Module 2 Demand and Supply

- Other things remaining the same, an increase in demand results in . . . . . . an increase in both the equilibrium price and the equilibrium quantity. - Other things being equal, a decrease in supply results in . . . . . . an increase in the equilibrium price but a decrease in the equilibrium quantity. A decrease in demand while supply increases results in . . . . . . the equilibrium price falling unambiguously.

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- When there is a shortage, the price rises. - Other things remaining the same, a decrease in demand results in a decrease in both the equilibrium price and the equilibrium quantity. - If both the demand and the supply of a good increase, the effect on the equilibrium price is ambiguous.

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Any price variation will affect quantity demanded and quantity supplied

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Other things remaining the same, the law of supply states that the quantity supplied of a good will increase as the price of the good increases. The price of a good does not cause a(n) shift in the supply curve of that good.

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Other things remaining the same, the quantity demanded of a good decreases as the price of the good increases . Supposing chocolate cake and cheesecake are substitutes, an increase in the price of chocolate cake increases the demand for cheesecake.

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Quantity supplied represents a specific good at a specific price.

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Supply is the relationship between the price of a good and how much of that good is produced.

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The supply curve has a positive slope. A higher cost of production causes a decrease in supply

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Change in Supply

A change in supply occurs when any factor other than the price of the good changes. A change in supply shifts the supply curve. An increase in supply shifts the supply curve rightward, and a decrease in supply shifts the supply curve leftward.

Competitive Markets

A market is any arrangement that brings buyers and sellers together. A market has two sides: buyers and sellers. Some markets are physical places, like meat and produce markets. Some markets are virtual spaces where buyers and sellers never meet face-to-face but connect over telephone lines or the Internet, like Amazon and eBay. Markets vary in the intensity of competition that buyers and sellers face. A competitive market has many buyers and sellers, so no single buyer or seller can influence the market price. In this topic, we will focus on competitive markets. We'll first examine the behavior of buyers in a competitive market.

Shortage

A shortage or excess demand is a situation in which the quantity demanded exceeds the quantity supplied. If the price is below the equilibrium price, consumers plan to buy more than firms plan to sell. A shortage occurs as a result. A shortage will force the price to rise toward the equilibrium price. In the supply-demand graph to the right, there is a shortage at any price below $3, so that the price is forced higher toward the equilibrium price. For example, when the price is $2, the quantity supplied is 10 units per month and the quantity demanded is 20 units per month. As a result, a shortage of 10 units (20 units - 10 units) occurs at the price of $2. The shortage will eventually force the price to rise toward the equilibrium price of $3.

Supply Curve

A supply curve is a graph of the relationship between the quantity supplied of a good and its price, other things being equal. The graph to the right illustrates the supply curve with the same data as the supply schedule in the table. With the data, we can draw a supply curve by plotting the units per month along the x axis and dollars per unit along the y axis. We label "quantity" on the x axis and "price" on the y axis.

Supply Schedule

A supply schedule is a list of the quantities supplied at each price when all other factors remain the same. The table to the right gives the supply schedule for a good in a given day. At the price of $1, the quantity supplied is 5 units per day. When the price increases from $1 to $2, the quantity supplied increases from 5 to 10. When the price increases further from $2 to $3, the quantity supplied increases 10 to 15 units.

Change in the Quantity Supplied versus Change in Supply

As for demand, the distinction between a change in quantity supplied and a change in supply is crucial for finding out how a market responds to the forces that affect the market price and quantity. Here is the distinction: A change in the quantity demanded occurs with a change in price results in a movement along the supply curve. A change in supply occurs when a change in other factors shifts the supply curve.

Predicting Price Changes

Because prices change to eliminate shortages and surpluses, markets are normally in equilibrium. Even when an event disturbs a market, a new equilibrium will eventually be reached. So, we are interested in knowing changes in the equilibrium price and the equilibrium quantity in order to predict changes in market prices and quantities.

To determine how an event affects the equilibrium, we need to answer three questions:

Does the event affect the demand or the supply? How does the event affect demand or supply? What are the new equilibrium price and quantity and how have they changed?

Analyzing the Effects of Changes in Supply and Demand

Effects of change in demand: If the demand for a good increases, the demand curve shifts rightward. As a result, both equilibrium price and equilibrium quantity increase. If the demand for a good decreases, the demand curve shifts leftward. As a result, both the equilibrium price and equilibrium quantity decrease. The figure illustrates an increase in demand. In this figure, the original equilibrium point is where demand curve D0 intersects the supply curve S. The equilibrium price is $3 and the equilibrium quantity is 15 units per day. Now, an increase in demand causes the demand curve to shift rightward from D0 to D1. If the price stays at $3, a shortage will occur. As a result, the equilibrium price rises from $3 toward the new equilibrium where the supply curve S intersects the new demand curve D1. At this new equilibrium, the equilibrium price is $4 and the equilibrium quantity is 20. The figure below shows that an increase in demand raises both the equilibrium price and equilibrium quantity. Effects of changes in supply: If the supply of a good or service increases, the supply curve shifts rightward. As a result, the equilibrium price falls and the equilibrium quantity increases. If the supply of a good or service decreases, the supply curve shifts leftward. As a result, the equilibrium price rises and the equilibrium quantity decreases. The figure illustrates an increase in supply. In this figure, the original equilibrium point is where demand curve D intersects the supply curve S0. The equilibrium price is $3 and the equilibrium quantity is 30 units per month. Now, an increase in supply causes the supply curve to shift rightward from S0 to S1. If the price stays at $3, a surplus will occur. As a result, the equilibrium price falls from $3 toward the new equilibrium where the demand curve D intersects the new supply curve S1. At this new equilibrium, the equilibrium price is $2 and the equilibrium quantity is 40. The demand curve does not shift; there is a movement along the demand curve. The figure shows that an increase in supply lowers the equilibrium price but raises the equilibrium quantity.

Decrease in Both Supply and Demand: The following is a list of changes and effects relating to decrease in supply and demand:

If both the demand and the supply of a good decrease, both the supply and demand curves shift leftward. As a result, the quantity unambiguously will decrease but the effect on the price is ambiguous. If the decrease in demand is greater than the decrease in supply, the price will decrease. If the decrease in demand is the same size as the decrease in supply, the price will not change. If the decrease in demand is less than the decrease in supply, the price will increase.

The following is a list of changes and effects to both supply and demand:

If both the demand and the supply of a good increase, both the supply and demand curves shift rightward. As a result, the quantity unambiguously will increase but the effect on the price is ambiguous. If the increase in demand is greater than the increase in supply, the price will increase. If the increase in demand is the same size as the increase in supply, the price will not change. If the increase in demand is less than the increase in supply, the price will decrease.

Decrease in Demand and Increase in Supply Learn about the decrease in demand and the increase in supply here:

If the demand decreases while the supply increases, the demand curve shifts leftward and the supply curves shifts rightward. As a result, the price unambiguously will decrease but the effect on the quantity is ambiguous. If the decrease in demand is greater than the increase in supply, the quantity will decrease. If the decrease in demand is the same size as the increase in supply, the quantity will not change. If the decrease in demand is less than the increase in supply, the quantity will increase.

Increase in Demand and Decrease in Supply: Learn about the increase in demand and decrease in supply here:

If the demand increases while the supply decreases, the demand curve shifts rightward and the supply curve shifts leftward. The price unambiguously rises but the effect on the quantity is ambiguous. If the increase in demand is greater than the decrease in supply, then the quantity will increase. If the increase in demand is the same size as the decrease in supply, the quantity will not change. If the increase in demand is less than the decrease in supply, the quantity will decrease.

Changes in Demand

In addition to the Law of Demand, a change in demand can also occur when other related factors change. The demand curve shifts with a change in demand. An increase in demand shifts the demand curve rightward, and a decrease in demand shifts the demand curve leftward.

Shift in Demand Curve

In this figure, the movement along the demand curve D0 from point A to point B is a result of the price rising from $2 to $4 and reveals a change in the quantity demanded. Moving from point A to point B, the quantity demanded decreases from 20 units to 10 units per day. The shift of the demand curve from D0 to the new demand curve D1 is a change in demand. As compared with D0, the quantity demanded on D1 is 5 units more at each price. The change in demand is the result of a change in any factor except for the price of the good.

What is the difference between the quantity supplied and supply?

Like what you've learned about the quantity demanded and demand, the quantity supplied is one quantity at one price, and supply is a list of quantities at different prices. Supply can be illustrated by a supply schedule, a table, or a supply curve.

Law Of Demand

Other things being equal, the quantity demanded of a good decreases as the price of that good increases.

The major factors that change supply are:

Price of related goods: In supply, two goods are related if they are either substitutes or complements in production. A substitute in production for a good is another good that can be produced in its place. Skinny jeans are substitutes in the production of boot cut jeans in a clothing factory. The supply of a good and the price of its substitute in production move in opposite directions. If the price of a substitute in production rises, the supply of a good falls. For example, if the price of skinny jeans increases, then the supply of boot cut jeans decreases. A complement in production of a good is another good that is in production along with it. Cheese is a complement in the production of milk in a dairy factory. The supply of a good and the price of its complement in production move in the same direction. If the price of a complement in production rises, the supply of a good rises. For example, if the price of milk increases, then the supply of cheese increases. Price of resources and other inputs: The prices of resources and inputs affect the cost of production. Other things remaining the same, the more it costs to produce a good, the lower is supply. For example, if the wage rate of workers making jeans rises, it costs more to produce jeans at each price, so the supply of jeans decreases. Number of sellers: The greater is the number of sellers in a market, the larger is the supply. For example, more companies make HDTVs today, so the supply of HDTVs increases. Productivity: Productivity is output per unit of input. An increase in productivity lowers the cost of producing a unit of good, so that supply increases. Technological change has increased productivity in factories making computers and other electronics. As the cost of producing a computer decreases, the supply of computers increases.

The major factors that change demand are:

Prices of related goods Goods have substitutes and complements. A substitute for a good is another good that can be consumed in its place. Chocolate cake is a substitute for cheesecake. The demand for a good and the price of its substitute move in the same direction. When the price of chocolate cake rises, the demand for cheesecake rises. A complement of a good is another good that is consumed along with it. Coffee is a complement of cheesecake. The demand for a good and the price of its complement move in the opposite direction. When the price of coffee rises, the demand for cheesecake falls. Expected future prices An expectation of a higher future price of a good increases the current demand for that good; an expectation of a lower future price of a good decreases the current demand for that good. If you expect the price of gas to fall tomorrow, you don't want to buy gas now as you plan to buy it tomorrow. You current demand for gas decreases as a result. Income For a normal good, a rise in income brings an increase in demand. For an inferior good, a rise in income brings a decrease in demand. If your income increases, you decide to buy more beef and less bread, then beef is a normal good and bread is an inferior good. Expected future income and credit When you expect your income to increase in the future or you can get credit more easily, the demand for some goods increases. Changes in expected future income and the availability of credit have a larger effect on the demand for big ticket items, such as homes and automobiles. Number of buyers The greater the number of buyers in the market, the larger demand is. For example, the demand for parking spaces, bottled water, or just about everything is greater in New York City than it is in a small town in Kansas. Preferences Preferences or tastes affect demand. When preferences change, the demand for one item increases and the demand for another item decreases. For example, when bell-bottom pants become trendy, the demand for bell-bottom pants increases and the demand for straight leg pants decreases.

Quantity demanded represents the cost of one specific quantity at one specific price

Quantity demanded is affected by price, but demand itself can be influenced by a variety of factors. Consider the demand for housing as an example

Quantity Demanded

The amount of any good, service, or resource that people are willing and able to buy during a specified period at a specified price.

Change in the Quantity Demanded Versus Change in Demand

The distinction between a change in quantity demanded and a change in demand is crucial for finding out how a market responds to the forces that affect its price and quantity. Here is the distinction: A change in the quantity demanded arises from a change in price that results in a movement along the demand curve A change in demand arises from a change in other factors that shifts the demand curve The graph displayed on the following screen illustrates this distinction. In the graph, there are two demand curves, D0 and D1. Demand curve D0 is constructed using the data for the demand schedule for D0, which appears on this screen. Another demand curve, D1, is constructed by adding 5 units for the quantity demanded at each price.

Increase in Both Supply and Demand

The figure illustrates an increase in both demand and supply: the demand curve shifts from D0 to D1 and the supply curve shifts from S0 to S1. In this figure, the original equilibrium point is where demand curve D0 intersects the supply curve S0. The equilibrium price is $3 and the equilibrium quantity is 15 units per day. Now, an increase in demand causes the demand curve to shift rightward from D0 to D1 at the same time an increase in supply causes the supply curve to shift rightward from S0 to S1. Because the shifts are the same size, the equilibrium price does not change and the equilibrium quantity increases from 15 units to 25 units per day.

Fluctuations in Supply and Demand

The figure illustrates an increase in demand and a decrease in supply: the demand curve shifts from D0 to D1 and the supply curve shifts from S0 to S1. In this figure, the original equilibrium point is where demand curve D0 intersects the supply curve S0. The equilibrium price is $3 and the equilibrium quantity is 15 units per day. Now, an increase in demand causes the demand curve to shift rightward from D0 to D1 at the same time a decrease in supply causes the supply curve to shift left from S0 to S1. Because the shifts are the same size, the equilibrium quantity remains at 15 units per day but the equilibrium price rises from $3 to $5.

Law of supply

The law of supply states that other things being equal, the quantity supplied of a good increases as its price increases, and the quantity supplied of a good decreases as its price decreases.

Equilibrium Price

The price at which the market is in equilibrium.

Equilibrium Quantity

The quantity bought and sold when the market is in equilibrium.

What is the difference between the quantity demanded and demand?

The quantity demanded is one quantity at one price, and demand is a list of quantities at different prices. Demand can be illustrated by a demand schedule or a demand curve. A demand schedule shows information in a table. A demand curve shows the same information in a graph. -Now you will be shown how to construct a demand schedule and a demand curve with data on quantities demanded.

Quantity supplied

The quantity supplied of a good or service is the amount that people are willing and able to sell at a specified price during a time period.

Surplus

To identify market equilibrium, we first go back to the demand curve and supply curve that we've constructed in this lesson. The figure below plots the demand curve and supply curve together. The data is reproduced on the left. -A surplus or excess supply is a situation in which the quantity supplied exceeds the quantity demanded. If the price is above the equilibrium price, sellers are willing to sell more than consumers are willing to buy. A surplus occurs as a result. A surplus will force the price to reduce toward the equilibrium price. In the supply-demand graph to the right, the equilibrium price is $3 and the equilibrium quantity is 15 units per day. If market equilibrium is disturbed, market forces will restore it. When there is a surplus, the price will fall. When there is a shortage, the price will rise.

Individual Demand and Market Demand

To study the behavior of a market, we must find the market demand. Market demand is the sum of the demands of all the buyers in a market. At a given price, the quantity demanded on the market demand curve equals the horizontal sum of the quantity demanded on the individual demand curves. Now we've learned how to construct a demand curve for an individual and for a market. But the demand curve shows how the quantity demanded of a good changes only when the price of that good changes, holding other factors constant. But any of these other factors can change, leading to a change in demand. How changes to these factors affects demand is what we'll learn next.

Individual Supply and Market Supply

To study the behavior of a market, we must find the market supply. Market supply is the sum of the supplies of all the sellers in a market. At a given price, the quantity supplied on the market supply curve is the horizontal sum of the individual supply curves. Now we've learned how to construct a supply curve for an individual and for a market. But the supply curve shows how the quantity supplied of a good changes only when the price of the good changes, holding other factors constant. But any of these other factors can change, leading to a change in supply. How changes in these factors affect change is what we'll learn next.

The demand curve show the negative relationship between the quantity demanded of a good and its price An increase in demand causes a shift of the demand curve to the right

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Supply

is the relationship (with all elements being equal) between the price of a good and how much of that good is produced or available

Demand

is the relationship between the price of a good and how much of that good consumers want to purchase (all elements being equal)

Market equilibrium

is the state at which the quantity of goods supplied equals the quantity of goods demanded. A surplus results when the quantity of goods supplied is higher than the quantity of goods demanded - When the reverse is true (lower quantity of goods supplied)