, firms will supply less Technology An improvement in technology leads to a fall in the cost of production and an increase in supply

Determinants of Supply (II) Prices of Substitutes in Production An increase in the price of one product will cause a drop in the supply of products that are substitutes in production Future Expectation of Suppliers Lower expected future prices will lead to an increase in supply Number of Suppliers A decrease in the number of suppliers will reduce market supply

Effects of an Increase in Supply D S1 S2 P1 P2 Q1 Q2

Effects of a Decrease In Supply Q2 Q1

Chapter Summary: What to Study and Remember the concept of demand vs. Qd the concept of supply vs. Qs the term “market” the concept of “equilibrium” price and quantity the determinants and effects of a change in demand or a change in supply why demand and supply determine price, not the reverse