1. Supply and Demand Chapter 4

2. Demand Buyers or Consumers are sometimes called demanders. Consumers are said to “demand” products in the market place. Demand refers to the consumption behavior of buyers in the market. Demand also means the willingness to pay of consumers at various prices and quantities.

3. Demand Prices are the tools by which the market coordinates individual desires.

4. The Law of Demand Quantity demanded rises as price falls, other things held constant (such as income or the prices of competitive products). Quantity demanded falls as prices rise, other things constant. Therefore, there is an inverse or negative relationship between price and quantity demanded.

5. The Law of Demand What accounts for the law of demand? People tend to substitute for goods whose price has gone up

6. The Demand Curve The demand curve is the graphic representation of the law of demand. The demand curve slopes downward and to the right. As the price goes up, the quantity demanded goes down.

7. The Demand Curve The slope tells us that quantity demanded varies indirectly—in the opposite direction—with price. The slope of the demand curve is negative because the relationship between price and quantity is inverse. A simple equation of demand in slope- intercept form is Q d = a - mP Slope is negative

8. Assumption :Other Things Constant Other things constant means that all other factors that affect the analysis are assumed to remain constant, whether they actually remain constant or not. These factors may include changing tastes, prices of other goods, the income of the buyers, even the weather.

9. D Price (per unit) 0 Quantity demanded (per unit of time) PAPA QAQA A A Sample Demand Curve

10. Shifts in Demand Versus Movements Along a Demand Curve Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant. Graphically, “demand” refers to the entire demand curve.

11. Shifts in Demand Versus Movements Along a Demand Curve Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price. Graphically, it refers to a specific point on the demand curve.

12. Shifts in Demand Versus Movements Along a Demand Curve A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded.

13. Shifts in Demand Versus Movements Along a Demand Curve A shift in demand is the graphical representation of the effect of anything other than price on demand. The original curve will move to the right or to the left.

14. Change in Quantity Demanded 0 D1D1 Change in quantity demanded (a movement along the curve) B Price (per unit) Quantity demanded (per unit of time) 100 $2 $1 200 A

15. D0D0 Shift in Demand Price (per unit) Quantity demanded (per unit of time) 100 $2 $1 200 A D1D1 Change in demand (a shift of the curve – in this case a decrease in demand) 250 B

16. Shift Factors of Demand Shift factors of demand are those that cause shifts in the demand curve to the right or left.

17. Shift Factors of Demand Shift factors of demand include—but are not limited—to the following: –Society's income –The prices of other goods –Tastes –Expectations

18. Shift Factors of Demand A rise in income will increase demand for goods. When the prices of substitute goods fall, you will consume less of the good whose price has not changed. A change in taste will change demand with no change in price.

19. Shift Factors of Demand If you expect your income to rise, you may consume more now. If you expect prices to fall in the future, you may put off purchases today.

20. The Demand Table The demand table assumes all the following: –As price rises, quantity demanded declines. –Quantity demanded has a specific time dimension to it. –All the products involved are identical in shape, size, quality, etc. –The schedule assumes that everything else is held constant.

21. From a Demand Table to a Demand Curve Plot each point in the demand table on a graph and connect the points to derive the demand curve. The demand curve graphically conveys the same information that is on the demand table. The curve represents the maximum price that you will for various quantities of a good—you will happily pay less.

22. Price per cassette (in dollars) A Demand Curve Quantity of cassettes demanded (per week) 123456789 101112 13 $6.00 5.00 4.00 3.00 2.00 1.00.50 0 3.50 E D C BF A From a Demand Table to a Demand Curve Price per cassette ABCDEABCDE A Demand Table Cassette rentals demanded per week $0.50 1.00 2.00 3.00 4.00 9864298642 Demand for cassettes

23. Individual and Market Demand Goods A market demand curve is the horizontal sum of all individual demand curves. The market demand curve is determined by adding the individual demand curves of all the demanders.

24. Individual and Market Demand Goods Real world sellers do not add up individual demand curves. They estimate total market demand for their product which becomes smooth and downward sloping curve.

25. Individual and Market Demand Goods The demand curve is downward sloping for the following reasons: –At lower prices, existing demanders buy more. –At lower prices, new demanders enter the market.

26. From Individual Demands to a Market (1) Price per cassette $.0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 (2) Alice’s demand (3) Bruce’s demand (2) Cathy’s demand (3) Market demand 9876543298765432 6543210065432100 1100000011000000 16 14 11 9 7 5 3 2 ABCDEFGHABCDEFGH Quantity of cassettes demanded per week 2 Cathy Bruce Alice D A C E F G $4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 Price per cassette (in dollars) 46810121416 B

27. Supply Individuals control the factors of production. –Factors of production are the resources or inputs, necessary to produce goods or services. Individuals supply factors of production to intermediaries or firms.

28. Supply The analysis of the supply of produced goods has two parts: –An analysis of the supply of the factors of production to firms. –An analysis of why firms transform those factors of production into final goods and services.

29. The Law of Supply Quantity supplied rises as price rises, other things constant. Quantity supplied falls as price falls, other things constant. Thus, there is a direct or positive relationship between price and quantity supplied.

30. The Law of Supply The law of supply is accounted for by two factors: –When prices of their product rise, firms arrange their activities to supply more of the good to the market, substituting production of that good for the production of other goods. –Assuming firms' costs are constant, a higher price means higher profits. –Or, assuming firms’ costs rise as production increases, they must raise price to cover their cost increase.

31. The Supply Curve The supply curve is the graphic representation of the law of supply. The supply curve slopes upward to the right. The slope tells us that the quantity supplied varies directly—in the same direction—with the price. A simple equation of supple is Q s = a + mP Slope is positive

32. Quantity supplied (per unit of time) 0 S A Price (per unit) PAPA QAQA A Sample Supply Curve

33. Shifts in Supply Versus Movements Along a Supply Curve Supply refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant.

34. Shifts in Supply Versus Movements Along a Supply Curve If the amount supplied is affected by anything other than a change in price, there will be a shift in supply. –Shift in supply -- the graphic representation of the effect of a change in a factor other than price on supply.

35. Shifts in Supply Versus Movements Along a Supply Curve Quantity supplied refers to a specific amount that will be supplied at a specific price.

36. Shifts in Supply Versus Movements Along a Supply Curve Changes in price causes changes in quantity supplied represented by a movement along a supply curve.

37. Shift in Supply Price (per unit) Quantity supplied (per unit of time) S0S0 Shift in Supply (a shift of the curve – in this case an increase in supply) S1S1 $15 AB 1,2501,500

38. Change in quantity supplied (a movement along the curve) Change in Quantity Supplied Price (per unit) Quantity supplied (per unit of time) S0S0 $15 A 1,2501,500 B

39. Shift Factors of Supply Shift factors of supply are those factors that cause shifts in the entire supply curve to the left or right.

40. Shift Factors of Supply The following are shift factors of supply: –Changes in the prices of inputs used in the production of a good –Changes in technology –Changes in suppliers' expectations –Changes in taxes and subsidies

41. Shift Factors of Supply Changes in the prices of inputs used in the production of a good. –If costs go up, then profits go down, and the incentive to supply also goes down. –If costs go up substantially, the firm may even shut down.

42. Shift Factors of Supply Technology makes costs go down, profits go up, thus the incentive to supply also goes up. –This is especially true when technology replaces labor.

43. Shift Factors of Supply If they expect prices to rise in the future, suppliers may store today's production for an expected windfall later. If they expect prices to fall in the future, suppliers may sell off more of their inventories today.

44. Shift Factors of Supply If taxes go up, costs also go up, and profits go down, leading suppliers to reduce output. If government subsidies go up, costs go down, and profits go up, leading suppliers to increase output.

45. From a Supply Table to a Supply Curve To derive a supply curve from a supply table, you plot each point in the supply table on a graph and connect the points. The supply curve represents the set of minimum prices an individual seller will accept for various quantities of a good. Competing suppliers’ entry into the market places a limit on the price any supplier can charge.

46. From a Supply Table to a Supply Curve Competing suppliers’ entry into the market places a limit on the price any supplier can charge.

47. Individual and Market Supply Curves The market supply curve is derived by horizontally adding the individual supply curves of each supplier.

48. From Individual Supplies to a Market Supply Quantities Supplied ABCDEFGHIABCDEFGHI (1) Price (in dollars) (2) Ann's Supply (5) Market Supply (4) Charlie's Supply $0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 012345678012345678 001234555001234555 000000022000000022 0 1 3 5 7 9 11 14 15 (3) Barry's Supply

49. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 From Individual Supplies to a Market Supply Price per cassette (in dollars) CharlieBarry Ann Quantity of cassettes supplied (per week) $4.00 3.50 3.00 2.50 2.00 1.50 1.00 0.50 0 I H G F E D C B A Market Supply CACA

50. The Dynamic Laws of Supply and Demand Supply and demand come together to determine equilibrium quantity and equilibrium price.

51. Excess Supply and Excess Demand Excess supply – prices tend to fall if quantity supplied is greater than quantity demanded. Excess demand – prices tend to rise if quantity demanded is greater than quantity supplied.

52. Price Adjusts The larger the difference between quantity demanded and quantity supplied, the greater the pressure for prices to rise (if there is excess demand) or fall (if there is excess supply. When quantity demanded equals quantity supplied, prices have no tendency to change.

53. A The Marriage of Supply and Demand Price per cassette (in dollars) $5.00 4.00 3.50 3.00 2.50 2.00 1.50 1.00 S D Quantity of cassettes supplied and demanded (per week) C Excess demand 123456789101112 Excess supply B E

54. Market Equilibrium Equilibrium is a concept in which opposing dynamic forces pushing cancel each other out. In supply and demand analysis, equilibrium means that the upward pressure on price is exactly offset by the downward pressure on price.

55. Equilibrium Equilibrium price is the price toward which the invisible hand drives the market. Equilibrium quantity is the amount bought and sold at the equilibrium price.

56. Equilibrium is not… A state of the world—it is a characteristic of the static model we use to examine the world. Neither good or bad—but simply a state in which dynamic pressures offset each other. Equilibrium exists at a particular moment in time.

57. Desirable Characteristics of Supply/Demand Equilibrium Consumer surplus – the distance between the demand curve and the price the demander pays is net benefit to consumers.

58. Desirable Characteristics of Supply/Demand Equilibrium Producer surplus – if a producer receives more than the price he would be willing to sell it for, he receives a net benefit.

59. Desirable Characteristics of Supply/Demand Equilibrium What's good about equilibrium is that it makes the combination of consumer and producer surplus as large as it can be.

60. Desirable Characteristics of Supply/Demand Equilibrium Markets allow trade, thereby leading to an increase in the combination of consumer and producer surplus.

61. Consumer and Producer Surplus Price Supply Demand Quantity 0 $10 9 8 7 6 5 4 3 2 1 10987654321 Producer Surplus Consumer Surplus Lost Surplus

62. Supply and Demand End of Chapter 4