Supply and Demand
The determinants of supply and
demand
Plot the following
Price Quantity
$9 2
8 3
7 5
6 9
What kind of curve is it?
Price Quantity Demanded
P Qd
$9 2
8 3
7 5
6 P 9
9 Qd just a point on the
To be on the
8 curve.
demand curve
7
a person must 6
be WILLING D
is the entire
and ABLE to
curve.
purchase the
product or service. 2 3 5 9 Q
Price Quantity Demanded
P Qd
$9 2
8 3
7 5
6 P 9
9 Qd just a point on the
There is an 8 curve.
inverse
___________ 7
relationship 6
D
between price is the entire
and quantity. curve.
2 3 5 9 Q
9
8
7
6
D
2 3 5 9 Q
Definitions:
Quantity demanded--it is the amount that will be
purchased at a specific P.
Demand--it is a schedule of quantities of goods and
services that will be purchased at various prices
at a specified time, all other things held constant.
9 Qd just a point on the
8 curve.
7
6
D
is the entire
curve.
2 3 5 9 Q
Price changes Quantity Demanded
Price does not change demand
The 8 Determinants of Demand
There are 8 reasons or factors that can
change a demand curve.
1. Number of consumers.
Eight Determinants of Demand:
1. Number of consumers
2. Income--Normal Goods
As people’s incomes go up demand for
normal goods increases. As people’s income
go down, demand for normal goods
decrease.
3. Income--Inferior Goods
As people’s incomes go up demand for
inferior goods decreases. As people’s income
go down, demand for inferior goods
increases.
Eight Determinants of Demand:
1. Number of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
Eight Determinants of Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
5. Price of related products: Substitutes
Eight Determinants of Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
5. Price of related products: Substitutes
6. Price of related products: Complements
Eight variables that shift Demand:
1. # of consumers
2. Income--Normal Goods
3. Income--Inferior Goods
4. Preferences
5. Price of related products: Substitutes
6. Price of related products: Complements
7. Expected future of prices by consumers
8. Expected future of income by consumers
Supply Curve
Determinants of supply
Price Quantity Supplied
$3 2
$4 3
$5 4
$6 5
P S
$6
$5
$4
$3
2 3 4 5 Q
Price Quantity Supplied
$3 2
$4 3
$5 4
$6 5
P S
$6
Quantity supplied $5
is just a point on $4
the curve. $3
2 3 4 5 Q
Price Quantity Supplied
$3 2
$4 3
$5 4
Supply is the
$6 5
entire curve.
P S
$6
$5
$4
$3
2 3 4 5 Q
Price Quantity Supplied
$3 2
$4 3
$5 4
$6 5
P S
$6
There is a
Direct $5
_________
relationship $4
between P $3
and Q.
2 3 4 5 Q
Price Quantity Supplied
$3 2
$4 3
$5 4
$6 5
P S
$6
Only one variable $5
changes QS
$4
and that is_____.
$3
2 3 4 5 Q
Price Quantity Supplied
$3 2
$4 3
$5 4
$6 5
P S
$6
PRICE DOES $5
NOT CHANGE
$4
SUPPLY!!!!
$3
2 3 4 5 Q
P
S
Q
Definitions:
Quantity supplied--it is the amount that will be
sold at a specific P.
Supply--it is a schedule of quantities of goods and
services that will be sold at various prices
at a specified time, all other things held constant.
Determinants of Supply
There are 5 determinants that can change a
supply curve.
Five determinants of Supply:
1. Number of suppliers
2. Costs
3. Physical Availability of Resources
4. Technology
5. Expected Future Prices by Consumer
What happens to the market for oranges when
there is a frost that hits Florida?
S1
P
S
P1 Decrease in
P the physical
availability
of resources.
D
Q1 Q Q
Your market is: Oranges
What happens to the market for CD’s when
iPods and downloaded music become popular?
P
S
Decrease in
Preferences.
P
P1
D
D1
Q1 Q Q
Your market is: CD’s
What happens to the market for downloaded
music when the royalties paid to the song artist
go up? P S1
S
Increase in
P1 costs.
P
D
Q1 Q Q
Your market is: Downloaded Music
The U.S. goes through a boom economy, what
happens to the market for steak?
P
S
Increase in
P1
incomes—
P Normal goods.
D1
D
Q Q1 Q
Your market is: Steak
The price of milk doubles; what happens to
the market for cereal?
P
S
Price of
related
P
product—
P1 complement.
D
D1
Q1 Q Q
Your market is: Cereal
U.S. automakers use robots to produce their
cars; what happens to the market for
foreign automobiles?
P
S
Price of
related
P
product—
P1 substitute.
D
D1
Q1 Q Q
Your market is: Foreign autos
The price of airline tickets doubles, what
happens to the market for bus tickets?
P
S
Increase in
P1
price of
P related
D1 product—
Substitute
D
Q Q1 Q
Your market is: Bus Tickets
Shifts in both Demand and
Supply Curves
P
S
S
P1 Quantity
P1 will definitely
P increase.
D1 Price is
Indeterminate
D It will either
go up.
Q Q1Q1 Q
Increase in demand
Increase in supply
P
S
S Quantity
P1
will definitely
P
P1 increase.
D1 Price is
Indeterminate
D It stayed the
same.
Q Q1 Q1
Increase in demand
Increase in supply
P
S
P1 Quantity
S will definitely
P increase.
P1 D1 Price is
Indeterminate
D It went down.
Q Q1 Q1
Increase in demand
Increase in supply
P
S
P
D
Q Q
What happens to the price and quantity if there
is an increase in demand and a decrease in supply?
Price definitely goes up; Quantity is indeterminate
P
S
P
D
Q Q
What happens to the price and quantity if there
is a decrease in demand and an increase in supply?
Price definitely goes down; Quantity is indeterminate
P
S
P
D
Q Q
What happens to the price and quantity if there
is a decrease in demand and an decrease in supply?
Price is indeterminate; Quantity will definitely decrease
Example 1
Gillette Shaving Company mails out millions of Fusion shaver handles to households for “free.”
Show what happens to the market for the Fusion attachable razor blades?
Determinant:
______________
Price:
___________
Fusion Razor Blades
Quantity:
____________
Example 2
Salaries of airline pilots go up while the economy goes into a recession.
Show what will happen to the market for airline tickets?
Determinant:
______________
Price:
___________
Airline Tickets Quantity:
____________
Example 3
New technology starts to be used in producing computer chips,
and at the same time, the government publishes a report that long-term
exposure to computers causes long-term damage to users’ eyes.
Determinant:
______________
Determinant:
____________
Price:
___________
Computers
Quantity:
____________
Surplus
What happens when we look at a price that it
is NOT the equilibrium price?
P
S
Surplus:
P Qs > Qd
P
D
Qd Q Qs Q
Shortage
S
Shortage:
Qd > Qs
P
P
D
Qs Q Qd Q