A schedule or curve that shows the various amounts of a product that consumers are willing and able to purchase at each of a series of possible prices during a specified period of time
A statement of a buyer’s plans, or intentions, with respect to the purchase of a product

Other-Things-Equal Assumption
As the Price (P) falls, the Quantity
Demanded (Q
D
) rises. (P ↓ Q
D
↑)
As the Price (P) rises, the Quantity
Demanded (Q
D
) falls. (P ↑ Q
D
↓)
Thus, there is an inverse (or negative) relationship between Price and Quantity
Demanded.

Common Sense
– People do buy more at low prices
– Sales!!!
Diminishing Marginal Utility
– Each additional unit of the product produces less satisfaction (or benefit, or utility)
Income Effect
– Lower prices increase the purchasing power of a buyer’s income
Substitution Effect
– Lower prices give buyers the incentive to substitute similar products

Individual
Demand
P Q d
$5 10
4 20
3 35
2 55
1 80
P
6
3
2
5
4
1
D
0
10 20 30 40 50 60 70 80
Quantity Demanded (bushels per week)
Q

Tastes
– Favorable change in consumer tastes (preferences) = More Demanded at each price
Number of Buyers
– Increase in number of buyers = Increase in Demand
Income
– Normal (Superior) Goods – Demand Varies Directly with Income
– Inferior Goods – Demand Varies Inversely with Income
Prices of Related Goods
– Substitutes: Used in place of another good
Example: Leather vs. Cloth Coats
– Complements: Used together with another good
Example: Computers & Software
– Unrelated Goods: Not related at all
Example: Potatoes & Automobiles
Consumer Expectations

Therefore, an Increase in Demand may be caused by:
– A favorable change in consumer tastes/preferences
– An increase in the number of buyers
– Rising incomes if the product is a normal good
– Falling incomes if the product is an inferior good
– An increase in the price of a substitute good
– A decrease in the price of a complimentary good
– A new consumer expectation that either prices or income will be higher in the future

Demand Can Increase or Decrease
P
6
Individual
Demand 5
Increase in Demand P Q d
$5 10
4
3
4 20
2 3 35
D
2
2
1
55
80
1
0
Decrease in Demand
D
1
D
3
2 4 6 8 10 12 14 16 18
Quantity Demanded (bushels per week)
Q

Not to be confused with Change in Demand
– A shift of the demand curve to the right (increase in demand) or to the left (decrease in demand)
– Cause: A change in one or more determinants of demand
Change in Quantity Demanded
– A movement from one point to another point – from one price/quantity combination to another – on a fixed demand schedule/curve
– Cause: An increase or decrease in the price of the product under consideration

Demand Can Increase or Decrease
An Increase in Demand
P
6
Means a Movement of the Line
Individual
5 Demand A Movement Between
Any Two Points on a
P Q d
$5
4
3
Demand Curve is
Called a Change in
Quantity
4
10
20 Demanded
3
2
1
35
55
80
2
D
2
1
0
Decrease in Demand
D
1
D
3
2 4 6 8 10 12 14 16 18
Quantity Demanded (bushels per week)
Q

A schedule or curve showing the various amounts of a product that producers are willing and able to make available for sale at each of a series of possible prices during a specific period

As the Price (P) falls, the Quantity Supplied (Q falls. (P ↓ Q s
↓) s
)
As the Price (P) rises, the Quantity Supplied (Q rises. (P ↑ Q s
↑) s
)
Thus, there is a direct (or positive) relationship between Price and Quantity Supplied.
Remember, the supplier is on the receiving end of the product’s price. Therefore, higher prices don’t pose the same obstacle on the supply side as they do on the demand side.

Individual
Supply
P Q s
$5 60
4
3
50
35
2
1
20
5
P
6
3
2
5
4
1
0
S
1
10 20 30 40 50 60 70
Quantity Supplied (bushels per week)
Q

Resource Prices
– Higher Resource Prices raise production costs & squeeze profits
– Lower Resource Prices reduce production costs & increase profits
Technology
– Improvements in technology enable firms to produce units of output with fewer resources
Taxes & Subsidies
– Businesses treat most taxes as costs.
– Increase in sales or property taxes will increase production costs
& reduce supply
– Subsidies are considered “taxes in reverse”
– Thus, lower production costs/increase in supply

Prices of other Goods
– Substitution in Production
– Example: Producing basketballs instead of soccer balls results in a decline in the supply of soccer balls
Producer Expectations
– Future Prices of Products
Number of Sellers in the Market
– Other things equal, the larger the number of suppliers, the greater the market supply
– As more firms enter the industry, the supply curve shifts to the right
– The smaller the number of suppliers, the less the market supply
– As more firms leave the industry, the supply curve shifts to the left

Supply Can Increase or Decrease
P
6
S
3 Individual
S
1
5 Supply
P Q s
$5 60
4
3
4 50
2 3 35
2
1
20
5
1
0
S
2
2 4 6 8 10 12 14
Quantity Supplied (bushels per week)
Q

Not to be confused with Change in Supply
– A change in the schedule & shift of the curve
– An increase in supply shifts curve to the right
– A decrease in supply shifts curve to the left
– Cause: A change in one or more of the determinants of supply
Change in Quantity Supplied
– A movement from one point to another on a fixed supply curve
– Cause: A change in the price of the specific product being considered

Supply Can Increase or Decrease
Individual
Supply
P Q s
$5 60
P
6
5
A Movement Between
Any Two Points on a
Supply Curve is Called a Change in Quantity
Supplied
4
S
3
S
1
3
4 50
2 3 35
2
1
20
5
1
0
S
2
An Increase in Supply
Means a Movement of the Line
2 4 6 8 10 12 14
Quantity Supplied (bushels per week)
Q

Equilibrium Price (P
E
– Market Clearing Price
)
– The price where the intentions of buyers & sellers match
– Q
D
= Q
S
Equilibrium Quantity
– The quantity demanded & supplied at the equilibrium price in a competitive market
Competition among buyers & sellers drives the price to equilibrium
Surplus: Excess Supply
Shortage: Excess Demand

Market
Demand
200 Buyers
P Q d
6
5
6,000 Bushel S
Surplus
$5 2,000 $4 Price Floor
4
4 4,000
Market
Supply
200 Sellers
P Q s
$5
4
12,000
10,000
3
2
7,000
11,000
1 16,000
2
3
$2 Price Ceiling
2
1
7,000
4,000
1,000
1
7,000 Bushel
Shortage
D
0
Bushels of Corn (thousands per week)

Price Ceilings
– The maximum legal price a seller may charge for a product or service
– Prices at or below the ceiling are legal
– Prices above are not
– Examples: Rent Controls
– Sometimes leads to black markets & political pressure to lower prices
Price Floors
– A minimum price fixed by the government
– A price at or above the floor are legal
– Prices below are not
– Distort resource allocation

Productive Efficiency
– The production of any particular good in the least costly way
Example: Have $100 worth of resources
Can produce a bushel of corn using either $5 or $3 of those resources, leaving either $95 or $97 remaining for alternative uses
Which is better?
Allocative Efficiency
– The particular mix of goods & services most highly valued by society (minimum cost production assumed)
– Society wants iPods instead of cassette tapes
– However, society also wants cell phones
– Competitive markets help assign allocative efficiency

In competitive markets, produces an assignment of resources that is “right” from an economic perspective
Demand reflects MB based on utility received
Supply reflects MC of producing good
Remember:
– MB>MC Expand Output
– MB<MC Reduce Output
– MB=MC Optimal Output

Changes in Demand
– Supply Constant, Demand Increases
Raises P
E and Q
E
See pg 57, Figure 3.7 a
– Supply Constant, Demand Decreases
Reduces P
E and Q
E
See pg 57, Figure 3.7b
Changes in Supply
– Demand Constant, Supply Increases
Reduces P
E
, Increases Q
E
See pg 57, Figure 3.7c
– Demand Constant, Supply Decreases
Increases P
E
, Reduces Q
E
See pg 57, Figure 3,7d

Complex Cases: (See pg. 57, Table 3.7)
– Supply ↑ Demand ↓ P
E
↓ Q
E
?
– Supply ↓ Demand ↑ P
E
↑ Q
E
?
– Supply ↑ Demand ↑ P
E
? Q
E
↑
– Supply ↓ Demand ↓ P
E
? Q
E
↓