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Supply and Demand

CHAPTER 4

Supply and Demand

Teach a parrot the terms supply and demand and youve got an economist.

Thomas Carlyle

McGraw-Hill/Irwin

Copyright 2010 by the McGraw-Hill Companies, Inc. All rights reserved.

Supply and Demand

Demand
The law of demand states that the quantity of a good demanded is inversely related to the goods price In other words, other things equal, Quantity demanded rises as price falls Quantity demanded falls as price rises As prices change, people change how much theyre willing to buy

The law of demand is based on the fact that when prices for a good rise, people substitute away from that good to other goods
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Supply and Demand

The Demand Curve


P

A demand curve is the graphic representation of the relationship between price and quantity demanded
The demand curve is downward sloping

P1 P0 Demand Q1 Q0 Q
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As price increases, quantity demanded decreases

Supply and Demand

Shifts in Demand versus Movements Along a Demand Curve


Quantity demanded refers to a specific amount that will be demanded per unit of time at a specific price, other things constant A change in price changes quantity demanded A change in price causes a movement along the demand curve Demand refers to a schedule of quantities of a good that will be bought per unit of time at various prices, other things constant A change in anything other than price that affects the demand curve changes the entire demand curve A change in the entire demand curve is a shift in demand

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Supply and Demand

Shifts in Demand versus Movements Along a Demand Curve


P

Shift in demand

A change in a shift factor causes a shift in demand

$1

A Demand0 Demand1 Q
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150

200

Supply and Demand

Shift Factors in Demand


Important demand shift factors include:
1. Societys income 2. The prices of other goods

3. Tastes
4. Expectations 5. Taxes and subsidies to consumers

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Supply and Demand

From a Demand Table to a Demand Curve


P
Price per DVD DVD rentals demanded per week

$4.00 $3.00 $2.00 $1.00

E D C B
2 4 6 8

A
Demand for DVDs

$0.50 $1.00 $2.00 $3.00 $4.00

9 8 6 4 2

B C D

A
10

E
Q

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Supply and Demand

Individual and Market Demand Curves


P

Market demand curve for DVDs per week


The market demand curve is the summation of all individual demand curves

$4.00 $3.00 $2.00 $1.00 CARMEN BRUCE ALICE

Market demand for DVDs Q


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Supply and Demand

Supply
The law of supply states that the quantity of a good supplied is directly related to the goods price In other words, other things equal, Quantity supplied rises as price rises Quantity supplied falls as price falls The law of supply occurs because: When prices rise, firms substitute production of one good for another Assuming firms costs are constant, a higher price means higher profit
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Supply and Demand

The Supply Curve


P

A supply curve is the graphic representation of the relationship between price and quantity supplied
Supply

P1 P0

The supply curve is upward sloping As price increases, quantity supplied increases

Q0

Q1

Q
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Supply and Demand

Shifts in Supply versus Movements Along a Supply Curve


Quantity supplied refers to a specific amount that will be supplied per unit of time at a specific price, other things constant A change in price changes quantity supplied A change in price causes a movement along the supply curve Supply refers to a schedule of quantities of a good a seller is willing to sell per unit of time at various prices, other things constant A change in anything other than price that affects the supply curve changes the entire supply curve A change in the entire supply curve is a shift in supply

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Supply and Demand

Shifts in Supply versus Movements Along a Supply Curve


P

Shift in Supply
S0

S1

A change in a shift factor causes a shift in supply

Q
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Supply and Demand

Individual and Market Demand Curves


Market supply curve for DVDs per week
P
$4.00 $3.00 $2.00 $1.00 CHARLIE BARRY ANN

The market supply curve is the summation of all individual supply curves

Market supply for DVDs

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12

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Q
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Supply and Demand

The Interaction of Supply and Demand


Equilibrium is a concept in which opposing dynamic forces cancel each other out
In the free market, the forces of supply and demand interact to determine: Equilibrium quantity is the amount bought and sold at equilibrium price

Equilibrium price is the price toward which the invisible hand drives the market

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Supply and Demand

The Interaction of Supply and Demand


P
Excess supply

Supply

P1 P* P0
Excess demand

Excess supply causes downward pressure on price

Excess demand causes upward pressure on price

Demand Q

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