Supply and Demand
The model that illustrates how a
competitive markets works
Basic Concepts
• Quantity demanded-
the amount of a good or service
consumer are willing and able to buy at different prices.
• Demand Curve-
Shows the relationship between quantity
demanded and price.
• Quantity Supplied- The actual amount of a good or service
producers are willing to sell at some specific price.
• Supply Curvesupplied and price.
Shows the relationship between quantity
Key Concepts
• A shift of the demand or
supply curve is different
from a movement ALONG
the demand or supply
curve.
• A change in quantity
demanded or supplied is
due to a change in price.
• Depending on the price,
the quantity demanded or
quantity supplied will be
different.
Price
A shift of the demand curve..
Is not the same as a movement along
the demand curve
As Price Decreases
Quantity Demanded Increases
P1
P2
Q1
Q2
Quantity
Changes in Demand and Supply
• An increase in demand or supply is shown by a rightward shift
of the curve. While a decrease in demand or supply is shown
by a leftward shift of the curve.
• When either demand or supply increases (either curve shifts)
the price remains the same but quantity demanded or
supplied changes.
Decrease in demand
Q3
Increase in supply
Increase in demand Decrease in supply
Q1
Q2
Q3
Q1
Q2
Factors that Shift Factors that Shift
the Demand Curve the Supply Curve
• Five Principle Factors
• Five factors
1. Changes in the price of related
goods or services.
2. Changes in income.
3. Changes in taste.
4. Changes in expectations.
5. Changes in the number of
consumers.
1.
2.
3.
$
4.
5.
$
Demand
*NEGATIVE SLOPE*
#
Changes in input prices
Changes in technology
Changes in the number of
producers
Changes in the price of related
goods or services
Changes in expectations
Supply
*POSITIVE SLOPE*
#
Substitutes vs. Compliments
• There are substitute and complimentary
goods.
• Two goods are substitutes if a rise in the price
of one of the goods leads to an increase in the
demand for the other good.
• Two goods are compliments if a rise in the
price of one good leads to a decrease in the
demand for the other good or service.
Penut butter and Jelly
Normal Goods and Inferior Goods
• Income change
or
– Normal goods and Inferior
goods
•
•
•
When individuals have more
income they are normally more
likely to purchase a good at any
given price
The demand for Normal Goods
increases as income increases. (a
Rightward shift of the demand
curve)
Goods for which demand
decreased when income rises are
know as Inferior goods.
Normal Good
Taste and Preferences
• People have certain preferences and tastes that determine what they
want to consume.
• When taste change in favor of a good, more people want to buy it at any
given price, so the demand curve shifts to the right.
• In the other case when taste change against a good, fewer people want to
buy something at a given price, so the demand curve shifts to the left
Changes in Expectations and in
Number of Consumers
• Expectations of a future drop in price will lead to a decrease in
demand today. On the other hand, expectations of a future rise in
price are likely to cause an increase in demand today
• Expected changes in income can also lead to changes in demand
– If an individual expects his income to rise in the future, he will most likely
borrow money today and increase his demand for certain goods.
– If an individual expects his income to fall in the future, he will instead save
today and reduce your demand for goods.
• The change in Number of Consumers is quite simple.
– If the number of consumers of a certain good rises then the demand for
that good or service increases
– If the number of consumers of a certain good falls then the demand for
that good or service decreases
Factors that Shift the Supply Curve
• Five factors
1.
2.
3.
4.
5.
Changes in input prices
Changes in technology
Changes in the number of producers
Changes in the price of related goods or services
Changes in expectations $
Supply
*POSITIVE SLOPE*
#
$
S2
$
S1
S1
S2
#
•
•
•
•
•
•
SUPPLY DECREASES IF…
If the price to of an input to produce
a good raises
If the price of a substitute used to
produce a good raises
If the price of a compliment in
production decreases
If the price of an good supplied is
expected to raise in the future
If the number of producers falls
#
•
SUPPLY INCREASES IF…
•
If the price of an input to produce a
good decreases
If the price of a substitute in production
falls
If the price of a compliment in
production raises
If the technology used to produce a
good improves
If the price of a good supplied is
expected to fall in the future
If the number of produces rises
•
•
•
•
•
Supply and Demand at Equilibrium
Price
Equilibrium
Price
Supply
At equilibrium no individual is
better off doing something
different.
Equilibrium
The price at which
the quantity demanded
of a good equals the quantity
supplied of that good
Demand
Equilibrium
Quantity
Quantity
The quantity of that good bought and sold at Eprice
Question
Which of the following could most likely cause the leftward shift of an industry's supply curve?
A) One of the industry's firms discovers a new technology that aids in
Production.
B) The price of a necessary input declines for some firms in the industry.
C) Consumer purchasing power rises considerably.
D) Several of the industry's firms shut down operations
E) The government levies a new tax on consumers
Correct answer is: choice D
This answer is correct because after the industry’s firms shut down, supply will decrease
Which is represented by a leftward shift of the supply curve
Question
Which of the following would most likely shift the demand curve for a good to the right?
A)
B)
C)
D)
E)
The government grants a subsidy to producers of the product.
New technology makes production quicker and easier.
The wage rate for the producer’s manufactures increases.
The company selling the product cuts the price by 25%
Consumers expect the price of the good to raise soon.
Correct answer: Choice E
This is the correct answer because it’s the only choice that guaranties a shift of the
demand curve. All the other choices would cause a shift in the supply curve.
Question
In general, technological improvements and industrial innovation will cause
A)
B)
C)
D)
E)
The productivity of workers to decrease
The supply curve for the industry to shift
The demand curve for the industry to shift
A movement along the industry supply curve
A movement along the industry demand curve
Correct answer is: choice B
This is correct because a change in technology is one of the non price factors that
shift a firm’s supply curve.
Other Concepts
• The supply and demand curves are seen everywhere.
• It’s also a common concept that determines the optimal point
of where markets should produce a good. And also
inefficiencies within a market.
MSC
Price
Supply
Price
Consumer
Surplus
Supply
PMSC
POPT
O
PMKT
Producer
Surplus
Quantity
Efficiency of Markets
QOPT QMKT
Quantity
Negative Externalities
Videos and Links
• http://www.youtube.com/watch?v=XNtjkNFYBw
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