Demand and Supply
Why do roses cost more on Valentine’s Day?
Why do TV ads cost more during the Super Bowl ($4.0
sec.) than during Nick at Nite reruns?
Why do hotel rooms in Sun Valley, Idaho cost
more in the winter than in the summer?
Why do surgeons earn more than butchers?
Why do pro basketball players earn more than pro hockey players?
“Econ, Econ”
Why do economics majors earn more than most other majors?
Why are some of you going to major in economics in college?
The answer to these and other economics questions boil down to the
workings of supply and demand – the subject of this chapter.
million for 30
Consumers “willingness to buy”
Price decreases; QD increases
P QD
$5 10
4 20
3 35
2 55
1 80
$5
D
$4
$3
$2
$1
0 10 20 35 55 80
Quantity Demanded
…a specified time period
…other things being equal
QD – how much will be purchased at a specific price [& date].
D
1. Income Effect
•
•
When things are expensive, money buys less
When things are cheap, money buys more
P1
P2
QD1 QD1
2. Substitution Effect
•
When apples are expensive and their
substitutes (pears) are relatively cheap,
I buy fewer apples and more pears
3. Diminishing Marginal Utility
•
•
Each additional unit of an item purchased gives less marginal utility
(happy points) than the previous unit. Therefore, the only way I will buy
more is if the price is lower.
Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The
reason I don’t buy a third taco is because the marginal utility of the
third taco is less than the price of the taco. But, if the price of the taco
is less than the marginal utility of the taco, then I will buy the third taco
D
iPhone
$399.00
Reasons For Downsloping “D” Curve
1. Income Effect –current buyers buy more.
2. Substitution Effect– new buyers now purchase.
3. Diminishing Marginal Utility - because buyers
of successive units receive less marginal utility,
they will buy more only when the price is lowered.
Change in QD
1. Price change
2. Movement
Price
QD
$250.00
[up/down the demand curve]
3. Point to point [along the curve]
Inverse
relationship
2
QD“whole
1 QDcurve”.
“D” refers to the
[“all prices”]
“QD” refers to a “point on the curve”
based on a “particular price.”
Picture of
Law of
Demand
Elasticity of D – the way price affects QD.
Elastic - QD that is very responsive to price.
Inelastic - a chg in price has little impact on QD.
Elastic (flexible) Demand
1. Substitutes (butter)
2. Luxury (mink coat)
3. Expensive (car)
4. Has durability (refrigerator)
5. Lasts a long time (gas-guzzling car)
Inelastic (inflexible) Demand
1. No substitutes (milk)
2. Necessity (insulin)
3. Inexpensive (safety pin)
4. No durability (pencil)
5. Lasts only a short time (bread)
Elastic
or
Inelastic
(Total Receipts Test)
$2
$1
Elastic
Inelastic
20
30
Total Receipts Test
20 x $2 = $40.00
30 x $1 = $30.00
40
50
Total Receipts Test
20 x $2 = $40
50 x $1 = $50
Quantity Demanded
vs. Demand
Quantity Demanded [QD] is triggered by a price chg.
The quantities of a good or service that people will
purchase at a specific price at a given time.
Demand [D] is triggered by “TIMER” [non-price].
A schedule of the total quantities of a good or service
that purchasers will buy at different prices at a
given time.
Demand is a bunch of QD’s strung together.
“Demand Shifters” [TIMER]
1. Taste [direct]
2. Income [normal-direct] [inferior-inverse]
3. Market Size [number of consumers-direct]
4. Expectations [of consumers about future *price-direct,
about future availability-inverse, or about future income–direct.
5. Related Good *Prices [substitutes-direct] [complements-inverse]
D
D1 D2
D3 D1
D2
P1
P
D2
P
P2
P
D1
Complement
[inverse]
QD1 QD2
Butter
Bread
Change in “D” [curve]
1. Non price change [“TIMER”]
2. Whole “D” curve shifts
QD3
[There is a change in “QD” but it is
not caused by a change in “price.”
QD1 QD2
[QD-”single price”; D-”all prices”]
Substitute
[Direct]
Bagels
“TIMER”
Tastes [direct]
Incomes
-Normal [direct] & Inferior[inverse]
Market Size(# of consumers) [direct]
Expectations of consumers about
[future price-direct; future
income [direct]; and availability [inverse]
Related Good Price Changes
[substitutes-direct; complements-inverse]
Helmets
Decrease in “QS”
Increase in “QS”
[caused by a “decrease in price”]
[caused by an “increase in price”]
S
P1
1. Price change
2. Movement
3. Point to point
P2
[“Snap
QS2
S
P2
P1
shot of 1 pt in time]
QS1 QS2
QS1
Change in “S” [RATNEST]
S1
P
“Increase in S”
S2
S2
1. Non-price
2. Whole curve
3. Shift
[“Time passes”]
S1
P
“Decrease in S”
What could cause an “increase in supply?”
4. Increase in number of producers
1. Decrease in resource cost [wages/raw materials]
5. Increase in technology
2. Decrease in the price of an alternative output for “X” 6. Increase in subsidies
3. Producer expectations of a price decrease
7. Decrease in taxes
Quantity Supplied vs. Supply
Quantity Supplied [QS] is triggered by a price change.
QS means quantity of a good/service that producers
are willing & able to supply on a given time.
Supply [S]: [triggered by “RATNEST”]
A schedule of the total quantities of a good or service
that producers will supply at different prices at a
given time. Supply is not an amount but a behavior.
Supply is a bunch of QS’s strung together.
Price can not cause a change in “S” [shift]
Price can only cause a change in “QS” [movement].
Consumers and Producers Feel
Differently About High & Low prices
Producers supply more at the higher price because
the opportunity cost increases if they don’t.
Consumers consume less at the higher price
because they now have less money to spend.
Producers supply less at the lower prices because
the opportunity cost decreases if they don’t.
Consumers consume more at the lower price
because they now have more money to spend.
I was going to buy a Honda
but this car is $4,000
cheaper.
I’m saving money
at the lower price.
I normally eat
one, but at this
low price, I’m
having two.
Price increases; QS increases
Price decreases; QS decreases
.
Direct
“S” refers to the “whole supply curve” and refers to what
producers will supply at “different prices”.
“QS” refers to a “point on the curve” and refers to what
producers will supply at a “particular price”.
S
More of you would
supply your labor
for $12 than if labor
were getting just $6
an hour.
Producers want the
highest price possible.
Change in “QS”
P2
1. Price change
2. Movement
(up/down “S” curve)
P1
3. Point to point
(along “S” curve)
QS1
QS2
Reasons For Upsloping “S” Curve
1. There is increasing opportunity cost if you don’t produce.
2. Current producers produce more [overtime/more shifts]
3. New producers are attracted to the market.
Elastic Supply – a small increase/decrease in price
causes significant change in QS. Elastic supply is very responsive
to price changes.
Elastic (Flexible) Supply
1. Can be made quickly
2. Little expense (few
capital resources required)
3. Unskilled workers
4. Long time
5. Don’t need scarce
natural resources
Examples: T-shirts, hats,
shot glasses, and posters
Inelastic (Inflexible) Supply
1. Cannot be made quickly
2. Great Expense (large capital
resources required)
3. Skilled workers
4. Short time
5. Scarcity of natural resources
Examples: Gold, diamonds,
and computers
Inelastic Supply - regardless of price, producers are
unwilling/unable to increase/decrease QS. (QS is inflexible
and unresponsive to price changes)
Elastic supply is very
responsive to price &
inelastic supply is
unresponsive to price.
Elastic supply results in
a more horizontal line &
inelastic supply results
in a more vertical line.
0
1000 2000 3000 400 5000
Quantity Supplied
Think of “responsiveness” as “flatness”.
Quantity Supplied
Supply Shifters [“RATNEST”]
•Resource Cost[wages & raw materials] [inverse]
•Alternative Output price changes [inverse]
•Technology [direct]
•Number of Suppliers [direct]
•Expectation(Suppliers) about future price [inverse]
• Subsidies [direct]
Taxes [inverse]
Decr in “S” of broccoli
Bigger supply of games
“Take this money.”
Up
down
Individual Supply Can Increase or Decrease
Change in Supply [“RATNEST”]
Individual
Supply
P
$5
Qs
60
4
50
3
35
2
20
1
5
1. Increase in resource cost
2. Alt. output price increase
3. Technological decrease
P
4.6Decrease in # of suppliers
5. Producer exp. of price increase
6. Decrease in subsidies
7.5Increase in taxes
Price (per bushel)
“S” is a whole bunch of
QS’s strung together.
S3
S1
S2
4
3
2
1
0
1. Decrease in resource cost
2. Alt. output price decrease
3. Technological change
2
4 4. Increase
6
10
12
14
in8# of suppliers
Quantity5.Supplied
(bushels
per week)
Producer exp.
of price decrease
6. Increase in subsidies
7. Decrease in taxes
Q
D
P
D1
[TIMER]
Q
D1
A
“D” for flag
after 9/11
D
Q
P
D1
S
B
S
P2
P1
P1
D2
Slide Rule
After introduction
of calculator
P2
After “Looking
For Nemo”
“Increase in Demand”
S
P
Q2 Q 1
Q1 Q2
Four Possibilities
Q
S
[RATNEST] D
D
C
S1
S1
Increase in $1.85
supply of gas
“Decrease in Demand”
P
D
S2
S1
$1.85
$1.00
Decrease in
“S” of gas
$1.00
“Increase in Supply”
Q
Q1 Q2
Q2 Q1
“Decrease in Suppy”
MARKET DEMAND & SUPPLY
Price of Corn
CORN
MARKET
P QD
$5 2,000
$4 4,000
$3 7,000
$2 11,000
$1 16,000
S
$5
P Q
Market
$5 12,000
S
Clearing
$4 10,000
Equilibrium
$3 7,000
$2 4,000
$1 1,000
4
$3
2
1
o
CORN
MARKET
D
2
4
6
78
10 12 14 16
Quantity of Corn
Q
“TIMER”[D] or “RATNEST”[S]
A Increase in income on the market for camcorders.
___1.
A Increase in # of consumers on market for computers.
___2.
D Producer expectations about a price increase.
___3.
___4.
A Consumer expectations about a price increase.
___5.
C Increase in # of producers on market for digital cameras.
___6.
D Increase in resource cost on the market for bagels.
___7.
A Increase in the price of Apple’s iPod Video on the
market for Microsoft’s Zune.
B Increase in the price of tea on the market for lemon.
___8.
___9.
D Increase in business taxes on the market for SUVs.
A Consumers expect a shortage of cell phones.
___10.
Effect of Changes in “D” or “S” on Price and Quantity
E2
E1
E1
E2
E2
E1
E2
E1
1. An increase in income if Microsoft’s Zune is a normal good would:
a. increase D, increase P, & increase Q.
c. increase S, increase P, & increase Q.
b. increase D, increase P, & decrease Q.
d. decrease D, increase P, & increase Q.
2. A decrease in the price of resources used to produce laptops will:
a. increase S, increase P, & increase Q.
c. decrease S, decrease P, & decrease Q.
3. Decrease in price of butter on the market
a. increase D, increase P, & decrease Q.
c. decrease D, increase P, & decrease Q.
b. increase D, increase P, & increase Q.
d. do none of the above
for the substitute margarine:
b. decrease D, decrease P, & increase Q.
d. do none of the above
4. An improvement in technology used to produce DVDs will:
a. decrease S, increase P, & decrease Q.
c. increase S, decrease P, & increase Q.
b. decrease S, increase P, & increase Q.
d. decrease D, decrease P, & decrease Q.
5. A decrease in the number of consumers for Fuzzy Wuzzies:
a. decrease S, decrease P, & decrease Q.
c. decrease D, decrease P, & decrease Q.
b. increase D, increase P, & increase Q.
d. decrease D, decrease P, & increase Q.
Effect of Changes in “D” or “S” on Price and Quantity
6. A decrease in taste for Fuzzy Wuzzies would:
a. increase D, increase P, & increase Q.
c. increase S, increase P, & increase Q.
b. decrease D, increase P, & decrease Q.
d. decrease D, decrease P, & decrease Q.
7. A reduction in the number of firms producing laptops:
a. increase S, increase P, & increase Q.
c. decrease S, increase P, & decrease Q.
b. increase D, increase P, & increase Q.
d. decrease S, decrease P, decrease Q.
8. An increase in the price of pancakes, a complement for syrup would:
a. increase D, increase P, & decrease Q.
c. decrease D, decrease P, & decrease Q.
b. decrease D, decrease P, & increase Q.
d. do none of the above
9. A decrease in income upon the market for spam would:
a. decrease S, increase P, & decrease Q.
c. increase D, decrease P, & increase Q.
b. decrease S, increase P, & increase Q.
d. increase D, increase P, & increase Q.
10. Consumer expectations that the price of PSP will increase by
50% in the future will:
a. decrease S, decrease P, & decrease Q.
c. decrease D, decrease P, & decrease Q.
b. increase D, increase P, & increase Q.
d. decrease D, decrease P, & increase Q.
[D – “TIMER”; QD
– price change of product (inverse)]
C Which of the following willcause an "Increase in Demand"
___1.
a. decrease in price of computers b. decrease in income
c. increase in income d. increase
A Which of the following willcause an "Increase in QD"
___2.
a. decrease in price of computers b. decrease in income c. increase
in
for computers?
in the in
price
of compu
ters
d. increase
price
of computers
for computers?
income d. increase
in
price of computers
C Which of the following willcause a "Decrease
___3.
in Demand"
for plasma TVs?
a. increase in price of plasma TVs b. decrease in price of plasma TVs c. decrease in # of consum
c. decrease in # ofers(marketsize)
consumers
A Which of the following willcause a "Decrease in QD"
for plasma TVs?
___4.
a. increase in
price of plasma TVs b. decrease in price of plasma TVs c. decrease in # of consumers (market size)
[S – “RATNEST”; QS
– price change of product (direct)]
C Which of the following willcause an "Increase in Supply"
for DVDs?
___5.
a.
b.
decrease in price of
DVDs
increase in price of DVDs
c. decrease in resource cost
d. expectations of price increase
B Which of the following willcause an "Increase in QS"
___6.
a. decrease in price of DVDs
b. increase in pric
e of DVDs
for DVDs?
c. decrease in resource price
d. expectations of price increase
D Which of the following willcause a "Decrease in Supply"
___7.
a. increase in price of DVDs
b. decrease in price of DVDs
for DVDs?
c. subsidies to suppliers of DVDs
d. expectations of price increase
B Which of the following willcause a "Decrease in QS"
___8.
a. increase in price of cameras
b. decrease in price of cameras
for digital cameras?
c. subsidies to suppliers of cameras
d. expectations of digital camera price increase