Economics’ Hottest Curves! Supply & Demand Economics’ Hottest Curves!

The Law of Demand The quantity demanded of a good falls when the price rises, ceteris paribus A change in price will lead to a change in quantity demanded Demand curves for most products are downward sloping from left to right We can graph individual demand or combine all individuals’ demand to get to market demand We will focus on market demand The market demand curve shows how the total quantity demanded of a good or service varies as the price of the good varies – while all other factors that affect how much consumers want to buy are held constant

Movement Along the Curve Any movement along the demand curve indicates a change in quantity demanded A change in price cannot change demand, it can only change quantity demanded!

Changes (Shifts) in Demand A change in demand means the quantity demanded at every price has changed

Increase in Demand An increase in demand means the quantity demanded at every price increased The demand curve shifts to the right Avoid saying demand goes up or down – say shifts right or left – demand increases or decreases

Decrease in Demand A decrease in demand means the quantity demanded at every price decreased The demand curve shifts to the left Left is less!

Determinants of Demand Income Prices of Related Goods Tastes/Preferences Expectations Number of Buyers (Population size) These lead to shifts in the demand curve

Income The effect of income on demand depends on the type of good normal good: a good for which an increase in income leads to an increase in demand, ceteris paribus (the reverse is also true) inferior good: a good for which an increase in income leads to a decrease in demand, ceteris paribus (the reverse is also true) Remind students about ceteris paribus Inferior good – examples generic brands (as opposed to brand names); greyhound bus (as opposed to air travel); canned food (as opposed to fresh food); fast food (as opposed to casual dining) When incomes rise Americans tend to eat more at casual dining restaurants (Olive Garden, Applebees) – when incomes fall Americans tend to eat KFC and McDonald’s more often

Prices of Related Goods The effect of this determinant of demand depends on whether the two goods are substitutes or complements substitutes: two goods for which an increase in price of one leads to an increase in demand for the other (the reverse is true too) muffins & doughnuts; coffee & tea; movie tickets & DVD rentals

Prices of Related Goods, Continued complements: two goods for which an increase in price of one leads to a decrease in demand for the other (the reverse is true too) peanut butter & jelly; printers & ink cartridges; hotdogs & hotdog buns

Tastes/Preferences If consumers come to prefer a good, demand will increase If a good or service falls out of favor, demand will decrease Add Ryan Reynolds pitching Nissan Leaf

Expectations 1) Expectations of future income Expectations of higher income leads to an increase in demand Expectations of a lower income leads a decrease in demand

Expectations 2) Expectations of future prices Expectations of higher prices leads to an increase in demand Expectations of lower prices leads to a decrease in demand

Number of Buyers An increase in the number of buyers leads to an increase in demand A decrease in the number of buyers leads to a decrease in demand

The Law of Supply Law of Supply: the quantity supplied of a good rises when the price of the good rises quantity supplied: the amount of a good or service that producers are willing and able to supply Generally upward sloping

Movement Along the Curve Any movement along the supply curve indicates a change in quantity supplied A change in price (of the particular good or service) cannot change supply, it can only change quantity supplied!

Changes (Shifts) in Supply A change in supply means the quantity supplied at every price has changed

Increase in Supply An increase in supply means the quantity supplied at every price has increased The supply curve shifts to the right

Decrease in Supply A decrease in supply means the quantity supplied at every price has decreased The supply curve shifts to the left Left is less!

Determinants of Supply A change in any one of the determinants will cause a change in supply which will shift the supply curve right or left. Cost of Inputs Availability of Inputs Technology/Productivity Price Expectations Number of Suppliers

Cost of Inputs If input costs rise, suppliers will supply fewer goods at every price - supply decreases If input costs decline, suppliers will supply more goods at every price – supply increases Give examples Jeans Input costs – cotton, denim cloth, workers to cut patterns and sew jeans, leather for labels, zippers, rivets, thread, any taxes or regulations related to denim

Availability of Inputs If inputs become less available - supply decreases If inputs become more available – supply increases Give examples Jeans Input costs – cotton, denim cloth, workers to cut patterns and sew jeans, leather for labels, zippers, rivets, thread, any taxes or regulations related to denim

Technology (in the long run) Any improvement in technology will lead to an increase in supply. Any decrease in related technology will lead to a decrease in supply. Ties to productivity

Price Expectations If the producer expects the price of a good to rise, they will hold back some product, decreasing supply. If a producer expects the price of a good to fall, they will supply as much as possible, increasing supply.

Number of Suppliers When more suppliers enter the market, supply increases. When suppliers leave the market, supply decreases.

The Dilemma Consumers (demanders) like low prices Producers (suppliers) like high prices Consumers will buy more if the price is right Producers would love to accommodate consumers, but only if the price is right Is there a price and quantity at which both groups can be satisfied?

Yes, in a unrestricted competitive market. Maybe! Yes, in a unrestricted competitive market.

Key Terms market: a group of buyers and sellers of a good or service competitive market: a market with so many buyers and sellers that no buyer or seller can control the price (assumes perfect competition)

Equilibrium Occurs at the price where the quantity supplied equals the quantity demanded. “market-clearing price” Occurs at the quantity where the price expected by consumers is equal to the price required by suppliers. The actions of buyers and sellers naturally move markets toward equilibrium – sort of negotiate equilibrium – may fluctuate frequently Have students graph a market (use table from p. 73 in 5 steps to a 5) – also put on the board There are some markets where the same good can sell for many different prices – for example, souvenirs in “tourist traps” tend to sell for a variety of prices b/c the buyers are unfamiliar with the market But in a market where buyers and sellers have both been around for some time, sales and purchases tend to converge at a generally uniform price – the market price Stress there are still buyers who would like the product, but have a willingness to pay that is too low Also, there are suppliers who would like to sell the product, but their costs are too high

Surplus Excess supply Quantity supplied exceeds quantity demanded What happens if a producer charges a price above the equilibrium? How will producers respond?

Surplus

Shortage Excess demand Quantity demanded exceeds quantity supplied What happens if consumers go to the store and find empty shelves? How will producers respond?

Shortage

Changes in Demand Only If D↑ there will be a shortage at the original market price Eq P↑ and Eq Q↑ If D↓ there will be surplus at the original market price Eq P↓ and Eq Q↓ P and Q move in the same direction as D Show on board

Changes in Supply Only If S↑ there will be a surplus at the original market price Eq P↓ and Eq Q↑ If S↓ there will be shortage at the original market price Eq P↑ and Eq Q↓ Q moves in the same direction as S, but P moves in the opposite direction as S Changes in supply cause the opposite directional change in price Changes in supply cause the same directional change in quantity

The Four Step Market Shuffle 1) Search What determinant(s) are affected? Are they determinants of supply and/or demand? 2) Shift Does supply and/or demand increase or decrease? Draw new supply and/or demand curves. 3) Slide Insert horizontal arrows showing the directional shift of supply and/or demand. 4) Settle Determine new equilibrium price and new equilibrium quantity. Put market graph for peanuts (warm-up) on the board Go through four steps Put market graph on the board – market for economic dancers

The Pizza Market The price of mozzarella cheese rises while the health hazards of hamburgers are widely publicized. Cost of Inputs↑, so S↓ S↑ means Eq P↓ and Eq Q↑ Tastes Preferences, so D↑ D↑ means Eq P↑ and Eq Q↑ Overall effect: Eq P↑↓ (Indeterminate), Eq Q↑

The Pizza Market New pizzerias enter the market while consumer incomes fall (assuming pizza is a normal good). Number of Producers↑ , so S↑ S↑ , means Eq P↓ and Eq Q↑ Income↓, so D↓ D↓ , means Eq P↓ and Eq Q↓ Overall effect Eq P↓, Eq Q↓↑ (Indeterminate)