Chapter 4 Demand and Supply

The Market can be a location, network of buyers and sellers for a product, demand for a product or a price-determination process the interaction of buyers and sellers determines what the price will be for a good or service

Demand the quantity of a good or service buyers will purchase at various prices during a given period of time the law of demand states the quantity demanded varies inversely with price (Ceteris Paribus – all other things remain the same)

Demand Reasons supporting the law of demand: Substitution Effect – we buy different goods when prices rise or fall Income Effect – we can buy more if price falls or less if it rises

Demand the demand schedule is the entire relationship between each price and quantity demanded the demand is downward-sloping

Demand the sum of all individual consumer demand curves for a good is the market demand curve “demand” is the entire set of price and quantity relationships while “quantity demanded” is the amount demanded at one price

Supply the quantities sellers will offer for sale at various prices during a given period of time law of supply states the quantity supplied will increase if price increases and fall if price falls “supply” is the entire set of price and quantity relationships while “quantity supplied” is the amount offered at one price

Supply Supply curve is upward sloping to the right

Market Equilibrium the interaction of buyers and sellers, of demand and supply equilibrium price is the result of supply and demand forces a price above the equilibrium leads to a surplus which can only be cleared by a drop in price a price below equilibrium leads to a shortage and can only be cleared with a price increase

Market Equilibrium The intersection of demand and supply

Demand Determinants (changes in Demand) Non-price factors shifting the entire curve (at every price) Income – more leads to increased demand Population – more leads to increased demand Tastes/Preferences – various reasons, reports, advertising Expectations – of a future event may lead to more or less demand now Price of Substitute Goods – if a compliment, demand shifts in the same direction; if substitute the opposite direction; eg. bread price increase, demand for butter decreases (compliment); e.g. steak price increases, hamburger demand increases

Supply Determinants (changes in Supply) Costs – increase/decrease in production costs decrease or increase supply Number of Sellers – new producers increase market supply Technology – usually decreases costs and increases supply Nature – weather or disaster can affect supply Prices of related outputs – if another good has higher price, producers may shift production

Movement along Demand curve Can only be caused by change in price

Movement along Supply Curve Can only be caused by price change

Shortage decrease in price, away from equilibrium Excess will be cleared with an increase in price and shrinking quantity demanded

Surplus Increase in price, causing excess quantity supplied Cleared by lowering prices and reducing quantity demanded

Change in Demand Can only be caused by a demand determinant (no price change) The whole demand curve shifts

Change in Supply Caused by change in supply determinant (no price change)