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The Foundations of MicroeconomicsD I A N N A D A S I L V A - G L A S G O W
D E P A R T M E N T O F E C O N O M I C S
U N I V E R S I T Y O F G U Y A N A
S E P T E M B E R 1 4 , 2 0 1 7
Lecture 3 . . .
INTRODUCTION TO THE SUPPLY AND DEMAND MODELS
DemandDemand means the willingness and capacity to pay.
Prices are the tools by which the market coordinates individual desires.
Demand vs. Quantity Demanded
Demand is the amount of a product that people are willing and able to purchase at each possible price during a given period of time.
The quantity demand is the amount of a product that people are willing and able to purchase at one, specific price.
The Law of DemandLaw of demand – there is an inverse relationship
between price and quantity demanded.◦Quantity demanded rises as price falls, other things
constant.
◦Quantity demanded falls as prices rise, other things constant.
Demand Schedule
A demand schedule is a table showing the likely number of purchases based on a series of arbitrarily chosen prices
The Law of Demand
What accounts for the law of demand?
• The Demand Curve
– Why do buyers purchase a greater quantity at lower prices
and vice-versa?
• The Substitution Effect
– The change in the quantity demanded of a good that results
because buyers switch to substitutes when the price of the
good changes
• The Income Effect
– The change in the quantity demanded of a good that results
because a change in the price of a good changes the
buyer’s purchasing power
The Demand CurveThe demand curve is the graphic representation of the law of demand.
The demand curve slopes downward and to the right.
As the price goes up, the quantity demanded goes down.
D
Pri
ce (
per
un
it)
0
Quantity demanded (per unit of time)
PA
QA
A
A Sample Demand Curve
Chapter 3 - Supply and Demand: An Introduction SLIDE 10
An Increase In Quantity Demanded vs. An Increase In Demand
Price
($/can)
Quantity
(1000s of cans/day)
5
2
3
4
1
4
122
6
0 106 8
Increase in quantity
demanded
D
Pric
e pe
r D
VD
s (in
dol
lars
)
A Demand Curve
Quantity of DVDs demanded (per week)1 2 3 4 5 6 7 8 9 10 11 12 13
$6.00
5.00
4.00
3.00
2.00
1.00 .50
0
3.50
E
D
C
BFA
From a Demand Table to a Demand Curve
Price per
cassette
A
B
C
D
E
A Demand Table
DVD rentals demanded per
week
$0.50
1.00
2.00
3.00
4.00
9
8
6
4
2
Demand for DVDs
G
Demand Schedule andDemand Curve for DVDs
Individual and Market Demand CurvesA market demand curve is the horizontal sum of all individual demand curves.◦This is determined by adding the individual demand curves of all the demanders.
From Individual Demandsto a Market Demand Curve Cathy Bruce Alice
D
A
C
EF
G
Quantity of cassettes demanded per week
2
$4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
0
Pric
e pe
r ca
sset
te (
in d
olla
rs)
4 6 8 10 12 14 16
B
Market demand
McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc., All Rights Reserved.
Aggregation of Demand (I)
Aggregation of Demand (II)
Quantity Demanded Total
Quantity
Price per
Orange
First Buyer
(Mark)
Second
Buyer
(Clifford)
Third
Buyer
(Simone)
Demanded
per week
$5 10 + 12 + 8 = 30
4 20 + 23 + 17 = 60
3 35 + 39 + 26 = 100
2 55 + 60 + 39 = 154
1 80 + 87 + 54 = 221
Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant.
Graphically, it refers to the entire demand curve.
Quantity demanded refers to a specific amount that will be demand per unit of time at a specific price.
Graphically, it refers to a specific point on the demand curve.
Shifts in Demand Versus Movements Along a Demand Curve
A movement along a demand curve is the graphical representation of the effect of a change in price on the quantity demanded.
Shifts in Demand Versus Movements Along a Demand
Curve
Change in Quantity Demanded
D1
Change in quantity demanded(a movement along the curve)
B
0
Price
(p
er
un
it)
Quantity demanded (per unit of time)
100
$2
$1
200
A
A shift in demand is the graphical representation of the effect of anything other than price on demand.
Shifts in Demand Versus Movements Along a Demand Curve
Chapter 3 - Supply and Demand: An Introduction SLIDE 22
An Increase In Quantity Demanded vs. An Increase In Demand
Price
($/can)
Quantity
(1000s of cans/day)
5
2
3
1
4
12
6
0
Increase in demand
D
D
D’
D’
D0
D1
Shift in Demand
Price
(p
er
un
it)
Quantity demanded (per unit of time)
100
$2
$1
200
B A
Change in demand
(a shift of the curve)
250
Determinants of Demand
Tastes
IncomeNumber of buyers
ExpectationsPrices of related goods
(substitutes and complements)
IncomeNormal VERSUS inferior goods.
Income
◦Normal Goods
◦One whose demand increases (decreases) when the incomes of buyers increase (decrease)
◦ Higher income = higher demand
◦ Lower income = lower demand
Income
◦ Inferior Goods
◦One whose demand decreases (increases) when the incomes of buyers increase (decrease)
◦ Higher income = lower demand
◦ Lower income = higher demand
Price of related goods
A change in the price of a related good may either increase or decrease the demand for a product, depending on whether the related good is a substitute or a compliment.
CHAPTER 3 - SUPPLY AND DEMAND: AN INTRODUCTION Slide 28
Price of related goods
◦Complements
Complementary goods are goods that are used together and are usually demanded together. If the price of gasoline falls and as a result you drive your car more often, the extra driving increases your demand for motor oil. Thus gas and motor oil are jointly demanded; they are complements.
When two products are complements the price of one and the demand of the other good move in the opposite directions.
CHAPTER 3 - SUPPLY AND DEMAND: AN INTRODUCTION Slide 29
Chapter 3 - Supply and Demand: An Introduction SLIDE 30
The Effect of the Release of JurassicPark on the Market for Toy Dinosaurs
Price
Toy Dinosaurs
(units per month)
P
Q
D
S
D’
P’
Q’
D’ = demand after release of movie
Price of related goods
◦ Substitutes◦ Two goods are substitutes in consumption if an increase (decrease) in the
price of one causes an increase (decrease) in the demand for the other.
◦ Beef and chicken are examples of substitute goods. When the price of beef rises, consumers buy less beef and increase the demand for chicken. Conversely, as the price of beef falls, consumers buy more of beef and decrease their demand for chicken.
◦ When two products are substitutes of each other the price of one and the demand for the other move in the same direction
CHAPTER 3 - SUPPLY AND DEMAND: AN INTRODUCTION Slide 31
Chapter 3 - Supply and Demand: An Introduction SLIDE 32
The Effect on the Market for Chicken of a decline in the price of fish
Price
($)
Quantity
(letters/month)
P
Q
S
D
P’
Q’
D’
Tastes and preferences
A favorable change in consumer taste (preference) for the product- a change that makes the product more desirable means that more of it will be demanded at each price. Demand will increase and the demand curve will shift to the right. An unfavorable change in consumer preference will decrease demand and shift the demand curve to the left.
ExpectationsIf you expect your income to rise, you may consume more now.
If you expect prices to fall in the future, you may put off purchases today.
Chapter 3 - Supply and Demand: An Introduction SLIDE 35
Shifts in Demand
◦Complements◦Two goods are complements in consumption if an increase (decrease) in the price of one cause a decrease (increase) in the demand for the other
Chapter 3 - Supply and Demand: An Introduction SLIDE 36
Shifts in Demand
◦Substitutes◦Two goods are substitutes in consumption if an increase (decrease) in the price of one causes an increase (decrease) in the demand for the other
Chapter 3 - Supply and Demand: An Introduction SLIDE 37
The Effect of the Increase inthe Population of Potential Buyers
Price
Housing NY City
(units per month)
P
Q
S
D
P’
Q’
D’
D’ = demand after increase in population
NUMBER OF BUYERS: an increase in the number of buyers in a market increases demand and therefore shifts the demand curve to the right. likewise a decrease in the number of buyers will decrease demand and thus shift the demand curve to the left.
Price Increase in demand
D1
Decrease D
in Demand D2
Quantity Demanded
Supply
• Supply refers to a schedule of quantities a
seller is willing to sell per unit of time at
various prices, other things constant.
Law of Supply
Law of Supply◦As the price of a product rises, producers will be willing to supply more.
◦The height of the supply curve at any quantity shows the minimum price necessary to induce producers to supplythat next unit to market.
◦The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.
The Law of Supply
The law of supply is accounted for by two factors:
– When prices rise, firms substitute
production of one good for another.
– Assuming firms’ costs are constant,
a higher price means higher profits.
The Supply CurveThe supply curve is the graphic representation of the law of supply.
The supply curve slopes upward to the right.
The slope tells us that the quantity supplied varies directly –in the same direction – with the price.
S
A
Quantity supplied (per unit of time)
0
Pri
ce (
pe
r u
nit
)
PA
QA
A Sample Supply Curve
Supply Curve DVDs
Individual and Market Supply CurvesThe market supply curve is derived by horizontally adding the individual supply curves of each supplier.
From Individual Supplies to a Market Supply
Quantities Supplied
A
B
C
D
E
F
G
H
I
(1)
Price (per DVD)
(2)
Ann's Supply
(5)
MarketSupply
(4)
Charlie'sSupply
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
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
0
1
3
5
7
9
11
14
15
(3)
Barry's Supply
Aggregation of Supply (I)
Aggregation of Supply (II)
Quantity supplied refers to a specific amount that will be supplied at a specific price.
Shifts in Supply Versus Movements Along a Supply Curve
Changes in price causes changes in quantity supplied represented by a movement along a supply curve.
Shifts in Supply Versus Movements Along a Supply Curve
Change in quantity supplied (a movement along the curve)
Change in Quantity Supplied
Pri
ce (
pe
r u
nit
)
Quantity supplied (per unit of time)
S0
$15A
1,250 1,500
B
Shift in supply – the graphic representation of the effect of a change in a factor other than price on supply.
Shifts in Supply Versus Movements Along a Supply Curve
Shift in Supply
Pri
ce (
pe
r u
nit
)
Quantity supplied (per unit of time)
S0
Shift in Supply(a shift of the curve)
S1
$15A B
1,250 1,500
Shift Factors of Supply
Other factors besides price affect how much will be supplied:◦ Prices of inputs used in the production of a good.
◦ Cost of production◦ Weather
◦ Technology
◦ Suppliers’ expectations.
◦ Taxes and subsidies.
Factors that Shift Supply
Supply
ResourcePrices
TechnologyAnd
Productivity
ExpectationsOf
Producers
Number Of
Producers
Prices of Related
Goods and Services
Price of Inputs (Resource Prices)
When costs go up, profits go down, so that the incentive to supply also goes down vice versa.
Decrease in Supply
Increase in Supply
TechnologyAdvances in technology reduce the number of inputs needed to produce a given supply of goods.
Costs go down, profits go up, leading to increased supply.
Chapter 3 - Supply and Demand: An Introduction SLIDE 60
Price
($/can)
Quantity
(1000s of cans/day)
5
2
3
4
1
4
102
6 S
0 6 8
S
S’
S’
Increase in supply
ExpectationsIf suppliers expect prices to rise in the future, they may store today's supply to reap higher profits later, vice versa.
Decrease in Supply
Increase in Supply
Number of SuppliersAs more people decide to supply a good the market supply increases (Rightward Shift), vice versa.
Price of Related Goods or ServicesThe opportunity cost of producing and selling any good is the forgone opportunity to produce another good.
If the price of alternate good changes then the opportunity cost of producing changes too!
Example Mc Don selling Hamburgers vs. Salads.
Chapter 3 - Supply and Demand: An Introduction SLIDE 66
The Effect on the Market for TennisBalls of a Decline in Court-Rental Fees
Price
($/ball)
Quantity
(letters/month)
1.00
S
D
40
D’
1.40
58
Taxes and SubsidiesWhen taxes go up, costs go up, and profits go down, leading suppliers to reduce output.
When government subsidies go up, costs go down, and profits go up, leading suppliers to increase output.
