Supply and Demand

Chapter 4 and 5

• Supply and demand are the two words that economists use most often.

• Supply and demand are the forces that make market economies work.

• Modern microeconomics is about supply, demand, and market equilibrium.

• The terms supply and demand refer to the behavior of people . . . as they interact with one another in markets.

• Buyers/Consumers determine demand

• Sellers/Producers determine supply

Supply and Demand Curve

P- Price

Q - Quantity

Demand

Consumer

•Expensive – consumers do not want to purchase the good or service

•Cheap – the demand for the good or service is greater

Supply

Producer

•Higher Price – the producers wants to make as many as possible

•Lower Price – the producers wants to limit the supply

• Surplus – quantity supply is greater than the demand– Found on the top part of the curve

• Shortage – demand is greater than the supply– Found on the bottom part of the curve

Quantity Demand

• When there is a change in price, causes a quantity demand

– Price goes up – Quantity goes down– Price goes down – Quantity goes up

Changes/Shifts in Demand

• Things that affect the curve other than price– If the curve moves to the right – increase in

demand– If the curve moves to the left – decrease in

demand

Shifts in Demand

D

D1

D2

Decrease in Demand

Increase in Demand

Factors - Demand

• Taste

• Income – More is normal, less = inferior

• Numbers of consumers – population

• Demographics of consumer – ie age

• Expectations

• Related Goods – Substitute – in place of another good– Compliment – along with another good

Example: When Michael Jordan began endorsing the products, demand for Nike & Gatorade

increased

Example: When Billy got laid off from his job, his demand for

gourmet steak dinners decreased

Example: Demand for girl scout patches increases when more

girls join girl scouts

Example: Demand for gas changes throughout the week

Substitute – Related Goods

Compliment – Related Goods

• Example: Demand for buns changes when hotdog prices fluctuate

Substitute OR Complementary?

• Cars and Tires

• Corn and Beans

• DVD Players and DVD’s

• Natural Gas and Electricity

• Cereal and Milk

• Toast and Jam

• Sweatshirts and Sweaters

Factors - Supply

• Labor Productivity

• Technology

• Producer Expectation – up or down price

• Input Cost – cost of resources

• Number of Producers – Competition

• Government Action – Taxes decrease supply– Subsidies opposite, regulations

Labor Productivity

• As technology advances, production becomes more efficient and supply increases (shifts to the right).

Producer Expectations

• Example: If Farmer Joe hears that the price of corn is going to increase next month, he’s going to wait to sell his corn (therefore decreasing the immediate supply of corn).

Resources - Input Cost

• Example: Don’s landlord increases his rent, which increases Don’s costs of production. Since it’s more expensive to make a donut, the profit per unit earned decreases and supply of Don’s Donuts falls

Government Involvement

• Example: If the import tax on Toyota Corollas increases, the profit per unit decreases, and American manufacturers will not be able to afford to offer as many for sale.

• Example: When the government decided to subsidize dairy farming, dairy farmers’ profits increased, therefore increasing supply of dairy cattle.

• Elasticity of Demand – how people react to price changes

• Elastic – large change in demand

• Inelastic – little change in demand

• Elasticity of Supply – how producers react to price changes

• Elastic – increase the quantity supplied

• Inelastic – there is only so much supply can be produced