Supply and Demand 1. Demand Demand represents the behavior of buyers. A Demand Curve A Demand Curve shows the quantity demanded at different prices. Quantity

Supply and DemandSupply and Demand

1

DemandDemandDemand represents the behavior of buyers.A Demand Curve A Demand Curve shows the quantity demanded at different prices.

◦The Quantity DemandedQuantity Demanded: the : the quantity that buyers are willing (and able) to purchase at a particular price.

2

Law of DemandLaw of DemandPrice and Quantity Demanded are negatively related

3

The Demand CurveThe Demand Curve

4

The Demand Curve for Oil

Price of Oil per Barrel

Quantity of Oil (MBD)

$55

5

$5

50

$20

25

Demand

PriceQuantity Demanded

$55 5

$20 25

$5 50

Reading Demand CurvesReading Demand CurvesDemand curves can be read in two ways:

◦Horizontally: How much buyers are willing and able to purchase at a certain price.

◦Vertically: The highest price buyers are willing to pay for a certain quantity.

5

What Shifts the Demand What Shifts the Demand Curve?Curve?

6

An “increase in demand” An “increase in demand” means that consumers buy more at every price level, (or consumers are willing to pay more for each quantity.)

On the graph: the demand curve shifts outwards, up, and to the right.

An Increase in DemandAn Increase in Demand

7

$50

80

Old Demand Curve

$25

70

Price per Unit

Quantity

New Demand Curve

Greater Quantity Demanded at the Same Price

Greater Willingness to Pay for the Same Quantity

What Shifts the Demand What Shifts the Demand Curve?Curve?A “decrease in demand” decrease in demand” means that consumers buy less at every price level, (or they reduce the price they’re willing to pay for a given quantity.)

◦On the graph: the demand curve shifts inwards, down, and to the left.

8

A Decrease in DemandA Decrease in Demand

9

$50

80

Old Demand Curve

$25

70

Less Quantity Demanded at the Same Price

Lower Willingness to Pay for the Same Quantity

Price per Unit

Quantity

New Demand Curve

Demand ShiftersDemand Shifters

Important Demand Shifters:

1.Income2.Population3.Price of Substitutes4.Price of Complements5.Expectations6.Tastes

10

Important Demand Shifters: Important Demand Shifters:

IncomeIncome1. The effect of changes in income

on demand depends on the nature of the good in question.◦A Normal GoodNormal Good: : demand increases when income increases (and vice versa).

◦An Inferior GoodInferior Good: : demand decreases when income increases (and vice versa)

11

Important Demand Shifters:Important Demand Shifters:

PopulationPopulation2. As the population of an

economy changes, the # of buyers of a particular good also changes, (thereby changing its demand.)◦What happens to the demand for formula in a country as birth rates drop?

12


Price of SubstitutesPrice of Substitutes3. Two goods are SubstitutesSubstitutes if

a decrease in the price of one leads to a decrease in demand for the other (or vice versa).

- What happens to the demand for travel in Hawaii if the (perceived) safety cost of traveling to Mexico increases?

13


Price of ComplementsPrice of Complements4. Two goods are ComplementsComplements

if a decrease in the price of one good leads to an increase in the demand for the other (or vice versa).◦ What happens to the demand

for Sport Utility Vehicles when gasoline gets more expensive?

14

Price of ComplementsPrice of Complements

Consumers often have to buy goods together.An increase in price of gasoline will decrease the demand for SUVs

15


ExpectationsExpectations5. The expectation of a higher

(lower) price for a good in the future increases (decreases) current demand for the good.◦Consumers will adjust their current spending in anticipation of the direction of future prices in order to obtain the lowest possible price. If prices for Xbox 360 consoles are

expected to drop right before Christmas, what will happen to sales during November?

16


TastesTastes6. Tastes and preferences are

subjective and will vary among consumers.◦ Seasonal

changes or fads have predictable effects on demand.

◦ What happens to demand for boots in October? To carbohydrates during the Atkins diet fad? Or to Acai berries after newly perceived health benefits?

17

What Shifts the Demand What Shifts the Demand Curve? Curve? A “change in quantity demanded” is NOT the same as a “change in demand.”

◦“Quantity demanded” changes only when the price of a good changes. It is a movement along a fixed demand

curve.

◦“Demand” changes only when a non-price factor (demand shifter) changes. It is a shift in the entire demand curve.

18

A “change in Quantity Demanded”

A “change in Quantity Demanded”

A “change in Demand”A “change in Demand”

SupplySupply

What made this oil field happen?

19

SupplySupplySupply represents the behavior of sellers.A Supply CurveSupply Curve shows the quantity supplied at different prices.

◦The Quantity SuppliedQuantity Supplied is the quantity that producers are willing and able to sell at a particular price.

20

Law of SupplyLaw of SupplyWhat do you think happens to the quantity of human organs donated in Israel when the government issues a point system that rewards donors? The Law of SupplyLaw of Supply: : there is a direct relationship between price and quantity supplied.

◦When price rises, all else equal, quantity supplied rises and vice versa

21

The Supply CurveThe Supply Curve

22



Supply Curve for Oil

503010

$5

$20

$55

The Supply Curve for Oil

Reading Supply CurvesReading Supply CurvesSupply curves can be read in two ways:

◦Horizontally: How much suppliers are willing and able to sell at a certain price.

◦Vertically: The minimum price for which suppliers are willing to sell a certain quantity.

23

Supply CurvesSupply CurvesWhy is the supply curve upward sloping?

◦The cost of producing a good is not equal across all suppliers. At a low price, a good is produced and sold only by the lowest cost suppliers.

At a high price, a good is also produced and sold by higher cost suppliers.

24

The Supply Curve for OilThe Supply Curve for Oil

25

Supply



604020

$60

$40

$20

80 100

Oil Shale Profitable Here

Low Cost OilHigher Cost Oil

The Supply Curve for Oil

Change in SupplyChange in Supply

26

Old Supply

$50

20

Lower Costs Increase Supply



New Supply

$10

80

Greater Quantity Supplied at the Same Price

Willing to Sell Same Quantity at Lower Prices

Change in SupplyChange in Supply

27

Old Supply

20

Higher Costs Decrease Supply



New Supply

$10

80

Smaller Quantity Supplied at the Same Price

Higher Price Needed to Sell Same Quantity

Supply Shifters Supply Shifters

Important Supply Shifters1. Technological Innovations2. Input Prices3. Taxes and Subsidies4. Expectations5. Entry or Exit of Producers6. Changes in Opportunity

Costs28

Important Supply Shifters:Important Supply Shifters:

Technological InnovationsTechnological Innovations1. A technological innovation makes

sellers willing to offer more at a given price, or sell a their quantity at a lower price.◦A technological innovation lowers costs and increases supply.

29

Production TechnologyProduction Technology

30


Input PricesInput Prices2. A decrease in the price of an

input (all else equal) increases profits and encourages more supply (and vice versa)◦What will happen to the amount of

new businesses if the government reduces the fees and red tape associated with new business licenses? What happens if the fees rise?

31

Important Supply Shifters: Important Supply Shifters:

Taxes and SubsidiesTaxes and Subsidies3. A tax on output reduces profit

and makes sellers less willing to supply at a given price, unless they can effectively raise the price without losing any sales. (for now, assume they cannot)◦A tax on output raises costs and

decreases supply.

32


Taxes and SubsidiesTaxes and Subsidies A subsidy on production makes

sellers willing to supply a greater quantity at a given price, or the subsidy allows producers to sell a given quantity at a lower price.◦A subsidy on production lowers costs

and increases supply.◦Graph the effect on supply of a new

subsidy to fast food producers aimed at helping them market and sell overseas.

33

Taxes and SubsidiesTaxes and Subsidies

Taxes and subsidies affect profits and therefore supply.

A 10% yacht tax reduced the supply of yachts 53% in the early 1990s.

34

Cotton SupplyCotton Supply

35

◦When the U.S. decreases its cotton subsidies, U.S. cotton supply decreases


Taxes and SubsidiesTaxes and Subsidies

36

$10

Supply With $10 Tax

$10

$1 0

$50

Supply Without Tax

$40

60



With a $10 Tax Suppliers Require a $10 Higher Price to Sell the Same Quantity


ExpectationsExpectations4. The expectation of a higher price

for a good in the future decreases current supply of the good – if they can store the good- (and vice versa).◦Sellers will adjust their current offerings in anticipation of the direction of future prices in order to obtain the highest possible price.

37

Future ExpectationsFuture ExpectationsA change in producers’ expectations about profitability will affect supply curves

◦Windmill production increases as producers expect sales and profitability to increase.

38


ExpectationsExpectations

39

Expectations Can Shift the Supply Curve

Quantity

Price per Unit

Supply Today

Supply Today with Expectation of Future Price Increase

Into Storage


Entry or Exit of ProducersEntry or Exit of Producers5. As producers enter and exit

the market, the overall supply changes.

◦Entry implies more sellers in the market increasing supply.

◦Exit implies fewer sellers in the market decreasing supply.

40

Number of ProducersNumber of ProducersAs more producers enter a market, supply increases (and vice versa)

41

As more firms enter the solar installation market, the number of solar installations available for sale increases

As more firms enter the solar installation market, the number of solar installations available for sale increases


Entry or Exit of Producers Entry or Exit of Producers

42

Domestic Supply

Domestic Supply Plus Canadian Imports

Price

Quantity

Entry Increases Supply

Greater Quantity Supplied at the Same Price

Lower Price for the Same Quantity Supplied


Changes in Opportunity Changes in Opportunity CostsCosts6. Inputs used in production have

opportunity costs. Sellers will choose to use those inputs where the profit is the highest ◦Sellers will supply less of a good if

the price of an alternate good using the same inputs rises (and vice versa).

◦Sellers always chase the highest profit goods.

43

Changes in Opportunity Changes in Opportunity CostsCosts

Producers have the ability to produce other goodsAn increase in the profitability of small cars will decrease the supply of SUVs

443- 44


Changes in Opportunity Changes in Opportunity CostsCosts

45

$5

Supply with Low Opportunity Costs

2,800

Higher (Opportunity) Costs Reduce Supply- Rising Wheat Prices Reduce Soybean Supply

Quantity of Soybeans (Millions of Bushels)

Price per Unit

2,000

$7

Supply with High Opportunity Costs

Smaller Quantity Supplied at the Same Price

Higher Price Required to Sell the Same Quantity

What Shifts the Supply What Shifts the Supply Curve?Curve?A “change in quantity supplied” is NOT

the same as a “change in supply.”◦“Quantity supplied” changes only when

the price of a good changes. It is a movement along a fixed supply curve.

◦“Supply” changes only when a non-price factor changes. It is a shift in the entire supply curve.

46

A “change in Quantity Supplied”A “change in Quantity Supplied” A “change

in Supply”A “change in Supply”

Documents

Supply and Demand 1. Demand Demand represents the behavior of buyers. A Demand Curve A Demand Curve shows the quantity demanded at different prices. Quantity