Bellwork
• A woman shoots her husband. Then she
holds him underwater for over 5 minutes.
Finally, she hangs him. But 5 minutes later
they both go out together and enjoy a
wonderful dinner together. How can this
be?
• TIH-1835-Mark Twain was born
Supply and Demand
Markets
• What is a market?
– A market is anytime a seller and buyer interact.
– It refers to both physical markets and the aggregate of
all products bought in sold in a region.
• Physical Markets- grocery stores, flea markets, shopping
malls
• In economics, however, “market” refers to all buyers and
sellers of a particular good or service, the aggregate.
• Supply and Demand Focuses on Markets
– Markets predict the price and quantity purchased
The Law of Demand
• Holding all other things equal, when the price
of a good rises, consumers decrease their
quantity demanded for that good.
– The economy is constantly changing, so in order to
identify the effect of a change we must “hold all
other things equal”. (Think of a science
experiment where you have a control group and
an independent variable.)
– If all else is held equal; as the price (P) increases
the quantity demanded (Qd) will decrease.
Quantity Demanded vs. Demand
• “Demand” refers to the aggregate of ALL
consumers purchasing preferences. Also
known as the “Demand Curve”
• “Quantity Demanded” refers to the amount
that will be purchased at a particular price. A
SINGLE POINT ALONG THE DEMAND CURVE.
What changes Quantity Demanded?
• Price As price goes up and down the
quantity demanded of a goes down or up
(inversely proportional)
• If price chances then we see a change in
Quantity Demanded.
Demand Schedule
• A “Demand Schedule” is a table that lists the
quantity of goods or services that consumers
will buy at certain prices.
• Demand schedules are the basis of the
“Demand Curve”
Price of Coffee
Quantity Demanded (daily)
$1
120
$2
100
$3
80
$4
60
$5
40
Demand Curve
Market for Coffee
P
r
i
c
e
D
Quantity
What we learn from the Demand
Curve and Demand Schedule
• Consumers will buy more when the price is
low.
• Consumers will buy less when the price is
high.
• There is an inverse relationship between price
and quantity.
Non-Price Determinants of Demand
INCREASE IN DEMAND
DECREASE IN DEMAND
Market for Coffee
P
r
i
c
e
Market for Coffee
D2
D1
P
r
i
c
e
D1
D2
Quantity
Quantity
• If there is a change in the market (not price) then
there is a SHIFT IN THE DEMAND CURVE.
Non-Price Determinants of Demand
• Consumer Income
– Normal vs. Inferior Goods
• Price of a substitute good
– Price of X falls, Demand for Y falls (because people buy X)
• Price of a complementary good
– Price of X falls Demand for Y increases, (because they go
together)
• Taste and Preferences
• Consumer Expectations about future prices
• Number of buyers in the market.
Determinants of Demand
Simulation
(not included)
Day 2
Law of Supply
• Holding all other things equal, when the price
of a good rises, suppliers increase their
quantity supplied for that good.
– The economy is constantly changing, so in order to
identify the effect of a change we must “hold all
other things equal”. (Think of a science
experiment where you have a control group and
an independent variable.)
– If all else is held equal; as the price (P) increases
the quantity supplied (Qs) will increase.
Quantity Supplied vs. Supply
• “Supply” refers to the aggregate of ALL
producers will offer at a certain pirce. Also
known as the “Supply Curve”
• “Quantity Supplied” refers to the amount that
will be offered at a particular price. A SINGLE
POINT ALONG THE SUPPLY CURVE.
What changes Quantity Supplied?
• Price As price goes up and down the
quantity demanded of a goes up or down.
(directly proportional)
• If price chances then we see a change in
Quantity Supplied.
Supply Schedule
• A “Supply Schedule” is a table that lists the
quantity of goods or services that producers
will offer at certain prices.
• Supply schedules are the basis of the “Supply
Curve”
Price of Coffee
Quantity Supplied (daily)
$1
40
$2
60
$3
80
$4
100
$5
120
Supply Curve
Market for Coffee
S
P
r
i
c
e
Quantity
What we learn from the Supply Curve
and Supply Schedule
• Producers will offer more when the price is
high.
• Producers will offer less when the price is low.
• There is a direct relationship between price
and quantity.
Non-Price Determinants of Demand
INCREASE IN SUPPLY
DECREASE IN SUPPLY
Market for Coffee
Market for Coffee S2
S1
S1
S2
P
r
i
c
e
P
r
i
c
e
Quantity
Quantity
• If there is a change in the market (not price) then
there is a SHIFT IN THE SUPPLY CURVE.
Determinants of Supply
•
•
•
•
•
•
Cost of an Input
Technology or Productivity
Taxes or Subsidies
Price Expectations
# of Suppliers
Price of Other Outputs
– If a similar good is more expensive then the
modes of production will switch to that resource
lowering supply
Interaction of Supply and Demand
Market for Coffee
S
To make a
Supply and
Demand Graph
simply draw a
demand curve
on top of a
supply curve.
P
r
i
c
e
D
Quantity
Results of an Increase in Demand
Market for Coffee
As Demand
increases the
Demand Curve
shifts to the
right.
S
P P2
r 1
i P
c
e
D2
D1
Q1 Q2
Quantity
This results in
an increase in
Price (P)
and an
increase in
Quantity (Q)
Reasons for an Increase in Demand
•
•
•
•
•
•
•
Rise in consumer income (normal goods)
Fall in consumer income (inferior goods)
Fall in the Price of complementary goods
Rise in the price of substitute goods
A positive change in taste and preferences
An increase in the number of buyers
Expectation that prices will rise in the future.
Results of a Decrease in Demand
Market for Coffee
S
P
r 1
i P
c P2
e
D1
D2
Q2 Q1
Quantity
As Demand
decreases the
Demand Curve
shifts to the
left.
This results in
a decrease in
Price (P)
and a decrease
in Quantity
(Q)
Reasons for a Decrease in Demand
•
•
•
•
•
•
•
Fall in consumer income (normal goods).
Rise in consumer income (inferior goods).
Rise in the Price of complementary goods.
Fall in the price of substitute goods.
A negative change in taste and preferences.
An decrease in the number of buyers.
Expectation that prices will fall in the future.
Results of an Increase in Supply
Market for Coffee
S1
S2
P
r 1
i P
c P2
e
D
Q1
Q2
Quantity
As Supply
increases the
Supply Curve
shifts to the
right.
This results in
a decrease in
Price (P)
and an
increase in
Quantity (Q)
Reasons for an Increase in Supply
• Rise in the number of sellers.
• Expectations that the price will rise in the
future.
• The cost of inputs falls.
• The price of similar outputs falls.
• A decrease in taxes.
• An increase in subsidies.
• New Technology
Results of a Decrease in Supply
Market for Coffee
S2
S1
P P2
r 1
i P
c
e
D
Q2
Q1
Quantity
As Supply
decreases the
Supply Curve
shifts to the
left.
This results in
an increase in
Price (P)
and a decrease
in Quantity
(Q)
Reasons for a Decrease in Supply
• Fall in the number of sellers.
• Expectations that the price will fall in the
future.
• The cost of inputs rises.
• The price of similar outputs rises.
• An increase in taxes.
• A decrease in subsidies.
Day 3
Results of a Decrease in Both
Supply and Demand
Market for Coffee
P
r
i
c
e
S2
S1
A decrease in
supply and
demand shifts
both curves to
the left
This results in:
no change in
Price and a
decrease in
Quantity (Q)
P
D1
D2
Q2
Q1
Quantity
Results of an Increase in Both
Supply and Demand
Market for Coffee
S1
S2
P
r
i
c
e
P
D2
D1
Q1
Quantity
Q2
An increase in
supply and
demand shifts
both curves to
the right.
This results in:
no change in
Price and an
increase in
Quantity (Q)
Results of an Increase in Supply
and a Decrease in Demand
Market for Coffee
S1
S2
P
r
i
c
e
P1
P2
D1
D2
Q
Quantity
An increase in
supply shifts
the supply
curve to the
right. And a
decrease in
Demand shifts
the Demand
curve to the
left.
This results in:
no change in
Quantity and a
decrease in
Price (P)
Results of a Decrease in Supply
and an Increase in Demand
Market for Coffee
S2
S1
P2
P
r
i
c
e
P1
D2
D1
Q
Quantity
A decrease in
supply shifts
the supply
curve to the
left. And an
increase in
Demand shifts
the Demand
curve to the
right.
This results in:
no change in
Quantity and
an increase in
Price (P)
Shortages, Surpluses and Equilibriums
• The study of economics claims that in a free market the
price and quantity sold will be the at the intersection of
Supply and Demand (QD=QS). In this case both consumers
and producers are satisfied.
– This is known as Equilibrium.
• If the price is set too low then the quantity demanded will
exceed the quantity supplied (QD>QS). Not everyone who
wanted to buy the product is able to.
– This is known as a Shortage.
• If the price is set too high then the quantity supplied will
exceed the quantity demanded (QS>QD). The producers will
be left with unsold product and this will lead to waste.
– This is known as a Surplus.
Market Equilibrium
Market for Coffee
S
Equilibrium
point: The price
and quantity at
which supply
equals demand;
and all goods are
sold.
P
r
i
c
e
D
Quantity
Market Surplus
Market for Coffee
S
P
P
r
i
c
e
Size of Surplus
D
QD
Quantity
QS
Surplus: The
price is too high
and the
consumers will
not purchase it.
The result is that
there is left over
product, not
sold. The amount
purchased is QD
Market Shortage
Market for Coffee
S
P
P
r
i
c
e
Size of Shortage
QS
Quantity
D
QD
Shortage: The
price is too low
and the
producers cannot
offer enough
product to satisfy
demand. The
amount sold will
be Qs.
Market Adjustments
• If the market is in a Surplus then:
– Sellers will lose money because they are not selling all
that they make (inefficiency) and the price will be
driven lower to the equilibrium point.
• If the market is in a Shortage then:
– Sellers will lose money because they cannot supply
enough to sell and the price will rise up to the
equilibrium point.
• This does not always happen on the sellers side, but will
always occur in the secondary market. (Scalped Tickets for
Concerts)