Transcript Supply And Demand

Supply and Demand
McGraw-Hill/Irwin
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
4-2
Laugher Curve
Q. What do you get when you cross the
Godfather with an economist?
A. An offer you can't understand.
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4-3
Demand

Demand means the willingness and
capacity to pay.
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4-4
Demand

Prices are the tools by which the market
coordinates individual desires.
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4-5
The Law of Demand
Quantity demanded rises as price falls,
other things constant.
 Quantity demanded falls as prices rise,
other things constant.

 Thus,
there is an inverse relationship
between price and quantity demanded.
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4-6
The Law of Demand

What accounts for the law of demand?
People tend to substitute for goods whose price has gone up
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4-7
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.
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The Demand Curve

The slope tells us that quantity
demanded varies indirectly—in the
opposite direction—with price.
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4-9
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, even the
weather.

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Price (per unit)
A Sample Demand Curve
PA
A
D
0
QA
Quantity demanded (per unit of time)
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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, it refers to the entire
demand curve.

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Shifts in Demand Versus
Movements Along a Demand
Curve

Quantity demanded refers to a specific
amount that will be demand per unit of
time at a specific price.
Graphically, it refers to a specific point on the demand curve.
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4 - 13
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.
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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.
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Price (per unit)
Change in Quantity Demanded
$2
B
Change in quantity demanded
(a movement along the curve)
$1
A
D1
0
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100
200
Quantity demanded (per unit of time)
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4 - 16
Price (per unit)
Shift in Demand
Change in demand
(a shift of the curve)
$2
$1
B
A
D0
D1
250
100
200
Quantity demanded (per unit of time)
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Shift Factors of Demand

Shift factors of demand are those that
cause shifts in the demand curve to the
right or left.
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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
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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.
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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.
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4 - 21
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.
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The Demand Table

The demand table assumes all the
following:
All the products involved are identical in shape, size,
quality, etc.
The schedule assumes that everything else is held
constant.
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From a Demand Table to a
Demand Curve

You plot each point in the demand table
on a graph and connect the points to
derive the demand curve.
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From a Demand Table to a
Demand Curve

The demand curve graphically conveys
the same information that is on the
demand table.
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From a Demand Table to a
Demand Curve

The curve represents the maximum
price that you will for various quantities
of a good—you will happily pay less.
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From a Demand Table to a
Demand Curve
A Demand Table
$0.50
1.00
2.00
3.00
4.00
9
8
6
4
2
Price per cassette (in dollars)
Price per Cassette rentals
cassette demanded per
week
A
B
C
D
E
A Demand Curve
$6.00
5.00
4.00
3.50
3.00
E
D
G
2.00
C
1.00
.50
0
F
Demand for
cassettes
B
A
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of cassettes demanded (per week)
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4 - 27
Individual and Market
Demand Goods

A market demand curve is the horizontal
sum of all individual demand curves.
 This
is determined by adding the
individual demand curves of all the
demanders.
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Individual and Market
Demand Goods

Real world sellers do not add up
individual demand curves.
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Individual and Market
Demand Goods

They estimate total market demand for
their product which becomes smooth
and downward sloping curve.
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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.
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From Individual Demands
to a Market
A $.0.50
B
1.00
C
1.50
D
2.00
E
2.50
F
3.00
G
3.50
H
4.00
9
8
7
6
5
4
3
2
6
5
4
3
2
1
0
0
(2)
Cathy’s
demand
1
1
0
0
0
0
0
0
(3)
Market
demand
16
14
11
9
7
5
3
2
$4.00
Price per cassette (in dollars)
(1)
(2)
(3)
Price per Alice’s Bruce’s
cassette demand demand
3.50
G
F
3.00
E
2.50
D
2.00
C
1.50
B
1.00
0.50
A
Cathy
0
2 4
Bruce Alice
6 8 10 12 14 16
Quantity of cassettes demanded per week
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4 - 32
Supply

Individuals control the factors of
production.
 Factors
of production are the resources or
inputs, necessary to produce goods or
services.
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Supply

Individuals supply factors of production
to intermediaries or firms.
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Supply

The analysis of the supply of produced
goods has two parts:
An analysis of the supply of the factors of production to
households and firms.
An analysis of why firms transform those factors of
production into usable goods and services.
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4 - 35
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 relationship
between price and quantity supplied.

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The Law of Supply

The law of supply is accounted for by
two factors:
In the face of rising prices, 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.
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4 - 37
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.

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4 - 38
Price (per unit)
A Sample Supply Curve
S
PA
0
McGraw-Hill/Irwin
A
QA
Quantity supplied (per unit of time)
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights reserved.
4 - 39
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.
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4 - 40
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.
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Shifts in Supply Versus
Movements Along a Supply
Curve

Quantity supplied refers to a specific
amount that will be supplied at a
specific price.
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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.
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Shift in Supply
S0
Price (per unit)
S1
$15
A
B
Shift in Supply
(a shift of the curve)
1,250
1,500
Quantity supplied (per unit of time)
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Change in Quantity Supplied
Price (per unit)
S0
B
$15
A
Change in quantity
supplied (a movement
along the curve)
1,250
1,500
Quantity supplied (per unit of time)
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4 - 45
Shift Factors of Supply

Shift factors of supply are those factors
that cause shifts in the entire supply
curve to the left or right.
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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
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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.
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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.
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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.
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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.
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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.
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From a Supply Table to a
Supply Curve

The supply curve represents the set of
minimum prices an individual seller will
accept for various quantities of a good.
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From a Supply Table to a
Supply Curve

Competing suppliers’ entry into the
market places a limit on the price any
supplier can charge.
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Individual and Market
Supply Curves

The market supply curve is derived by
horizontally adding the individual supply
curves of each supplier.
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From Individual Supplies to
a Market Supply
(1)
(2)
(3)
(4)
(5)
Quantities
Price
Ann's Barry's Charlie's Market
Supplied (in dollars) Supply Supply Supply Supply
A
B
C
D
E
F
G
H
I
McGraw-Hill/Irwin
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
0
1
2
3
4
5
6
7
8
0
0
1
2
3
4
5
5
5
0
0
0
0
0
0
0
2
2
0
1
3
5
7
9
11
14
15
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4 - 56
Price per cassette (in dollars)
From Individual Supplies to
a Market Supply
$4.00
Charlie
Barry
Ann
Market Supply
3.50
H
3.00
G
2.50
F
2.00
E
1.50
D
1.00
0.50
0 A
I
C
B
CA
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantity of cassettes supplied (per week)
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The Marriage of Supply and
Demand

The English historian Thomas Carlyle
once said:
“Teach any parrot the words supply and
demand and you’ve got an economist.”
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The Dynamic Laws of
Supply and Demand

Supply and demand come together to
determine equilibrium quantity and
equilibrium price.
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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.

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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.
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Price Adjusts

When quantity demanded equals
quantity supplied, prices have no
tendency to change.
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Price per cassette (in dollars)
The Marriage of Supply and
Demand
$5.00
S
Excess supply
4.00
3.50
A
3.00
B
E
2.50
C
2.00
1.50
Excess demand
1.00
1
McGraw-Hill/Irwin
Excess supply
D
2 3 4 5 6 7 8 9 10 11 12
Quantity of cassettes supplied and demanded
(per week)
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Equilibrium

Equilibrium is a concept in which
opposing dynamic forces pushing
cancel each other out.
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Equilibrium

In supply and demand analysis,
equilibrium means that the upward
pressure on price is exactly offset by the
downward pressure on price.
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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.
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Equilibrium Isn't:
A state of the world—it's a characteristic
of the model used to look at the world.
 Inherently good or bad—but simply a
state in which dynamic pressures offset
each other.

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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.
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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.
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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.
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Desirable Characteristics of
Supply/Demand Equilibrium

Markets allow trade, thereby leading to
an increase in the combination of
consumer and producer surplus.
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Consumer and Producer
Surplus
$10
9
Consumer Surplus
8
Lost
7
Surplus
6
5
4 Producer
3 Surplus
2
1
0
1 2 3 4 5 6 7 8
Quantity
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Supply
Demand
9 10
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Supply and Demand
End of Chapter 4
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