D EMAND AND S UPPLY Economics 101 Lecturer: Jack Wu

D EMAND AND S UPPLY Demand and supply are the two words that economists use most often. Demand and supply are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium.

M ARKET A market is a group of buyers and sellers of a particular good or service. Buyers determine demand. Sellers determine supply

C OMPETITIVE M ARKET A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

P ERFECT C OMPETITION Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers

N O C OMPETITION Monopoly: One seller, and seller controls price Monopsony: One buyer, and buyer controls price

I MPERFECT C OMPETITION Oligopoly Few sellers Not always aggressive competition Monopolistic Competition Many sellers Slightly differentiated products Each seller may set price for its own product

D EMAND Quantity demanded is the amount of a good that buyers are willing and able to purchase. Law of Demand The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.

D EMAND S CHEDULE Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

E XAMPLE OF D EMAND S CHEDULE Price Quantity ($ per movie) (movies per month)

D EMAND C URVE Demand Curve The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

individual demand curve Quantity (Movies a month) Price ($ per movie) INDIVIDUAL DEMAND CURVE

T WO V IEWS for every possible price, it shows the quantity demanded for each unit of item, it shows the maximum price that the buyer is willing to pay

A NOTHER E XAMPLE OF D EMAND S CHEDULE

Copyright © 2004 South-Western Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ A decrease in price increases quantity of cones demanded. A NOTHER W AY OF D EMAND C URVE

N EGATIVE P RICE ? A negative price case : Hoover ’ s special promotion -- two free air tickets (worth more than £ 400) for purchase of appliance over £ 100.  promotion attracted over 100,000 customers  Hoover incurred £ 48 million loss

C ETERIS P ARIBUS When a demand curve is drawn, everything but price and quantity demanded is held constant. Definition: a Latin phrase, translated as “other things being equal”.

M ARKET D EMAND Market demand refers to the sum of all individual demands for a particular good or service. Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

C HANGE IN Q UANTITY D EMANDED Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product.

0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A tax that raises the price of ice-cream cones results in a movement along the demand curve. A B $ C HANGES IN Q UANTITY D EMANDED

C HANGE IN D EMAND Change in Demand A shift in the demand curve, either to the left or right. Caused by any change that alters the quantity demanded at every price.

Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve,D 3 Demand curve,D 1 Demand curve,D 2 0 C HANGE IN D EMAND

S HIFT IN THE D EMAND C URVE Consumer income Prices of related goods Tastes Expectations Number of buyers

D EMAND AND I NCOME Changes in income normal good – demand increases with income inferior good – demand falls with income -- example: potato

I NFERIOR G OOD V. S. B ADS Inferior good is different from “bads”. Examples of “bads”: pollution or garbage

D EMAND AND P RICES OF R ELATED G OODS Prices of Related Goods When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes. When a fall in the price of one good increases the demand for another good, the two goods are called complements.

C ASE S TUDY Two ways to reduce the quantity of smoking demanded: -- Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on TV (shift demand curve) -- Raising the price of cigarettes through tobacco taxes (move along demand curve)

S UMMARY variablechangeDemandShift Income (Normal)Rise (fall) Right (left) Income (Inferior)Rise (fall)Fall (rise)Left (right) Price of substituteRise (fall) Right (left) Price of complementRise (fall)Fall (rise)Left (right) TasteRise (fall) Right (left) Expected PriceRise (fall) Right (left) Number of buyersRise (fall) Right (left)

S UPPLY Quantity supplied is the amount of a good that sellers are willing and able to sell. Law of Supply The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises.

S UPPLY S CHEDULE Supply Schedule The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

E XAMPLE OF S UPPLY S CHEDULE

S UPPLY C URVE Supply Curve The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones $ An increase in price increases quantity of cones supplied.

T WO V IEWS For every possible price, it shows the production rate For each unit of item, it shows the minimum price that the seller is willing to accept

M ARKET S UPPLY Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

C HANGE IN Q UANTITY S UPPLIED Change in Quantity Supplied Movement along the supply curve. Caused by a change in price.

1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. C HANGE IN Q UANTITY S UPPLIED

C HANGE IN S UPPLY Change in Supply A shift in the supply curve, either to the left or right. Caused by a change in a determinant other than price.

F IGURE 7 S HIFTS IN THE S UPPLY C URVE Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

S HIFT IN THE S UPPLY C URVE Input prices Technology Expectations Number of sellers

S UMMARY variablechangeSupplyShift Input (factor) price Rise (fall) Fall (rise)Left (right) TechnologyRise (fall) Right (left) Expected Price Rise (fall) Fall (rise)Left (right) Number of sellers Rise (fall) Right (left)

E QUILIBRIUM Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

E QUILIBRIUM P RICE AND Q UANTITY Equilibrium Price The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

S URPLUS AND S HORTAGE Surplus When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium. Shortage When price the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

A LTERNATIVE E XAMPLE : #2 L EAD P ENCILS PriceQuantity demandedQuantity supplied

Q UICK Q UIZ 1 Draw demand and supply curves Find equilibrium price and quantity

Q UICK Q UIZ 2 How would following events shift either the demand or the supply of #2 lead pencil? -- an increase in the use of standardized exams (using opscan forms) -- a decrease in the price of ink pens -- a start of a school year

Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Initial equilibrium D D 3....and a higher quantity sold resulting in a higher price Hot weather increases the demand for ice cream New equilibrium $ I NCREASE IN D EMAND

Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Demand New equilibrium Initial equilibrium S1S1 S2S resulting in a higher price of ice cream An increase in the price of sugar reduces the supply of ice cream and a lower quantity sold $ D ECREASE IN S UPPLY

S UMMARY

D ISCUSSION Each of the events listed below has an impact on the market for bicycles. 1.An increase in the price of automobile. 2.A decrease in incomes of consumers if bicycles are a normal good.

D ISCUSSION - CONTINUED 3.An increase in the price of steel used to make bicycle frames. 4.An environmental movement shifts tastes toward bicycling.

D ISCUSSION - CONTINUED 5.Consumers expect the price of bicycles to fall in the future. 6.A technological advance in the manufacture of bicycles.

D ISCUSSION - CONTINUED 7.A reduction in the price of bicycle helmets and shoes. 8.A decrease in incomes of consumers if bicycles are an inferior good.