1. Economics’ Hottest Curves!
Supply & Demand
Economics’ Hottest Curves!

2. The Law of Demand
The quantity demanded of a good falls when the price rises, ceteris paribus
A change in price will lead to a change in quantity demanded
Demand curves for most products are downward sloping from left to right
We can graph individual demand or combine all individuals’ demand to get to market demand
We will focus on market demand
The market demand curve shows how the total quantity demanded of a good or service varies as the price of the good varies – while all other factors that affect how much consumers want to buy are held constant

3. Movement Along the Curve
Any movement along the demand curve indicates a change in quantity demanded
A change in price cannot change demand, it can only change quantity demanded!

4. Changes (Shifts) in Demand
A change in demand means the quantity demanded at every price has changed

5. Increase in Demand
An increase in demand means the quantity demanded at every price increased
The demand curve shifts to the right
Avoid saying demand goes up or down – say shifts right or left – demand increases or decreases

6. Decrease in Demand
A decrease in demand means the quantity demanded at every price decreased
The demand curve shifts to the left
Left is less!

7. Determinants of Demand
Income
Prices of Related Goods
Tastes/Preferences
Expectations
Number of Buyers (Population size)
These lead to shifts in the demand curve

8. Income The effect of income on demand depends on the type of good
normal good: a good for which an increase in income leads to an increase in demand, ceteris paribus (the reverse is also true)
inferior good: a good for which an increase in income leads to a decrease in demand, ceteris paribus (the reverse is also true)
Remind students about ceteris paribus
Inferior good – examples generic brands (as opposed to brand names); greyhound bus (as opposed to air travel); canned food (as opposed to fresh food); fast food (as opposed to casual dining)
When incomes rise Americans tend to eat more at casual dining restaurants (Olive Garden, Applebees) – when incomes fall Americans tend to eat KFC and McDonald’s more often

9. Prices of Related Goods
The effect of this determinant of demand depends on whether the two goods are substitutes or complements
substitutes: two goods for which an increase in price of one leads to an increase in demand for the other (the reverse is true too)
muffins & doughnuts; coffee & tea; movie tickets & DVD rentals

10. Prices of Related Goods, Continued
complements: two goods for which an increase in price of one leads to a decrease in demand for the other (the reverse is true too)
peanut butter & jelly; printers & ink cartridges; hotdogs & hotdog buns

11. Tastes/Preferences
If consumers come to prefer a good, demand will increase
If a good or service falls out of favor, demand will decrease
Add Ryan Reynolds pitching Nissan Leaf

12. Expectations 1) Expectations of future income
Expectations of higher income leads to an increase in demand
Expectations of a lower income leads a decrease in demand

13. Expectations 2) Expectations of future prices
Expectations of higher prices leads to an increase in demand
Expectations of lower prices leads to a decrease in demand

14. Number of Buyers
An increase in the number of buyers leads to an increase in demand
A decrease in the number of buyers leads to a decrease in demand

15. The Law of Supply
Law of Supply: the quantity supplied of a good rises when the price of the good rises
quantity supplied: the amount of a good or service that producers are willing and able to supply
Generally upward sloping

16. Movement Along the Curve
Any movement along the supply curve indicates a change in quantity supplied
A change in price (of the particular good or service) cannot change supply, it can only change quantity supplied!

17. Changes (Shifts) in Supply
A change in supply means the quantity supplied at every price has changed

18. Increase in Supply
An increase in supply means the quantity supplied at every price has increased
The supply curve shifts to the right

19. Decrease in Supply
A decrease in supply means the quantity supplied at every price has decreased
The supply curve shifts to the left
Left is less!

20. Determinants of Supply
A change in any one of the determinants will cause a change in supply which will shift the supply curve right or left.
Cost of Inputs
Availability of Inputs
Technology/Productivity
Price Expectations
Number of Suppliers

21. Cost of Inputs
If input costs rise, suppliers will supply fewer goods at every price - supply decreases
If input costs decline, suppliers will supply more goods at every price – supply increases
Give examples
Jeans
Input costs – cotton, denim cloth, workers to cut patterns and sew jeans, leather for labels, zippers, rivets, thread, any taxes or regulations related to denim

22. Availability of Inputs
If inputs become less available - supply decreases
If inputs become more available – supply increases
Give examples
Jeans
Input costs – cotton, denim cloth, workers to cut patterns and sew jeans, leather for labels, zippers, rivets, thread, any taxes or regulations related to denim

23. Technology (in the long run)
Any improvement in technology will lead to an increase in supply.
Any decrease in related technology will lead to a decrease in supply.
Ties to productivity

24. Price Expectations
If the producer expects the price of a good to rise, they will hold back some product, decreasing supply.
If a producer expects the price of a good to fall, they will supply as much as possible, increasing supply.

25. Number of Suppliers
When more suppliers enter the market, supply increases.
When suppliers leave the market, supply decreases.

26. The Dilemma Consumers (demanders) like low prices
Producers (suppliers) like high prices
Consumers will buy more if the price is right
Producers would love to accommodate consumers, but only if the price is right
Is there a price and quantity at which both groups can be satisfied?

27. Yes, in a unrestricted competitive market.
Maybe!
Yes, in a unrestricted competitive market.

28. Key Terms market: a group of buyers and sellers of a good or service
competitive market: a market with so many buyers and sellers that no buyer or seller can control the price (assumes perfect competition)

29. Equilibrium
Occurs at the price where the quantity supplied equals the quantity demanded.
“market-clearing price”
Occurs at the quantity where the price expected by consumers is equal to the price required by suppliers.
The actions of buyers and sellers naturally move markets toward equilibrium – sort of negotiate equilibrium – may fluctuate frequently
Have students graph a market (use table from p. 73 in 5 steps to a 5) – also put on the board
There are some markets where the same good can sell for many different prices – for example, souvenirs in “tourist traps” tend to sell for a variety of prices b/c the buyers are unfamiliar with the market
But in a market where buyers and sellers have both been around for some time, sales and purchases tend to converge at a generally uniform price – the market price
Stress there are still buyers who would like the product, but have a willingness to pay that is too low
Also, there are suppliers who would like to sell the product, but their costs are too high

30. Surplus Excess supply Quantity supplied exceeds quantity demanded
What happens if a producer charges a price above the equilibrium?
How will producers respond?

31. Surplus

32. Shortage Excess demand Quantity demanded exceeds quantity supplied
What happens if consumers go to the store and find empty shelves?
How will producers respond?

33. Shortage

34. Changes in Demand Only
If D↑ there will be a shortage at the original market price
Eq P↑ and Eq Q↑
If D↓ there will be surplus at the original market price
Eq P↓ and Eq Q↓
P and Q move in the same direction as D
Show on board

35. Changes in Supply Only
If S↑ there will be a surplus at the original market price
Eq P↓ and Eq Q↑
If S↓ there will be shortage at the original market price
Eq P↑ and Eq Q↓
Q moves in the same direction as S, but P moves in the opposite direction as S
Changes in supply cause the opposite directional change in price
Changes in supply cause the same directional change in quantity

36. The Four Step Market Shuffle
1) Search
What determinant(s) are affected? Are they determinants of supply and/or demand?
2) Shift
Does supply and/or demand increase or decrease? Draw new supply and/or demand curves.
3) Slide
Insert horizontal arrows showing the directional shift of supply and/or demand.
4) Settle
Determine new equilibrium price and new equilibrium quantity.
Put market graph for peanuts (warm-up) on the board
Go through four steps
Put market graph on the board – market for economic dancers

37. The Pizza Market
The price of mozzarella cheese rises while the health hazards of hamburgers are widely publicized.
Cost of Inputs↑, so S↓
S↑ means Eq P↓ and Eq Q↑
Tastes Preferences, so D↑
D↑ means Eq P↑ and Eq Q↑
Overall effect: Eq P↑↓ (Indeterminate), Eq Q↑

38. The Pizza Market
New pizzerias enter the market while consumer incomes fall (assuming pizza is a normal good).
Number of Producers↑ , so S↑
S↑ , means Eq P↓ and Eq Q↑
Income↓, so D↓
D↓ , means Eq P↓ and Eq Q↓
Overall effect Eq P↓, Eq Q↓↑ (Indeterminate)