1. Demand and Supply Chapter 3

2. Competition Provides consumers with alternatives Competition by producers to satisfy consumer wants underlies markets which are characterized by demand and supply

3. Demand Relates the quantity of a good that consumers would purchase at each of various possible prices over some period of time Quantity demanded The quantity that consumers would purchase at a given price Ceteris paribus  Holding all else constant

4. Demand PriceQuantity $4600 $5400 $6350 $7250 Demand $6 350 5 400

5. Law of Demand The quantity demanded of a good will move inversely to the price of the good As price increases, quantity demanded decreases As price decreases, quantity demanded increases. Inverse relationship leads to downward sloping demand curve

6. Movement along demand curve Occur when price and only price changes Go from $6 to $4 Called movement along the demand curve Quantity demanded changes Happens when ceteris paribus occurs When we hold other things constant

7. Other things constant “Assumptions” Income Price of related goods Tastes Expected future prices When any of these change then DEMAND CHANGES We shift the curve Create a new relationship to quantity demand at each and every price

8. Increase in Demand $4 600 750 D1 D2 At each and every price more of the good is demanded. PriceQ1Q2 $4600750 $5400500 $6350450 $7300400 A shift occurs in the Demand curve

9. Increase in Demand Increase in consumer income More money consumers have the more they are willing to pay for a good More units sold at each and every price

10. Increase in Demand Normal goods Demand for these goods varies directly with income Inferior Goods Demand for these goods varies inversely with income

11. Increase in Demand Change in taste If good becomes in style then consumers are willing to buy more of the good at any price

12. Increase in Demand Price of related goods Complements Two goods that must be consumed together Decrease in the price of one will increase demand for the other

13. Increase in Demand Substitutes Two goods that must be consumed separately Coke and Pepsi Gasoline and diesel Increase in price of one will cause an increase in the demand of the other

14. Increases in Demand Demand will increase to the extent that population increases A change in consumer expectations about future prices will shift demand in the present

15. Decrease in Demand At each and every price Less of the good will be demanded PriceQ1Q2 $4600500 $5400300 $6350250 $7300200 D1 D2 4 500 600 Demand curve shifts

16. Decrease in demand Change in income Income decreases Consumers have less money to spend and buy less at each and every price Depends on inferior or normal good

17. Decrease in demand Change in taste Something becomes out of style Consumers will buy less at each and every price

18. Decrease in demand Complement As price of one good increases, demand for the other good decreases

19. Decrease in demand Substitutes As the price of one substitute decreases, the demand for the other will decrease

20. Supply Relates the quantity of a good that will be offered for sale at each of various possible prices, over some period of time, ceteris paribus Quantity supplied: the quantity of that will be offered for sale at a given price.

21. Law of Supply There is a direct relationship between the price of a good and the quantity supplied Upward sloping curve due to Direct relationship As price increases, quantity Supplied increases As price decreases, quantity Supplied decreases Supply PriceQ1 $5100 $6200 $7300 $8400

22. Movement along Supply Curve Caused by changes in price and only in the price of the good Move from one position on line to another 4 3 100 150

23. Changes in Supply Caused by a change in the other things constant At each and every price a new quantity is supplied Curve will shift

24. Increase in Supply At each and every price, more of the good is supplied Supply shifts to the right S1 S2 PQ1Q2 $5100150 $6200300 $7300400 $8400500 7 300 400

25. Other things constant Resource prices Technology Number of sellers Price of jointly produced goods Producer expectations Production Restrictions

26. Increase in Supply Resource prices If the price of resources such as land, labor and capital decreases, supply increases

27. Increase in supply Changes in technology Makes production cheaper or easier Increases supply

28. Increase in supply Increase in the number of sellers will increase supply

29. Increase in Supply Producers expectations of future prices If we expect prices to decline in the future, increase production today

30. Increase in Supply Price of jointly produced goods If it rises then supply increases Price of beef rises, causing the supply of leather to increase

31. Decrease in Supply At each and every price less of the good is supplied Left shift S1 S2 6 150 200

32. Decrease in supply Decrease in number of sellers Increase in resource prices Strike or disaster Price of substitute rises Price of jointly produced product falls Producers expect future prices to rise

33. Decrease in Supply Production restrictions Natural disasters Strikes

34. Equilibrium When supply and demand meet in the marketplace, a market price is created There is only one price that clears the market, meaning that the quantity supplied equals the quantity demanded. A situation in which there is no tendency for either price or quantity to change

35. Equilibrium Where Quantity Demanded = Quantity Supplied One or only one equilibrium price S D Pe Qe

36. Equilibrium  Surplus Situation If market price is above equilibrium Then surplus occurs Qd < Qs What happens? Suppliers drop price to sell inventory Surplus: Qs > Qd Price drops until we reach equilibrium S D Pa Pe Qd Qs

37. Equilibrium  Shortage D S Pe Qe Pb Qs Qd At Pb, a price below Equilibrium, Qd > Qs We experience a shortage Shortage : Qd > Qs Consumers push the price until we reach equilibrium Market always moves Toward equilibrium

38. Changes in Market Equilibrium Caused by shifts in demand or supply Equilibrium price not longer holds true Market moves toward new equilibrium point

39. Change in Supply S1 P1 Q1 S2 P2 Q2 Economy in Equilibrium At P1 and Q1 (pt. A) Resource prices drops Then supply shifts out At old price, surplus occurs so market price is dropped by suppliers New Eq. is lower price And larger quantity A B

40. Government Intervention When the market failure occurs, government enters the economy Price controls Subsidies

41. Price controls Government artificially creates the market price Market will fail to reach equilibrium Shortage or surplus occurs

42. Price Floor Pe Qe Pf Price floor S D Qd Qs Government sets Price above equilibrium Price. Causes a surplus Price cannot drop No market equilibrium Surplus is permanent Price floor – minimum Legal price

43. Price Ceiling Pe Qe Pc Price ceiling Qs Qd Price ceiling – maximum Legal price If Pc is below Pe then economy has a shortage Price cannot rise and Eliminate shortage Shortage is permanent

44. Subsidies Government pays corporations Not to produce To reduce production costs

46. Change in Demand D1 S D2 P2 P1 Q1 Q2 Economy in equilibrium When demand shifts due To change in income At P1, we face a shortage So market price increases To P2 New Eq. is higher price and higher quantity