Supply and Demand 1

Demand Demand represents the behavior of buyers. A Demand Curve shows the quantity demanded at different prices. The Quantity Demanded: the quantity that buyers are willing (and able) to purchase at a particular price. 2

Law of Demand Price and Quantity Demanded are negatively related 3

The Demand Curve for Oil Price of Oil per Barrel Quantity of Oil (MBD) Demand Price Quantity Demanded $55 5 $20 25 $5 50 $55 5 $20 25 $5 50 4

Reading Demand Curves Demand curves can be read in two ways: Horizontally: How much buyers are willing and able to purchase at a certain price. Vertically: The highest price buyers are willing to pay for a certain quantity. 5

What Shifts the Demand Curve? An “increase in demand” means that consumers buy more at every price level, (or consumers are willing to pay more for each quantity.) On the graph: the demand curve shifts outwards, up, and to the right. 6

An Increase in Demand Price per Unit Quantity Greater Quantity Demanded at the Same Price Greater Willingness to Pay for the Same Quantity $50 $25 New Demand Curve Old Demand Curve 70 80 7

What Shifts the Demand Curve? A “decrease in demand” means that consumers buy less at every price level, (or they reduce the price they’re willing to pay for a given quantity.) On the graph: the demand curve shifts inwards, down, and to the left. 8

A Decrease in Demand Price per Unit Quantity $50 80 $25 70 Old Demand Curve $25 70 Lower Willingness to Pay for the Same Quantity Less Quantity Demanded at the Same Price New Demand Curve 9

Important Demand Shifters: Income Population Price of Substitutes Price of Complements Expectations Tastes 10

Important Demand Shifters: Income The effect of changes in income on demand depends on the nature of the good in question. A Normal Good: demand increases when income increases (and vice versa). An Inferior Good: demand decreases when income increases (and vice versa) 11

Important Demand Shifters: Population As the population of an economy changes, the # of buyers of a particular good also changes, (thereby changing its demand.) What happens to the demand for formula in a country as birth rates drop? 12 12

Important Demand Shifters: Price of Substitutes Two goods are Substitutes if a decrease in the price of one leads to a decrease in demand for the other (or vice versa). - What happens to the demand for travel in Hawaii if the (perceived) safety cost of traveling to Mexico increases? 13 13

Important Demand Shifters: Price of Complements Two goods are Complements if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa). What happens to the demand for Sport Utility Vehicles when gasoline gets more expensive? 14

Price of Complements Consumers often have to buy goods together. An increase in price of gasoline will decrease the demand for SUVs 15 15

Important Demand Shifters: Expectations The expectation of a higher (lower) price for a good in the future increases (decreases) current demand for the good. Consumers will adjust their current spending in anticipation of the direction of future prices in order to obtain the lowest possible price. If prices for Xbox 360 consoles are expected to drop right before Christmas, what will happen to sales during November? 16

Important Demand Shifters: Tastes Tastes and preferences are subjective and will vary among consumers. Seasonal changes or fads have predictable effects on demand. What happens to demand for boots in October? To carbohydrates during the Atkins diet fad? Or to Acai berries after newly perceived health benefits? 17

What Shifts the Demand Curve? A “change in quantity demanded” is NOT the same as a “change in demand.” “Quantity demanded” changes only when the price of a good changes. It is a movement along a fixed demand curve. “Demand” changes only when a non-price factor (demand shifter) changes. It is a shift in the entire demand curve. A “change in Demand” A “change in Quantity Demanded” 18