•
Chapter 4:
Demand, supply
and prices
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Chapter Outcomes
Once you have studied this chapter you should be able to
• identify the most important determinants of the quantity demanded
•
show how demand can be expressed in words, numbers, graphs and
equations
•
explain the difference between demand and quantity demanded
•
differentiate between a movement along a demand curve and a shift
of a demand curve
•
explain the determinants of the quantity supplied
•
distinguish between a movement along a supply curve and a shift of
a supply curve
•
explain how the equilibrium price and quantity are determined
distinguish between the consumer surplus and the producer surplus
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Demand and supply:
An introductory overview
Figure 4-1 The interaction between households and firms
(Textbook page 60)
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Demand
• Demand – quantities of a good or service that
the potential buyers are willing and able to buy
• Market demand – the combined demand for
all the households in a particular market
Determinants of market demand
The price of the product
The prices of related products
The income of the consumers
The taste (or preference) of the consumers
The size of the household
The law of demand – other things equal (ceteris paribus),
the higher the price of a good, the lower the quantity
demanded
Four ways to express demand
and the law of demand
Like many economic concepts, demand
can
be
expressed
in
words,
schedules (or numbers), curves (or
graphs) and equations (or symbols)
Using words
• The quantity of a good demanded by an
individual (or household) in a particular
period depends on (or is a function of) the
price of the good, the price of related
goods, the income of the individual (or
household), taste and preference of the
individual, the number of people in the
household and any other possible
influence.
Using numbers: the demand
schedule
• Using graphs: the demand curve
• Using symbols: the demand equation
Demand
• Individual demand
Table 4-1 Anne Smith’s demand schedule for tomatoes
(Textbook page 63)
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Demand
Individual demand
Figure 4-2 Anne Smith’s weekly demand for tomatoes
(Textbook page 63)
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Demand
• Market demand
Table 4-2 Deriving the market demand schedule from individual
demand schedules (Textbook page 65)
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Demand
Market demand
Figure 4-3 The market demand curve (Textbook page 65)
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Demand
Market demand
Figure 4-3 The market demand curve continued
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Movement along the curve vs. shift of the
curve
• Movement along the curve (change in the
quantity demanded) relates to the slope of the
curve
Figure 4-4: A movement
along a demand curve
(Textbook page 66)
• Shift of the curve (a change in demand) relates
to the position or intercept of the curve
Figure 4-5: Two substitutes: butter and margarine (Textbook page 67)
Figure 4-6: Two complements: CD players and CDs (Textbook page 67)
• Summary:
Table 4-3: The market
demand curve: a
summary (Textbook
page 70)
Figure 4-7: A change in the quantity demanded versus a change in demand
(Textbook page 69)
Determinants which will cause the
demand curve to shift
• A change in the price of a related good
– Substitutes
– Complements
• A change in the income of consumers
• A change in consumers’ tastes or preferences
• A change in population
• Other influences on demand
- Change in expected future prices
- The distribution of income
Supply
• Supply – the quantities of a good or service that
producers plan to sell at each possible price during
a certain period
• They must be willing AND able to sell
Determinants of market supply
The price of the product
The price of alternative products
Prices of factors of production and other
inputs
Expected future prices
The state of technology
The law of supply – other things equal (ceteris paribus), the
higher the price of a good, the higher the quantity supplied
Various ways to express supply and the law of
supply:
• Using words
• Using numbers: the supply schedule
• Using graphs: the supply curve
• Using symbols: the supply equation
Movement along the curve and shifts of
the curve
• Movement along the supply curve
• Shift of the supply curve
• Possible
causes of
change in
supply:
Market equilibrium
• Equilibrium (quantity demanded = quantity
supplied)
• Excess demand (market shortage)
• Excess supply (market surplus)
Table 4-6: The demand and supply of tomatoes in a market on a particular day
(Textbook page 77)
Figure 4-11: Demand, supply and market equilibrium (Textbook page 77)
Consumer surplus and
producer surplus
• Consumer surplus
– the difference
between what
consumers pay and
the value that they
receive
Figure 4-12 : The consumer surplus
(Textbook page 78)
• Producer surplus – the difference between the
lowest price producers are willing to accept and
the price they actually receive
Figure 4-13: The producer surplus (Textbook page 79)
Consumer surplus and producer surplus
• Consumer surplus and producer surplus at market
equilibrium
Figure 4-14 Consumer surplus and producer surplus at market
equilibrium (Textbook page 79)
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Appendix 4-1: Algebraic analysis of demand
and supply
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Appendix 4-1: Algebraic analysis of demand and supply
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Important concepts
•
Demand
•
Income effect
•
Individual demand
•
Supply
•
Market demand
•
Individual supply
•
Complements
•
Market supply
•
Substitutes
•
Supply schedule
•
Law of demand
•
Supply curve
•
Demand schedule
•
Change in quantity supplied
•
Demand curve
•
Movement along supply curve
•
Change in quantity demanded
•
Change in supply
•
Movement along demand curve
•
Shift of supply curve
•
Change in demand
•
Equilibrium
•
Shift of demand curve
•
Excess demand (shortage)
•
Normal and inferior goods
•
Excess supply (surplus)
•
Relative prices
•
Consumer surplus
•
Substitution effect
•
Producer surplus
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