1. Supply and Demand

2. Since people want more of scarce goods than is freely available, we need a way of rationing the goods. Some possible criteria are:
beauty
popularity
income
first come, first served
the market or price (supply & demand)

3. Law of Demand
There is a negative relation between the price of a good and the amount of the good that buyers are willing to purchase.

4. example:
price quantity demanded per month(QD)

5. price 13 12 11 10 9 8 7
quantity

6. price 13 12 11 10 9 8 7
Demand
quantity

7. The demand curve slopes down!

8. Law of Supply
There is a positive relation between the price of a good and the amount of the good that producers are willing to produce and sell.

9. example:
price quantity supplied per month(Qs)

10. price 13 12 11 10 9 8 7
quantity

11. price 13 12 11 10 9 8 7
Supply
quantity

12. The supply curve slopes up!

13. price 13 12 11 10 9 8 7

14. price QD

15. price QD Qs

16. price QD Qs mkt. cond.
< excess supply
< excess supply
< excess supply

17. price QD Qs mkt. cond.
excess supply
excess supply
excess supply
> excess demand
> excess demand
> excess demand

18. price QD Qs mkt. cond.
excess supply
excess supply
excess supply
= equilibrium
excess demand
excess demand
excess demand

19. When the quantity demanded is equal to the quantity supplied, we have equilibrium.
Equilibrium means that there is no tendency for things to change. The system is in balance.

20. price QD Qs mkt. cond. price pressure
excess supply down
excess supply down
excess supply down
equilibrium
excess demand
excess demand
excess demand

21. price QD Qs mkt. cond. price pressure
excess supply down
excess supply down
excess supply down
equilibrium
excess demand up
excess demand up
excess demand up

22. price QD Qs mkt. cond. price pressure
excess supply down
excess supply down
excess supply down
equilibrium none
excess demand up
excess demand up
excess demand up

23. price 13 12 11 10 9 8 7
Demand
quantity

24. price 13 12 11 10 9 8 7
Supply
quantity

25. Supply Demand price equilibrium 10 equilibrium price quantity 550
equilibrium quantity

26. The equilibrium is at the intersection of the demand curve and the supply curve.
The equilibrium quantity can be read from the horizontal axis.
The equilibrium price can be read from the vertical axis.

27. Changes in Demand & Changes in Quantity Demanded.

28. A change in the price of a product results in a change in the quantity demanded or a movement along the demand curve.

29. Suppose the price of a product is initially $12
Suppose the price of a product is initially $12. The quantity demanded is We are at point A.
price 13 12 11 10 9 8 7 A
Demand
quantity

30. If price decreases to $11, quantity demanded increases to 500
If price decreases to $11, quantity demanded increases to We are now at point B on the same demand curve.
price 13 12 11 10 9 8 7 B
Demand
quantity

31. The quantity demanded has changed
The quantity demanded has changed. We have moved along a particular demand curve from one point to another.
price 13 12 11 10 9 8 7 A B
Demand
quantity

32. If price increases from $11 to $12, quantity demanded decreases from 500 to 450.13 12 11 10 9 8 7
Demand
quantity

33. The demand curve for a product does not shift when the price of the product changes! We simply move from one point on the curve to another point on the same curve.

34. Do not confuse a change in the quantity demanded with a change in demand!
change in quantity demanded: move along the same curve
change in demand: entire curve moves

35. What is a change in demand?
A change in demand means that at each price you want to purchase a different amount than you did previously. The entire demand curve moves when your demand is affected by something other than the price of the product.

36. When demand increases, the curve shifts to the right.
price
When demand increases, the curve shifts to the right.
New Demand
Demand
quantity
At each price, the quantity increases.
So think about increasing along the quantity axis.

37. When demand decreases, the curve shifts to the left.
price
When demand decreases, the curve shifts to the left.
Demand
New Demand
quantity
At each price, the quantity decreases.
So think about decreasing along the quantity axis.

38. What factors cause demand to change? (a shift of the entire curve)
a change in income
a change in the price of a related good
a change in tastes for the good

39. A Change in Income.
Suppose you buy CDs. What happens if your income increases?
If you had more income, you would consider buying more CDs at each price level.

40. Before your income increased, if the price was 12, you bought 450 CDs
Before your income increased, if the price was 12, you bought 450 CDs Now, perhaps if the price is 12, you buy 500 CDs.
price 13 12 11 10 9 8 7
Demand
quantity

41. Before, if the price was 11, you bought 500 CDs
Before, if the price was 11, you bought 500 CDs. Now, perhaps if the price is 11, you buy 550 CDs.
price 13 12 11 10 9 8 7
Demand
quantity

42. Before, if the price was 10, you bought 550 CDs
Before, if the price was 10, you bought 550 CDs. Now, perhaps if the price is 10, you buy 600 CDs.
price 13 12 11 10 9 8 7
Demand
quantity

43. Connecting the new points, we see that when your income increased, you changed to an entirely different demand curve.
price 13 12 11 10 9 8 7
New Demand
Demand
quantity

44. The new demand curve lies to the right of the old curve, or the demand curve has shifted to the right Demand increased.
price 13 12 11 10 9 8 7
New Demand
Demand
quantity

45. Similarly, if your income decreased, the Demand curve for CDs would shift left. Demand decreases.
price 13 12 11 10 9 8 7
Demand
New Demand
quantity

46. Normal Goods and Inferior Goods
When your income increased, your demand for CDs increased. When your income decreased, your demand for CDs decreased. Goods that behave this way are called normal goods.

47. In general for normal goods:
When income increases, demand increases. (D shifts right.)
When income decreases, demand decreases. (D shifts left.)

48. Inferior goods work the opposite way.
Example: potatoes. People who have little income eat lots of potatoes, because potatoes are cheap and filling.
When income rises, people eat fewer potatoes.
When income falls, people eat more potatoes.

49. In general for inferior goods:
When income increases, demand decreases. (D shifts left.)
When income decreases, demand increases. (D shifts right.)

50. “Related Goods” fall into two categories:
substitute goods
complementary goods

51. Two goods are substitutes if you can use one good instead of the other good.
Apples and pears are substitute goods.

52. If the price of pears increases, the demand for apples would increase
If the price of pears increases, the demand for apples would increase. (D for apples shifts right.)
If the price of pears decreases, the demand for apples would decrease. (D for apples shifts left.)

53. In general: If the price of a substitute good increases, the demand for the other good increases. (D shifts right.)
If the price of a substitute good decreases, the demand for the other good decreases. (D shifts left.)

54. Two goods are complements if you use them together.
Probably for most people, coffee and cream are complementary goods.

55. If the price of coffee increases, the demand for cream would decrease
If the price of coffee increases, the demand for cream would decrease. (D for cream shifts left.)
If the price of coffee decreases, the demand for cream would increase. (D for cream shifts right.)

56. In general: If the price of a complementary good increases, the demand for the other good decreases. (D shifts left.)
If the price of a complementary good decreases, the demand for the other good increases. (D shifts right.)

57. Changes in tastes can also lead to changes in demand.
Taste changes can take the form of fads or responses to new health information concerning a product.

58. A fad for hula hoops can result in an increase in demand for them
A fad for hula hoops can result in an increase in demand for them. (D shifts right.)
Findings about cancer-causing effects of chewing tobacco can reduce the demand for that product. (D shifts left.)

59. Changes in Supply & Changes in Quantity Supplied.

60. Changes in Quantity Supplied
a change in the price of a product results in
a change in the quantity supplied or
a movement along the supply curve.

61. price
Supply 13 12 11 10 9 8 7
If price decreases from $12 to $11, quantity supplied decreases from 600 to 575.
quantity

62. price
Supply 13 12 11 10 9 8 7
If price increases from $11 to $12, quantity supplied increases from 575 to 600.
quantity

63. Do not confuse a change in the quantity supplied with a change in supply!
change in supply: entire curve moves
change in quantity supplied: move along the same curve

64. What is a change in supply?
A change in supply means that at each price, producers are willing to produce and sell a different amount than previously. The entire supply curve moves when supply is affected by something other than the price of the product.

65. What factors cause supply to change? (a shift of the entire curve)
a change in the price of an input
a change in technology
a change in weather (for agricultural products)

66. A Change in the Price of an Input
When there is a change in the price of an input (such as labor or raw materials), the supply of a good that uses that input will change.

67. price
New Supply
Supply
When the price of an input increases, the supply of the good decreases. (S shifts left.)
quantity

68. Supply
price
New Supply
When the price of an input decreases, the supply of the good increases. (S shifts right.)
quantity

69. Technological Advance
When there is a technological advance that makes it cheaper to produce a good, the supply of the good will increase.
S shifts right.

70. Weather Changes
When the weather becomes particularly good or particularly bad for growing a crop, the supply of that crop will change.
When the weather becomes particularly good for growing a crop, the supply of that crop increases. (S shifts right.)
When the weather becomes particularly bad for growing a crop, the supply of that crop decreases. (S shifts left.)

71. What happens to equilibrium price and quantity when supply or demand changes?

72. P decreases & Q increases.
price
S increases:
P decreases & Q increases. S2 P1 P2 D
quantity Q1 Q2

73. P increases & Q decreases.
price
S decreases:
P increases & Q decreases. S1 P2 P1 D
quantity Q2 Q1

74. P increases & Q increases.
D increases:
P increases & Q increases.
price S P2 P1 D2 D1
quantity Q1 Q2

75. P decreases & Q decreases.
D decreases:
P decreases & Q decreases.
price S P1 P2 D1 D2
quantity Q2 Q1

76. What happens to equilibrium price and quantity when both supply and demand change?

77. S increases & D increases:
In this case, Q increases & P stays the same.
price S1 S2
P2 = P1 D2 D1
quantity Q1 Q2

78. S increases & D increases: In this case, Q increases & P increases.
price S1 P2 S2 P1 D2 D1
quantity Q1 Q2

79. S increases & D increases: In this case, Q increases & P decreases.
price S1 S2 P1 P2 D2 D1
quantity Q1 Q2

80. So.... If demand increases more than supply, the price will increase.
If supply increases more than demand, the price will decrease.
If supply and demand increase the same amount, the price will stay the same.

81. In other words, what happens to the price when both supply and demand increase depends on the relative magnitudes of the changes in supply and demand.

82. S decreases & D decreases: P ? & Q decreases
price S2 S1
P2 = P1 D1 D2
quantity Q2 Q1

83. S increases & D decreases: P decreases & Q ?
price S1 P1 S2 P2 D1 D2
quantity Q1
= Q2

84. S decreases & D increases: P increases & Q ?
price S2 P2 S1 P1 D2 D1
quantity Q1
= Q2

85. Price Ceilings and Price Floors

86. Price Ceiling A government imposed maximum legal price.
Example: rent controls on apartments

87. Price Ceiling Notice that Qd > Qs
Price Ceiling Notice that Qd > Qs. Thus, there is excess demand or a shortage.
price S P1 Pc D
quantity
Qs Q1 Qd

88. Price Floor A government imposed minimum legal price.
Examples: minimum wages, agricultural price supports

89. Price Floor Notice that Qs > Qd
Price Floor Notice that Qs > Qd. Thus, there is excess supply or a surplus.
price S Pf P1 D
quantity
Qd Q1 Qs