Demand and Supply

1. Demand and Supply

2. The Law of Demand • Law of demand – an inverse relationship between price and quantity demanded. • Other things being equal: • Quantity demanded rises as price falls • Quantity demanded falls as price rises • Law of demand is based on the fact that: • A given amount of income buys less goods at higher prices • The opportunity cost of a good increases when the price increases

3. B PB QB The Demand Curve • Graphic depiction of the law of demand. • Slopes downward and to the right. A PA Price (per unit) D 0 QA Quantity demanded (per unit of time)

4. B $2 100 Quantity Demanded Vs. Change in Demand Change in quantity demanded Change in demand $2 Price (per 50 miles) Price (per 50 miles) B A A $1 $1 D0 D1 D1 0 200 175 200 Cars (per mile each hour) Cars (per mile each hour)

5. Factors That Cause Changes in Demand • Income • Prices of Other Goods • Substitutes • Complements • Tastes and Preferences • Expectations • Taxes and Subsidies

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

7. G F E D C B A Carmen Bruce Alice Individual vs. Market Demand Curves $4.00 Price per DVD Alice’s demand Bruce’s demand Carmen’s demand Market demand + + + = 3.50 Market demand 3.00 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 2.50 2.00 Price per DVD (in dollars) 1.50 1.00 0.50 0 2 4 6 8 10 12 14 16 Quantity of DVDs demanded per week

8. The Law of Supply • There is a direct relationship between price and quantity supplied. • Other things constant: • Quantity supplied rises as price rises. • Quantity supplied falls as price falls. • The law of supply occurs because: • When prices rise, firms substitute production of one good for another. • Assuming firms’ costs are constant, a higher price means higher profits.

9. Supply Curve • Graphic depiction of law of supply. • Slopes upward and to the right. S B PB Price (per unit) A PA 0 QA QB Quantity supplied (per unit of time)

10. Quantity Supplied vs. Change in Supply Movement along Supply Curve S1 C $80 Price (per barrel) S0 B A $50 Shift in Supply 4.1 4.3 4.6 Barrels per day (millions)

11. Factors That Cause Changes in Supply • Price of Inputs • Technology • Expectations • Taxes and Subsidies

12. Ann Market $4.00 supply 3.50 3.00 2.50 2.00 1.50 1.00 0.50 Individual vs. Market Supply Price + Sam + Fred = Fred Sam Ann Market Supply $0.00 0.50 1.00 1.50 2.00 2.50 3.00 3.50 4.00 A B C D E F G H I 0 1 3 5 7 9 11 14 15 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 I H G F E D C CA B A 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 Quantity of DVDs supplied (per week)

13. Equilibrium • Equilibrium • Occurs when opposing forces cancel each other out. • Unless something changes, no movement occurs • In free markets, supply and demand interact to determine: • Equilibrium price • Equilibrium quantity

14. Excess demand Equilibrium $5.00 S Excess supply 4.00 3.50 3.00 Price per DVD E 2.50 2.00 1.50 D 1.00 6 7 8 1 2 3 4 5 Quantity of DVDs supplied and demanded (per week)

15. Shifts in Supply and Demand • Shifts in either supply or demand change the equilibrium price. • An increase in demand or a decrease in supply: • Creates excess demand at the original equilibrium price. • Excess demand increases price until a new higher equilibrium price and quantity are reached.

16. Excess demand Increase in Demand S0 B $2.50 A Price (per DVDs) C 2.25 D1 D0 0 8 9 10 Quantity of DVDs (per week)

17. C Decrease in Supply S1 S0 $2.50 Excess demand Price (per DVDs) B A 2.25 D0 0 8 9 10 Quantity of DVDs (per week)