# SUPPLY & DEMAND

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```					SUPPLY & DEMAND
 Three functions of price
A. Determines value
B. Communicates between
C. Rationing device
DEMAND
Single Consumer Demand Schedule

Average Price      Quantity
of dvd movies     Demanded

\$25               0
\$20               2
\$15               4
\$10               6
\$5                8
MARKET DEMAND
Market Demand
Quantity Purchased
Average
Price
of DVD                   Ice     Morrissey   Total
Sting
Movies                 Cube

\$25           0         1         0         1
\$20           2         2         1         5
\$15           4         3         2         9
\$10           6         4         3        13
\$5           8         5         4        17
DEMAND CURVE
DEMAND CONT.
 The Law of Demand implies the following
with respect to a demand curve (all of
these say exactly the same thing):
 The demand curve is downward
sloping
 The demand curve has a negative
slope
 The demand curve shows an inverse
relationship between price and quantity
demanded
DEMAND CONT.
 The Law of Demand simply proposes that
as the price of a good declines the quantity
you would be willing and able to purchase
during some period of time increases,
given that everything else remains
unchanged.
Demand vs. QD
 Change in Demand Versus Change in
Quantity Demanded
 First we said that according to the Law
of Demand that a change in price will
lead to a movement along a stable
demand curve and result in a change in
the quantity demanded. For example,
more will be purchased but only at a
lower price. The only thing that can
change the quantity demanded is a
change in the market price.
Demand vs. QD cont.
 Second we said that if one of the ceteris
paribus assumptions is violated (e.g., a
change in income) there will be a change
in demand. Economists use the term
"demand" to refer to the entire demand
curve. Consequently when we say there
has been an increase in demand we mean
that the entire demand curve has shifted to
the right. More will now be purchased at
the same price.
Demand Shift
Shifters of demand
 Non-Price Determinants of Demand
increase =>     demand increases
decrease =>     demand decreases
 Consumer Tastes
increase =>     demand increases
decrease =>     demand decreases
Shifters cont.
 Consumer income (normal good)
Increase =>  demand increases
Decrease =>  demand decreases
 Consumer income (inferior good)
Increase =>  demand decreases
Decrease =>  demand increases
Shifters cont.

 Price of Substitutes
Increase =>   demand increases
Decrease =>   demand decreases
 Price of Complements
Increase =>   demand decreases
Decrease =>   demand increases
Shifter cont.
 Belief that the future price will
Increase =>       demand now will
increase
Decrease =>       demand now will
decrease
 Belief that your future income will
Increase =>       demand now will
increase
Decrease =>       demand now will
decrease
SUPPLY
 The Law of Supply states that firms will
produce and offer for sale greater
quantities of a good or service the higher
the market price, given that everything
else remains unchanged.
SUPPLY SCHEDULE
SUPPLY CURVE
SUPPLY CONT.
 The Law of Supply implies the following
with respect to a supply curve (all of these
say exactly the same thing):
 The supply curve is upward sloping
 The supply curve has a positive slope
 The supply curve shows a direct
relationship between price and quantity
demanded
Change in Supply vs. QS
 Change in Supply versus Change in
Quantity Supplied
   First we said that according to the Law of
Supply that a change in price will lead to a
movement along a stable supply curve and
result in a change in the quantity supplied.
For example, more will be produced for sale
but only at a higher price.
Change (Supply vs. QS) cont.
 Second we said that if one of the ceteris
paribus assumptions is violated (e.g., a
change in technology) there will be a change
in supply. Economists use the term "supply"
to refer to the entire supply curve.
Consequently when we say there has been
an increase in supply we mean that the entire
supply curve has shifted to the right. More will
now be produced at the same price.
Change in Supply
Shifters of the Supply Curve
 Non-Price Determinants of Supply
 # of sellers
increase => Supply increases
 decrease => Supply decreases

 Supply will always increase
Shifters cont.
 Cost of Labor
Increase =>     supply decreases
Decrease =>     supply increases
 Cost of Natural Resources
Increase =>     supply decreases
Decrease =>     supply increases
 Operating Costs (electricity)
Increase =>     supply decreases
Decrease =>     supply increases
Shifters Cont.
Increase =>     supply decreases
Decrease =>     supply increases
 Government Regulations
Increase =>     supply decreases
Decrease =>     supply increases
 Government subsidies
Increase =>     supply increases
Decrease =>     supply decreases
EQUILIBRIUM
 A market is in equilibrium when the
quantity demanded is equal to quantity
supplied at the market price. At the
equilibrium market price there are exactly
the same number of goods that suppliers
are willing to sell as consumers are willing
MARKET PRICE
 Equilibrium Price - the price at which the
quantity demanded is equal to the quantity
supplied. Other things being unchanged,
there is no tendency for this price to
change.
MARKET EQUILIBRIUM
Market Demand and Supply
Schedules for DVD Movies

Average
Price  Quantity Quantity
of DVD Demanded Supplied
Movies

\$25        1       17
\$20        5       13
<-
\$15        9       9
Equilibrium
\$10       13       5
\$5       17       1
MARKET EQUILIBRIUM
DISEQUILIBRIUM
 How can you tell if your market is not in
equilibrium? The easiest way for the firm
to tell is by monitoring its inventory. When
the quantity supplied is not equal to the
quantity demanded at the current market
price we have either undesired inventory
build or undesired inventory decline. Store
shelves start overflowing because you are
producing more than is being sold or the
store shelves go bare because people are
make it.
SHORTAGE
SURPLUS
SHORTAGE &CEILINGS
 Price Ceiling - a legal requirement that
maintains the market price below the
equilibrium price.
 Shortage - the amount that the quantity
demanded exceeds the quantity supplied
when the market price is below the
equilibrium price.
SURPLUS & FLOORS

Price Floor - a legal requirement
that maintains the market price
above the equilibrium price.
Surplus - the amount that the
quantity supplied exceeds the
quantity demanded when the market
price is above the equilibrium price
Increase in Demand

Price                      S

P1                 b

P         a

D1

D

Q       Q1

Quantity
Decrease in Demand

Price                       S

P          a

P1      b

D1       D

Q1 Q
Increase in Supply

Price                       S

S1

P         a

P1                 b

D

Q        Q1

Quantity
Decrease in Supply

S1

Price                         S

P1       b

P            a

D

Q1   Q

Quantity

```
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 views: 19 posted: 9/14/2012 language: Unknown pages: 37