Transcript Quantity demanded

Demand and supply
In a market system, the
3 fundamental
questions are resolved by a
decentralized decision making
process encompassing
a large number of buyers
and sellers. A vast number
of individual decisions to buy
and sell add up to “market forces”—
or the forces of demand and supply.
What is Demand?
•Quantity demanded : The quantity of a good or
service buyers are willing (and able) to buy during a
specified period at a specific price, ceteris paribus.
•Demand: The relationship between the quantity
demanded of a good and the price of the good when all
other influences on buying plans remain the same.
•The Law of Demand: Ceteris paribus, if the price of a
good rises, the quantity demanded of that good
decreases; and if the price of the good falls, the
quantity demand of that good increases.
The Demand Schedule
A list of quantities demanded at each
different price when all other influences
on buying plans remain the same.
Quantity-demanded
Price
(millions of bottles
($ per bottle)
per day)
A
2.00
8.5
B
1.50
9.0
C
1.00
10.0
D
0.50
12.0
The Demand Curve
A graph of the relationship between
the quantity demanded of a good and
its price when other influences on
buying plans remain constant.
Price ($ per bottle)
A
Demand
Curve
B
1.50
C
1.00
D
0
9
10
Quantity (millions per day)
A change in any of the following factors would
cause a change in demand, or a shift of the entire
demand curve. These influences on demand include:
The price of substitute goods
The price of complementary goods
Income
Expectations
Number of buyers
Tastes and preferences
Substitutes
A good that can be consumed in the
place of another.
•Cheesecake—Tiramisu
•Orange juice—grapefruit juice
•Pizza-tacos
•Cab rides—subway rides
•VCRs-DVD players
•Pork-chicken
Why is the demand curve
downward sloping?
•A movement from point A to B
results from a change in price,
ceteris paribus.
Price
•The decrease in price from P2
to P1 is a change in quantity
demanded.
A
P2
B
P1
•The demand curve is downward
sloping due to the substitution
effect of a price change.
D
0
q1
q2
Quantity
Let the price of chicken increase, ceteris
paribus.
This should cause
the demand for
pork to shift to the
right
Price/lb.
P2
A
H
P1
B
D2
D1
0
q1
q2
Quantity
(lbs.)
Complements
A good that is consumed with another
good
•Computers—printers
•Tortilla chips-salsa
•Tents—sleeping bags
•Airline service—rental cars
•Shot guns--shells
Cheaper air fares should
stimulate sales in the rental car
business
Rental
fee
P2
A
H
P1
B
D2
D1
0
q1
q2
Cars rented per day
Normal and Inferior Goods
•A normal good is a good for which demand increases
(shifts right) when income increases.
Examples: Scotch whiskey, Swiss-made watches,
lobster, air travel, vacations abroad.
•An inferior good is a good for which demand decreases
(shifts left) when income increases.
Examples: macaroni, used clothing, bus service.
Expectations
Price/lb
Salmon
D1
D2
0
If buyers anticipate that
prices of fresh salmon will
be falling shortly, they may
purchase less today.
Quantity
(lbs.)
Demand could shift right
due to:
Price
Increase in the price of
substitutes
P2
A
H
Decrease in the price of
complements
B
Increase in income
(normal good)
P1
D2
D1
0
q1
q2
Quantity
Increase in the number of
buyers
Change of preferences
What is Supply?
•Quantity supplied : The amount of a good or service
sellers are willing (and able) to sell during a specified
period at a specific price, ceteris paribus.
•Supply: The relationship between the quantity
supplied of a good and the price of the good when all
other influences on selling plans remain the same.
•The Law of Supply: Ceteris paribus, if the price of a
good rises, the quantity supplied of that good
increases; and if the price of the good falls, the quantity
supplied of that good decreases.
The Supply Schedule
A list of quantities supplied at each
different price when all other influences
on selling plans remain the same.
Price
($ per bottle)
Quantity-supplied
(millions of bottles
per day)
A
2.00
11.5
B
1.50
11.0
C
1.00
10.0
D
0.50
8.0
The Supply Curve A graph of the relationship between
the quantity supplied of a good and
its price when other influences on
selling plans remain constant.
Price ($ per bottle)
Supply
Curve
A
1.50
B
1.00
C
D
0
10
11
Quantity (millions per day)
A change in any of the following factors would
cause a change in supply, or a shift of the entire
supply curve. These influences on demand include:
The price of resources or other inputs
The number of sellers
Productivity—a measure of the efficiency with which
labor is employed to produce goods or services.
The Price of Resources
Employee health
insurance premiums are
a big component of our
cost. When firms see an
increase in their
premiums, supply
curves shift the left.
Price
per unit
S2
S1
0
Quantity
(units)
Productivity
•Productivity is output per unit of input.
•Improvements in technology or organization (i.e.,
hybrid seeds, high speed printing, automated data
capture, robotics, internet browser software) can raise
productivity—so that the same expenditure of
resources can yield a higher output than before.
S2
Price
S1
Supply could shift left due
to:
Increase in the price of
productive resources.
A
Decrease in the number of
sellers.
P2
P1
0
H
A decline in productivity.
B
q1
q2
Quantity
Market equilibrium
Price ($ per bottle)
Supply
Equilibrium
price
Market
equilibrium
1.00
Equilibrium
quantity
0
10
Demand
Quantity (millions per day)