1. Demand Supply The term demand refers to the entire relationship between the quantity demanded and the price of a good, other things remaining the same. Demand is described by both the demand schedule and the demand curve. The demand for MP3 files is the relationship between the price of MP3s and the quantity of MP3s demanded, holding all other influences on the quantity of MP3 files bought constant. The term supply refers to the entire relationship between the quantity supplied and the price of a good, other things remaining the same. Supply is described by both the supply schedule and the supply curve. The supply of MP3 files is the relationship between the price of MP3 files and the quantity of MP3 files supplied, holding all other influences on the quantity of MP3 files sold constant.

2. The Buying Decision The quantity of MP3 Players that people plan to buy depends on: –The price of an MP3 Player –The prices of related goods (such as tapes, portable CD players, CDs, and services that sell downloadable music ): these are generically known as SUBSTITUTES and COMPLEMENTS –Disposable Income –Expectations of the future –Size of the market: number of consumers interested in MP3 Players. –Consumer tastes/preferences

3. Law of Demand Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded of that good. Why? For two reasons. –If the price of a good rises, the opportunity cost of using that good rises, so people buy less of that good and more of some substitute goods. This is a substitution effect. –If the price of a good rises, real income falls, so people buy less of all goods including the good whose price has risen. This is a income effect. Price/unit Number of units D

4. Law of Demand The law of demand can be illustrated by a demand schedule or a demand curve. A demand schedule lists the quantities demanded at each price, holding constant all other influences on buying plans. A demand curve graphs the quantity demanded at each price holding constant all other influences on buying plans. The demand curve can be interpreted as a willingness to pay curve. It tells us the highest price that people are willing to pay for a given quantity of the good. Price/unit Number of units D p q

5. Movements along the Demand Curve A change in the price of the good in question, all else remaining the same: –Is shown as a movement along the demand curve. –And as a change in the quantity demanded in the horizontal axis.. Price/unit Number of units D A B PAPA PBPB QAQA QBQB

6. Shifts of the Demand The demand curve shifts in response to a change in any influence, other than own-price. Consumers’ incomes [+,-], prices of substitutes [+], prices of complements [-], future expectations [+], number of consumers [+] Price/unit Number of units D1D1 D2D2 The trickiest effect is from income: Demand increases with income for normal goods [+], and demand decreases with income rising for inferior goods [-]

7. The Selling Decision The quantity of MP3 Players that firms plan to sell depends on: –The price of a MP3 Player –The prices of the factors of production used to make MP3 Players –The prices of related goods (such as tapes, portable CD players, and CDs) –Expected future prices –The number of suppliers –Technology –Knowledge –Institutional and Cultural factors

8. Law of Supply Other things remaining the same, the higher the price of a good, the larger the quantity supplied of that good. Why? If the quantity produced of a good increases, the opportunity of producing the good also rises due to the law of diminishing returns. Thus, firms are only willing to produce and sell more of a good if the price they get for the additional units covers the opportunity costs of producing and selling the units, per the marginal principle.. Price/unit Number of units

9. Law of Supply The law of supply can be illustrated by a supply schedule or a supply curve. A supply schedule lists the quantities supplied at each price, holding constant all other influences on selling plans. A supply schedule graphs the quantities supplied at each different price, ceteris paribus. The supply curve can be interpreted as the lower price limits to the willingness to sell by producers. It provides us with the lowest price sellers will accept to sell a unit of commodity. S Price/unit Number of units p q

10. Movements along the Supply Curve A movement along the supply curve describes how a change in the price of a good, with everything else remaining the same, affecting the quantity supplied. If the price of a good rises from P A to P B, then the quantity supplied would also rise from Q A to Q B (and viceversa) Price/unit Number of units S A B PBPB PAPA QAQA QBQB

11. Change (Shift) of Supply Curve The key influences on a firm’s selling plans are: –Number of firms that produce a good [+] –Prices of factors of production [-] –Technology [+] –Prices of substitute goods [+] –Prices of complements [-] –Future expectations [+] When any of these factors change, there is a change in supply—the curve shifts. A change in supply is shown by a new supply schedule or by a new supply curve, i.e. a shift in the supply curve. Price/unit Number of units S1S1 S2S2

12. Price Determination Price as a regulator Equilibrium (equilibrium price and equilibrium quantity)

13. Price as a regulator The price of a good regulates the quantities demanded and supplied. The higher the price of a good, other things remaining the same, the smaller the quantity demanded and the greater the quantity supplied for that good. The lower the price of a good, other things remaining the same, the greater is the quantity demanded and the smaller is the quantity supplied for that good. If the price is too high, there is a surplus of goods and if the price is too low, there is a shortage of goods.

14. Price as a regulator If there is a shortage of a good, the price rises, and if there is a surplus of a good, the price falls. When there is neither a shortage nor a surplus of a good, the quantity demanded equals the quantity supplied and the price does not change. This price is then the equilibrium price representing the quantity demanded and supplied. The equilibrium quantity is the quantity that is bought and sold.

15. Equilibrium You can describe changes in prices and quantities by studying the effects of: –A change in demand –A change in supply –A change in both demand and supply

16. Effects on Equilibrium from Change in Demand A change in the demand for MP3s can result from a change in any of the following: –The price of a substitute for a Walkman, such as a portable CD player –The price of a complement to a Walkman, such as an audio tape –Income –Relevant population –Tastes/Preferences of consumers If demand increases, both the price and quantity increase (U to Z on next graph). If demand decreases, both the price and the quantity decrease (U to T on next graph).

17. Quantity Price S D0D0 D1D1 D2D2 Y6Y6 U Z T P1P1 P2P2 P3P3 Y2Y2 Y3Y3 Effects on Equilibrium from Change in Demand D1 to D2: Price of a substitute rises Price of a complement falls Consumer income increases Good becomes more appealing D1 to D0: Price of a substitute falls Price of a complement rises Consumer income decreases Good becomes less appealing D1 to D2: Price of a substitute rises Price of a complement falls Consumer income increases Good becomes more appealing D1 to D0: Price of a substitute falls Price of a complement rises Consumer income decreases Good becomes less appealing

18. Effects on Equilibrium from Change in Supply A change in the supply for Walkmans can result from a change in any of the following: –The price of a factor of production, such as the wage rate of the labor that produces Walkmans –The price of a substitute in production to Walkmans, such as a car tape deck –The number of firms that make Walkmans –The technology used to produce Walkmans If supply increases, the price falls and quantity increases (See U to Y on next graph). If supply decreases, the price rises and the quantity decreases (See U to X on next graph).

19. Quantity Price S0S0 S2S2 S1S1 D Y6Y6 U X Y P1P1 P2P2 P3P3 Y4Y4 Y1Y1 Effects on Equilibrium from Change in Supply S1 to S0: Price of an input falls Price of a substitute increases # of competitors increases Technology increases input productivity S1 to S2: Price of an input rises Price of a substitute falls # of competitors decreases

20. Equilibrium Changes If both demand and supply increase, the quantity increases but the price can rise, fall, or remain unchanged. (U to Z, Y or V) If both demand and supply decrease, the quantity decreases but the price can rise, fall, or remain unchanged. (U to T, X or W) If demand increases and supply decreases, the price rises but the quantity can increase, decrease, or remain unchanged. (U to X, Z or S) If demand decreases and supply increases, the price falls but the quantity can increase, decrease, or remain unchanged. (U to T, Y or R)

21. Quantity Price S0S0 S2S2 S1S1 D0D0 D1D1 D2D2 Y6Y6 U S X W Z T V Y R P0P0 P1P1 P2P2 P3P3 P4P4 Y5Y5 Y4Y4 Y2Y2 Y3Y3 Y1Y1 Y0Y0 Equilibrium Changes