Demand 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.

Examples of Demand 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. Similarly, the demand for MP3 players is the relationship between the price of MP3 players and the quantity of MP3 players demanded, holding all other influences on the quantity of MP3 files bought constant.

Supply 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.

Examples of Supply 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. Similarly, the supply of MP3 players is the relationship between the price of MP3 players and the quantity of MP3 players supplied, holding all other influences on the quantity of MP3 files sold constant.

The Buying Decision The quantity of MP3 Players that people plan to buy depends on: The price of a MP3 Player The prices of related good (such as tapes, portable CD players, and CDs) Disposable Income Expected future prices Population interested in MP3 Players To begin to learn how these factors influence demand, you will look at the law of demand.

Law of Demand The law of demand states that other things remaining the same, the higher the price of a good, the smaller is the quantity demanded of that good.

Law of Demand Examples If the price of a movie ticket rises, other things remaining the same, the quantity of movie tickets that people plan to buy decreases. If the price of a PC falls, other things remaining the same, the quantity of PCs that people plan to buy increases.

Law of Demand Price/unit Number of units D 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.

Law of Demand Price/unit Number of units D p q 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.

Influences on Demand Price/unit Number of units D A movement along the demand curve: A change in the price of a good, with everything else remaining the same, brings a movement along the demand curve and a change in the quantity demanded. A PA B PB QA QB

Influences on Demand A shift of the demand curve: A change in any other influence on buying plans, except the price of the good, brings a shift of the demand curve and a change in demand. Price/unit D2 D1 Number of units

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 You are going to learn how these factors influence supply. To begin, you will look at the law of supply.

Law of Supply The law of supply states that other things remaining the same, the higher the price of a good, the greater is the quantity supplied of that good.

Supply A supply schedule lists the quantities supplied at each different price when all other influences on the amount producers plan to sell remain the same. A supply curve shows the relationship between the quantity supplied of a good and its price, holding constant all other influences on producers' planned sales. A supply curve is plotted in a graph that measures the quantity supplied of the good on the x-axis, and the price of the good on the y-axis.

Change in Supply A change in the quantity supplied at each and every price is called a change in supply. It is illustrated as a shift in the supply curve. An increase in supply is shown by a rightward shift in the supply curve and a decrease in supply is shown by a leftward shift in the supply curve. [Remember, increase = rightward shift and decrease = leftward shift. An increase in supply is not an upward shift in the supply curve. What looks like an upward shift on a graph is actually a leftward shift and is a decrease in supply.] A change in the quantity supplied is the change in the quantity of a good that firms plan to sell when the price of the good changes and all other influences on selling plans remain the same. A change in the quantity supplied is illustrated by movement along the supply curve.

Law of Supply Other things remaining the same, the higher the price of a good, the greater is the quantity supplied of that good. Why? If the quantity produced of a good increases, the opportunity cost of producing that good rises. And firms are willing to sell more of a good only if the price rises to cover the opportunity cost of producing it.

Law of Supply Price/unit 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. S Number of units

Supply Curve The supply curve can be interpreted as a minimum supply price curve. It tells us the lowest price that firms are willing to accept for supplying a given quantity of the good.

Change in Supply Four key influences on a firm’s selling plans are: Price/unit Four key influences on a firm’s selling plans are: Number of firms that produce a good Prices of other goods Prices of factors of production Technology 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. The graph opposite summarizes the effects of these factors. S1 S2 Number of units

Change in Supply Price/unit A movement along the supply curve describes a change in the price of a good, with everything else remaining the same. (A change in any other influence on selling plans except the price of the good brings a shift of the supply curve and a change in supply.) S B PB A PA QA QB Number of units

Price Determination You will cover two topics in your study of price determination: Price as a regulator Equilibrium (equilibrium price and equilibrium quantity)

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 is the quantity demanded and the greater is 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.

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.

Equilibrium You will learn how to predict 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

Effects on Equilibrium from Change in Demand A change in the demand for Walkmans 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).

Effects on Equilibrium from Change in Demand Quantity Price S D0 D1 D2 Y6 U Z T P1 P2 P3 Y2 Y3 D1 to D2: Price of a substitute rises Price of a complement falls Consumer income increases Good becomes more 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 D1 to D0: Price of a substitute falls Price of a complement rises Consumer income decreases Good becomes less appealing

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).

Effects on Equilibrium from Change in Supply Quantity Price S0 S2 S1 D Y6 U X Y P1 P2 P3 Y4 Y1 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

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)

Equilibrium Changes Quantity Price S0 S2 S1 D0 D1 D2 Y6 U S X W Z T V