Supply and Demand January 14, 2015.

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Presentation transcript:

Supply and Demand January 14, 2015

What Is Demand? Demand is a relationship between a product’s price and quantity demanded. The law of demand states that price and quantity demanded are inversely related. Market demand is the sum of quantities demanded by all consumers in a market. 1

The Demand Curve P D Q

Changes in Demand Demand Determinants Prices of other products The number of buyers (an increase causes a rightward demand shift) Income For normal products, an increase causes a rightward demand shift. For inferior products, an increase causes a leftward demand shift. Prices of other products For substitute products, a rise in the other product’s price causes a rightward demand shift. For complementary products, a rise in the other product’s price causes a leftward demand shift. Consumer preferences Consumer expectations Changes in quantity demanded: are shown by movements along demand curve are caused by price changes Market Demand Curve for Popcorn 0.50 1.00 1.50 2.00 2.50 Price ($ per kg) D2 D0 D1 1 3 5 7 9 11 13 Quantity Demanded (millions of kg per year) . 3

Changes in Quantity Demanded 500 600 Quantity Demanded (cans of soda) Change in Quantity Demanded Price ($ per can of soda) 0.50 1.00 1.50 2.00 500 Change in Demand Price ($ per pair of skis) 0.50 1.00 1.50 2.00 a b D0 D0 D1 Quantity Demanded (cans of soda) 3

What Is Supply? Supply: is a relationship between a product’s price and quantity supplied The law of supply states there is a direct relationship between price and quantity supplied. 6

The Supply Curve P S Q

Supply Determinants P S Q Supply determinants include the following factors: Number of producers (an increase causes a rightward supply shift) Resource prices (an increase causes a leftward supply shift) State of technology (an improvement causes a rightward supply shift) Prices of related products (an increase causes a leftward supply shift) changes in nature (an improvement causes a rightward shift for some products) producer expectations (an expectation of lower prices in the future causes an immediate rightward supply shift) P S Q 9

Changes in Quantity Supplied (a) are shown by movements along the supply curve are caused by price changes P S Q