Transcript Chapter 2 Demand and Supply

Chapter 2
Demand and Supply
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What is Demand?
 Demand - the relationship between the
various possible prices of a product and the
quantities of that product consumers are
willing to buy. Price is the independent
variable.
 Quantity demanded is the amount of a
product consumers are willing to buy at each
price. Quantity demanded is the dependent
variable.
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The Law of Demand
 States that there is an inverse relationship
between a product’s quantity demanded and
its price.
 Ceteris paribus is the assumption here
 When the price of a product falls, people are
willing to purchase more of that product i.e..
strawberries
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The Demand Curve
 Graph that expresses the possible combination
of prices and quantities demanded of a product
 Independent variable (Price) is on the y-axis
 Dependent variable (Quantity) is on the x-axis
 The demand curve’s negative (downward) slope
reflects the law of demand; an increase in price
leads to a decrease in quantity demanded and
vice versa
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The Law of Demand
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The Veblen Effect
 In rare situations the relationship between
price and quantity demanded can be direct –
the demand curve has a positive (upward)
slope
 Happens when a product’s price is seen as a
status symbol
 Consumers who can afford the product are
attracted to it because its high price makes it
more fashionable/attractive than before
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Market Demand
 The sum of all consumers’ purchases (quantity
demanded) for a product at each price
 See Figure 2.2 in text book on page 31
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Changes in Demand –
Demand Determinants
Demand Determinants
 Factors that can cause an increase or decrease
in a product’s demand (other than price)
 Cause the entire curve to shift
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Demand Determinants
1. Number of Buyers
 When the number of buyers for a certain product
increases, more purchases are made
 Thus the product’s quantity demanded increases
whatever its price – this is called an increase in
demand
 When the number of buyers decreases, demand also
decreases at every price – this is called a decrease in
demand
 See figure 2.3 in textbook
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Effect of Demand Determinants on
Demand
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Demand Determinants cont’d
2. Income
 When consumers’ incomes increase, demand for
luxury items and necessities also increases
 This results in a shift of the demand curve to the right
 Normal products – products whose demand changes
directly with income i.e.. luxury products and/or
necessities (shift to the right)
 Inferior products – products whose demand changes
inversely with income i.e.. second hand clothing, Kraft
dinner, no-name products (shift to the left)
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Demand Determinants cont’d
3. Prices of Other Products
 Substitute products – products that can be consumed in
place of one another i.e. butter and margarine
 i.e.. if the price of butter rises, people will choose to buy
more margarine (shift in the demand curve of margarine to
the right)
 Complementary products – products that are consumed
together i.e. cars and gas
 i.e.. if the price of cars rises, the demand for gas falls (shift
in the demand curve of gas to the left)
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Demand Determinants Cont’d
4. Consumer Preferences
 People’s preferences, current trends, fads and
advertising affect people’s buying patterns
 i.e. if consumers view MacBook laptops as superior to
HP laptops than the demand curve for the MacBook
will shift to the right
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Demand Determinants cont’d
5. Consumer Expectations
 the expectations that consumers have about future
changes in prices and their own income affect their
current purchases
 i.e. if people expect the price of TV’s to fall, the
current demand for TV’s falls (shift in demand curve
to the left)
 Also, if people expect their incomes to grow, their
current demand for normal products will increase
(shift to the right) and for inferior products will
decrease (shift to the left)
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Change in Quantity Demanded vs. Change in Demand
Change in quantity demanded
 Caused by a change in price
 Movement along a product’s demand curve
 i.e. if the price of a product rises, demand for
that product falls
Change in demand
 Caused by a change in a demand determinant
 Shift in the entire demand curve (to the left or
right)
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Change in Quantity Demanded vs.
Change in Demand
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What is Supply?
 Supply – the relationship between the various
possible prices of a product and the quantities of
the product that businesses are willing to supply.
Price is the independent variable.
 Quantity Supplied – the amount of a product
businesses are willing to supply at each price.
Quantity supplied is the dependent variable.
 Market Supply – the sum of all producers’
quantities supplied at each price.
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The Law of Supply
 When price changes, quantity supplied changes in
the same direction
 Direct relationship between price and quantity
supplied
 i.e.. if the price of strawberries rises, farmers will
increase the quantity of strawberries they supply
because the higher the price, the higher the
revenue for farmers.
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The Supply Curve
 Graph that expresses the possible combination of
prices and quantities supplied of a product
 Independent variable (Price) is on the y-axis
 Dependent variable (Quantity) is on the x-axis
 The supply curve’s positive (upward) slope
reflects the law of supply; an increase in price
leads to an increase in quantity supplied and vice
versa
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The Law of Supply
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Changes in Supply – Supply
Determinants
Supply Determinants
 Factors that can cause an increase or a
decrease in a product’s supply (other than
price)
 Cause the entire supply curve to shift
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Supply Determinants
1. Number of Producers
 An increase in the number of businesses in an
industry causes an increase in supply. This leads to a
higher quantity supplied at each price (shift in the
supply curve to the right)
 A decrease in the number of businesses in an industry
has the opposite effect (shift in the supply curve to
the left)
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Shifts in the Supply Curve
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Supply Determinants – cont’d
2. Resource Prices
 If there is a price increase for a resource used to make
a product, the costs for the business increase
 As a result, fewer products can be produced for the
same cost resulting in a cutback in production.
 Causes the supply curve to shift to the left
 i.e.. an increase in worker’s wages causes a decrease
in supply
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Supply Determinants – cont’d
3. State of Technology
 Modern/new technology allows businesses to use
more efficient production methods.
 As a result, more products can be produced at every
price so supply will increase
 Causes a shift of the supply curve to the right
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A shift in the Supply Curve
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Supply Determinants – cont’d
4. Changes in Nature
 An early frost, record high temps, a flood or an
earthquake can affect the supply of many products
(especially agricultural products)
 i.e.. a cold, rainy summer in Canada’s prairies will
decrease the supply of wheat. The market supply for
wheat will shift to the left as a result.
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Supply Determinants Cont’d
5. Prices of Related Products
 A product’s supply can be influenced by changes in
the prices of other products
 i.e. farmers switching crops to grow (for example
corn to barley) if price of corn falls
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Supply Determinants Cont’d
6. Producer Expectations
 If producers expect the price of the item they sell to
change in the near future, this affects the product’s
current supply
 i.e. if barley farmers expect the price of barley to fall,
they may decide to provide as much barley as
possible now raising its current supply
 i.e. if beef farmers expect that the price of beef will
rise, they may hold back on the amount they make
available, immediately reducing the supply of beef
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Change in Quantity Supplied vs.
Change in Supply
Change in Quantity Supplied
 Caused by a change in price
 Movement along the supply curve
 Increase in price causes an increase in
supply/decrease in price causes a decrease in supply
Change in Supply
 Caused by a change in a supply determinant
 Shift of the entire supply curve (to the left or to the
right)
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