Chapter 3 Notes 3.1 Demand Quantity demanded is the amount of a good or service that customers want to purchase during some time period - It is a desired quantity; the amount they want to purchase given the price, competition, income, taste, and other variables. - It is a flow of purchases; expressed as X units per (day, week, month, etc.) - Important variables that influence demand 1. Product’s own price 2. Consumer’s income 3. Prices of other products 4. Consumers’ tastes 5. Population 6. Significant changes in weather Quantity Demanded and Price - “How will the quantity demanded of a product change as its own price changes?” - As the price goes up the quantity demanded decreases Demand Schedules and Demand Curves A demand schedule is a table showing the relationship between quantity demanded and the price of a product, other things being equal. A demand curve is the graphical representation of the relationship between quantity demanded and the price of a product, other things being equal. - Negative slope in the graph shows that quantity demanded increases as price falls Demand refers to the entire relationship between the quantity of a product that buyers want to purchase and the price of that product, other things being equal. This is not to be confused with quantity demanded. - Demand refers to the entire demand curve while quantity demanded refers to a particular point on the demand curve. An increase in annual household income increases the quantity demanded at each price. - A demand curve can be drawn with the assumption that everything except the product’s own price is being held constant. - A change in ANY of the variables (other than the price) that affect the quantity demanded will shift the demand curve - Demand curve shifting right means more quantity is desired at each price - Demand curve shifting left means less quantity is desired at each price Change in demand is a change in the quantity demanded at each price of the product, represented by a shift in the demand curve Change in quantity demanded is a change in the specific quantity of the good demanded, represented by movement along the curve either on the original demand curve or on a new one - A change in quantity demanded can result from a shift in the demand curve with the price constant, from a movement along a given demand curve due to a change in the price, or from a combination of the two. - A movement left on the demand curve means less quantity demanded in response to a higher possible price *an increase in demand causes the demand curve to shift right, hence quantity demanded is higher at each price. A simultaneous rise in price causes the movement to a left point on the new demand curve, hence quantity demanded falls. 3.2 Supply Quantity Supplied - The amount of a good or service that producers want to sell in a given time period - Quantity supplied is a flow (x per unit of time) - Quantity supplied is influenced by these key variables: 1. Product’s own price 2. Prices of inputs 3. Technology 4. Government taxes or subsidies 5. Prices of other products 6. Significant changes in weather 7. Number of suppliers - We study the variables one at a time because it is too hard to decipher what happens when all variables are dynamic Quantity Supplied and Price - A basic hypothesis is that the price and quantity supplied are related positively, other things being equal. So, the higher the price, the more producers will supply, and vice versa. - Founded on the basic assumption that firms are profit-maximizing Supply Schedules and Supply Curves A supply schedule is a table showing the relationship between quantity supplied and the price of a product, other things being equal A supply curve is the graphical representation of the relationship between quantity supplied and the price of a product, other things being equal Both the table and the graph show the quantities producers are willing to sell at various prices - The supply curve’s positive slope indicates that quantity supplied increases when price increases - Supply refers to the entire relationship between quantity supplied and the price of the product A single point on the supply curve refers to the quantity supplied at that price A change in any of the variables other than price will result in a shift of the supply curve A cost-saving innovation increases the quantity supplied at each price. Change in supply is when the whole supply curve shifts; that is, a change in the quantity supplied at every price Change in quantity supplied is the movement along a supply curve, either on the same one or a new one. - A change in quantity supplied can result from a change in supply with the price constant, a movement along a given supply curve because of a change in the price, or a combination of the two. 3.3 The Determination of Price The Concept of a Market Market is any situation in which buyers and sellers can negotiate the exchange of goods or services - Individual markets differ in the degree of competition among the buyers and sellers - Perfectly competitive markets are roughly when the market is large enough for there to be no major market price influence by any one individual Market Equilibrium Excess Demand is a situation in which, at the given price, quantity demanded exceeds quantity supplied Excess Supply is a situation in which, at the given price, quantity supplied exceeds quantity demanded The equilibrium price corresponds to the intersection of the supply and demand curves Equilibrium Price is the price at which quantity demanded equals quantity supplied. Also called the market-clearing price. Disequilibrium Price is a price as which quantity demanded does not equal quantity supplied Disequilibrium is a situation in a market in which there is excess demand or excess supply Changes in Market Equilibrium Comparative Statics is the derivation of predictions by analyzing the effect of a change in a single exogenous variable on the equilibrium Shifts in either demand or supply curves will generally lead to changes in equilibrium price and quantity Four possible curve shifts: 1. An increase in demand causes an increase in both the equilibrium price and the equilibrium quantity exchanged. 2. A decrease in demand causes a decrease in both the equilibrium price and the equilibrium quantity exchanged. 3. An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity exchanged. 4. A decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity exchanged. In each of these 4 examples, a change in some exogenous variable has caused one of the curves to shift, and then in response to that shift, there has been a movement along the other curve toward the new equilibrium point. A Numerical Example The hypothetical wholesale market for potatoes in Atlantic Canada in 2019: The price (p) is the dollar price per crate and the quantity is the number of crates (in thousands) The demand and supply curves are: QD = 100 - 3p QS = 20 + 2p - The many variables shifting the demand curve such as income, tastes, etc. are not explicitly shown in the demand equation but rather already represented in the constant term. To get the market equilibrium, we must find the intersection of QD and QS. By setting QD = QS we get: 100 - 3p = 20 + 2p p = 16 Therefore the equilibrium price is $16 per crate. To find equilibrium quantity, substitute p into equations QD or QS. Relative Prices Absolute price is the amount of money that must be spent to acquire one unit of a product. Also called money price. Relative price is the ratio of the money price of one product to the money price of another product; that is, a ratio of two absolute prices. - The supply and demand of specific products depends on their relative, not absolute, prices.
