Supply and Demand • Supply and demand model ○ a model of how a competitive market functions • The demand curve • The supply curve • The determinants of demand and supply • The equilibrium price and quantity Demand Schedule and Demand Curve • The law of demand ○ A higher price leads to a lower quantity demaned ○ A lower price leads to a higher quantity demanded • Demand schedule vs. demand curve ○ A demand schedule is a table that shows the quantity demanded at each price. ○ A demand curve is a graph that shows the quantity demanded at each price • Demand vs. quantity demanded ○ demand the relationship between a range of prices and the quantities demanded at those prices, as illustrated by a demand curve or a demand schedule. quantity demanded only a certain point on the demand curve or one quantity on the demand schedule ○ Demand refers to the curve, and quantity demanded refers to a specific point on the curve. ○ If price increases, what happens? § No change in demand § Decrease in quantity demanded ○ Graphical Comparison • Demand curve ○ Horizontal axis: Quantity Demanded ○ Vertical axis: Price Shift of the Demand Curve • Changes in the price of related goods ○ Substitutes (positive correlation) § fall in the price of one goods makes consumers less willing to buy the other good ○ Complements (negative correlation) § fall in the price of one of the goods makes consumers more willing to buy the other good ○ How to remember § Kids are positive when having a substitute teacher § We lived in a cynical world. If someone gives you a complement, the true intention might be negative. • Changes in income ○ Normal goods § rise in income increases demand § ie. computers, Disneyland, steak ○ Inferior goods § rise in income decreases demand § ie. macaroni & cheese, top ramen ○ Normal goods vs. inferior goods • Changes in tastes ○ Why do people want what they want? ○ Changes due to fad, beliefs, cultural shifts are all clumped together under preferences. • Changes in expectations ○ If you expect more income in the future, demand for certain goods (ie. car or refrigerator) might increase ○ If expectation of a future price drop of items exist, then the demand for these items drop today, almost like a self-fulfilling prophecy. • Graph • Summary Supply Schedule and Supply Curve • The law of supply ○ A higher price leads to a higher quantity supplied. ○ A lower price leads to a lower quantity supplied. • Supply schedule vs. supply curve ○ A supply schedule is a table that shows the quantity supplied at each price. ○ A supply curve is a graph that shows the quantity supplied at each price. • Supply vs. quantity supplied ○ supply the relationship between a range of prices and the quantities supplied at those prices, as illustrated by a supply curve or a supply schedule. quantity supplied only a certain point on the supply curve or one quantity on the supply schedule ○ Supply refers to the curve, and quantity supplied refers to a specific point on the curve. ○ If price increase, what happens to supply? § Nothing § This is a change in quantity supplied not supply Shifts of the Supply Curve • Changes in input prices ○ Input is a good used to produce another good ○ ie. cheese in a cheese pizza • Change in technology ○ All the ways in which people can turn more inputs into useful goods ○ For example, an improved strain of corn resistant to disease increase supply of corn. • Change in expectations ○ If expectations of a future price increase of items exist, then supplier will tend to hoard the item in order to make more profit in the future. • Related goods ○ If the price of other things I can produce goes up, then my supply of grapes, once again, would go down. • Graph • Summary Supply, Demand, and Equilibrium • Equilibrium price ○ price that clears the market • Equilibrium quantity ○ quantity of good bought and sold at market-clearing price • Equilibrium ○ where the supply and demand curves intersect • Graph Surplus & Shortage • Surplus ○ when quantity supplied exceeds quantity demanded ○ Q_s Q_D ○ Surplus=Q_S−Q_D • Shortage ○ when quantity demanded exceeds quantity supplied ○ Q_D Q_s ○ Shortage=Q_D−Q_S • Graph
