Unit 2
Law of Demand
• The law of demand states that as price decreases,
quantity demanded increases.
• An inverse relationship exists.
• The law of demand is dependent on ceteris paribus- all
other factors remaining unchanged.
A Change in Quantity Demanded
• A change in quantity demanded caused ONLY by a
change in the PRICE of the product. On a graph it is
represented by a movement ALONG a SINGLE demand
curve.
Changes in demand
• Sometimes, factors other than price affect people’s
desire to purchase a good or service.
• When something other than the price of a good affects
people’s willingness to buy, there is a CHANGE IN
DEMAND
Changes in Demand
Increase in Demand
Decrease in Demand
• Quantity Demanded increases
at every price
• Quantity Demanded decreases
at every price
• Entire curve moves right
• Entire curve moves left.
Determinants of Demand (Cause Shifts)
Changes in
Consumer
Tastes
Changes in
the price of
Complements
and
Substitutes
Change in the
# of Buyers
Determinants
Change in
consumer
expectations
Change in
Consumer
incomes
• These factors will cause a
CHANGE IN DEMAND
• QUANTITY DEMANDED
will change (increase or
decrease) at every
possible price
• The curve will shift to the
left or right
Determinants of Demand
Changes in Customer tastes
• If an item is currently “popular” demand
will increase
• Celebrity endorsements can also effect
demand
Determinants of Demand
Changes in Consumer Income
• An increase in income shifts the demand curve of normal goods to the right.
Inferior goods to the left.
• A decrease in income shifts the demand curve for normal goods to the left.
Inferior goods to the right.
Inferior goods
Determinants of Demand
Prices of related goods
• Complements - an increase in the price of a complement reduces demand,
shifting the demand curve to the left.
• Substitutes - an increase in the price of a substitute product increases demand,
shifting the demand curve to the right.
Determinants of Demand
Number of potential buyers
• an increase in population or market size shifts the demand curve to the right.
Determinants of Demand
Changes in Consumer Expectations (of a price change)
• a news report predicting higher prices in the future can increase the current
demand as customers increase the quantity they purchase in anticipation of the
price change.
Law of Supply
• The law of Supply states that as price decreases,
quantity supplied decreases.
• A DIRECT relationship exists.
• The law of supply is also dependent on ceteris paribusall other factors remaining unchanged.
Supply Schedule and Curve
• Direct relationship between price and quantity
• Curve ALWAYS has a positive slope
A Change in Quantity Supplied
• A change in quantity Supplied is caused ONLY by a
change in the PRICE of the product. On a graph it is
represented by a movement ALONG a SINGLE Supply
curve.
Changes in Supply
• Sometimes, factors other than price affect a businesses
desire to produce a good or service.
• When something other than the price of a good affects
businesses willingness to produce, there is a CHANGE
IN SUPPLY
Changes in Supply
Increase in Supply
Decrease in Supply
• Quantity Supplied increases at
every price
• Quantity Supplied decreases at
every price
• Suppliers will offer goods at
lower price
• Suppliers will offer goods at
higher prices
• Entire curve moves right
• Entire curve moves left.
Determinants of Supply (Cause Shifts)
Changes in
Technology
Change in
Supplier
expectations
Determinants
Change in
input costs
Change in
the # of
Sellers
• These factors will cause a
CHANGE IN SUPPLY
• QUANTITY SUPPLIED
will change (increase or
decrease) at every
possible price
• The curve will shift to the
left or right
Determinants of Supply
Prices of inputs
• If the price of resources used to make goods increases, sellers will be less inclined
to make the same quantity at a given price, and the supply curve will shift left
• Inputs include
• Raw materials
• Cost of labor
• Rent
Government can Influence
•Subsidies (payments made for production)
• Increases supply
•Regulation (increase cost of production)
• Decrease supply
•Taxes
• Increase = suppliers produce less
• Decrease = suppliers produce more
Determinants of Supply
Technology
• If technology increases efficiency, it will cost producers less to make an item, and they
will provide more
• (shift right)
Determinants of Supply
Number of Sellers
• More sellers = More supply (shift right)
• Less sellers = Less supply (shift left)
Determinants of Supply
Producer Expectations
• If sellers expect prices to increase they will decrease supply now so that they can
increase supply after prices change.
• (shift left)
• For example, if farmers expect the future of the price of corn to decline, they will
increase their present supply of corn, in the hopes of making more money now.
Section 3
Equilibrium
• Equilibrium price refers to the price that makes the quantity demanded
equal to the quantity supplied.
•
Equilibrium in a market occurs when the price balances the plans of buyers and
sellers. It sets the value of the product.
•
On a supply and demand curve, equilibrium price is represented by the point where
the demand and supply curves intersect.
equilibrium
price
equilibrium
equilibrium
quantity
Surplus
• A surplus is a situation where there is an excess at some price of quantity
supplied over quantity demanded.
• On a supply and demand curve a surplus is represented by points above
the equilibrium price.
• When a surplus exists buyers have an oversupply of product to choose
from and will probably pay less for goods and services.
• For sellers, they will be forced to lower prices, but will sell more.
Shortage
• A shortage is a situation where there is an excess at some price of
quantity demanded over quantity supplied.
• On a supply and demand curve a shortage is represented by points below
the equilibrium price.
• When a shortage exists buyers are competing with one another for
limited quantities of goods.
• For sellers, it is an opportunity to raise prices and increase sales.
Price Floor
A price floor set above the market
equilibrium price
Consumers find they must now
pay a higher price for the same
product.
• As a result, they reduce their
purchases or drop out of the market
entirely.
Suppliers find they are
guaranteed a new, higher price
than they were charging before.
• As a result, they increase production.
Example
Minimum Wage
•Sets lowest wage that can be paid for an
hour of work.
•Allows people to maintain a standard of
living, but creates a surplus of workers
(unemployment) if set too high
Price Ceiling
A price ceiling is a
government-imposed limit on
the price charged for a
product.
Governments intend price
ceilings to protect consumers
from conditions that could
make necessary commodities
unattainable.
• However, a price ceiling can
cause problems if imposed for
a long period without
controlled rationing.
Example
Rent Control
• When soldiers returned from World War II and started
families (which increased demand for apartments), but
stopped receiving military pay, many could not deal
with the jumping rent.
• The government put in price controls, so soldiers and
their families could pay the rent and keep their homes.
• This increased the quantity demanded for apartments
and lowered the quantity supplied, meaning that
available apartments were rapidly taken until none left
were for late-comers.
Shifts
• When there is a change in Supply or
Demand, equilibrium price and
equilibrium quantity are affected.
Shifts in Demand and Supply
Simultaneous Shifts of Supply and
Demand
•
When demand increases and supply decreases the
equilibrium price definitely increases, but quantity is
ambiguous
Simultaneous Shifts of Supply and
Demand
•
When demand decreases and supply increases the
equilibrium price definitely decreases, but quantity
is ambiguous
Simultaneous Shifts of Supply and
Demand
•
When demand and supply increase, the change in
equilibrium price is ambiguous, but equilibrium quantity
definitely increases
Simultaneous Shifts of Supply and
Demand
•
When demand and supply decrease, the change in
equilibrium price is ambiguous, but equilibrium
quantity definitely decreases