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“Supply, Demand, and Market

Equilibrium”
Introduction to Demand
• In the United States, the forces of supply and demand work
together to set prices.
• Demand is the desire, willingness, and ability to buy a good or
service.
– Supply can refer to one individual consumer or to the total demand
of all consumers in the market (market demand).
• Based on that definition, which of the following do you have a
demand for?
 Demand -is an economic term that refers to the
amount of products or services that consumers wish
to purchase at a given price.
 The mere desire of a consumer for a product is not
demand.
 Demand includes the purchasing power of the
consumer to acquire a given product at a given
period. In other words, it’s the amount of products
or services that consumers are willing and able to
purchase.
Based on that definition, which of the
following do you have a demand for?
 Market- the exchange process between seller and buyer
 Seller- the producer of goods and services who make supply
available
 Buyers-are consumers of goods and services who create a
demand of goods and services
 Supply- producer
 Demand- consumer
Introduction to Demand
 A demand schedule is a table that lists the various
quantities of a product or service that someone is willing to
buy over a range of possible prices.

Price per widget Quantity Demanded of


Widget per day
$5 2
$4 4
$3 6
$2 8
$1 10
Introduction to Demand
 A demand schedule can be shown as points on a graph.

 The graph lists prices on the vertical axis and quantities


demanded on the horizontal axis.
 Each point on the graph shows how many units of the
product or service an individual will buy at a particular
price.
 The demand curve is the line that connects these points.
Demand Curve for Widgets
$6

$5

$4
Price per Widget

$3
Demand Curve for Widgets

$2

$1

$0
0 2 4 6 8 10 12
Quantity Demanded of Widgets

What do you notice about the demand


curve?
How would you describe the slope of the
demand curve?
Do you think that price and quantity
demanded tend to have this relationship?
Introduction to Demand
 The demand curve slopes downward.

 This shows that people are normally willing to buy less of a


product at a high price and more at a low price.
 According to the law of demand, quantity demanded and
price move in opposite directions.

Demand Curve for Widgets


$6
$5
Price per Widget

$4
$3
$2 Demand Curve for Widgets

$1
$0
0 2 4 6 8 10 12
Quantity Demanded of Widgets
• We buy products for their utility- the pleasure, usefulness, or
satisfaction they give us.
• What is your utility for the following products? (Measure your
utility by the maximum amount you would be willing to pay
for this product)

• Do we have the same utility for these goods?


Introduction to Demand
• One reason the demand curve slopes downward is due to
diminish marginal utility
– The principle of diminishing marginal utility says
that our additional satisfaction tends to go down as we
consume more and more units.
• To make a buying decision, we consider whether the
satisfaction we expect to gain is worth the money we must
give up.
Changes in Demand
 Change in the quantity demanded due to a price change occurs
ALONG the demand curve

Demand Curve for Widgets •At $3 per Widget, the


Quantity demanded of
$6 widgets is 6.

•An increase in the Price of


Widgets from $3 to $4 will
$5 lead to a decrease in the
Quantity Demanded of
Widgets from 6 to 4.

$4
Price per Widget

$3
Demand Curve for Widgets

$2

$1

$0
0 2 4 6 8 10 12
Quantity Demanded of Widgets
Analysis of demand and Supply
 The demand curve is a schedule that shows the level
of consumption at alternative prices at a given point
in time. The demand curve of commodity
summarizes the benefits derive by the consumers
from the purchase of good or service.
Changes in Demand
• Demand Curves can also shift in response to the following
factors:
– Buyers (# of): changes in the number of consumers
– Income: changes in consumers’ income
– Tastes: changes in preference or popularity of product/ service
– Expectations: changes in what consumers expect to happen in the
future
– Related goods: compliments and substitutes
• BITER: factors that shift the demand curve
What is a Demand Curve ?
The first major actor in a market is the consumer
whose primary objective is to purchase a commodity
because it can give him benefits. His inclination to
purchase is indicated by the demand curve.
A demand curve is a schedule of the willingness and
capacity of a consumer to buy a commodity at
alternative prices at a given point in time other things
held constant.
In the construction of the demand curve, it is important
to consider not only the willingness to buy but also the
capacity to buy. Everyone wants or willing to buy a good
but not all is able to buy because some do not have the
capacity to buy the good. The demand curve is derived
from the demand for a commodity since it only reflects
the relationship between quantity demand and the price
of commodity. When we say other things held constant ,
the other factors that may affect the demand for the
commodity are not changing.
Other Factors Affecting the Demand of
a Commodity
1. Income
As indicated in the concept of demand, it is the willingness and
capacity of a consumer to buy a commodity at alternative prices.
Although the willingness maybe influenced by the price of
commodity as well as the taste for the commodity the capacity to
purchase on the other hand is influenced by the income of the
consumer. A higher level of income will give him higher capacity to
consume while a lower income will give him limited purchasing
power.
As a result, we observe that richer families have higher levels of
consumption while poorer families have lower and limited
consumption.
2. Prices of other commodities – Aside from the price of
commodity being sold, the demand for a good or service may also
be influenced by prices of other goods and services. Although the
price of many commodities may have an effect on the demand of a
particular good, the influence of related goods is more
pronounced.
For example, if other good is a substitute, the increase in the price
of the substitute good may increase the demand for the commodity
at hand. Thus, when the price of beef increases , the demand for
chicken will increase since beef and chicken maybe considered as
substitute goods. On the other hand, if the other good is a
complementary good, a decrease in its price will impact positively
on the demand of the good being investigated. For instance, when
the price of bread decreases , the demand for butter may increase
since butter and bread considered as complimentary goods
3. Expectation – In addition to price of the commodity , the
expectation or prospect on what is going to happen to the price can
influence the demand for the commodity. For example, if you
believed that the price of gasoline will increase tomorrow, there is a
tendency for a consumers to increase their consumption today.
Similarly, if there is a prospect that the price of US dollor will
decline tomorrow, people will postponed their purchase of US
dollars. They will buy US dollars the following day when the price
is expected to be lower.
4. Taste – Taste or preference is another important factor that may
influence the demand for a commodity. The formation of taste is
influenced by several factors. Some of them can be shaped by
cultural values, others through peer pressure or the power of
advertising. For example , on the celebration of New Years Eve, it is
customary for families to have round fruits at their fruit plate to
attract good luck. This tradition which was influenced by Chinese
Filipinos has increased the demand for fruits during this season. On
the other hand, advertising that shows that cigartte is bad for your
health has to some extent decrease the demand for cigarette.
5. Market – The size and characteristic of market can also influence
the demand for a commodity. An increasing population can
contribute to the expansion of existing markets for various
commodities. A lower birth rate, on the other hand, coupled with
an ageing population may alter the composition of demand by
shifting the demand towards the needs of the elderly and away from
goods and services that target the youth.
Substitution and Income Effects
The inverse or negative relationship between the price of
commodity and the quantity demand shown in the demand
curve can be explained through the substitution effect and
income effect of a price change. Thus, as the price of mangoes
increases, the consumer will make a choice of consuming of
cheaper papayas and bananas to substitute for mangoes which
have become more expensive.
Changes in Demand
• Prices of related goods affect on demand
– Substitute goods a substitute is a product that can be used in the
place of another.
• The price of the substitute good and demand for the other good are directly
related
• For example, Coke Price Pepsi Demand
– Complementary goods a compliment is a good that goes well
with another good.
• When goods are complements, there is an inverse relationship between the
price of one and the demand for the other
• For example, Peanut Butter Jam Demand
Changes in Demand
Demand
Increase
Curve
in Demand
for Widgets •Several factors will
change the demand for
$6$6 the good (shift the entire
demand curve)

•As an example, suppose


$5$5 consumer income
increases. The demand for
Widgets at all prices will
increase.

$4$4
Price per Widget
Price per Widget

$3$3
Orginal Demand Curve
Demand Curve for Widgets
New Demand Curve

$2$2

$1$1

$0$0
00 2 2 4 4 6 6 8 8 10 10 12 12 14
Quantity
QuantityDemanded
Demandedofof
Widgets
Widets
Changes in Demand
Demand
Decrease
Curve
in Demand
for Widgets •Demand will also
decrease due to changes
$6$6 in factors other than price.

•As an example, suppose


$5$5 Widgets become less
popular to own.

$4$4
Price per Widget
Price per Widget

$3$3
Original Demand Curve
Demand Curve for Widgets
New Demand Curve

$2
$2

$1
$1

$0
$0 0 2 4 6 8 10 12
0 2 4 6
Quantity Demanded of Widgets 8 10 12
Quantity Demanded of Widgets
Changes in Demand
Changes in any of the factors other than price causes the
demand curve to shift either:

 Decrease in Demand shifts to the Left (Less demanded at


each price)
OR
 Increase in Demand shifts to the Right (More demanded at
each price)
What is Supply?
Supply - The total amount of goods or
services that producer make available
for sale at a given price.
Supply - is a fundamental economic
concept that describes the total amount of a
specific good or service that the producer
make available for sale at a given price
Introduction to Supply
• Supply refers to the various quantities of a good or
service that producers are willing to sell at all possible
market prices.

• Supply can refer to the output of one producer or to


the total output of all producers in the market
(market supply).
Introduction to Supply
 A supply schedule is a table that shows the quantities
producers are willing to supply at various prices

Price per Widget ($) Quantity Supplied of Widget


per day
$5 10
$4 8
$3 6
$2 4
$1 2
Introduction to Supply
 A supply schedule can be shown as points on a graph.

 The graph lists prices on the vertical axis and quantities


supplied on the horizontal axis.
 Each point on the graph shows how many units of the
product or service a producer (or group of producers)
would willing sell at a particular price.
 The supply curve is the line that connects these points.
Supply Curve for Widgets
$6

$5

$4
Price per Widget

$3
Supply Curve

$2

$1

$0
0 2 4 6 8 10 12
Quantity Supplied of Widgets

What do you notice about the supply curve?

How would you describe the slope of the supply


curve?
Do you think that price and quantity supplied
tend to have this relationship?
Introduction to Supply
• As the price for a good rises, the quantity supplied rises and
the quantity demanded falls. As the price falls, the quantity
supplied falls and the quantity demanded rises.
• The law of supply holds that producers will normally offer
more for sale at higher prices and less at lower prices.

Supply Curve for Widgets


$6

$5
Price per Widget

$4

$3

$2 Supply Curve

$1

$0
0 2 4 6 8 10 12
Quantity Supplied of Widgets
Introduction to Supply
 The reason the supply curve slopes upward is due to costs and
profit.
 Producers purchase resources and use them to produce output.
 Producers will incur costs as they bid resources away from their
alternative uses.
Introduction to Supply
 Businesses provide goods and services hoping to make a
profit.
 Profit is the money a business has left over after it
covers its costs.
 Businesses try to sell at prices high enough to cover
their costs with some profit left over.
 The higher the price for a good, the more profit a
business will make after paying the cost for resources.
Changes in Supply
•Change in the quantity supplied due to a price change
occurs ALONG the supply curve
•At $3 per Widget, the
Supply Curve for Widgets Quantity supplied of
widgets is 6.
$6
•If the price of Widgets fell
to $2, then the Quantity
Supplied would fall to 4
Widgets.
$5

$4
Price per Widget

$3
Supply Curve

$2

$1

$0
0 2 4 6 8 10 12
Quantity Supplied of Widgets
Changes in Supply
• Supply Curves can also shift in response to the following factors:
– Subsidies and taxes: government subsides encourage production,
while taxes discourage production
– Technology: improvements in production increase ability of firms
to supply
– Other goods: businesses consider the price of goods they could be
producing
– Number of sellers: how many firms are in the market
– Expectations: businesses consider future prices and economic
conditions
– Resource costs: cost to purchase factors of production will
influence business decisions
• STONER: factors that shift the supply curve
Changes in Supply
•Several factors will
Supply
Increase
Curveinfor
Supply
Widgets change the demand for
the good (shift the entire
$6
demand curve)

•As an example, suppose


that there is an
$5 improvement in the
technology used to
produce widgets.

$4
Price per Widget

$3
Original Supply Curve
Supply Curve
New Supply Curve

$2

$1

$0
0 2 2 4 4 6 6 8 810 12 10 14 12
Quantities
QuantitySupplied
Supplied
of Widgets
of Widgets
Changes in Supply
•Supply can also decrease
Supply
Decrease in Curve
Supplyfor Widgets due to factors other than
a change in price.
$6

•As an example, suppose


that a large number of
$5 Widget producers go out
of business, decreasing
the number of suppliers.

$4
Price per Widget

$3
Original Supply Curve
Supply Curve
New Supply Curve

$2

$1

$0
0 22 4 4 6 6 8 8 10 10 12 12
Quantity
Quantity
Supplied
Supplied
of Widgets
of Widgets
Changes in Supply
Changes in any of the factors other than price causes the
supply curve to shift either:

 Decrease in Supply shifts to the Left (Less supplied at each


price)
OR
 Increase in Supply shifts to the Right (More supplied at each
price)
Supply Practice Answers
Cost to Produce Amount of Supply Supply Curve Shifts

Cost of Resources Falls

Cost of Resources
Rises

Productivity Decreases

Productivity Increases

New Technology

Higher Taxes

Lower Taxes

Government Pays
Subsidy
1. The government of Pago-Paga adds a
subsidy to boomerang production.
Price

S
S1

Quantity
2. Boomerang producers also produce Frisbees.
The price of Frisbees goes up.

S1
Price

Quantity
3. The government of Pago-Paga adds a new
tax to boomerang production.

S1
Price

Quantity
4. Boomerang producers expect an increase in
the popularity of boomerangs worldwide.
Price

S
S1

Quantity
5. The price of plastic, a major input in boomerang
production, increases.

S1
Price

Quantity
6. Pago-Pagan workers are introduced to coffee as Pago-
Paga become integrated into the world market and their
productivity increases drastically.
Price

S
S1

Quantity
7. Come up with your own story about boomerangs and the
Pago-Pagans. Write down the story, draw the change in
supply based on the story, and explain why supply
changed.
Price

Quantity
Supply and Demand at Work
 Markets bring buyers and sellers together.
 The forces of supply and demand work together in
markets to establish prices.
 In our economy, prices form the basis of economic
decisions.
Supply and Demand at Work
 Supply and Demand Schedule can be combined into one
chart.

Price per Widget ($) Quantity Demanded Quantity Supplied


of Widget per day of Widget per day

$5 2 10

$4 4 8

$3 6 6

$2 8 4

$1 10 2
Supply and Demand at Work
Supply and Demand for Widgets
$6

$5

$4
Price per Widget

$3
Demand Curve
Supply Curve

$2

$1

$0
0 2 4 6 8 10 12
Quantity of Widgets
Supply and Demand at Work
• A surplus is the amount by which the quantity
supplied is higher than the quantity demanded.
– A surplus signals that the price is too high.
– At that price, consumers will not buy all of the product
that suppliers are willing to supply.
– In a competitive market, a surplus will not last. Sellers
will lower their price to sell their goods.
Supply and Demand at Work •Suppose that the price in
the Widget market is $4.
Supply and Demand for Widgets
•At $4, Quantity
$6
demanded will be 4
Widgets
Surplus •At $4, Quantity supplied
will be 8 Widgets.
$5

•At $4, there will be a


surplus of 4 Widgets.

$4
Price per Widget

$3
Demand Curve
Supply Curve

$2

$1

$0
0 2 4 6 8 10 12
Quantity of Widgets
Supply and Demand at Work
 A shortage is the amount by which the quantity
demanded is higher than the quantity supplied

 A shortage signals that the price is too low.


 At that price, suppliers will not supply all of the product
that consumers are willing to buy.
 In a competitive market, a shortage will not last. Sellers
will raise their price.
Supply and Demand at Work •Suppose that the price in
the Widget market is $2.
Supply and Demand for Widgets
•At $2, Quantity supplied
$6 will be 4 Widgets

•At $2, Quantity


demanded will be 8
$5 Widgets.

•At $2, there will be a


shortage of 4 Widgets.
$4
Price per Widget

$3
Demand Curve
Supply Curve

$2

$1
Shortage
$0
0 2 4 6 8 10 12
Supply and Demand at Work
• When operating without restriction, our market
economy eliminates shortages and surpluses.
– Over time, a surplus forces the price down and a shortage forces
the price up until supply and demand are balanced.
– The point where they achieve balance is the equilibrium price.
At this price, neither a surplus nor a shortage exists.
• Once the market price reaches equilibrium, it tends to stay
there until either supply or demand changes.
– When that happens, a temporary surplus or shortage occurs until
the price adjusts to reach a new equilibrium price.
Supply and Demand at Work •Suppose that the price in
the Widget market is $3.
Supply and Demand for Widgets
$6 •At $3, Quantity supplied
will be 6 Widgets

•At $3, Quantity


demanded will be 6
$5
Widgets.

•At $3, there will be


neither a surplus or a
$4 shortage.
Price per Widget

$3
Demand Curve
Supply Curve

$2

$1

$0
0 2 4 6 8 10 12
Quantity of Widgets
Supply and Demand Practice
Answers
Supply and Demand for Boomerangs
$12

Surplus
$10

$8
Price per Boomerang

$6
Demand
Supply

$4

$2

$0
0 2 4 6 8 10 12
Quantity of Boomerangs
Supply and Demand for Boomerangs
$12

$10

$8
Price per Boomerang

$6
Demand
Supply

$4

$2

Shortage
$0
0 2 4 6 8 10 12
Quantity of Boomerangs
Supply and Demand for Boomerangs
$12

Market Equilibrium
$10

$8
Price per Boomerang

$6
Demand
Supply

$4

$2 6

$0
0 2 4 6 8 10 12
Quantity of Boomerangs
Supply and Demand for Boomerangs
$12

$10

$8
Price per Boomerang

$6 Original Demand
Supply
New Demand

$4

$2

$0
0 2 4 6 8 10 12 14 16
Quantity of Boomerangs
1. The income of the Chapel Hill townies
declines after an early loss during March
Madness.
Price

P1

P2

D1
Q2 Q1 Quantity
2. Chapel Hill is named one of the most
beautiful towns in North Carolina and
tourism doubles
Price

S
P2

P1 D1

Q1 Q2 Quantity
3. The price of blue ties decreases. (Blue
ties are a substitute good for purple ties)
Price

P1

P2

D1 D

Q2 Q1 Quantity
4. The Federal government has been warning the
public about the possibility of a recession and job
loss in the RDU area. (Think expectations!)
Price

P1

P2

D
D1

Q2 Q1 Quantity
5. The price of purple striped shirts decreases (Purple
striped shirts are a complement to purple ties)
Price

P2

P1

D1

Q1 Q2 Quantity
6. The price of silk increases (ties are made
with silk).

S1
Price

P2
P1

Q2 Q1 Quantity
7. The government adds a subsidy to tie
production.
Price

S
S1

P1

P2

Q1 Q2 Quantity
8. After the release of Alan Greenspan’s first jazz
flute album, purple tie producers are expecting a
huge increase in demand and thus an increase in
the price.
Price

S
S1

P1

P2

Q1 Q2 Quantity
9. Congress enacts new tax on the production of
purple ties.
S1
Price

S
P2

P1

Q2 Q1 Quantity
10. As the popularity of purple ties sweeps the
greater Orange County area, new producers
enter the purple tie market.
Price

S
S1

P1

P2
D

Q1 Q2 Quantity
11. Purple ties are named by GQ magazine as a “must
have” for all young professionals. At the same time, a
new textile machine decreases the cost of producing
purple ties.
Price

S S1

P1

D1
D

Q1 Q2 Quantity
12. The price of pink ties (a related good that most purple tie producers also
produce) rises as spring approaches. Tie consumers in Chapel Hill begin to
expect purple ties to be put on sale since spring is coming, so they put off
purchasing.

S1
Price

P1

D
D1

Q2 Q1 Quantity