1. SUPPLY & DEMAND

2. Interaction between buyers and sellers Markets may be
Local
National
International
Price is discovered in the interactions of buyers and sellers
LO1
3-2

3. Demand
Demand is the combination of desire, willingness and ability to buy a product. It is how much consumers are willing to purchase at specific prices.
The Law of Demand is the rule stating that more will be demanded at lower prices and less at higher prices.

4. Demand Curve
Demand can either be shown on a Demand Schedule or a Demand Curve. It shows an inverse relationship between price and quantity demanded.

5. Supply
Supply is the schedule of quantities offered for sale at all possible prices in a market. It is how much producers are willing to supply at specific prices.
The Law of Supply is the rule stating that more will be offered for sale at high prices than at lower prices.

6. Supply Curve
Supply can either be shown on a Supply Schedule or a Supply Curve.

7. Equilibrium Point
The Equilibrium Point is where Supply & Demand intersect. That is considered the Market Price. Any price above the equilibrium price creates a surplus. A price below the equilibrium price creates a shortage.

8. Non-price Factors Affecting Demand
There are also “non-price factors that affect the demand for a good. These cause changes in demand, rather than changes in quantity demanded.
Changes in Demand (shifts of the curve) are caused by:
Change in income
Change in tastes, preferences
Price of complementary goods
Price of substitute goods
People’s expectations for the future and the number of consumers in the marketplace.

9. Determinants of Demand
Determinants of Demand: Factors That Shift the Demand Curve
Determinant
Examples
Change in buyers’ tastes
Physical fitness rises in popularity, increasing the demand for jogging shoes and bicycles; cell phone popularity rises, reducing the demand for land-line phones.
Change in the number of buyers
A decline in the birthrate reduces the demand for children’s toys.
Change in income
A rise in incomes increases the demand for normal goods such as restaurant meals, sports tickets, and necklaces while reducing the demand for inferior goods such as cabbage, turnips, and inexpensive wine.
Change in the prices of related goods
A reduction in airfares reduces the demand for bus transportation (substitute goods); a decline in the price of DVD players increases the demand for DVD movies (complementary goods).
Change in consumer expectations
Inclement weather in South America creates an expectation of higher future coffee bean prices, thereby increasing today’s demand for coffee beans.
LO1
3-9

10. Increase in Demand

11. Decrease in Demand

12. Changes in Demand and Equilibrium`
Changes in Demand and Equilibrium
Changes in Demand and Equilibrium `
D increase:
P, Q
D decrease:
P, Q P P S S D2 D3 D1 D4
Increase in demand
Decrease in demand
LO4
LO4
3-12

13. Non-price Factors Affecting Supply
There are also “non-price factors that affect the supply of a good. These cause changes in supply, rather than changes in quantity supplied.
Changes in Supply (shifts of the curve) are caused by:
Change in production
Change in the cost of resources
Producer’s expectations
Competition

14. Determinants of Supply
Determinants of Supply: Factors That Shift the Supply Curve
Determinant
Examples
Change in resource prices
A decrease in the price of microchips increases the supply of computers; an increase in the price of crude oil reduces the supply of gasoline.
Change in technology
The development of more effective wireless technology increases the supply of cell phones.
Change in taxes and subsidies
An increase in the excise tax on cigarettes reduces the supply of cigarettes; a decline in subsidies to state universities reduces the supply of higher education.
Change in prices of other goods
An increase in the price of cucumbers decreases the supply of watermelons.
Change in producer expectations
An expectation of a substantial rise in future log prices decreases the supply of logs today.
Change in the number of suppliers
An increase in the number of tattoo parlors increases the supply of tattoos; the formation of women’s professional basketball leagues increases the supply of women’s professional basketball games.
LO2
3-14

15. Increase in Supply

16. Decrease in Supply

17. Changes in Demand and Equilibrium
Changes in Supply and Equilibrium `
Changes in Demand and Equilibrium `
S increase:
P, Q
S decrease:
P, Q P P S1 S2 S4 S3 D D
Increase in supply
Decrease in supply
LO4
LO4
3-17

18. Government-Set Prices
Price Ceilings
Set below equilibrium price
Rationing problem
Black markets
Example: Rent control
LO5
3-18

19. Government-Set Prices
$3.50 P0
Ceiling
3.00 PC D
Shortage Q Qs Q0 Qd
LO5
3-19

20. Government-Set Prices
Price Floors
Prices are set above the market price
Chronic surpluses
Example: Minimum wage laws
LO5
3-20

21. Government-Set Prices
Surplus
Floor
$3.00 Pf
2.00 P0 D Q Qd Q0 Qs
LO5
3-21