Module 3 Supply and Demand

Market Demand Curve

A curve that shows how much of a product all consumers will buy at all possible prices with the horizontal summation of prices at a certain level and the qty each individual will buy.

Substitute

A rise in price will cause consumes to choose an alternative, but similar product (e.g. soda brands or clothing)

Complement

A rise in the price in one will cause a decrease in the price of the other. Examples include cereal and milk. Cream Cheese and Bagels.

demand schedule

a table that lists the quantity of a good a person will buy at each different price

Need

A concept reserved for policy makers and political decision making. For needs and wants to be demands, they must reflect what people will actually do when confronted with different prices.

Income and Wealth

Income changes can also shift the demand curve. Whether the demand increases in increases of income depends on whether the good is a normal god or an inferior good. Most goods are normal goods, but there are a few inferior goods such as instant noodles or a mobile home.

Functions of Prices

Informing; Directing; Motivating

Explain the difference between change in supply vs. change in quantity supplied.

A change in prices affects quantity supplied because it only causes movement along the curve, whereas a change in ceteris paribus conditions cause a change in supply and a shift in the curve. A change in the prices affects qty supplied, not supply.

Tastes

Affect ceteris paribus conditions in the market demand for a good because an increase in demand causes the demand curve to shift to the right. An increase in demand means that at every price, consumers demand a larger qty than they did before. The opposite would occur if this changed away from a product resulting in a decrease in demand; a decrease in demand means that at every price consumers will demand a smaller qty than before.

Prices of other goods and services

Complements and Substitutes. The fourth non-price determinant of demand is the prices of other goods and services.

Assume that a market is in equilibrium at E1 and the demand curve shifts to the left. Draw a graph to show the new equilibrium point E2. Explain the process of price adjustment (use the surplus/shortage explanation) as the market equilibrium changes from E1 to E2.

Equilibrium occurs in the market from where the curves intersect on a graph (when looking at supply and demand put together). At the point of intersection, the qty supplied exactly equals the qty demanded. There are no shortages nor surpluses. At this point the market is efficient. When the supply and demand curves shift, a new equilibrium is created. If demand increases, the new equilibrium with be at a higher price and a higher qty. If demand decreases, the new equilibrium will be at a lower price and lower quantity. If supply increases, there will be a lower price and a higher qty at a new equilibrium. If supply decreases, the new equilibrium will have a higher price and a lower qty.

Size of the Group

If the number of individuals in a group of potential customers changes, market demand will also change. The size of a group that increases, will increase the demand for a good, or a larger qty demanded at every price. The opposite is true if the size of the group decreases.

If price of a book increases, what happens to its quantity demanded? Demand?

If the price increases, the quantity demanded will decrease. Demand relates to the various amounts that consumers are willing to buy over a specified period of time.

The cost of productive resources

Is a factor that affects the supply of a good, not the demand.

What is true about a supply curve?

It has a direct or positive relationship between price and quantity supplied.

Explain the difference between shift of a curve (change in demand) vs. movement along a curve (change in quantity demanded)

Movements along the curve are exchange in qty demanded, caused solely by a change in price of the the good. A shift in the curve will be a change in demand through factors such as taste, size, income, prices of other goods/services, and expectations about future prices/income.

How does market eliminate shortage?

Producers will produce more of a product or good in shortage because the higher price means higher profit margin for them.

Supply

Provided by business and is based on the marginal costs of producing the good or service.

Quantity Demanded

The amount of a good or service consumers are willing and able to buy at a specific price during a certain period of time. For example, how many donuts would you be willing to buy if a donut were $1 today?

What is the law of demand?

Quantity demanded typically increases at lower prices. As prices rise, ceteris paribus, consumers will purchase less of a service or good.

A change in any of the ceteris paribus conditions for demand leads to

Shift of the demand curve (not movement)

Change in demand

Shift of the demand curve when people buy different amounts at every price. An example would be consumers buying more oranges because research suggests that oranges can prevent cancers. This would shift the demand curve.

Identify three factors that shift the demand curve.

Tastes, Size, Income/Wealth, Prices of other goods/services, expectations about the future. Also the gov't can shift the demand curve with regulations, takes, and subsidies.

Identify three factors that affect supply. Identify the factor that affects quantity supplied.

Technology, input costs including labor, expectations, number of sellers, prices of goods that use the same inputs, natural events, and the government with regulations, taxes, and subsidies. Price affects the qty supplied.

What does the slope of the demand curve signify?

The inverse relationship relationship between price and qty. The cheaper the good/service is, the more of it consumers will be causing it to slope downward.

Determining the Equilibrium Price and Qty of a Good/Service

The market supply is combined with the market demand.

Demand

The relationship between quantities demanded of a good or service at various prices over a certain time period. It is important to recognize that a consumer's demand is not the same as needs or wants, which can be measured in some social or biological way.

What is the slope of the supply curve? What does it tell us about the relationship between price and quantity supplied?

The supply curve will move upward from left to right as the price of a given commodity increases, the qty supplied increases, all else being equal.

nonprice determinant of demand

These shift the demand curve causing a change in demand within the group: tastes, size, income/wealth, prices of other goods and services; expectations about future prices or income. Nearly everything that demand does so by working through one of these.

The Law of Supply

With other things being equal, the price and quantity supplied of a good are positively related (ceteris paribus). Directly related (qty and price). With all else held constant, suppliers will supply less of a good or service at lower prices. As prices rise the qty supplied will increase because it becomes more profitable to produce and sell the good. Note also the word usually with the exceptions of no time to produce more units (e.g. theater seats in a sold out show) or a unique supplier that no longer exists. The second exception is for certain products for which increased volume allows costs per unit to fall (e.g. software).

Ceteris Paribus

a Latin phrase that means "all other things held constant"; As applied in demand theory, holding constant all factors that affect demand except one. Changes in the ceteris paribus conditions may change the demand for a good or service.

Inferior Good

a good that consumers demand less of when their incomes increase (e.g. Ramen Noodles)

Market Supply Curve

a graph of the quantity supplied of a good by all suppliers at different prices with the curve being derived from horizontally adding the individual supplies at each price level.

demand curve

a graph showing the quantity demanded at each and every price that might prevail in the market

change in quantity demanded

a movement along the demand curve that occurs in response to a change in price. Higher price, less demand in qty.

Normal Good

A good for which, other things equal, an increase in income leads to an increase in demand. Having an income elasticity of demand coefficient that is positive but less than one.

Assuming a positive slope for supply curve and a negative slope for demand curve, when the supply of a product increases, but the demand for the product remains unchanged, the equilibrium price of the product will______

Fall, and equilibrium will increase.

The Law of Demand

The law of demand states that as the price of an item falls, the number of items sold (quantify demanded) will increase. If the price increases, consumers will purchase less of the qty or service because its opportunity cost in terms of other goods is higher. *Note: quantity demanded - not demand - is a function of price*