The Economics
Department, UMR
Presents:
Supply and Demand:
Price and Quantity
Determination in
Competitive Markets
Starring

Demand

Supply
Equilibrium and
Disequilibrium

Featuring
The
Law of Demand
D = D(PENTE)
The Tendency of Supply
S = S(PENT)
Equilibrium/Disequilibrium
In Three Parts
Demand
Supply
Equilibrium/Disequilibrium
Part 1
What is Demand?
It
is the relationship between
quantity demanded and
price, c.p., within a specific
period
Or, it is the relationship
between the maximum
willingness to pay in return
for something of value
Individual vs.
Market Demand
Market
demand is the
horizontal sum of individual
demands
It is market demand that
commands our interest
But Start with Individual
Demand
Consider
your demand for
peanuts per semester (This is
called “Quantity Demanded,
qd”)
We will first look at this
information in a table called a
“Demand Schedule”
Your Demand Schedule
Demand Schedule - a table showing the relationship
between the price of a good and the quantity demanded
per period of time, ceteris paribus. Peanuts are
measured in pounds.
Price of Peanuts ($) Quantity Demanded
per semester
Your Demand Schedule
P ($)
qd
$2.00
5
Your Demand Schedule
P ($)
qd
$2.00
5
$1.50
7
Your Demand Schedule
P ($)
qd
$2.00
5
$1.50
7
$1.00
10
15
Law of Demand
The
price (willingness to pay) of
a product, service, or activity is
inversely related to the quantity
demanded, ceteris paribus.
Applies to Market Demand (but
notice your demand for peanuts
obeyed the law)
Demand Schedules and
Curves
Demand
Curve - a graph of
the demand schedule showing
the relationship between the
price of a good and the
quantity demanded per
period of time, ceteris paribus.
Individual Demand Curve
P($)
Note: ALWAYS label your axes!
qd per semester
Individual Demand Curve
P($)
2.00
1.50
1.00
0.50
0
5
10
15
qd per semester
Individual Demand Curve
P($)
2.00
A
1.50
1.00
0.50
0
5
10
15
qd per semester
Individual Demand Curve
P($)
A
2.00
B
1.50
1.00
0.50
0
5
7
10
15
qd per semester
Individual Demand Curve
P($)
2.00
A
B
1.50
C
1.00
0.50
0
5
7
10
15
qd per semester
Individual Demand Curve
P($)
2.00
A
B
1.50
C
1.00
d
0.50
0
qd per semester
5
7
10
1
5
Market Demand Curve
The
demand curve we just
drew was the Demand for
Peanuts by one person.
We want an aggregate
measure of the price,
quantity demanded
relationship--a market
demand
Two Views of Demand
WTP
- Maximum
willingness to pay for a
given unit of a good
(marginal WTP) or for a
number of units of a good
The Law of Demand - P, Qd
relationship
WTP and the Law of
Demand
The max. WTP for the 23rd
unit is $1.50. The quantity
demanded at $2.00 is 15
units per period
P
$2.00
$1.50
D
15
23
Qd/t
Market Demand Schedule
Market
Demand Schedule - a
table showing the relationship
between the price of a good
and the total quantity
demanded by all consumers
in the market per period of
time, ceteris paribus.
Market Demand Schedule
Market
Demand is obtained
by summing horizontally the
quantity demanded by each
person at each price
Market Demand Schedule
5
Mary’s
qd
3
10
2
15
1
P($)
Market Demand Schedule
P($)
5
Mary’s John’s
qd
qd
3
12
10
2
8
15
1
3
Market Demand Schedule
P($)
5
Mary’s John’s
qd
qd
3
12
Ling’s
qd
7
10
2
8
5
15
1
3
4
Market Demand Schedule
P($)
5
Mary’s John’s
qd
qd
3
12
Ling’s Market
qd
Qd
7
22
10
2
8
5
15
15
1
3
4
8
Demand Curve
P
Note: the linear demand
is used for convenience
$15
$10
$5
D
8
15
22
Qd/t
Change in D vs. Change in
Qd
 Change
in Demand - a change in a factor
that effects demand other than the price of
the good, thus there is a change in quantity
demanded at EVERY price.
 Change in Quantity Demanded - a
movement along a given demand curvedue only to a change in the price of the
good itself
Change in Demand
Increase
in demand - demand
curve shifts to the right (or up an increase in WTP)
Decrease in demand - demand
curve shifts to the left (or down
- a decrease in WTP)
Increase in Demand
P
D
D’
Qd/t
Increase in Qd
P($)
A
B
D
Qd/t
Behind the Demand Curve
A demand
curve is drawn under
the assumption of ceteris paribus all other important factors
remaining unchanged
Factors to be considered may be
remembered by D = D(PINTE)
Factors affecting market
demand, PINTE
P
= Prices
I = income
N = number of buyers
T = tastes or preferences
E = expectations about
future prices and market
conditions
Price of Other Goods
The
price of substitutes
The price of complements
Price of Substitutes
What
would happen to the
demand for Peanuts if the price
of pretzels fell?
 The
demand for Peanuts would probably
fall since people would buy pretzels instead.
There
is a positive relationship
between the demand for a good
and the price of its substitutes
Price of Substitutes
Thus
an increase in the price
of a substitute will increase
the demand for the good
And a decrease in the price
of a substitute will decrease
the demand for the good
Price of Complements
Complementary
goods are
goods used together
What if the price of beer
goes up? What ought to
happen to the demand for
Peanuts?
 It
ought to go down, since people want
beer to drink with Peanuts. If the price of
beer rises, the demand for Peanuts will fall.
Price of Complements
Thus
an increase in the price
of a complement will decrease
the demand for the good
And a decrease in the price of
a complement will increase
the demand for the good
Price of Other Goods Summary
Thus,
either of the following
will increase Demand
•
•
Price of a substitute good increases
Price of a complement good decreases
And
either of the following
will decrease Demand
•
•
Price of a substitute good decreases
Price of a complement good increases
Income
For most goods there is a
positive relationship between
income and demand. These are
defined as normal goods.

For
inferior goods, there is an
inverse relationship between
income and demand.
Normal and Inferior Goods
Are
Peanuts a normal good?
Are they for you? If they
are, upon graduation and a
higher salary you would buy
more peanuts.
The question is empirical how do people react?
Normal and Inferior Goods
What
about Spam? Is the
relationship between income
and demand positive or
negative, c.p.?
Cheaper food products are
examples of inferior goods
Number of Buyers
A
positive relationship - the greater
the number of buyers, the larger the
total quantity demanded of the good
at a given price. Demand increases,
or the demand curve shifts to the
right.
Likewise, if there are fewer buyers in
the market there is less quantity
demanded at every price, so demand
has decreased.
Tastes and Preferences
If
we find out Peanuts improves
our attractiveness to others, our
willingness to pay for Peanuts
would increase (an upward shift
of the demand curve)
If we find out Peanuts are
unhealthy the demand for the
good decreases (a leftward shift
of the curve)
Expectations
If
we were to hear a new
story about how Peanut
prices were going to go up
would you stock up?
If you expect your employer
to begin downsizing would
you reduce your demand for
goods now?
Demand Reminders
 Demand
curves downward and to the
right.
 Changes in only the price of a good
cause changes in the quantity
demanded.
 The only demand factor that cannot
cause a change in the demand of a good
is a change in its own price.
PINTE factors may alone or jointly
change the demand for a good.
The End
Continue to:
Supply