Demand
• The term demand refers to the entire
relationship
between
the
quantity
demanded and the price of a good, other
things remaining the same. Demand is
described by both the demand schedule
and the demand curve.
Examples of Demand
• The demand for MP3 files is the relationship
between the price of MP3s and the quantity of
MP3s demanded, holding all other influences on
the quantity of MP3 files bought constant.
• Similarly, the demand for MP3 players is the
relationship between the price of MP3 players
and the quantity of MP3 players demanded,
holding all other influences on the quantity of
MP3 files bought constant.
Supply
• The term supply refers to the entire
relationship between the quantity supplied
and the price of a good, other things
remaining the same. Supply is described
by both the supply schedule and the
supply curve.
Examples of Supply
• The supply of MP3 files is the relationship
between the price of MP3 files and the quantity
of MP3 files
supplied, holding all other
influences on the quantity of MP3 files sold
constant.
• Similarly, the supply of MP3 players is the
relationship between the price of MP3 players
and the quantity of MP3 players supplied,
holding all other influences on the quantity of
MP3 files sold constant.
The Buying Decision
• The quantity of MP3 Players that people plan to
buy depends on:
– The price of a MP3 Player
– The prices of related good (such as tapes, portable
CD players, and CDs)
– Disposable Income
– Expected future prices
– Population interested in MP3 Players
• To begin to learn how these factors influence
demand, you will look at the law of demand.
Law of Demand
• The law of demand states that other things
remaining the same, the higher the price
of a good, the smaller is the quantity
demanded of that good.
Law of Demand Examples
• If the price of a movie ticket rises, other
things remaining the same, the quantity of
movie tickets that people plan to buy
decreases.
• If the price of a PC falls, other things
remaining the same, the quantity of PCs
that people plan to buy increases.
Law of Demand
•
•
Other things remaining the same,
the higher the price of a good, the
smaller is the quantity demanded
of that good.
Why? For two reasons.
– If the price of a good rises, the
opportunity cost of using that
good rises, so people buy less of
that good and more of some
substitute goods. This is a
substitution effect.
– If the price of a good rises, real
income falls, so people buy less
of all goods including the good
whose price has risen. This is a
income effect.
Price/unit
D
Number
of units
Law of Demand
•
•
•
•
•
The law of demand can be
illustrated by a demand schedule
or a demand curve.
A demand schedule lists the
quantities demanded at each
price, holding constant all other
influences on buying plans.
A demand curve graphs the
quantity demanded at each price
holding constant all other
influences on buying plans.
¨
The demand curve can be
interpreted as a willingness to
pay curve.
¨
It tells us the highest price
that people are willing to pay for a
given quantity of the good.
Price/unit
p
D
q
Number
of units
Influences on Demand
• A movement along
the demand curve: A
change in the price of a
good, with everything
else remaining the
same, brings a
movement along the
demand curve and a
change in the
quantity demanded.
Price/unit
A
PA
B
PB
D
QA
QB
Number
of units
Influences on Demand
• A shift of the demand
curve: A change in
any other influence on
buying plans, except
the price of the good,
brings a shift of the
demand curve and a
change in demand.
Price/unit
D2
D1
Number
of units
The Selling Decision
• The quantity of MP3 Players that firms plan to sell
depends on:
– The price of a MP3 Player
– The prices of the factors of production used to make MP3
Players
– The prices of related goods (such as tapes, portable CD players,
and CDs)
– Expected future prices
– The number of suppliers
– Technology
• You are going to learn how these factors influence
supply. To begin, you will look at the law of supply.
Law of Supply
• The law of supply states that other things
remaining the same, the higher the price
of a good, the greater is the quantity
supplied of that good.
Supply
• A supply schedule lists the quantities supplied at
each different price when all other influences on
the amount producers plan to sell remain the
same.
• A supply curve shows the relationship between
the quantity supplied of a good and its price,
holding constant all other influences on
producers' planned sales. A supply curve is
plotted in a graph that measures the quantity
supplied of the good on the x-axis, and the price
of the good on the y-axis.
Change in Supply
• A change in the quantity supplied at each and every price
is called a change in supply. It is illustrated as a shift in
the supply curve. An increase in supply is shown by a
rightward shift in the supply curve and a decrease in
supply is shown by a leftward shift in the supply curve.
[Remember, increase = rightward shift and decrease =
leftward shift. An increase in supply is not an upward shift
in the supply curve. What looks like an upward shift on a
graph is actually a leftward shift and is a decrease in
supply.]
• A change in the quantity supplied is the change in the
quantity of a good that firms plan to sell when the price of
the good changes and all other influences on selling plans
remain the same. A change in the quantity supplied is
illustrated by movement along the supply curve.
Law of Supply
• Other things remaining the same, the higher the
price of a good, the greater is the quantity
supplied of that good.
• Why?
• If the quantity produced of a good increases, the
opportunity cost of producing that good rises.
And firms are willing to sell more of a good only
if the price rises to cover the opportunity cost of
producing it.
Law of Supply
• The law of supply
can be illustrated by
a supply schedule or
a supply curve.
• A supply schedule
lists the quantities
supplied at each
price, holding
constant all other
influences on selling
plans.
Price/unit
S
Number
of units
Supply Curve
• The supply curve can be interpreted as a
minimum supply price curve.
• It tells us the lowest price that firms are
willing to accept for supplying a given
quantity of the good.
Change in Supply
• Four key influences on a firm’s Price/unit
selling plans are:
– Number of firms that produce a
good
– Prices of other goods
– Prices of factors of production
– Technology
• When any of these factors
change, there is a change in
supply—the curve shifts.
• A change in supply is shown by
a new supply schedule or by a
new supply curve, i.e. a shift in
the supply curve.
• The graph opposite
summarizes the effects of these
factors.
S1
S2
Number
of units
Change in Supply
• A movement along
the supply curve
describes a change in
the price of a good,
with everything else
remaining the same.
• (A change in any other
influence on selling
plans except the price
of the good brings a
shift of the supply
curve and a change in
supply.)
Price/unit
B
PB
S
A
PA
QA
QB
Number
of units
Price Determination
• You will cover two topics in your study of
price determination:
• Price as a regulator
• Equilibrium (equilibrium price and
equilibrium quantity)
Price as a regulator
• The price of a good regulates the quantities demanded
and supplied.
• The higher the price of a good, other things remaining
the same, the smaller is the quantity demanded and the
greater is the quantity supplied for that good.
• The lower the price of a good, other things remaining the
same, the greater is the quantity demanded and the
smaller is the quantity supplied for that good.
• If the price is too high, there is a surplus of goods and if
the price is too low, there is a shortage of goods.
Price as a regulator
• If there is a shortage of a good, the price rises,
and if there is a surplus of a good, the price falls.
• When there is neither a shortage nor a surplus
of a good, the quantity demanded equals the
quantity supplied and the price does not change.
• This price is then the equilibrium price
representing the quantity demanded and
supplied. The equilibrium quantity is the
quantity that is bought and sold.
Equilibrium
• You will learn how to predict changes in
prices and quantities by studying the
effects of:
• A change in demand
• A change in supply
• A change in both demand and supply
Effects on Equilibrium from Change in Demand
• A change in the demand for Walkmans can result from a
change in any of the following:
– The price of a substitute for a Walkman, such as a portable CD
player
– The price of a complement to a Walkman, such as an audio tape
– Income
– Relevant population
– Tastes/Preferences of consumers
• If demand increases, both the price and quantity
increase (U to Z on next graph).
• If demand decreases, both the price and the quantity
decrease (U to T on next graph).
Effects on Equilibrium from Change in Demand
Price
S
D1 to D2:
•Price of a substitute rises
•Price of a complement falls
•Consumer income increases
•Good becomes more appealing
Z
P3
U
P2
P1
T
D2
D1
D0
Y2
Y6 Y3
D1 to D0:
•Price of a substitute falls
•Price of a complement rises
•Consumer income decreases
•Good becomes less appealing
Quantity
Effects on Equilibrium from Change in Supply
• A change in the supply for Walkmans can result
from a change in any of the following:
– The price of a factor of production, such as the wage
rate of the labor that produces Walkmans
– The price of a substitute in production to Walkmans,
such as a car tape deck
– The number of firms that make Walkmans
– The technology used to produce Walkmans
• If supply increases, the price falls and quantity
increases (See U to Y on next graph).
• If supply decreases, the price rises and the
quantity decreases (See U to X on next graph).
Effects on Equilibrium from Change in Supply
S2
Price
S1
S0
X
P3
U
S1 to S0:
•Price of an input falls
•Price of a substitute increases
•# of competitors increases
•Technology increases
input productivity
P2
Y
P1
D
Y1
Y6
Y4
S1 to S2:
•Price of an input rises
•Price of a substitute falls
•# of competitors decreases
Quantity
Equilibrium Changes
• If both demand and supply increase, the quantity
increases but the price can rise, fall, or remain
unchanged. (U to Z, Y or V)
• If both demand and supply decrease, the
quantity decreases but the price can rise, fall, or
remain unchanged. (U to T, X or W)
• If demand increases and supply decreases, the
price rises but the quantity can increase,
decrease, or remain unchanged. (U to X, Z or S)
• If demand decreases and supply increases, the
price falls but the quantity can increase,
decrease, or remain unchanged. (U to T, Y or R)
Equilibrium Changes
S2
Price
S1
S
S0
P4
Z
X
P3
P2
W
U
V
T
P1
Y
D2
R
P0
D1
D0
Y0
Y1
Y2
Y6
Y3
Y4
Y5
Quantity