Demand and Demand and SupplySupplyChapter 3Chapter 3

DemandDemand

demand is a schedule that demand is a schedule that shows the various amounts of a shows the various amounts of a product consumers are product consumers are WILLINGWILLING and and ABLEABLE to to BUYBUY at each specific at each specific price at a specific time.price at a specific time.

Demand ScheduleDemand Schedule: listing that : listing that shows the # demanded at different shows the # demanded at different pricesprices Demand Schedule for Donuts Price Quantity

$2 0

$1.50 1

$1.00 3

$.75 6

$.50 15

$.25 25

Demand CurveDemand Curve: the schedule on a : the schedule on a graphgraph

See graph on document cameraSee graph on document camera

Law of DemandLaw of Demand

There is an inverse relationship There is an inverse relationship between price & quantity between price & quantity demandeddemanded– If price If price , demand , demand – If price If price , demand , demand

Marginal UtilityMarginal Utility: : Extra satisfaction from getting one more unit of a product

Diminishing marginal utilityDiminishing marginal utility: : the extra satisfaction we get the extra satisfaction we get from one more unit begins to from one more unit begins to diminishdiminish– i.e., the third donut, yields less i.e., the third donut, yields less

extra satisfaction than the first.extra satisfaction than the first.

DDemand Curveemand Curve

Always Always DDownward sloping—ownward sloping—indicating lower quantity indicating lower quantity demanded at higher prices, demanded at higher prices, higher quantities at lower prices higher quantities at lower prices

Change in Change in PRICEPRICE reflects reflects movement along the curve = movement along the curve = change in change in quantityquantity demanded demanded

If a change in demand is If a change in demand is NOTNOT caused by a change in caused by a change in PRICEPRICE, , the entire curve will shift = the entire curve will shift = change in demandchange in demand

Determinants that affect Determinants that affect demand (other than price)demand (other than price)

Consumer tastesConsumer tastes # of buyers# of buyers IncomeIncome Prices of related goodsPrices of related goods

– Substitute goodsSubstitute goods– Complementary goodsComplementary goods

ExpectationsExpectations

Demand Schedule for Donuts

Price Quantity1 Quantity2$2 0 1

$1.50 1 3

$1.00 3 6

$.75 6 15

$.50 15 25

$.25 25 35

Demand has increased so the curve hasshifted to the right.

Income EffectIncome Effect: Lower prices : Lower prices increase the purchasing power of increase the purchasing power of money income enabling the money income enabling the consumer to buy more at lower consumer to buy more at lower pricesprices

Substitution EffectSubstitution Effect: a lower price : a lower price gives an incentive to substitute gives an incentive to substitute the lower-priced good for the the lower-priced good for the higher priced goodhigher priced good

SupplySupply

Supply is a schedule that shows Supply is a schedule that shows the amount of a product a the amount of a product a producer is producer is WILLINGWILLING and and ABLEABLE to to produce and produce and SELLSELL at each at each specific price at a specific time.specific price at a specific time.

Law of supplyLaw of supply

Producers will produce and sell Producers will produce and sell more of their product at a high P more of their product at a high P than at a low P.than at a low P.

There is a direct relationship in P There is a direct relationship in P and Q suppliedand Q supplied– If price If price , supply will , supply will – If price If price , supply will , supply will

Explanation of the Law of Explanation of the Law of SupplySupply

Given product costs, a higher P Given product costs, a higher P means greater profits and thus means greater profits and thus an incentive to increase the Q an incentive to increase the Q suppliedsupplied..

SSupupply Curveply Curve

UpUpward ward sloping—sloping—indicating indicating higher Qs higher Qs supplied at supplied at higher P, lower higher P, lower Qs at lower PQs at lower P

Supply Schedule for cakes

P P (Price)(Price)

Q Q (Quantity)(Quantity)

$20$20 1515

$15$15 1010

$10$10 88

$5$5 33

Supply Curve for cakesSupply Curve for cakes

See board or document cameraSee board or document camera

Change in PRICE reflects Change in PRICE reflects movement along the curve = movement along the curve = change in quantity suppliedchange in quantity supplied

If a change in supply is NOT If a change in supply is NOT caused by a change in PRICE, the caused by a change in PRICE, the entire curve will shift = entire curve will shift = change in change in supplysupply

Determinants that affect Determinants that affect supply (other than price)supply (other than price)

Resource pricesResource prices TechnologyTechnology Taxes and subsidiesTaxes and subsidies Price of related goodsPrice of related goods ExpectationsExpectations Number of sellersNumber of sellers

Supply Schedule for cakes

$$ Q1Q1 Q2Q2

2020 1515 1010

1515 1010 88

1010 88 55

55 33 11

Market EquilibriumMarket Equilibrium Quantity supplied = quantity Quantity supplied = quantity

demandeddemanded– Where the two curves intersectWhere the two curves intersect

Prices above equilibrium = surplus of Prices above equilibrium = surplus of supplysupply

Prices below equilibrium = shortage of Prices below equilibrium = shortage of supplysupply

Market Clearing or Market Price is Market Clearing or Market Price is another name for equilibriumanother name for equilibrium

Price FloorsPrice Floors: a legally : a legally determined price at or above determined price at or above the equilibrium price (can’t go the equilibrium price (can’t go below)below)

Price CeilingPrice Ceiling: a legally : a legally established maximum price for a established maximum price for a good or service (can’t go above)good or service (can’t go above)