SAYRE | MORRIS Seventh Edition Demand and Supply: an Introduction CHAPTER 2 2-1© 2012 McGraw-Hill Ryerson Limited

Demand the quantities that consumers are willing and able to buy over a period of time at various prices must be willing to purchase it AND must have ability to pay for it 2-2© 2012 McGraw-Hill Ryerson Limited LO1

Demand the quantities that consumers are willing and able to buy over a period of time at various prices shows relationship between quantity & price price is the most important determinant “ceteris paribus” – all else remains the same 2-3© 2012 McGraw-Hill Ryerson Limited LO1

Demand Demand Schedule A table showing the various quantities demanded at different prices Demand Curve A graphic representation of a demand schedule 2-4© 2012 McGraw-Hill Ryerson Limited LO1

Demand Schedule Price Per Case of Beer Quantity Demanded (cases per month) $ © 2012 McGraw-Hill Ryerson Limited LO1

Demand Curve PriceQuantity $ Price Quantity $ $18 $ © 2012 McGraw-Hill Ryerson Limited LO1

Demand Curve Price Quantity $ $18 $ Demand curve 2-7© 2012 McGraw-Hill Ryerson Limited LO1

Demand Curve Price Quantity $ $18 $ A B - as price increases, quantity demanded decreases - movement is along an existing demand line - as price increases, quantity demanded decreases - movement is along an existing demand line 2-8© 2012 McGraw-Hill Ryerson Limited LO1

Why the Demand Curve Slopes Downward 1.Income effect The effect of a price change on real income, and therefore on quantity demanded Real income is measured in terms of the goods and services it will buy Real income will increase if prices fall, or decrease if prices rise. 2-9© 2012 McGraw-Hill Ryerson Limited LO1

Real Income Example 20 Years AgoToday $2.50$5.75 © 2012 McGraw-Hill Ryerson Limited2- 10

Why the Demand Curve Slopes Downward 2.Substitution effect The substitution of one product for another as a result of a change in their relative prices 2-11© 2012 McGraw-Hill Ryerson Limited LO1

Market Demand The total demand for a product or service from all consumers It is the summation of all individual demand curves Consumers do not set prices; they react to different prices by altering their quantity demanded 2-12© 2012 McGraw-Hill Ryerson Limited LO1

Market Demand Schedule Quantity demanded (cases/month) $/caseTomikoAbdiJanMarket demand $18649 $19547 $20446 $21333 $ = 2-13© 2012 McGraw-Hill Ryerson Limited LO1

P Q D TOMIKO D JAN D ABDI D MARKET Market Demand Schedule Market demand is the horizontal summation of all individual demands. 2-14© 2012 McGraw-Hill Ryerson Limited LO1

Supply the quantities that producers are willing and able to supply over a period of time at various prices 2-15© 2012 McGraw-Hill Ryerson Limited LO2

Supply 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 2-16© 2012 McGraw-Hill Ryerson Limited LO2

Supply Schedule Price Per Case of Beer Quantity Supplied (cases per month) $ © 2012 McGraw-Hill Ryerson Limited LO2

Supply Curve PriceQuantity $ Price Quantity $ $19 $ © 2012 McGraw-Hill Ryerson Limited LO2

Supply Curve Price Quantity $ $19 $ as price increases, quantity supplied (Q s ) increases - movement is along an existing supply line - as price increases, quantity supplied (Q s ) increases - movement is along an existing supply line A B 2-19© 2012 McGraw-Hill Ryerson Limited LO2

Why the Supply Curve Slopes Upward Suppliers are motivated by profit Higher price means more profit. Greater profit means more suppliers are willing to produce the product Costs rise as more is produced, so higher prices are required to supply more 2-20© 2012 McGraw-Hill Ryerson Limited LO2

Market Supply Curve Total supply from all producers of a product 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 © 2012 McGraw-Hill Ryerson Limited LO2 2-21

Market Supply Schedule Quantity supplied (cases/month) $/caseBobbieOther Brewers Market Supply $18268 $ $ $ $ = 2-22© 2012 McGraw-Hill Ryerson Limited LO2

P Q S BOBBI S OTHER + S MARKET = Market Supply Curve Market supply is the total quantity of all producers at each price. © 2012 McGraw-Hill Ryerson Limited LO2 2-23

Market Equilibrium Market A mechanism that allows buyers and sellers to exchange products or services Equilibrium The point where quantity demanded equals quantity supplied There is neither a shortage nor a surplus Q D = Q S 2-24© 2012 McGraw-Hill Ryerson Limited LO3. LO4

Market Equilibrium 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 2-25© 2012 McGraw-Hill Ryerson Limited LO4

Market Equilibrium Quantity supplied (cases/month) $/caseMarket Supply Market Demand Shortage/ Surplus $18822 $ $2016 $21209 $ _ = © 2012 McGraw-Hill Ryerson Limited LO4

Market Equilibrium 2-27 Demand Supply P Q $20 16 The market is in equilibrium when Q S = Q D LO4 © 2012 McGraw-Hill Ryerson Limited

Shortage 2-28 Demand Supply P Q $20 16 At a price lower than equilibrium, Q S < Q D there is a shortage At a price lower than equilibrium, Q S < Q D there is a shortage $ (Q D ) (Q S ) shortage LO4 © 2012 McGraw-Hill Ryerson Limited

Surplus 2-29 Demand Supply P Q $20 16 At a price higher than equilibrium, Q S > Q D there is a surplus At a price higher than equilibrium, Q S > Q D there is a surplus $ (Q S ) (Q D ) surplus LO4 © 2012 McGraw-Hill Ryerson Limited

Market Adjustments When there is a Surplus: producers drop the price to sell excess stock as price drops: - quantity demanded increases - quantity supplied falls market moves back to equilibrium price, quantity 2-30© 2012 McGraw-Hill Ryerson Limited LO4

Market Adjustment - Surplus 2-31 Demand Supply P Q $20 16 $ (Q S ) (Q D ) surplus LO4 © 2012 McGraw-Hill Ryerson Limited

Market Adjustment - Surplus 2-32 Demand Supply P Q $ Sellers drop price to sell excess - Buyers buy more at lower price - Sellers supply less at lower price - Back to equilibrium - Sellers drop price to sell excess - Buyers buy more at lower price - Sellers supply less at lower price - Back to equilibrium $ (Q S ) (Q D ) surplus LO4 © 2012 McGraw-Hill Ryerson Limited

Market Adjustments When there is a Shortage: buyers bid up the price as price rises: - quantity demanded decreases - quantity supplied increases market moves back to equilibrium price, quantity 2-33© 2012 McGraw-Hill Ryerson Limited LO4