DEMAND AND SUPPLY WEEKS 3 & 4

Demand Demand means the willingness and capacity to pay. The amount of a product that a consumer wishes to purchase is called quantity demanded. Prices are the tools by which the market coordinates individual desires.

Demand vs. Quantity Demanded Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time. The quantity demanded is the amount of a product that people are willing and able to purchase at one specific price.

The Law of Demand Law of demand – there is an inverse relationship between price and quantity demanded. Quantity demanded rises as price falls, other things constant. Quantity demanded falls as prices rise, other things constant.

The Law of Demand What accounts for the law of demand? People tend to substitute for goods whose price has gone up.

The Demand schedule The demand schedule is a numerical tabulation that shows the quantity that will be demanded at some selected prices. assumes all the following: As price rises, quantity demanded declines. Quantity demanded has a specific time dimension to it. All the products involved are identical in shape, size, quality, etc.

The Demand Curve The demand curve is the graphical representation of the law of demand. The demand curve slopes downward and to the right. It’s negatively sloped. As the price goes up, the quantity demanded goes down. Demand function is the mathematical presentation of demand and the factors that influence it.

From a Demand schedule to a Demand Curve Price per cassette A B C D E A Demand Table DVD rentals demanded per week $0.50 1.00 2.00 3.00 4.00 9 8 6 4 2 A Demand Curve $6.00 5.00 E 4.00 Price per DVDs (in dollars) 3.50 G D 3.00 Demand for DVDs C 2.00 B F 1.00 A .50 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of DVDs demanded (per week)

A Sample Demand Curve A PA D QA Price (per unit) Quantity demanded (per unit of time) D A PA QA

The determinants of quantity demanded: the demand function The price of the product The prices of other products The consumer’s income and wealth The consumer’s taste Epectations. Population D=f(Px, Py, I, T, E, N)

The market demand curve. To obtain a market demand schedule, we sum the quantities demanded by each consumer at a particular price. draw

Aggregation of Demand (II)

Shifts in Demand Versus Movements Along a Demand Curve Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant. Graphically, it refers to the entire demand curve.

Shifts in Demand Versus Movements Along a Demand Curve Quantity demanded refers to a specific amount that will be demand per unit of time at a specific price. Graphically, it refers to a specific point on the demand curve.

Shifts in Demand Versus Movements Along a Demand Curve A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded.

Change in Quantity Demanded Price (per unit) Quantity demanded (per unit of time) 100 $2 $1 200 B Change in quantity demanded (a movement along the curve) A D1

Shifts in Demand Versus Movements Along a Demand Curve A shift in demand is the graphical representation of the effect of anything other than price on demand.

Shift in Demand Price (per unit) Quantity demanded (per unit of time) 100 $2 $1 200 D0 Change in demand (a shift of the curve) D1 B A 250

Determinants of Demand Number of buyers Income Tastes Expectations Prices of related goods

Shift Factors of Demand Income-An increase in income will increase demand for normal goods.An increase in income will decrease demand for inferior goods. Price of Other Goods-When the price of a substitute good falls, demand falls for the good whose price has not changed. When the price of a complement good falls, demand rises for the good whose price has not changed.

Tastes-A change in taste will change demand with no change in price. If you expect your income to rise, you may consume more now. If you expect prices to fall in the future, you may put off purchases today. Taxes levied on consumers increase the cost of goods to consumers, thereby reducing demand. Subsidies have an opposite effect.

Factors that Shift Demand

SUPPLY Businesses make the goods and services that consumers want to buy. The supplier/business/firm main goal is profit maximization. Supply is the amount of a product that firms are able and willing to offer for sale. Supply is a desired flow- willing to sell, and not actually sell.

The determinants of quantity supplied: the supply function The price of the product The price of inputs to production The state of technology The quantity of any product that firms will produce and offer for sale is positively related to the product’s own price, rising when price rises and falling when price falls. The supply schedule is analogous to that of demand. The supply curve shows the quantity produced and offered for sale at each price.

Movement Along a Supply Curve As the price declines from P1 to P, the quantity decreases from Q1 to Q. Unit 1 : Macroeconomics National Council on Economic Education

Shift in Supply Factors that Shift supply: Number of suppliers Prices of resources used to produce good Prices of related goods produced Technology Expectations about future prices Increase in supply from S to S1 shows that at the same price (P), the quantity increased from Q to Q1. Unit 1 : Macroeconomics National Council on Economic Education

Determination of price: the concept of a market DD SS DD-SS 0.5 110.0 5.0 105.0 1.0 90.0 46.0 44.0 1.5 77.5 0.0 2.0 67.5 100.0 -32.5 2.5 62.5 115.0 -52.5 3.0 60.0 122.5 -62.5

Equilibrium Quantity and Price What happens if the price is $10? What happens if the price is $6? What happens if the price is $8? Unit 1 : Macroeconomics National Council on Economic Education

Determination of equilibrium price It is the price at which DDq = SSq. The amount that is bought and sold at the equilibrium price is called equilibrium quantity. The term equilibrium means ‘a state of balance’. It occurs when desired purchases equal desired sales and there are no forces tending to make anything change.

In a state of disequilibrium? The law of price adjustment predicts what will happen to the market price when there is either excess DD or excess SS When SS > DD, the market price will fall. When SS < DD, the market price will rise.

Predictions of demand and supply analysis A rightward shift of the DD and SS curves means that more is DD and SS at each market price, and vice versa. To discover the effects of DD & SS shifts that we wish to study, we use the method known as comparative statics. We start from the position of equilibrium then introduce the change to be studied. The new eqm position is determined and compared with the original one.

The predictions Rise in DD—increase in both price and quantity DD & SS, and vice versa Rise in SS—decrease in eqm price and an increase in quantity DD & SS, and vice versa

Formal treatment of Demand and Supply