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Demand and Supply Price per unit of Good A SGood A Pe DGood A Q Quantity Demanded of Good A The Demand Curve and the Law of Demand The quantity demanded of a good or service is the quantity that consumers are willing to buy at a particular price during a particular period, ceteris paribus. Price per dozen 90 90 Quantity/mo. 80 80 70 200 200 300 300 400 400 60 50 40 40 500 500 600 600 700 700 90 A demand curve is a graphical representation of a demand schedule. A demand curve virtually always slopes downward because as the price of a good or service increases the quantity demanded decreases, ceteris paribus. This relationship is known as the law of demand. 80 70 A Price per dozen (cents) A demand schedule is a table that shows the quantities of a good or service demanded at different prices during a particular period, ceteris paribus. 60 Demand Curve 50 B 40 30 20 10 0 100 200 300 400 500 600 700 800 Quantity (millions of dozens per month) Price Quantity Quantity’ Quantity” $.90 200 400 0 .80 300 500 100 .70 400 600 200 .60 500 700 300 .50 600 800 400 .40 700 900 500 A change in quantity demanded is a movement along the curve; it results from a change in the price of a good or service. A change in demand is a shift in the demand curve itself and results from a change in one of the variables held constant. 90 80 A’ Price per dozen (cents) 70 A” DEMAND SHIFTERS A • Consumer preferences/tastes (i.e., concerns about cholesterol) 60 50 D3 40 D1 • Income/wealth • Prices of Substitutes and Complements (normal vs. inferior goods) 30 20 10 0 • Consumer Expectations 100 200 300 400 500 600 700 800 Quantity (millions of dozens per month) • Demographic Characteristics PRACTICE PROBLEM Write an equation in the form indicated below to represent the demand function in our “eggsample.” P = a + bQd Next, express demand as a function of price. SOLUTION: Demand for eggs P = a + bQd b = Y/X = -10/100 so, P = a - .1Qd substitute an ordered pair 90 = a - .1(200) 110 = a so, P = 110 - .1Qd To express quantity as a function of price 1P/.1 = 110/.1 - .1Qd/.1 divide the equation by .1 to yield 10P = 1100 - Qd then algebraically, Qd = 1100 - 10P Price and the Supply Curve A supply schedule is a table that shows the quantities of a good or service supplied at different prices during a particular period, ceteris paribus. A supply curve is a graphical representation of a supply schedule. A supply curve virtually always slopes upward because as the price a seller receives for a good or service increases the quantity supplied increases, ceteris paribus. This relationship is known as the law of supply. Price per dozen Quantity/mo. 40 50 60 300 400 500 70 80 90 600 700 800 90 80 70 Price per dozen (cents) The quantity supplied of a good or a service is the quantity sellers are willing to sell at a certain price during a particular period, ceteris paribus. 60 Supply Curve 50 40 30 20 10 0 100 200 300 400 500 600 700 Quantity (millions of dozens per month) 800 Price Quantity Quantity’ Quantity” $.40 300 500 100 .50 400 600 200 .60 500 700 300 .70 600 800 400 .80 700 900 500 .90 800 1000 600 90 80 A change in the quantity supplied of a good or service is a movement along the supply curve, resulting from a change in the price received for the good or service. A change in supply is a shift in the supply curve and results from a change in one of the variables previously held constant. SUPPLY SHIFTERS 70 Price per dozen (cents) Prices of Factors of Production (Input Costs) 60 50 40 Returns from Alternative Production Activities 30 Technology 20 Suppliers’ Expectations 10 Natural Events 0 100 200 300 400 500 600 700 800 Quantity (millions of dozens per month) Number of Sellers PRACTICE PROBLEM Write an equation in the form indicated below to represent the supply function in our “eggsample.” P = a + bQs Next, express supply as a function of price. SOLUTION: Supply of eggs P = a + bQs b = Y/X = 10/100 so, P = a + .1Qs substitute an ordered pair 40 = a + .1(300) 10 = a so, To express quantity as a function of price P = 10 + .1Qs 1P/.1 = 10/.1 + .1Qs/.1 divide the equation by .1 to yield 10P = 100 + Qs then algebraically, 10P - 100 = Qs DEMAND, SUPPLY, AND EQUILIBRIUM When we combine the demand and supply curves for a good on a single graph, the point at which they intersect is called the equilibrium price. In our “eggsample,” the equilibrium price is $.60 per dozen. Consumers demand, $.60 and suppliers supply, 500 million dozen eggs at this price. This is what economists call the equilibrium price and output (quantity). The model of demand and supply combines the demand and supply curves for a good to explain the determination of price and output in a market. Pe Qe S D 500 PRACTICE PROBLEM Show mathematically that the equilibrium price for eggs equals 60 cents per dozen and the equilibrium output equals 500 million dozens. Remember the equilibrium condition, Qs = Qd SOLUTION: Since, Qs = Q d substitute and Qs = 10P - 100 Qd = 1100 - 10P so that 10P - 100 = 1100 - 10P algebraically, therefore 20P = 1200 Pe = 60 cents/dozen Now, substitute Pe into or Qs = 10P - 100 Qd = 1100 - 10P to obtain Qe = 500 Qs = 10(60) - 100 Qd =1100 - 10(60) A surplus exists if the quantity of a good or service supplied exceeds the quantity demanded at the current price level. A shortage exists if the quantity of a good or service demanded exceeds the quantity supplied at the current price. Suppose the current price for eggs is 80 cents per dozen. How many eggs will be demanded? How many will be supplied? S $.60 Suppose the current price is 40 cents per dozen. How many eggs will be demanded? How many eggs will be supplied? D 500 At a price of $.80/dozen, the quantity supplied is 700 million dozen eggs and the quantity demanded is 300 million dozen eggs. Thus, there is a surplus of 400 million dozen eggs. At a price of $.40/dozen, the quantity supplied is 300 million dozen eggs and the quantity demanded is 700 million dozen eggs. Thus, there is a shortage of 400 million dozen eggs. Given a surplus, in most markets prices will quickly fall back toward the equilibrium price. Similarly, when a shortage of a good or service exists, prices quickly rise until the market returns to equilibrium. Surpluses and Shortages in the Egg Market S $.80 $.40 D Shortage or surplus 300 700 SUPPLY AND DEMAND SCORECARD Supply Demand Price Quantity