Kaplan University Supply and Demand

Topics Covered Supply, Demand, Equilibrium (Quantity, Curves, Schedules) Law of Demand & Law of Supply Movements Along Curves Shifts of Curves Normal Goods & Inferior Goods Substitutes & Complements Price Floors & Price Ceilings (Shortages & Surpluses)

Demand Relates to the quantity of a good that consumers would purchase at each various possible prices, over some period of time…. Ceteris paribus (holding all constant) Quantity demand is the quantity that consumers would purchase at a given price. Examples: groceries, clothes, office equipment Can you think of more every day demand examples?

Law of Demand As prices fall, the quantity demanded increases Price and quantity demanded have an inverse relationship Examples: airline tickets, sale items, clearance items, etc.

Demand Schedules & Demand Curves A table that shows the relationship between the price of a good and quantity demanded A demand schedule can be plotted into a curve

The Demand Schedule and LO1 Exhibit 1 The Demand Schedule and Demand Curve for Pizza (a) Demand schedule 9 6 3 12 Price per pizza $15 D Price per pizza Quantity Demanded Per week (millions) a b c d e $15 12 9 6 3 8 14 20 26 32 a b c d e The market demand D shows the quantity of pizza demanded, at various prices, by all consumers. Price and quantity demanded are inversely related. 26 20 14 8 Millions of pizzas per week 32 Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

Normal Goods & Inferior Goods It is important to consider normal goods & inferior goods when considering demand... Demand for normal goods vary directly with income Example: certain restaurants, cars, clothes, etc. Demand for inferior goods vary inversely with income Example: fast food, thrift stores, etc.

Substitutes & Complements It is important to consider substitutes & complements when considering demand... A substitute is something that takes the place of something else (ie/ brand name, closely related product) A complement is a good or service that goes well with each other (hotdogs & buns, coffee and cream, etc.) Can you think of other examples?

Demand Shifts Demand shifts when there is a change in any shift factor An increase in demand moves the demand curve to the right A decrease in demand moves the demand curve to the left

An Increase in the Market LO1 An Increase in the Market Demand for Pizza D’ 9 6 3 12 Price per pizza $15 D An increase in the demand for pizza is shown by a rightward shift of the demand curve, so the quantity demanded increases at each price. b f Exhibit 2 26 20 14 8 Millions of pizzas per week 32 Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

Demand Shifts Demand Shifts Left (decrease demand) when the following occurs: Price of a substitute decreases Price of a compliment increases Good is a normal and income decreases Good is inferior and income increases Population decreases Consumers expect price to fall in the future Tastes and preferences turn against the product

Demand Shifts Demand Shifts Right (increase demand) when the following occurs: Price of a substitute increases Price of complement decreases Good is normal and income increases Good is inferior and income decreases Population increases Consumers expect the price to rise in the future Tastes and preferences turn in favor of the product

Movements in Demand A change in price does not shift demand! A price change causes a movement along the demand curve to a new quantity demand

The Demand Schedule and LO1 Exhibit 1 The Demand Schedule and Demand Curve for Pizza (a) Demand schedule 9 6 3 12 Price per pizza $15 D Price per pizza Quantity Demanded Per week (millions) a b c d e $15 12 9 6 3 8 14 20 26 32 a b c d e The market demand D shows the quantity of pizza demanded, at various prices, by all consumers. Price and quantity demanded are inversely related. 26 20 14 8 Millions of pizzas per week 32 Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

Supply Relates to the quantity of a good that will be offered for sale at each of various possible prices, over some period of time…. Ceteris paribus (holding all constant) Examples: produce, agriculture, labor Can you think of more every day supply examples?

Law of Supply As price rises, the quantity supplied increases Price and quantity supply have an direct relationship Examples: hotels, automobiles, seasonal food items

Supply Schedules & Supply Curves Supply shifts when there is a change in any of its shift factors An increase in supply moves the supply curve to the right A decrease in supply moves the supply curve to the left

The Supply Schedule and Supply Curve for Pizza LO2 Exhibit 3 The Supply Schedule and Supply Curve for Pizza (a) Supply schedule (b) Supply curve 9 6 3 12 Price per pizza $15 S Price per pizza Quantity Supplied Per week (millions) $15 12 9 6 3 28 24 20 16 The market supply S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related. 12 16 20 24 28 Millions of pizzas per week Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

Supply Schedules & Supply Curves A table that shows the relationship between the price of a good and quantity supplied A supply schedule can be plotted into a curve

Supply Shifts Supply shifts left (decreases) when following occurs: The number of sellers decreases The price of labor or other input rises Producers expect the price to rise in the future Government, labor or other restrictions on production practices increase costs Price of a jointly produced product falls The price of a substitute in production rises

Supply Shifts Supply shifts right (increases) when following occurs: The number of sellers increases The price of labor or other input falls Producers expect the price to fall in the future Technological change lowers costs Price of a jointly produced product rises The price of a substitute in production falls

An Increase in the Supply of Pizza LO2 Exhibit 4 An Increase in the Supply of Pizza 9 6 3 12 Price per pizza $15 S S’ g h An increase in the supply of pizza is reflected by a rightward shift of the supply curve, from S to S’. Quantity supplied increases at each price level. 12 16 20 24 28 Millions of pizzas per week Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

Movements in Supply A change in price does not shift supply! A price change causes a movement along the supply curve to a new quantity supplied.

The Supply Schedule and Supply Curve for Pizza LO2 Exhibit 3 The Supply Schedule and Supply Curve for Pizza (a) Supply schedule (b) Supply curve 9 6 3 12 Price per pizza $15 S Price per pizza Quantity Supplied Per week (millions) $15 12 9 6 3 28 24 20 16 The market supply S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related. 12 16 20 24 28 Millions of pizzas per week Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

Market Equilibrium Demand & Supply come together to determine the equilibrium Market equilibrium is a situation in which there is no tendency for either price or quantity to change

Surplus and Shortage Any price above the equilibrium = surplus (excess of quantity supplied over quantity demanded) Any price below the equilibrium = shortage (excess of quantity demanded over quantity supplied)

Equilibrium in the Pizza Market LO3 Exhibit 5(b) Equilibrium in the Pizza Market (b) Market curves 9 6 3 12 Price per pizza $15 S Market equilibrium occurs at: Price where QD=QS; Point c D Surplus Above the equilibrium price: QS>QD; Surplus; Downward pressure on P c Shortage Below the equilibrium price: QD>QS; Shortage; Upward pressure on P 14 16 20 24 26 Millions of pizzas per week Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

4 Cases of Shifting Demand And Supply Equilibrium Price Equilibrium Quantity 1 No change Shifts right Falls Rises 2 Shifts left 3 4

Thinking as an Economist…. Why are cherries so expensive in the winter? Why do less people shop at high end stores versus dollar stores? Why do more rich people drive BMWs and Mercedes compared to individuals earning minimum wage?

Terms to Consider supply complements demand Law of demand quantity demand Law of supply quantity supply surplus Normal goods shortage Inferior goods Market equilibrium substitutes

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