Chapter 4 - Supply and Demand

Quantity supplied

The amount of any good, service, or resource that people are willing and able to sell during a specified period at a specified price. For example, when the price of spring water is $1.50 a bottle, a spring owner decides to sell 2,000 bottles a day. The 2,000 bottles a day is the quantity supplied of spring water by this individual producer.

law of market forces

When there is a surplus, the price falls; and when there is a shortage, the price rises.

Change in the quantity demanded

A change in the quantity of a good that people plan to buy that results from a change in the price of the good with all other influences on buying plans remaining the same.

Change in the quantity supplied

A change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good.

Change in demand

A change in the quantity that people plan to buy when any influence on buying plans other than the price of the good changes.

Change in supply

A change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes.

Complement

A complement of a good is another good that is consumed with it. Wrist guards are a complement of in-line skates, and bottled water is a complement of fitness center services.

Substitute in production

A good that can be produced in place of another good. Skinny jeans are substitutes in production for boot cut jeans in a clothing factory.

Equilibrium price

The price at which the quantity demanded equals the quantity supplied.

1. Distinguish between quantity demanded and demand, and explain what determines demand.

• Other things remaining the same, the quantity demanded increases as the price falls and decreases as the price rises—the law of demand. • The demand for a good is influenced by the prices of related goods, expected future prices, income, expected future income and credit, the number of buyers, and preferences. A change in any of these influences changes the demand for the good.

2. Distinguish between quantity supplied and supply, and explain what determines supply.

• Other things remaining the same, the quantity supplied increases as the price rises and decreases as the price falls—the law of supply. • The supply of a good is influenced by the prices of related goods, prices of resources and other inputs, expected future prices, the number of sellers, and productivity. A change in any of these influences changes the supply of the good.

The main influences on selling plans

• Prices of related goods • Prices of resources and other inputs • Expected future prices • Number of sellers • Productivity

The main influences on buying plans

• Prices of related goods • Expected future prices • Income • Expected future income and credit • Number of buyers • Preferences

Predicting Price Changes: Three Questions

1. Does the event influence demand or supply? 2. Does the event increase or decrease demand or supply—shift the demand curve or the supply curve rightward or leftward? 3. What are the new equilibrium price and equilibrium quantity and how have they changed?

Complement in production

A good that is produced along with another good. Cream is a complement in production of skim milk in a dairy.

Demand curve

A graph of the relationship between the quantity demanded of a good and its price when all the other influences on buying plans remain the same. The downward slope of the demand curve illustrates the law of demand. Along the demand curve, when the price of the good falls, the quantity demanded increases. For example, in Figure 4.1, when the price of a bottle of water falls from $1.00 to 50 cents, the quantity demanded increases from 2 bottles a day to 3 bottles a day. Conversely, when the price rises, the quantity demanded decreases. For example, when the price rises from $1.00 to $1.50 a bottle, the quantity demanded decreases from 2 bottles a day to 1 bottle a day.

Supply curve

A graph of the relationship between the quantity supplied of a good and its price when all the other influences on selling plans remain the same. when the price of a bottle of water rises from $1.50 to $2.00, the quantity supplied increases from 2,000 bottles a day to 3,000 bottles a day. And when the price falls, the quantity supplied decreases. For example, when the price falls from $1.50 to $1.00 a bottle, the quantity supplied decreases from 2,000 bottles a day to 1,000 bottles a day.

Demand schedule

A list of the quantities demanded at each different price when all the other influences on buying plans remain the same. It tells us that if the price of water is $2.00 a bottle, Tina buys no water. Her quantity demanded is 0 bottles a day. If the price of water is $1.50 a bottle, her quantity demanded is 1 bottle a day. Tina's quantity demanded increases to 2 bottles a day at a price of $1.00 a bottle and to 3 bottles a day at a price of 50 cents a bottle.

Supply schedule

A list of the quantities supplied at each different price when all the other influences on selling plans remain the same.

Market

A market is any arrangement that brings buyers and sellers together. A market has two sides: buyers (demanders) and sellers (suppliers).

Shortage

A shortage is a situation in which the quantity demanded exceeds the quantity supplied.

Substitute

A substitute for a good is another good that can be consumed in its place. Chocolate cake is a substitute for cheesecake, and bottled water is a substitute for Gatorade.

Surplus

A surplus is a situation in which the quantity supplied exceeds the quantity demanded.

Market equilibrium

In everyday language, "equilibrium" means "opposing forces are in balance." In a market, demand and supply are the opposing forces. When the quantity demanded equals the quantity supplied—buyers' and sellers' plans are in balance.

Income

Normal good - A good for which demand increases when income increases and demand decreases when income decreases. Inferior good - A good for which demand decreases when income increases and demand increases when income decreases. For example, if your income increases and you decide to buy more chicken and less pasta, for you, chicken is a normal good and pasta is an inferior good.

law of demand

Other things remaining the same, if the price of a good rises, the quantity demanded of that good decreases; and if the price of a good falls, the quantity demanded of that good increases. for example, that the price of bottled water fell from $1 a bottle to 25 cents a bottle while the price of Gatorade remained at $1 a bottle. Wouldn't some people switch from Gatorade to water? By doing so, they save 75 cents a bottle, which they can spend on other things they previously couldn't afford.

law of supply

Other things remaining the same, if the price of a good rises, the quantity supplied of that good increases; and if the price of a good falls, the quantity supplied of that good decreases. For example, the law of supply states that when all other things remain the same, if the price of bottled water rises, spring owners will offer more water for sale; if the price of a flat panel TV falls, Sony Corp. will offer fewer flat panel TVs for sale.

Productivity

Productivity is output per unit of input. An increase in productivity lowers the cost of producing the good and increases its supply. A decrease in productivity has the opposite effect and decreases supply.

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. For example, when spring water costs $1 a bottle, you decide to buy 2 bottles a day. The 2 bottles a day is your quantity demanded of spring water. The quantity demanded is measured as an amount per unit of time. For example, your quantity demanded of water is 2 bottles per day.

Equilibrium quantity

The quantity bought and sold at the equilibrium price.

Demand

The relationship between the quantity demanded and the price of a good when all other influences on buying plans remain the same.

Supply

The relationship between the quantity supplied and the price of a good when all other influences on selling plans remain the same.

Market demand

The sum of the demands of all the buyers in the market. For example, at a price of $1.00 a bottle, the quantity demanded by Tina is 2 bottles a day, the quantity demanded by Tim is 1 bottle a day, and so the quantity demanded in the market is 3 bottles a day.

Market supply

The sum of the supplies of all the sellers in the market. For example, at a price of $1.00 a bottle, the quantity supplied by Agua is 1,000 bottles a day, the quantity supplied by Prima is 2,000 bottles a day, and the quantity supplied in the market is 3,000 bottles a day.

3. Explain how demand and supply determine price and quantity in a market, and explain the effects of changes in demand and supply.

• The law of market forces brings market equilibrium—the equilibrium price and equilibrium quantity at which buyers and sellers trade. • The price adjusts to maintain market equilibrium—to keep the quantity demanded equal to the quantity supplied. A surplus brings a fall in the price to restore market equilibrium; a shortage brings a rise in the price to restore market equilibrium. • Market equilibrium responds to changes in demand and supply. An increase in demand increases both the price and the quantity; a decrease in demand decreases both the price and the quantity. An increase in supply increases the quantity but decreases the price; and a decrease in supply decreases the quantity but increases the price.