Demand and Supply1 DEMAND AND SUPPLY Economics 2023 Principles of Microeconomics Dr. McCaleb

Demand and Supply2 Two Questions  How are prices determined in a competitive market?  What are the consequences of attempting to manipulate, manage, or regulate prices in a competitive market?

Demand and Supply3 TOPIC OUTLINE I.Demand II.Supply III.Market Equilibrium

Demand and Supply4 Demand

Demand and Supply5 DEMAND  Quantity Demanded and Demand Quantity demanded The amount of a good, service, or resource that people are willing and able to buy during a specified period at a specified price. The quantity demanded is an amount per unit of time. For example, the amount per day or per month. Quantity demanded is a number.

Demand and Supply6 DEMAND  Quantity Demanded and Demand Demand The relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same. Demand is a list of quantities at different prices. Demand is a set of numbers indicating the quantities demanded at each possible price. Information on demand is displayed in a demand schedule or illustrated by a demand curve.

Demand and Supply7 DEMAND Demand Schedule and Demand Curve: Example

Demand and Supply8 DEMAND  The Law of Demand Price and quantity demanded are negatively or inversely related Ceteris paribus, if the price of a good rises, the quantity demanded decreases. If the price of a good falls, the quantity demanded increases. Because of the law of demand, demand curves are always negatively sloped.

Demand and Supply9 DEMAND  Changes in Quantity Demanded and in Demand Change in quantity demanded A change in the quantity of a good that people plan to buy resulting from a change in the price of the good. A change in quantity demanded is shown by a move from one price- quantity pair in a demand schedule to a different price-quantity pair. A change in quantity demanded is shown by a movement along a fixed demand curve from one price-quantity point to another price- quantity point.

Demand and Supply10 DEMAND  Changes in Quantity Demanded and in Demand Change in demand A change in the quantity that people plan to buy when any variable other than the price of the good changes. A change in demand is shown by a change in the data in a demand schedule. The quantity demanded at each price changes. A change in demand is shown by a shift of the demand curve. The entire curve shifts so that the quantity demanded at each price changes.

Demand and Supply11 DEMAND When demand decreases, the demand curve shifts leftward from D 0 to D 1. When demand increases, the demand curve shifts rightward from D 0 to D 2. Effect of a Change in Demand on the Demand Curve

Demand and Supply12 The __________ a good is the amount people are willing and able to buy at a specified price. 1.quantity demanded of 2.demand for

Demand and Supply13 The law of demand states that, ceteris paribus, an increase in the price of a good _____ the quantity demanded so that demand curves are _____. 1.Increases; positively-sloped 2.Increases; negatively-sloped 3.Decreases; positively-sloped 4.Decreases; negatively-sloped

Demand and Supply14 A change in the price of a good results in a change in _____ and is shown by a _____ the demand curve. 1.Demand; move along 2.Demand; shift in 3.quantity demanded; move along 4.Quantity demanded; shift in

Demand and Supply15 DEMAND  Variables That Influence Demand The main influences on demand Prices of related goods Income Expectations Number of buyers Preferences

Demand and Supply16 DEMAND  Variables That Influence Demand Prices of related goods Any two goods are either unrelated to one another or they are related goods. If the two goods are unrelated, a change in the price of one good has no effect on the demand for the other. If the two goods are related, a change in the price of one good either increases or decreases the demand for the other. Related goods can be either substitutes or complements.

Demand and Supply17 DEMAND  Variables That Influence Demand Substitute A good that can be consumed in place of another good. Apples and oranges are substitutes for one another. The demand for a good increases if the price of a substitute good rises. The demand for a good decreases if the price of a substitute good falls.

Demand and Supply18 DEMAND  Variables That Influence Demand Complement A good that is consumed with another good. Ice cream and fudge sauce are complements with one another. The demand for a good increases if the price of a complementary good falls. The demand for a good decreases if the price of a complementary good rises.

Demand and Supply19 DEMAND  Variables That Influence Demand Income Normal good The demand for a normal good increases if income increases. Inferior good The demand for an inferior good decreases if income increases.

Demand and Supply20 DEMAND  Variables That Influence Demand Expectations Expected future income and expected future prices influence demand today. Examples If the price of a computer is expected to fall next month, the demand for computers today decreases. If expected future income increases, the demand for computers today increases.

Demand and Supply21 DEMAND  Variables That Influence Demand Number of buyers The greater the number of buyers in a market, ceteris paribus, the larger is the demand for any good. The fewer the number of buyers, ceteris paribus, the smaller is demand for the good.

Demand and Supply22 DEMAND  Variables That Influence Demand Preferences When preferences change, the demand for one item increases and the demand for another item (or items) decreases. Preferences change, for example, when: people become better informed new goods become available.

Demand and Supply23 If consumer incomes increase and Coke is a normal good, the __________ Coke __________. 1.demand for; increases 2.demand for; decreases 3.quantity demanded of; increases 4.quantity demanded of; decreases

Demand and Supply24 If the price of Pepsi, a substitute for Coke, increases, the __________ Coke __________. 1.demand for; increases 2.demand for; decreases 3.quantity demanded of; increases 4.quantity demanded of; decreases

Demand and Supply25 If the price of peanuts, a complement to Coke (at least in the South), increases, the __________ Coke __________. 1.demand for; increases 2.demand for; decreases 3.quantity demanded of; increases 4.quantity demanded of; decreases

Demand and Supply26

Demand and Supply27 Supply

Demand and Supply28 SUPPLY  Quantity Supplied and Supply Quantity supplied The amount of a good, service, or resource that people are willing and able to sell during a specified period at a specified price. The quantity supplied is an amount per unit of time. For example, the amount per day or per month. Quantity supplied, like quantity demanded, is a number.

Demand and Supply29 SUPPLY  Quantity Supplied and Supply Supply The relationship between the quantity supplied and the price of a good when all other influences on selling plans remain the same. Supply is a list of quantities at different prices. Supply is a set of numbers indicating the quantities supplied at each possible price. Information on supply is displayed in a supply schedule or illustrated by a supply curve.

Demand and Supply30 SUPPLY Supply Schedule and Supply Curve: Example

Demand and Supply31 SUPPLY  The Law of Supply Price and quantity supplied are positively or directly related Ceteris paribus, if the price of a good rises, the quantity supplied increases. If the price of a good falls, the quantity supplied decreases. Because of the law of supply, supply curves are always positively sloped.

Demand and Supply32 SUPPLY  Changes in Quantity Supplied and in Supply Change in quantity supplied A change in the quantity of a good that suppliers plan to sell resulting from a change in the price of the good. A change in quantity supplied is shown by a move from one price- quantity pair in a supply schedule to a different price-quantity pair. A change in quantity supplied is shown by a movement along a fixed supply curve from one price-quantity point to another price-quantity point.

Demand and Supply33 SUPPLY  Changes in Quantity Supplied and in Supply Change in supply A change in the quantity that suppliers plan to sell when any variable other than the price of the good changes. A change in supply is shown by a change in the data in a supply schedule. The quantity supplied at each price changes. A change in supply is shown by a shift of the supply curve. The entire curve shifts so that the quantity supplied at each price changes.

Demand and Supply34 SUPPLY When supply decreases, the supply curve shifts leftward from S 0 to S 1. When supply increases, the supply curve shifts rightward from S 0 to S 2. Effect of a Change in Supply on the Supply Curve

Demand and Supply35 The __________ of a good is the amount people are willing and able to sell at a specified price. 1.quantity supplied 2.supply

Demand and Supply36 The law of supply states that, ceteris paribus, an increase in the price of a good _____ the quantity supplied so that supply curves are _____. 1.increases; positively-sloped 2.increases; negatively-sloped 3.decreases; positively-sloped 4.decreases; negatively-sloped

Demand and Supply37 A change in the price of a good results in a change in _____ and results in a _____ the supply curve. 1.supply; shift in 2.supply; move along 3.quantity supplied; shift in 4.quantity supplied; move along

Demand and Supply38 SUPPLY  Variables That Influence Supply The main influences on supply Prices of related goods Prices of resources or inputs Expectations Number of sellers Productivity

Demand and Supply39 SUPPLY  Variables That Influence Supply Prices of Related Goods If two goods are related in supply or production, a change in the price of one good brings about a change in the supply of the other good. Goods that are related in supply may be either substitutes or complements. Goods that are related in demand are not necessarily related in supply. Even if they are related, they may be substitutes in demand and complements in supply, or they may be complements in demand but substitutes in supply.

Demand and Supply40 SUPPLY  Variables That Influence Supply Substitute in production A good that can be produced in place of another good. Trucks and SUVs are substitutes in an automobile factory. Gasoline and home heating oil are substitutes in a petroleum refinery. The supply of a good increases if the price of another good that is a substitute in production falls. The supply of a good decreases if the price of another good that is a substitute in production rises.

Demand and Supply41 SUPPLY  Variables That Influence Supply Complement in production A good that is produced along with another good. Straw is a complement in production with wheat. Natural gas is often a complement in production with crude oil. The supply of a good increases if the price of another good that is a complement in production rises. The supply a good decreases if the price of another good that is a complement in production falls.

Demand and Supply42 SUPPLY  Variables That Influence Supply Prices of Resources or Inputs Resource or input prices influence the cost of production. If it costs more to produce a good, the supply of the good decreases. If it costs less to produce a good, the supply increases. Expectations Expectations about future prices of both goods and the inputs used to produce them influence supply.

Demand and Supply43 SUPPLY  Variables That Influence Supply Number of Sellers The greater the number of sellers in a market, ceteris paribus, the larger is supply. The smaller the number of sellers, the smaller is supply. Productivity Productivity is output per unit of input. An increase in productivity lowers costs and therefore increases supply. A decrease in productivity increases costs and therefore decreases supply.

Demand and Supply44 If the wages of oil well drillers increase, the __________ of oil __________. 1.supply; increases 2.supply; decreases 3.quantity supplied; increases 4.quantity supplied; decreases

Demand and Supply45 If natural gas and oil are produced together and the price of natural gas increases, the __________ of oil __________. 1.supply; increases 2.supply; decreases 3.quantity supplied; increases 4.quantity supplied; decreases

Demand and Supply46 If the productivity of oil well drillers increases, the __________ of oil __________. 1.supply; increases 2.supply; decreases 3.quantity supplied; increases 4.quantity supplied; decreases

Demand and Supply47

Demand and Supply48 Market Equilibrium

Demand and Supply49 MARKET EQUILIBRIUM  Market Equilibrium Definition When the quantity demanded equals the quantity supplied—when buyers’ and sellers’ plans are consistent with one another. Equilibrium: Q D = Q S

Demand and Supply50 MARKET EQUILIBRIUM  Market Equilibrium Equilibrium price The price at which the quantity demanded equals the quantity supplied. Equilibrium quantity The quantity bought and sold at the equilibrium price.

Demand and Supply51 MARKET EQUILIBRIUM Market equilibrium is at the intersection of the demand curve and the supply curve. The equilibrium price is $1 a bottle. The equilibrium quantity is 10 million bottles a day. Market Equilibrium: Illustration

Demand and Supply52 MARKET EQUILIBRIUM  Price: A Market’s Automatic Regulator Law of market forces Surplus, or Excess Supply A surplus or excess supply exists when, at the current market price, the quantity supplied exceeds the quantity demanded. When there is a surplus, the price falls.

Demand and Supply53 MARKET EQUILIBRIUM At $1.50 a bottle... quantity supplied is 11 bottles. There is a surplus. Price falls until the market is in equilibrium. quantity demanded is 9 bottles. Surplus Results in a Fall in Price

Demand and Supply54 MARKET EQUILIBRIUM  Price: A Market’s Automatic Regulator Shortage, or Excess Demand A shortage or excess demand exists when, at the current market price, the quantity demanded exceeds the quantity supplied. When there is a shortage, the price rises.

Demand and Supply55 MARKET EQUILIBRIUM At 75 cents a bottle... quantity demanded is 11 bottles. There is a shortage. Price rises until the market is in equilibrium. quantity supplied is 9 bottles. Shortage Results in a Rise in Price

Demand and Supply56 Market equilibrium occurs at the quantity and price at which 1.quantity demanded equals quantity supplied. 2.demand equals supply.

Demand and Supply57 If the market price is above the equilibrium price, a _____ exists and the market price will _____. 1.surplus; rise 2.surplus; fall 3.shortage; rise 4.shortage; fall

Demand and Supply58 If the market price is below the equilibrium price, a _____ exists and the market price will _____. 1.surplus; rise 2.surplus; fall 3.shortage; rise 4.shortage; fall

Demand and Supply59 MARKET EQUILIBRIUM An increase in demand shifts the demand curve out or rightward. The price rises to restore market equilibrium. Because of the price increase, quantity supplied increases along the supply curve. Equilibrium quantity increases. Effect of an Increase in Demand on Equilibrium

Demand and Supply60 MARKET EQUILIBRIUM A decrease in demand shifts the demand curve in or leftward. The price falls to restore market equilibrium. Because of the price decrease, quantity supplied decreases along the supply curve. Equilibrium quantity decreases. Effect of a Decrease in Demand on Equilibrium

Demand and Supply61 MARKET EQUILIBRIUM An increase in supply shifts the supply curve out or rightward. The price falls to restore market equilibrium. Because of the price decrease, quantity demanded increases along the supply curve. Equilibrium quantity increases. Effect of an Increase in Supply on Equilibrium

Demand and Supply62 MARKET EQUILIBRIUM A decrease in supply shifts the supply curve in or leftward. The price rises to restore market equilibrium. Because of the price increase, quantity demanded decreases along the supply curve. Equilibrium quantity decreases. Effect of a Decrease in Supply on Equilibrium

Demand and Supply63 MARKET EQUILIBRIUM An increase in demand shifts the demand curve out or rightward and an increase in supply shifts the supply curve out or rightward. Equilibrium quantity increases. Equilibrium price might rise or fall or remain the same. Effect of an Increase in Both Demand and Supply

Demand and Supply64 MARKET EQUILIBRIUM A decrease in demand shifts the demand curve in or leftward and a decrease in supply shifts the supply curve in or leftward. Equilibrium quantity decreases. Equilibrium price might rise or fall or remain the same. Effect of a Decrease in Both Demand and Supply

Demand and Supply65 MARKET EQUILIBRIUM An increase in demand shifts the demand curve out or rightward, and a decrease in supply shifts the supply curve in or leftward. Equilibrium price rises. Equilibrium quantity might increase, decrease, or remain the same. Effect of an Increase in Demand and a Decrease in Supply

Demand and Supply66 MARKET EQUILIBRIUM A decrease in demand shifts the demand curve in or leftward, and an increase in supply shifts the supply curve out or rightward. Equilibrium price falls. Equilibrium quantity might increase, decrease, or remain the same. Effect of a Decrease in Demand and an Increase in Supply

Demand and Supply67 MARKET EQUILIBRIUM  Market Equilibrium Analysis Analysis of the Variables That Influence Demand and Supply How does the event affect demand? Increases: Shift the demand curve out or rightward Decreases: Shift the demand curve in or leftward Unchanged: No shift in demand How does the event affect supply? Increases: Shift the supply curve out or rightward Decreases: Shift the supply curve in or leftward Unchanged: No shift in supply

Demand and Supply68 MARKET EQUILIBRIUM  Market Equilibrium Analysis Conclusions from the Analysis How do the shifts in demand and supply affect equilibrium price? Increases Decreases Unchanged Cannot be determined How do the shifts in demand and supply affect equilibrium quantity? Increases Decreases Unchanged Cannot be determined