Supply and Demand

1. Supply and Demand The model that illustrates how a competitive markets works

2. Basic Concepts • Quantity demanded- the amount of a good or service consumer are willing and able to buy at different prices. • Demand Curve- Shows the relationship between quantity demanded and price. • Quantity Supplied- The actual amount of a good or service producers are willing to sell at some specific price. • Supply Curve- Shows the relationship between quantity supplied and price.

3. Key Concepts A shift of the demand curve.. Is not the same as a movement along the demand curve • A shift of the demand or supply curve is different from a movement ALONG the demand or supply curve. Price As Price Decreases Quantity Demanded Increases • A change in quantity demanded or supplied is due to a change in price. • Depending on the price, the quantity demanded or quantity supplied will be different. P1 Q2 P2 Quantity Q1

4. Changes in Demand and Supply • An increase in demand or supply is shown by a rightward shift of the curve. While a decrease in demand or supply is shown by a leftward shift of the curve. • When either demand or supply increases (either curve shifts) the price remains the same but quantity demanded or supplied changes. Increase in supply Increase in demand Decrease in supply Decrease in demand Q2 Q2 Q1 Q3 Q3 Q1

5. Factors that Shift the Demand Curve Factors that Shift the Supply Curve • Five Principle Factors • Changes in the price of related goods or services. • Changes in income. • Changes in taste. • Changes in expectations. • Changes in the number of consumers. • Five factors • Changes in input prices • Changes in technology • Changes in the number of producers • Changes in the price of related goods or services • Changes in expectations $ $ Supply *POSITIVE SLOPE* Demand *NEGATIVE SLOPE* # #

6. Substitutes vs. Compliments • There are substitute and complimentary goods. • Two goods are substitutes if a rise in the price of one of the goods leads to an increase in the demand for the other good. • Two goods are compliments if a rise in the price of one good leads to a decrease in the demand for the other good or service. Penut butter and Jelly

7. Normal Goods and Inferior Goods • Income change • Normal goods and Inferior goods • When individuals have more income they are normally more likely to purchase a good at any given price • The demand for Normal Goods increases as income increases. (a Rightward shift of the demand curve) • Goods for which demand decreased when income rises are know as Inferior goods. or Normal Good

8. Taste and Preferences • People have certain preferences and tastes that determine what they want to consume. • When taste change in favor of a good, more people want to buy it at any given price, so the demand curve shifts to the right. • In the other case when taste change against a good, fewer people want to buy something at a given price, so the demand curve shifts to the left

9. Changes in Expectations and in Number of Consumers • Expectations of a future drop in price will lead to a decrease in demand today. On the other hand, expectations of a future rise in price are likely to cause an increase in demand today • Expected changes in income can also lead to changes in demand • If an individual expects his income to rise in the future, he will most likely borrow money today and increase his demand for certain goods. • If an individual expects his income to fall in the future, he will instead save today and reduce your demand for goods. • The change in Number of Consumers is quite simple. • If the number of consumers of a certain good rises then the demand for that good or service increases • If the number of consumers of a certain good falls then the demand for that good or service decreases

10. Factors that Shift the Supply Curve • Five factors • Changes in input prices • Changes in technology • Changes in the number of producers • Changes in the price of related goods or services • Changes in expectations $ Supply *POSITIVE SLOPE* #

11. S2 $ $ S1 S1 S2 • SUPPLY DECREASES IF… • If the price to of an input to produce a good raises • If the price of a substitute used to produce a good raises • If the price of a compliment in production decreases • If the price of an good supplied is expected to raise in the future • If the number of producers falls • SUPPLY INCREASES IF… • If the price of an input to produce a good decreases • If the price of a substitute in production falls • If the price of a compliment in production raises • If the technology used to produce a good improves • If the price of a good supplied is expected to fall in the future • If the number of produces rises # #

12. Supply and Demand at Equilibrium Supply Price At equilibrium no individual is better off doing something different. Equilibrium Price Equilibrium The price at which the quantity demanded of a good equals the quantity supplied of that good Demand Equilibrium Quantity Quantity The quantity of that good bought and sold at Eprice

13. Question Which of the following could most likely cause the leftward shift of an industry's supply curve? • One of the industry's firms discovers a new technology that aids in • Production. • B) The price of a necessary input declines for some firms in the industry. • C) Consumer purchasing power rises considerably. • E) The government levies a new tax on consumers D) Several of the industry's firms shut down operations Correct answer is: choice D This answer is correct because after the industry’s firms shut down, supply will decrease Which is represented by a leftward shift of the supply curve

14. Question Which of the following would most likely shift the demand curve for a good to the right? • The government grants a subsidy to producers of the product. • New technology makes production quicker and easier. • The wage rate for the producer’s manufactures increases. • The company selling the product cuts the price by 25% E) Consumers expect the price of the good to raise soon. Correct answer: Choice E This is the correct answer because it’s the only choice that guaranties a shift of the demand curve. All the other choices would cause a shift in the supply curve.

15. Question In general, technological improvements and industrial innovation will cause The productivity of workers to decrease The supply curve for the industry to shift The demand curve for the industry to shift A movement along the industry supply curve A movement along the industry demand curve Correct answer is: choice B This is correct because a change in technology is one of the non price factors that shift a firm’s supply curve.

16. Other Concepts • The supply and demand curves are seen everywhere. • It’s also a common concept that determines the optimal point of where markets should produce a good. And also inefficiencies within a market. Price Price MSC Supply Supply Consumer Surplus PMSC O POPT PMKT Producer Surplus Quantity Quantity QOPT QMKT Efficiency of Markets Negative Externalities

17. Videos and Links • http://www.youtube.com/watch?v=XNtjkN-FYBw • Drug Shortages • Consumer Demand for iPhone 4S • AP Central Question