SUPPLY & DEMAND

Economics
DEMAND

The desire, ability,

and willingness to
buy a product or
service
 Demand Curve for
Price smartphone
smartphone
D
A
$500
B
$450
C
400
E
350
F
300
G
250
H
200
D
0 45 50 55 60 65 70 75
Quantity Demanded
in Billions of smartphone per Year
Law of Demand
P= Price QD= Quantity
Demanded

P QD
P QD 
 The Law of Demand
Graph
Price

Quantity Demanded
 Change in Quantity
Demanded versus Change in
Demand

Change in Quantity Demanded

 Movement along the demand curve.
 Caused by a change in the price of
the product.
 Changes in Quantity
Price of
Demanded
smartphon
e A tax that raises the
price of smartphone
B results in a
$450
movement along the
demand curve.

$250 A

D1
0 12 70 Number of
smartphone
 Change in Quantity
Demanded versus Change in
Demand

Change in Demand
 A shift in the demand curve, either
to the left or right.
 Caused by a change in a determinant
other than the price.
Q: What causes a shift in Demand?
A: Non-price determinants
Price

Decrease Increase in
in demand demand

Quantity Demanded
Non-Price Determinants of
Demand
1) Buyer’s Income
2) Price of Substitutes
3) Market Size
4) Consumer Tastes
5) Consumer Expectations
6) Complement Goods
1) Buyer’s Income

Income  Demand
Income  Demand
Examples:
- Minimum wage increases

- Economic Recession

- The Great Depression

 Consumer Income
Normal Good
Price
$3.0 An
0
2.5 increase
0 Increase in
2.0 in demand income...
0
1.5
0
1.0
0
0.5
0
D2
D1
Quantit
0 1 2 3 4 5 6 7 8 9 1 1 1
0 1 2 y
 Consumer Income
Inferior Good
Price
$3.0
0
2.5 An
0
2.0
increase
0 Decrease
in
1.5 in demand income...
0
1.0
0
0.5
0
D2 D1
Quantity
0 1 2 3 4 5 6 7 8 9 1 1 1
0 1 2
 2) Price of Substitute
Goods

Goods or services that can

be used instead of other
goods or services,
causing a change in
demand.
3) Market Size

Market Size  Demand 

Market Size  Demand 

Examples:
 Immigration

 Increase/decrease in population
4) Consumer Tastes
The popularity of a good or service has a
strong effect on the demand for it, and in
the marketplace, popularity can change
quickly.
5) Consumer
Expectations
What you expect prices to do in
the future
can influence your buying habits
today.
Examples:
 Land
 Homes
 Gold
6) Complement Goods
When the use of one product increases
the use of another product.
Change in Quantity Demanded
versus Change in Demand
Variables that A Change in
Affect Quantity
Demanded This Variable . . .
Price Represents a movement
along the demand curve
Income Shifts the demand curve
Prices of related Shifts the demand curve
goods
Tastes Shifts the demand curve
Expectations Shifts the demand curve
Number of Shifts the demand curve
buyers
 Supply
The desire, ability, and willingness to
offer products for sale
*Anyone who offers an economic product for
sale is a supplier

*When you work at your job, you are offering

your services for sale. Your economic
product is labor. You would probably supply
more for a higher wage.
Law of Supply
P= Price QS= Quantity Supplied

P QS 
P QS 
 The Law of Supply Graph
Price

Quantity Supplied
Q: What causes a change in quantity
supplied?
A: Price
Price
S
C
$3.0 A rise in the price
0 results in a
movement along
the supply curve.

A
1.00

Quantit
0 1 5
y
 Change in Q: What causes a shift in supply?
A: Non Price Determinants of Supply
Supply
Price
S3 S1
S2
Decrease
in Supply

Increase
in Supply

Quantit
0
y
Non-Price Determinants of
Supply
1) Number of Products
2) Input Costs
3) Labor Productivity
4) Technology
5) Government Action
6) # of sellers
7) Producer Expectations
 1) Number of Products

A successful new product or service always brings out

competitors who initially raise overall supply.
2) Input Costs
 Input costs, the collective price of
resources that go into producing a good or
service, affect supply directly
 Examples
 Minimum Wage increases
 Cost of cotton increases, supply of t-shirts
decreases
3) Labor Productivity

Better trained or more-skilled workers are

usually more productive. Increased
productivity decreases costs and increases
supply.
 4) Technology

By applying scientific advances to the production

process, producers have learned to generate their
goods or services more efficiently.
5) Government Action
Government actions, such as taxes or subsidies, can
have a positive or negative effect on production costs.
6) # of Sellers

# of sellers increases, supply increases

# of sellers decreases, supply decreases
Examples:
 McDonald’s Plans to Open 1,000 new

stores
 All Circuit City stores in America went out

of business
7) Producer Expectations

The amount of a product that producers are

willing and able to supply may be
influenced by whether they believe prices
will go up or down.
Change in Quantity Supplied
versus Change in Supply

Variables that
Affect Quantity Supplied A Change in This Variable . . .
Price Represents a movement along
the supply curve
Input prices Shifts the supply curve
Technology Shifts the supply curve
Expectations Shifts the supply curve
Number of sellers Shifts the supply curve
Market Equilibrium

Situation in which prices are relatively stable

and the quantity of goods or services
supplied is equal to the quantity demanded.

QS = QD
Equilibrium Price – the price that “clears the
market.” No Shortage or Surplus.
 Market Equilibrium
D S
Price smartphone

A a
$500

450

400
E
Equilibrium Price
350

Equilibrium Quantity
300
g G
250
D
200
S
0 30 40 50 60 70 80 90
Quantity
in Billions of smartphone per Year

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Surplus
Situation in which the quantity supplied is
greater than the quantity demanded at a
given price.

QS > QD
P 
Note: If there is a surplus, prices generally fall
 Market Equilibrium
At $500 there is a surplus
D S
A
Price smartphone
a
$500

450

400
E
Equilibrium Price
350

Equilibrium Quantity
300
g G
250
D
200
S
0 30 40 50 60 70 80 90
Quantity
in Billions of smartphone per Year

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.

Shortage
The situation in which the quantity
demanded is greater than the quantity
supplied.

QD > QS
P
Note: If there is a shortage, prices generally
rise
 Market Equilibrium
A price of $250 causes a shortage
D S
Price smartphone

A a
$500

450

400
E
Equilibrium Price
350

300
g G
250
D
200
S Equilibrium Quantity
0 30 40 50 60 70 80 90
Quantity
in Billions of smartphone per Year
 Changes in Equilibrium

 Increase in demand  Increase in supply leads

leads to higher equilibrium to lower equilibrium price
price and higher and higher equilibrium
equilibrium quantity. quantity.
 Changes in Equilibrium

 Decrease in demand  Decrease in supply

demand leads to lower price leads to higher price
and lower quantity and lower quantity
exchanged. exchanged.
 Three Steps To Analyzing
Changes in Equilibrium

 Decide whether the event shifts the

supply or demand curve (or both).
 Decide whether the curve(s) shift(s) to
the left or to the right.
 Examine how the shift affects
equilibrium price and quantity.
 How an Increase in Demand
Affects the Equilibrium
Price of AC 1. Hot weather increases
the demand for AC...

Supply

$250 New equilibrium

200
2. ...resulting Initial
in a higher equilibrium
price...
D2

D1
0 7 10 Quantity of
3. ...and a higher
quantity sold. AC
 How a Decrease in Supply
Affects the Equilibrium
Price of AC 1. An earthquake reduces
the supply of AC...
S2
S1

New
$250 equilibrium

200 Initial equilibrium

2. ...resulting
in a higher
price...
Demand

0 1 2 3 4 7 8 9 10 11 12 13 Quantity of
3. ...and a lower AC
quantity sold.