 # Chapter 3 Demand and Supply Huanren (Warren) Zhang.

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Chapter 3 Demand and Supply Huanren (Warren) Zhang

Law of demand Demand = quantity of a good a consumer is willing and able to purchase at various prices Law of demand = quantity demanded (Q d ) and price (P) are inversely related

movement from one point to another point on the same demand curve (no shift) A B A B Increase in quantity demanded Decrease in quantity demanded Change in the quantity demanded

Shift of the entire demand curve Change in demand

1. Income – Normal goods vs. Inferior goods 2. Prices of related goods – Substitutes vs. Complements 3. Expectations 4. # of buyers 5. Tastes and preferences Factors causing changes in demand

Law of Supply Supply = maximum quantity a seller is willing and able to sell at various prices Law of supply = Price (P) and quantity supplied (Q s ) are directly related

Change in the quantity supplied: movement from one point to another point on the same supply curve (no shift) Change in supply: Shift of the entire supply curve

Change in supply Decrease in supply Increase in supply

Factors causing changes in supply 1. Input prices 2. Price of related goods in production – Substitutes vs. Complements in production 3. Expectations 4. # of sellers 5. Technology

Equilibrium in a market occurs when the price balances the plans of buyers and sellers. When price is greater than equilibrium price, the quantity supplied exceeds the quantity demanded – => there is a surplus and a downward pressure on price When price is less than equilibrium price, the quantity demanded exceeds the quantity supplied – => there is a shortage and a upward pressure on price Market Equilibrium

Market equilibrium Equilibrium price =_____ Equilibrium quantity= _____

Market equilibrium Equilibrium price = \$6 Equilibrium quantity= 20 At P=\$4, there is a ____ (surplus/shortage), causing a ____ (increase/decrease) in price At P=\$8, there is a ____ (surplus/shortage), causing a ____ (increase/decrease) in price

Market equilibrium Equilibrium price = \$6 Equilibrium quantity= 20 At P=\$4, there is a shortage, causing a increase in price At P=\$8, there is a surplus, causing a decrease in price

Changes in equilibrium Changes (shifts) in demand Changes (shifts) in supply Changes (shifts) in both demand and supply

Changes in demand ↓ D → ↓ P and ↓ Q ↑ D → ↑ P and ↑ Q

Changes in demand How does an increase in income affect the market for cars (considered as normal goods)?

Changes in supply ↓ S → ↑ P and ↓ Q ↑ S → ↓ P and ↑ Q

Changes in supply How does an decrease in the price of steel (an input for producing cars) affect the market for cars?

Simultaneous shifts in demand and supply Increase in wages paid to auto workers has raised incomes – Decrease S and increase D Decrease in S → ↑ P and ↓ Q Increase in D → ↑ P and ↑ Q Price rises but change in Q in indeterminate

Simultaneous shifts in demand and supply Anytime both D & S shift, one component of equilibrium will always be indeterminate