Demand and Supply: Basics September 9, 2009

Demand  In a market economy, the price of a good is determined by the interaction of demand and supply.

Demand  Demand is the relationship between the price of a good and the quantity of the good demanded at each price.  The various combinations of price and quantity demanded can be reported in a demand schedule.  Each individual in a market has a demand schedule since each person has different preference over the products.

Demand  The law of demand: The greater the price the lower the quantity demanded, other things being equal.

Demand  Market Demand: the total quantity demanded in the market equals the sum of the quantities demanded by each person in the market at a given price.  The law of demand also holds for market demand.

Demand Demand schedules in the Market for Chewing Gum Price Quantity Demanded by Total Quantity Demanded Person 1Person 2Person 3Person 4 $ $ $ $ $ $

Demand A simple demand curve

Supply  Supply is the relationship between the price of a good and the quantity supplied by producers.  A market supply is found by adding up individual producer supply schedules. Summing the quantity supplied at each price by each producer (horizontal summing of the individual supply curves) derives the market supply curve.

Supply  The law of supply: The higher the price of a good, the greater the quantity supplied, other things being equal.  The law of supply is the result of the law of increasing cost.

Supply Supply Schedules in the Market for Chewing Gum Price Quantity Supplied by Total Quantity Supplied Firm 1Firm 2Firm 3 $ $ $ $ $ $

Supply A simple supply curve

Supply  A change in supply indicates a shift of the supply curve.  A change in the quantity supplied is represented by the movement long the supply curve, when there is a change of the own price.

Supply  Determinants of Supply (other than own price)  The prices of factors of production  The price of related goods: substitutes and complements in the production process.  Expected future prices  Number of suppliers  Technology  Taxes and subsidies  The state of nature

Demand and Supply  Market Equilibrium  In the supply and demand model, the equilibrium occurs when there is neither a shortage nor a surplus in the market.

Demand and Supply Supply and demand diagram Surplus Shortage

Demand and Supply  Equilibrium Price is the price at which the quantity demanded equals the quantity supplied.  Equilibrium Quantity is the quantity bought and sold at the equilibrium price.

Demand and Supply  Changes in demand and Supply does not change  Increase in demand leads to a rise in the equilibrium price and quantity.  Decrease in demand leads to a fall in the equilibrium price and quantity.

Demand and Supply  Changes in supply and demand does not change  Increase in supply leads to a fall of equilibrium price and quantity.  Decrease in supply leads to a rise of equilibrium price and quantity.