Supply and Demand

1. Supply and Demand Chapter 4

2. Laugher Curve Q. What do you get when you cross the Godfather with an economist? A. An offer you can't understand.

3. Demand • Demand means the willingness and capacity to pay.

4. Demand • Prices are the tools by which the market coordinates individual desires.

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.

6. The Law of Demand • What accounts for the law of demand? People tend to substitute for goods whose price has gone up

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.

8. The Demand Curve • The slope tells us that quantity demanded varies indirectly—in the opposite direction—with price.

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.

10. A PA Price (per unit) D 0 QA Quantity demanded (per unit of time) A Sample Demand Curve

11. 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.

12. 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.

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.

14. 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.

15. B $2 Change in quantity demanded (a movement along the curve) Price (per unit) A $1 100 200 Quantity demanded (per unit of time) Change in Quantity Demanded D1 0

16. Change in demand (a shift of the curve) $2 Price (per unit) B A $1 D0 D1 100 200 Quantity demanded (per unit of time) Shift in Demand 250

17. Shift Factors of Demand • Shift factors of demand are those that cause shifts in the demand curve to the right or left.

18. 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

19. 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.

20. 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.

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.

22. 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.

23. 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.

24. From a Demand Table to a Demand Curve • The demand curve graphically conveys the same information that is on the demand table.

25. 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.

26. A Demand Table Price per cassette Cassette rentals demanded per week E G D A B C D E $0.501.00 2.00 3.00 4.00 9 8 6 4 2 Demand for cassettes C F B A From a Demand Table to a Demand Curve A Demand Curve $6.00 5.00 4.00 3.50 Price per cassette (in dollars) 3.00 2.00 1.00 .50 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity of cassettes demanded (per week)

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.

28. Individual and Market Demand Goods • Real world sellers do not add up individual demand curves.

29. Individual and Market Demand Goods • They estimate total market demand for their product which becomes smooth and downward sloping curve.

30. 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.

31. (1) Price per cassette (2) Alice’s demand (3) Bruce’s demand (2) Cathy’s demand (3) Market demand G F E A B C D E F G H $.0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 9 8 7 6 5 4 3 2 6 5 4 3 2 1 0 0 1 1 0 0 0 0 0 0 16 14 11 9 7 5 3 2 D C B A Cathy Bruce Alice From Individual Demandsto a Market $4.00 3.50 3.00 2.50 2.00 Price per cassette (in dollars) 1.50 1.00 0.50 0 2 4 6 8 10 12 14 16 Quantity of cassettes demanded per week

32. Supply • Individuals control the factors of production. • Factors of production are the resources or inputs, necessary to produce goods or services.

33. Supply • Individuals supply factors of production to intermediaries or firms.

34. 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.

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.

36. 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.

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.

38. S Price (per unit) A PA 0 QA Quantity supplied (per unit of time) A Sample Supply Curve

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.

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.

41. Shifts in Supply Versus Movements Along a Supply Curve • Quantity supplied refers to a specific amount that will be supplied at a specific price.

42. 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.

43. S1 A B Shift in Supply (a shift of the curve) Shift in Supply S0 Price (per unit) $15 1,250 1,500 Quantity supplied (per unit of time)

44. B Change in quantity supplied (a movement along the curve) A Change in Quantity Supplied S0 Price (per unit) $15 1,250 1,500 Quantity supplied (per unit of time)

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.

46. 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

47. 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.

48. 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.

49. 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.

50. 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.