supply and demand the determinants of supply and demand

Supply and Demand

The determinants of supply and demand

Plot the following

Price Quantity

$9 28 3

7 5

6 9

What kind of curve is it?

PriceP

Quantity DemandedQd

$9 28 3

7 5

6 9P

Q

9

2

8

3

7

5

6

9

D

Qd just a point on thecurve.

is the entirecurve.

To be on thedemand curvea person mustbe WILLINGand ABLE topurchase theproduct or service.

PriceP

Quantity DemandedQd

$9 28 3

7 5

6 9P

Q

9

2

8

3

7

5

6

9

D

Qd just a point on thecurve.

is the entirecurve.

There is an___________relationshipbetween priceand quantity.

inverse

Q

9

2

8

3

7

5

6

9

D

Quantity demanded--it is the amount that will be purchased at a specific P.

Definitions:

Demand--it is a schedule of quantities of goods and services that will be purchased at various prices at a specified time, all other things held constant.

Q

9

2

8

3

7

5

6

9

D

Qd just a point on thecurve.

is the entirecurve.

Price changes Quantity Demanded

Price does not change demand

The 8 Determinants of Demand

There are 8 reasons or factors that can change a demand curve.

1. Number of consumers.

Eight Determinants of Demand:

1. Number of consumers

2. Income--Normal Goods

3. Income--Inferior Goods

As people’s incomes go up demand fornormal goods increases. As people’s incomego down, demand for normal goods decrease.

As people’s incomes go up demand forinferior goods decreases. As people’s incomego down, demand for inferior goods increases.

Eight Determinants of Demand:

1. Number of consumers

2. Income--Normal Goods

3. Income--Inferior Goods

4. Preferences

Eight Determinants of Demand:

1. # of consumers

2. Income--Normal Goods

3. Income--Inferior Goods

4. Preferences

5. Price of related products: Substitutes

Eight Determinants of Demand:

1. # of consumers

2. Income--Normal Goods

3. Income--Inferior Goods

4. Preferences

5. Price of related products: Substitutes

6. Price of related products: Complements

Eight variables that shift Demand:

1. # of consumers

2. Income--Normal Goods

3. Income--Inferior Goods

4. Preferences

5. Price of related products: Substitutes

6. Price of related products: Complements

7. Expected future of prices by consumers

8. Expected future of income by consumers

Supply Curve

Determinants of supply

Price Quantity Supplied

$3 2

$4 3

$5 4

$6 5

P

Q

$3

2

$4

3

$5

4

$6

5

S

Price Quantity Supplied

$3 2

$4 3

$5 4

$6 5

P

Q

$3

2

$4

3

$5

4

$6

5

S

Quantity supplied is just a point on the curve.

Price Quantity Supplied

$3 2

$4 3

$5 4

$6 5

P

Q

$3

2

$4

3

$5

4

$6

5

S

Supply is the entire curve.

Price Quantity Supplied

$3 2

$4 3

$5 4

$6 5

P

Q

$3

2

$4

3

$5

4

$6

5

S

There is a_________relationshipbetween Pand Q.

Direct

Price Quantity Supplied

$3 2

$4 3

$5 4

$6 5

P

Q

$3

2

$4

3

$5

4

$6

5

S

Only one variablechanges QSand that is_____.

Price Quantity Supplied

$3 2

$4 3

$5 4

$6 5

P

Q

$3

2

$4

3

$5

4

$6

5

S

PRICE DOESNOT CHANGESUPPLY!!!!

Q

S

Quantity supplied--it is the amount that will be sold at a specific P.

Definitions:

Supply--it is a schedule of quantities of goods and services that will be sold at various prices at a specified time, all other things held constant.

P

Determinants of Supply

There are 5 determinants that can change a supply curve.

Five determinants of Supply:

1. Number of suppliers

2. Costs

3. Physical Availability of Resources

4. Technology

5. Expected Future Prices by Consumer

Your market is:

What happens to the market for oranges whenthere is a frost that hits Florida?

P

Q

S

D

P

Q

S1

P1

Q1

Decrease inthe physicalavailabilityof resources.

Oranges

Your market is:

What happens to the market for CD’s wheniPods and downloaded music become popular?

Decrease in Preferences.

CD’s

P

Q

S

D

P

Q

D1

P1

Q1

Your market is:

What happens to the market for downloadedmusic when the royalties paid to the song artist go up?

Increase incosts.

Downloaded Music

P

Q

S

D

P

Q

S1

P1

Q1

Your market is:

The U.S. goes through a boom economy, whathappens to the market for steak?

Increase inincomes—Normal goods.

Steak

P

Q

S

D

P

Q

D1

P1

Q1

Your market is:

The price of milk doubles; what happens tothe market for cereal?

Price of related product—complement.

Cereal

P

Q

S

D

P

Q

D1

P1

Q1

Your market is:

U.S. automakers use robots to produce their cars; what happens to the market for foreign automobiles?

Price of related product—substitute.

Foreign autos

P

Q

S

D

P

Q

D1

P1

Q1

Your market is:

The price of airline tickets doubles, what happens to the market for bus tickets?

Increase inprice of related product—Substitute

Bus Tickets

P

Q

S

D

P

Q

D1

P1

Q1

Shifts in both Demand and Supply Curves

P

Q

S

D

P

Q

D1

P1

Q1

Increase in demand

Increase in supply

S

Q1

Quantitywill definitelyincrease.

Price isIndeterminate

It will eithergo up.

P1

PS

D

P

Q

D1

P1

Q1

Increase in demand

Increase in supply

S

Q1

Quantitywill definitelyincrease.

Price isIndeterminate

It stayed thesame.

P1

PS

D

P

Q

D1

P1

Q1

Increase in demand

Increase in supply

S

Q1

Quantitywill definitelyincrease.

Price isIndeterminate

It went down.

P1

P

Q

S

D

P

Q

What happens to the price and quantity if thereis an increase in demand and a decrease in supply?

Price definitely goes up; Quantity is indeterminate

P

Q

S

D

P

Q

What happens to the price and quantity if thereis a decrease in demand and an increase in supply?

Price definitely goes down; Quantity is indeterminate

P

Q

S

D

P

Q

What happens to the price and quantity if thereis a decrease in demand and an decrease in supply?

Price is indeterminate; Quantity will definitely decrease

Example 1Gillette Shaving Company mails out millions of Fusion shaver handles to households for “free.” Show what happens to the market for the Fusion attachable razor blades?

Determinant:

______________

Price:

___________

Quantity:

____________

Fusion Razor Blades

Example 2Salaries of airline pilots go up while the economy goes into a recession. Show what will happen to the market for airline tickets?

Determinant:

______________

Price:

___________

Quantity:

____________

Airline Tickets

Example 3New technology starts to be used in producing computer chips, and at the same time, the government publishes a report that long-term exposure to computers causes long-term damage to users’ eyes.

Determinant:

______________Determinant:____________

Price:

___________

Quantity:

____________

Computers

Surplus What happens when we look at a price that it

is NOT the equilibrium price?P

Q

S

D

P

Q QsQd

Surplus:

Qs > QdP

Shortage

Q

S

D

P

Q QdQs

Shortage:

Qd > Qs

P