Supply and Demand

• Supply and demand model

  • a model of how a competitive market functions

• The demand curve

• The supply curve

• The determinants of demand and supply

• The equilibrium price and quantity

Demand Schedule and Demand Curve

• The law of demand

  • A higher price leads to a lower quantity demaned

  • A lower price leads to a higher quantity demanded

• Demand schedule vs. demand curve

  • A demand schedule is a table that shows the quantity demanded at each price.

  • A demand curve is a graph that shows the quantity demanded at each price

• Demand vs. quantity demanded

• Demand refers to the curve, and quantity demanded refers to a specific point on the curve.

• If price increases, what happens?

  • No change in demand

  • Decrease in quantity demanded

• Graphical Comparison

  

• Demand curve

  • Horizontal axis: Quantity Demanded

  • Vertical axis: Price

  

Shift of the Demand Curve

• Changes in the price of related goods

  • Substitutes (positive correlation)

    • fall in the price of one goods makes consumers less willing to buy the other good

  • Complements (negative correlation)

    • fall in the price of one of the goods makes consumers more willing to buy the other good

  • How to remember

    • Kids are positive when having a substitute teacher

    • We lived in a cynical world. If someone gives you a complement, the true intention might be negative.

• Changes in income

  • Normal goods

    • rise in income increases demand

    • ie. computers, Disneyland, steak

  • Inferior goods

    • rise in income decreases demand

    • ie. macaroni & cheese, top ramen

  • Normal goods vs. inferior goods

  

• Changes in tastes

  • Why do people want what they want?

  • Changes due to fad, beliefs, cultural shifts are all clumped together under preferences.

• Changes in expectations

  • If you expect more income in the future, demand for certain goods (ie. car or refrigerator) might increase

  • If expectation of a future price drop of items exist, then the demand for these items drop today, almost like a self-fulfilling prophecy.

• Graph

  

• Summary

  

Supply Schedule and Supply Curve

• The law of supply

  • A higher price leads to a higher quantity supplied.

  • A lower price leads to a lower quantity supplied.

• Supply schedule vs. supply curve

  • A supply schedule is a table that shows the quantity supplied at each price.

  • A supply curve is a graph that shows the quantity supplied at each price.

• Supply vs. quantity supplied

• Supply refers to the curve, and quantity supplied refers to a specific point on the curve.

• If price increase, what happens to supply?

  • Nothing

  • This is a change in quantity supplied not supply

Shifts of the Supply Curve

• Changes in input prices

  • Input is a good used to produce another good

  • ie. cheese in a cheese pizza

• Change in technology

  • All the ways in which people can turn more inputs into useful goods

  • For example, an improved strain of corn resistant to disease increase supply of corn.

• Change in expectations

  • If expectations of a future price increase of items exist, then supplier will tend to hoard the item in order to make more profit in the future.

• Related goods

  • If the price of other things I can produce goes up, then my supply of grapes, once again, would go down.

  

• Graph

• Summary

  

Supply, Demand, and Equilibrium

• Equilibrium price

  • price that clears the market

• Equilibrium quantity

  • quantity of good bought and sold at market-clearing price

• Equilibrium

  • where the supply and demand curves intersect

• Graph

  

Surplus & Shortage

• Surplus

  • when quantity supplied exceeds quantity demanded

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• Shortage

  • when quantity demanded exceeds quantity supplied

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• Graph