Demand and
Supply
Chapter Objectives
• Explain the main influences on demand
• Explain the main influences on supply
• Use a model to show h...
Demand and its Determinants
• If a person demands something, they
– Want it,
– Can afford it, and
– Have made a definite p...
Demand and its Determinants
• The quantity demanded of a good or service is
the amount that consumers plan to buy in a
giv...
Demand
• What determines buying plans?
–
–
–
–
–
–

The price of the good
The prices of related goods
Income
Expected futu...
Demand
• The Law of Demand
– Other things being equal, the higher the price of a
good, the lower is the quantity demanded....
Demand
• Demand Curve and Demand Schedule
– Demand curves graphs the relationship between
the quantity demanded of a good ...
Demand
Price

Quantity

(dollars per tape)

(millions of tapes per week)

a

1

9

b

2

6

c

3

4

d

4

3

e

5

2
Price (dollar per tape)

Demand
6

e

5

d

4

c

3

b

2

a

1

0

2

Demand
for tapes

4
6
8
10
Quantity (millions of ta...
Demand
• A Change in Demand
–

When any factor that influences buying plans
other than the price of the good changes, ther...
A Change in Demand
• Prices of Related Goods
–
–

Substitutes — goods used in the place of another
good
Complements — good...
A Change in Demand
• Income
–
–

Normal Goods — demand increases as income
increases
Inferior Goods — demand decreases as ...
A Change in Demand
• Expected Future Prices
• Population
–

Size and age structure

• Preferences
–

Attitudes toward good...
The Demand for Tapes
• The Law of Demand
–

The quantity of tapes demanded
•

Decreases if:
–

•

The price of a tape rise...
The Demand for Tapes
• Changes In Demand
–

The demand for tapes
•

Decreases if:

The price of a substitute falls
– The p...
The Demand for Tapes
• Changes In Demand
–

The demand for tapes
•

Increases if:

The price of a substitute rises
– The p...
Movement Along versus a Shift in the
Demand Curve
• A movement along a demand curve, results
from a change in price, shows...
A Change in Demand and a Shift in the
Demand Curve
Original demand schedule

New demand schedule

Walkman $200

Price

a
b...
Price (dollar per tape)

Demand
6
5
4

e

e'
d

3

d'
c

2
1

Demand for tapes
(Walkman $50)

c'
b

b'

Demand for tapes
(...
Price

A Change in the Quantity Demanded Versus a
Change in Demand
Decrease in
quantity
demanded

Decrease in

Increase in...
Supply and its Determinants
• If a firm supplies a good or service, the firm
–
–
–

Has the resources and technology to pr...
Supply and its Determinants
• The quantity supplied of a good or service is

the amount that producers plan to sell during...
Supply and its Determinants
• What determines selling plans?
–

The price of the good

–

The prices of resources used to ...
Supply
• The Law of Supply
–

Other things being equal, the higher the price of a
good, the greater is the quantity suppli...
Supply
• Supply Curve and Supply Schedule
–

–

Supply curves graphs the relationship between
the quantity supplied and th...
Supply
Price
(dollars per tape)

a
b
c
d
e

Quantity
(millions of tapes per week)

1
2
3
4
5

0
3
4
5
6
Price (dollar per tape)

Supply
6

Supply of Tapes

5

e

4

d

3

c

2

Supply curve

b

1

a
0

2

4
6
8
10
Quantity (mi...
Supply
• A Change in Supply
–

When any factor that influences selling plans
other than the price of the good changes, the...
A Change in Supply
• Price of factors of production
• Technology
• The Number of Suppliers
A Change in Supply
• Price of Related Goods Goods Produced
– Substitutes in Production
– Complements in Production

• Expe...
The Supply of Tapes
• Changes in Supply
– The supply of tapes
• Decreases if:
– The price of a factor of production used t...
The Supply of Tapes
• Changes in Supply
– The supply of tapes
• Increases if:
– The price of a factor of production used t...
Supply
Original supply schedule

New supply schedule

Original technology

New technology

Price

a
b
c
d
e

Quantity

Pri...
Price (dollar per tape)

A Change in Supply and a Shift in the
Supply Curve
6

Supply of tapes
(original technology)

5

e...
The Supply of Tapes
• The Law of Supply
–

The quantity of tapes supplied
•

Decreases if:
–

•

The price of a tape falls...
Movement Along Versus a Shift in the
Supply Curve
• A movement along a supply curve, which
results from a change in price,...
Price

A Change in the Quantity Supplied Versus a Change
in Supply
S1

Increase in
S0
quantity
supplied

Decrease in
suppl...
Market Equilibrium
• Equilibrium in a market occurs when the price

balances the plans of buyers and sellers.
• Equilibriu...
Market Equilibrium
• Price as a Regulator
– If the price is too low, quantity demanded exceeds
quantity supplied.
– If the...
Market Equilibrium
Price

1
2
3
4
5

Quantity
demanded

9
6
4
3
2

Quantity
supplied

0
3
4
5
6

Shortage(–)
or surplus(+)...
Price (dollar per tape)

Market Equilibrium
Surplus of
2 million tapes
at $4 a tape

6

Supply of Tapes

5
4

Equilibrium
...
Market Equilibrium
• Price as a regulator
–
–

A shortage forces the price up.
A surplus forces the price down.

• Such pr...
Predicting Changes in
Price and Quantity
• A Change in Demand
– What would happen to the price and quantity of
tapes if th...
The Effect of a Change in Demand
Quantity demanded

Price

(millions of tapes per week)

Quantity supplied
millions of tap...
Price (dollar per tape)

The Effects of a Change in Demand
Supply of tapes

6
5
4
3
2

Demand for tapes
(Walkman $50)

1
D...
A Change in Demand
• Prediction
–
–

When demand increases, both the price and
quantity increase.
When demand decreases, b...
Predicting Changes in
Price and Quantity
• A Change in Supply
– What would happen to the price and quantity
of tapes if a ...
The Effects of a Change in Supply
Price
dollars/tape

Quantity demanded
(millions of tapes per week)

Quantity supplied
(m...
Price (dollar per tape)

The Effects of a Change in Supply
Supply of tapes
(original technology)

6

Supply of tapes
(new ...
A Change in Supply
• Prediction
–
–

When supply increases, the quantity increases and
the price falls.
When demand decrea...
Predicting Changes in
Price and Quantity
• A Change in Both Demand and Supply
– What would happen if both demand and suppl...
The Effects of an Increase in Both Demand and
Supply

Original Quantities

New Quantities

(millions of tapes per week)

(...
Price (dollar per tape)

The Effects of an Increase in Both Demand and
Supply
Supply of tapes
(original technology)

6

Su...
A Change in Both
Demand and Supply
• Prediction
–

–

When both demand and supply increase, the quantity
increases and the...
The Effects of an Decrease in Demand and an
Increase in Supply

Original tapes per week)
Quantities
(millions of
Price

(d...
Price (dollar per tape)

The Effects of an Decrease in Demand and an
Increase in Supply
Supply of tapes
(original technolo...
The Effects of a Decrease in Demand
and an Increase in Supply
• Prediction
– When demand decreases and supply increases,
t...
END
Upcoming SlideShare
Loading in …5
×

Demand and supply

741 views

Published on

Published in: Business, Technology
1 Comment
1 Like
Statistics
Notes
No Downloads
Views
Total views
741
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
20
Comments
1
Likes
1
Embeds 0
No embeds

No notes for slide
  • Instructor Notes:
    1) The table shows a demand schedule listing the quantity of tapes demanded at each price if all other influences on buyers’ plans remain the same.
    2) At a price of $1 a tape, 9 million tapes a week are demanded; at a price of $3 a tape, 4 million tapes a week are demanded.
  • Instructor Notes:
    1) The demand curve shows the relationship between quantity demanded and price, everything else remaining the same.
    2) The demand curve slopes downward: As price decreases, the quantity demanded increases.
    3) The demand curve can be read in two ways. For a given price, it tells us the quantity that people plan to buy. For example, at a price of $3 a tape, the quantity demanded is 4 million tapes a week.
    4) For a given quantity, the demand curve tells us the maximum price that consumers are willing and able to pay for the last tape available. For example, the maximum price that consumers will pay for the 6 millionth tape is $2.
  • Instructor Notes:
    1) A change in any influence on buyers’ plans other than price itself results in a new demand schedule and a shift of the demand curve.
    2) A change in the price of a Walkman changes the demand for tapes.
    3) At a price of $3 a tape (row c of the table), 4 million tapes a week are demanded when the Walkman costs $200 and 8 million tapes a week are demanded when the Walkman costs only $50.
    4) A fall in the price of a Walkman increases the demand for tapes because the Walkman is a complement of tapes.
  • Instructor Notes:
    When demand increases, the demand curve shifts rightward, as shown by the shift arrow and the resulting red curve.
  • Instructor Notes:
    The table shows the supply schedule of tapes. For example, at $2 a tape, 3 million tapes a week are supplied; at $5 a tape, 6 million tapes a week are supplied.
  • Instructor Notes:
    1) The supply curve shows the relationship between the quantity supplied and price, everything else remaining the same.
    2) The supply curve usually slopes upward: As the price of a good increases, so does the quantity supplied.
    3) A supply curve can be read in two ways. For a given price, it tells us the quantity that producers plan to sell.
    4) And for a given quantity, it tells us the minimum price that producers are willing to accept for that quantity.
  • Instructor Notes:
    1) A change in any influence on sellers’ plans other than the price of the good itself results in a new supply schedule and a shift of the supply curve.
    2) For example, if Sonny and 3M invent a new, cost-saving technology for producing tapes, the supply of tapes changes.
    3) At a price of $3 a tape, 4 million tapes a week are supplied when producers use the old technology (row c of the table) and 8 million tapes a week are supplied when producers use the new technology.
  • Instructor Notes:
    An advance in technology increases the supply of tapes and shifts the supply curve rightward, as shown by the shift arrow and the resulting red curve.
  • Instructor Notes:
    1) If the price is $2 a tape, 6 million tapes a week are demanded and 3 million are supplied.
    2) There is a shortage of 3 million tapes a week, and the price rises.
    3) If the price is $4 a tape, 3 million tapes a week are demanded and 5 million are supplied.
    4) There is a surplus of 2 million tapes a week, and the price falls.
    5) If the price is $3 a tape, 4 million tapes a week are demanded and 4 million are supplied.
    6) There is neither a shortage nor a surplus.
    7) Neither buyers nor sellers have any incentive to change price.
    8) The price at which the quantity demanded equals the quantity supplied is the equilibrium price.
  • Instructor Notes:
    1) If the price is $2 a tape, 6 million tapes a week are demanded and 3 million are supplied.
    2) There is a shortage of 3 million tapes a week, and the price rises.
    3) If the price is $4 a tape, 3 million tapes a week are demanded and 5 million are supplied.
    4) There is a surplus of 2 million tapes a week, and the price falls.
    5) If the price is $3 a tape, 4 million tapes a week are demanded and 4 million are supplied.
    6) There is neither a shortage nor a surplus.
    7) Neither buyers nor sellers have any incentive to change price.
    8) The price at which the quantity demanded equals the quantity supplied is the equilibrium price.
  • Instructor Notes:
    1) As the price rises to $5, the quantity supplied increases, shown by the blue arrow on the supply curve--to the new equilibrium quantity of 6 million tapes a week.
    2) Following an increase in demand, the quantity supplied increases but supply does not change--the supply curve does not shift.
  • Instructor Notes:
    1) As the price falls to $2, the quantity demanded increases--shown by the blue arrow on the demand curve--to the new equilibrium quantity of 6 million tapes a week.
    2) Following an increase in supply, the quantity demanded increases but demand does not change--the demand curve does not shift.
  • Instructor Notes:
    1) The new supply curve intersects the new demand curve at $3 a tape, the same price as before, but the quantity increases to 8 million tapes a week.
    2) These increases in demand and supply increase the quantity but leave the price unchanged.
  • Instructor Notes:
    1) The new supply curve intersects the new demand curve at $2, a lower price, but in this case the quantity remain constant at 6 million tapes a week.
    2) This decrease in demand and increase in supply lowers the price but leaves the quantity unchanged.
  • Demand and supply

    1. 1. Demand and Supply
    2. 2. Chapter Objectives • Explain the main influences on demand • Explain the main influences on supply • Use a model to show how prices are determined by demand and supply • Make predictions about the price and quantity changes using the demand and supply model
    3. 3. Demand and its Determinants • If a person demands something, they – Want it, – Can afford it, and – Have made a definite plan to buy it. • Wants are the unlimited desires or wishes that people have for goods and services.
    4. 4. Demand and its Determinants • The quantity demanded of a good or service is the amount that consumers plan to buy in a given period at a particular price.
    5. 5. Demand • What determines buying plans? – – – – – – The price of the good The prices of related goods Income Expected future prices Population Preferences
    6. 6. Demand • The Law of Demand – Other things being equal, the higher the price of a good, the lower is the quantity demanded. • Reasons for the Law of Demand – Substitution effect • money price rise increases its relative price – Income effect • cannot afford to buy as much of everything as before rise in money price
    7. 7. Demand • Demand Curve and Demand Schedule – Demand curves graphs the relationship between the quantity demanded of a good and its price (ceteris paribus). – Demand schedules list the quantities demanded at each different price (ceteris paribus).
    8. 8. Demand Price Quantity (dollars per tape) (millions of tapes per week) a 1 9 b 2 6 c 3 4 d 4 3 e 5 2
    9. 9. Price (dollar per tape) Demand 6 e 5 d 4 c 3 b 2 a 1 0 2 Demand for tapes 4 6 8 10 Quantity (millions of tapes per week)
    10. 10. Demand • A Change in Demand – When any factor that influences buying plans other than the price of the good changes, there is a change in demand. • • An increase in demand causes the demand curve to shift rightward. A decrease in demand causes the demand curve to shift leftward.
    11. 11. A Change in Demand • Prices of Related Goods – – Substitutes — goods used in the place of another good Complements — goods used in conjunction with another good What Happens to Demand if the price of a substitute good increases? A complement?
    12. 12. A Change in Demand • Income – – Normal Goods — demand increases as income increases Inferior Goods — demand decreases as income increases
    13. 13. A Change in Demand • Expected Future Prices • Population – Size and age structure • Preferences – Attitudes toward goods and services
    14. 14. The Demand for Tapes • The Law of Demand – The quantity of tapes demanded • Decreases if: – • The price of a tape rises Increases if: – The price of a tape falls
    15. 15. The Demand for Tapes • Changes In Demand – The demand for tapes • Decreases if: The price of a substitute falls – The price of a complement rises – Income falls (a tape is a normal good) – The price of a tape is expected to fall in the future – The population decreases –
    16. 16. The Demand for Tapes • Changes In Demand – The demand for tapes • Increases if: The price of a substitute rises – The price of a complement falls – Income rises (a tape is a normal good) – The price of a tape is expected to rise in the future – The population increases –
    17. 17. Movement Along versus a Shift in the Demand Curve • A movement along a demand curve, results from a change in price, shows a change in the quantity demanded. • If some other influence on buyers’ plans changes, holding price constant, there is a shift in the demand curve.
    18. 18. A Change in Demand and a Shift in the Demand Curve Original demand schedule New demand schedule Walkman $200 Price a b c d e (dollars per tape) 1 2 3 4 5 Walkman $50 Quantity (millions of tapes per week) 9 6 4 3 2 Price a' b' c' d' e' (dollars per tape) 1 2 3 4 5 Quantity (millions of tapes per week)) 13 10 8 7 6
    19. 19. Price (dollar per tape) Demand 6 5 4 e e' d 3 d' c 2 1 Demand for tapes (Walkman $50) c' b b' Demand for tapes (Walkman $200) 0 2 4 a a' 6 8 10 12 14 Quantity (millions of tapes per week)
    20. 20. Price A Change in the Quantity Demanded Versus a Change in Demand Decrease in quantity demanded Decrease in Increase in demand Increase in quantity demanded demand D1 D2 D0 Quantity
    21. 21. Supply and its Determinants • If a firm supplies a good or service, the firm – – – Has the resources and technology to produce it, Can profit from producing it, and Has made a definite plan to produce it and sell it.
    22. 22. Supply and its Determinants • The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price. • The quantity supplied isn’t the amount a firm would like to sell but is the amount it plans to sell
    23. 23. Supply and its Determinants • What determines selling plans? – The price of the good – The prices of resources used to produce the good – The prices of related goods produced – Expected future prices – The number of suppliers – Technology
    24. 24. Supply • The Law of Supply – Other things being equal, the higher the price of a good, the greater is the quantity supplied.
    25. 25. Supply • Supply Curve and Supply Schedule – – Supply curves graphs the relationship between the quantity supplied and the price of a good, holding everything else constant. Supply schedules list the quantities supplied at each different price (ceteris paribus).
    26. 26. Supply Price (dollars per tape) a b c d e Quantity (millions of tapes per week) 1 2 3 4 5 0 3 4 5 6
    27. 27. Price (dollar per tape) Supply 6 Supply of Tapes 5 e 4 d 3 c 2 Supply curve b 1 a 0 2 4 6 8 10 Quantity (millions of tapes per week)
    28. 28. Supply • A Change in Supply – When any factor that influences selling plans other than the price of the good changes, there is a change in supply. • • An increase in supply causes the supply to shift rightward. A decrease in supply causes the supply curve to shift leftward.
    29. 29. A Change in Supply • Price of factors of production • Technology • The Number of Suppliers
    30. 30. A Change in Supply • Price of Related Goods Goods Produced – Substitutes in Production – Complements in Production • Expected Future Prices
    31. 31. The Supply of Tapes • Changes in Supply – The supply of tapes • Decreases if: – The price of a factor of production used to produce tapes rises – The price of a substitute in production rises – The price of a complement in production falls – The price of a tape is expected to rise in the future – The number of firms supplying tapes decreases
    32. 32. The Supply of Tapes • Changes in Supply – The supply of tapes • Increases if: – The price of a factor of production used to produce tapes decreases – The price of a substitute in production falls – The price of a complement in production rises – The price of a tape is expected to fall in the future – The number of firms supplying tapes increases – More efficient technologies for producing tapes are discovered
    33. 33. Supply Original supply schedule New supply schedule Original technology New technology Price a b c d e Quantity Price (dollars per tape) (millions of tapes per week) (dollars per tape) 1 2 3 4 5 0 a' 3 4 5 6 b' c' d' e' 1 2 3 4 5 Quantity (millions of tapes per week) 3 6 8 10 12
    34. 34. Price (dollar per tape) A Change in Supply and a Shift in the Supply Curve 6 Supply of tapes (original technology) 5 e 4 e' d 3 d' c 2 1 Supply of tapes (new technology) b a c' b' a' 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)
    35. 35. The Supply of Tapes • The Law of Supply – The quantity of tapes supplied • Decreases if: – • The price of a tape falls Increases if: – The price of a tape rises
    36. 36. Movement Along Versus a Shift in the Supply Curve • A movement along a supply curve, which results from a change in price, shows a change in the quantity supplied. • If some other influence on sellers’ plans changes, holding price constant, there is a shift in the supply curve
    37. 37. Price A Change in the Quantity Supplied Versus a Change in Supply S1 Increase in S0 quantity supplied Decrease in supply S2 Increase in supply Decrease in quantity supplied Quantity
    38. 38. Market Equilibrium • Equilibrium in a market occurs when the price balances the plans of buyers and sellers. • Equilibrium price is the price at which quantity demanded equals quantity supplied. • Equilibrium quantity is the quantity bought and sold at the equilibrium price.
    39. 39. Market Equilibrium • Price as a Regulator – If the price is too low, quantity demanded exceeds quantity supplied. – If the price is too high, quantity supplied exceeds quantity demanded.
    40. 40. Market Equilibrium Price 1 2 3 4 5 Quantity demanded 9 6 4 3 2 Quantity supplied 0 3 4 5 6 Shortage(–) or surplus(+) –9 –3 0 +2 +4
    41. 41. Price (dollar per tape) Market Equilibrium Surplus of 2 million tapes at $4 a tape 6 Supply of Tapes 5 4 Equilibrium 3 2 1 0 2 Shortage of 3 million tapes at $2 a tape Demand for tapes 4 6 8 10 Quantity (millions of tapes per week)
    42. 42. Market Equilibrium • Price as a regulator – – A shortage forces the price up. A surplus forces the price down. • Such price changes are mutually beneficial to both buyers and sellers.
    43. 43. Predicting Changes in Price and Quantity • A Change in Demand – What would happen to the price and quantity of tapes if the price of a Walkman falls from $200 to $50.
    44. 44. The Effect of a Change in Demand Quantity demanded Price (millions of tapes per week) Quantity supplied millions of tapes per week (dollars/tape) Walkman $200 Walkman $50 1 2 3 4 5 9 6 4 3 2 13 10 8 7 6 0 3 4 5 6
    45. 45. Price (dollar per tape) The Effects of a Change in Demand Supply of tapes 6 5 4 3 2 Demand for tapes (Walkman $50) 1 Demand for tapes (Walkman $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)
    46. 46. A Change in Demand • Prediction – – When demand increases, both the price and quantity increase. When demand decreases, both the price and quantity decrease.
    47. 47. Predicting Changes in Price and Quantity • A Change in Supply – What would happen to the price and quantity of tapes if a new cost-saving production technology was developed? – The new technology changes the supply
    48. 48. The Effects of a Change in Supply Price dollars/tape Quantity demanded (millions of tapes per week) Quantity supplied (millions of tapes/week Original technology 1 2 3 4 5 9 6 4 3 2 0 3 4 5 6 New technology 3 6 8 10 12
    49. 49. Price (dollar per tape) The Effects of a Change in Supply Supply of tapes (original technology) 6 Supply of tapes (new technology) 5 4 3 2 1 Demand for tapes 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)
    50. 50. A Change in Supply • Prediction – – When supply increases, the quantity increases and the price falls. When demand decreases, the quantity decreases and the price falls
    51. 51. Predicting Changes in Price and Quantity • A Change in Both Demand and Supply – What would happen if both demand and supply change together?
    52. 52. The Effects of an Increase in Both Demand and Supply Original Quantities New Quantities (millions of tapes per week) (millions of tapes per week) Price (dollars per tape ) 1 2 3 4 5 Quantity demanded Walkman $200 9 6 4 3 2 Quantity supplied Quantity demanded original technology Walkman $50 0 3 4 5 6 13 10 8 7 6 Quantity supplied new technology 3 6 8 10 12
    53. 53. Price (dollar per tape) The Effects of an Increase in Both Demand and Supply Supply of tapes (original technology) 6 Supply of tapes (new technology) 5 4 3 Demand for tapes (Walkman $50) 2 1 Demand for tapes (Walkman $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)
    54. 54. A Change in Both Demand and Supply • Prediction – – When both demand and supply increase, the quantity increases and the price decreases, or remains constant. When both demand and supply decreases, the quantity decreases and the price increases, decreases, or remains constant.
    55. 55. The Effects of an Decrease in Demand and an Increase in Supply Original tapes per week) Quantities (millions of Price (dollars per tape ) 1 2 3 4 5 Quantity demanded CD player $400 13 10 8 7 6 Quantity supplied original technology 0 3 4 5 6 New Quantities (millions of tapes per week) Quantity Quantity demanded supplied CD player $200 9 6 4 3 2 original technology 3 6 8 10 12
    56. 56. Price (dollar per tape) The Effects of an Decrease in Demand and an Increase in Supply Supply of tapes (original technology) 6 5 Supply of tapes (new technology) 4 3 Demand for tapes (CD player $400) 2 1 Demand for tapes (CD player $200) 0 2 4 6 8 10 12 14 Quantity (millions of tapes per week)
    57. 57. The Effects of a Decrease in Demand and an Increase in Supply • Prediction – When demand decreases and supply increases, the price falls and the quantity increases, decreases, or remains constant. – When demand increases and supply decreases, the price rises and the quantity increases, decreases, or remains constant.
    58. 58. END

    ×