W.A. Franke College of Business - Dr. D. Foster Supply & Demand: the basics W.A. Franke College of Business - Dr. D. Foster

Demand = Consumers Supply = Producers Law of Demand : All else equal, the quantity demanded of a good, that consumers are willing to buy and able to pay for, varies inversely with its price. Supply = Producers Supply Relationship: All else equal, the quantity supplied of a good, that producers are willing to sell and able to produce, varies directly with its price.

Change in Quantity Demanded (ΔQD) A change in the price of the good will cause a movement along the curve: Change in Quantity Demanded (ΔQD) Price Quantity

Demand A change in some other relevant factor of demand for the good will cause a shift in the curve: Change in Demand (ΔD) Price Increase in Demand Decrease in Demand D1 D3 D2 Quantity

Change in Quantity Supplied Supply A change in the price of the good will cause a movement along the curve: Change in Quantity Supplied (ΔQS) Price Quantity

Supply A change in some other relevant factor of supply for the good will cause a shift in the curve: Change in Supply (ΔS) Price Decrease in Supply Increase in Supply S3 S1 S2 Quantity

Factors that affect Demand Income Tastes and Preferences Expectations Others (price of substitute/complement goods; size of market) Factors that affect Supply A change in the costs of production A change in technology A changes in taxes /subsidies/restrictions Others (price of other goods; expectations; size of market ).

Putting Demand & Supply Together At P1 a surplus will drive down prices. Price Quantity Supply Demand P1 P2 P3 Q1 Q2 Q3 At P3 a shortage will drive up prices. At P2 the market is in equilibrium.

Supply & Demand Problems #1. In the market for oranges, what will happen if there is great weather in Florida and California? Costs fall  supply increases Higher output  surplus Supply Demand Price Quantity Pe Qe Surplus  lower price New Supply New Price New Quantity Net effect: higher Qe lower Pe

W.A. Franke College of Business - Dr. D. Foster Supply & Demand: the basics W.A. Franke College of Business - Dr. D. Foster

Appendix: Price Controls - Ceilings Quantity Price Pe Qe Supply Demand A price ceiling is a maximum (legal) price. To be “effective” it must be set below Pe What problem does this cause? How is it resolved? P* QD QS

Appendix: Price Controls - Floors Quantity Price Pe Qe Supply Demand A price floor is a minimum (legal) price. To be “effective” it must be set above Pe What problem does this cause? How is it resolved? P* QD QS