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# DEMAND, SUPPLY and MARKET

EQUILIBRIUM

DEMAND
Demand is the desire, willingness, and

## ability to buy a good or service.

Demand refers to one individual consumer

## or to the total demand of all consumers in

the market (market demand).
It represents the behavior of buyers

DEMAND
A demand schedule is a table that lists

## the various quantities of a product or

service that someone is willing to buy over
a range of possible prices.
Price per cup of Rice
(P)

Quantity Demanded

16

14

12

10

10

DEMAND
A demand schedule can be shown as

points on a graph.

## axis and quantities demanded on the

horizontal axis.
Each point on the graph shows how many
units of the product or service an
individual will buy at a particular price.
The demand curve is the line that
connects these points.
- It shows the quantity demanded at
different prices.

DEMAND
Price (P)

18
16
14
12
Demand for Rice

10
8
6
4
2
0

10

## Quantity Demanded (Q)

DEMAND
What do you notice about the demand

curve?
- The demand curve slopes downward.
What does it mean?

LAW of DEMAND
The law of demand holds that other things

## equal, as the price of a good or service

rises, its quantity demanded falls.
The reverse is also true: as the price of a

## good or service falls, its quantity demanded

increases.
The demand curve has a negative slope,

## consistent with the law of demand.

DEMAND
One reason the demand curve slopes
downward is due to diminishing marginal
utility

## The principle of diminishing marginal

utility says that our additional satisfaction
tends to go down as we consume more
and more units.

## To make a buying decision, we consider

whether the satisfaction we expect to
gain is worth the money we must give up.

## From Household Demand to

Market Demand
Assuming there are only two households in

follows:

## What Shifts the Demand Curve?

A decrease in demand

## means that consumers buy less

at every price level, (or they
reduce the price theyre willing
to pay for a given quantity.)
On the graph: the demand curve

## shifts inwards, down, and to the

left.

10

A Decrease in Demand

Price
per
Unit
\$50

Lower Willingness to
Pay for the Same
Quantity
Less Quantity Demanded
at the Same Price

\$25
Old Demand
Curve
New
Demand
Curve
11

70

80

Quantity

An Increase in Demand
Price
per
Unit
\$50

Greater Willingness
to Pay for the Same
Quantity
Greater Quantity
Demanded at the Same
Price

\$25

New
Demand
Curve
Old Demand
Curve

70
12

80

Quantity

## What makes the demand shift

outward or inward?

Demand Shifters
Important Demand Shifters:
1. Income
3. Price of Substitutes
4. Price of Complements
5. Expectations
6. Tastes
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## Important Demand Shifters

1. The effect of changes in

## income on demand depends

on the nature of the good in
question.
A Normal Good: demand

## increases when income increases

(and vice versa).
An Inferior Good: demand
decreases when income increases
(and vice versa)

## When the price of petroleum goes up,

the demand for natural gas ______, the
demand for coal ______, and the
demand for solar power ______.
a) increases; increases; increases
b) increases; increases; decreases
c) decreases; decreases; increases
d) decreases; decreases; decreases
To next
Try it!

## Important Demand Shifters

2. As the population of an

## economy changes, the

particular good also changes,
(thereby changing its
demand.)
What happens to the demand for

rates drop?

## Important Demand Shifters

3. Two goods are Substitutes if a

## decrease in the price of one

leads to a decrease in demand
for the other (or vice versa).
-

## What happens to the demand for

travel in Hawaii if the
(perceived) safety cost of
traveling to Mexico increases?

## Important Demand Shifters

4. Two goods are Complements if

## a decrease in the price of one

good leads to an increase in
the demand for the other (or
vice versa).
What happens to the demand

## for Sport Utility Vehicles when

gasoline gets more expensive?

Price of Complements

## Consumers often have to buy goods together.

An increase in price of gasoline will decrease

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## Important Demand Shifters

5. The expectation of a higher (lower) price

## for a good in the future increases

(decreases) current demand for the good.

## spending in anticipation of the

direction of future prices in order to
obtain the lowest possible price.
If prices for rice are expected to drop

## right before Christmas, what will happen

to sales during November?

## Important Demand Shifters

6. Tastes and preferences are

among consumers.

## Seasonal changes or fads have

predictable effects on demand.
What happens to the demand for
roses in February? To carbohydrates
during diet fad? Or to Acai berries
after newly perceived health
benefits?

## What Shifts the Demand Curve?

A change in quantity demanded is

## NOT the same as a change in demand.

Quantity demanded changes only when the

## price of a good changes.

It is a movement along a fixed demand curve.

## factor (demand shifter) changes.

It is a shift in the entire demand curve.

A
A change
change in
in
Quantity
Quantity
Demanded
Demanded
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A
A change
change
in
in Demand
Demand

## When the price of a good increases the

quantity demanded ______. When the price
of a good decreases the quantity demanded
______.
a) rises; rises
b) rises; falls
c) falls; rises
d) falls; falls
To next
Try it!

Supply

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Supply

## Supply refers to the various quantities of a

good or service that producers are willing to
sell at all possible market prices.

## Supply can refer to the output of one

producer or to the total output of all
producers in the market (market supply).

Supply
A supply schedule can be shown as

points on a graph.

## axis and quantities supplied on the

horizontal axis.
Each point on the graph shows how many
units of the product or service a producer
(or group of producers) would willing sell
at a particular price.
The supply curve is the line that
connects these points.

Supply
Supply represents the behavior

of sellers.
A Supply Curve shows the
quantity supplied at different
prices.
The Quantity Supplied is the

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## quantity that producers are willing

and able to sell at a particular
price.

Law of Supply
What do you think happens to the quantity

## of human organs donated in Israel when the

government issues a point system that
rewards donors?
The Law of Supply: there is a direct
relationship between price and quantity
supplied.
When price rises, all else equal, quantity

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Price of
Oil per

Barrel

## The Supply Curve for

Oil
Supply Curve for Oil

\$55

\$20

Pric
e

Quantit
y
Supplie
d

\$55

50

\$20

30

\$5

10

\$5
30

10

30

50

Quantity of Oil
(MBD)

Supply curves can be read in

two ways:
Horizontally: How much suppliers

## are willing and able to sell at a

certain price.
Vertically: The minimum price for
which suppliers are willing to sell
a certain quantity.
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Supply Curves
Why is the supply curve upward

sloping?
The cost of producing a good is not

## equal across all suppliers.

At a low price, a good is produced and
sold only by the lowest cost suppliers.
At a high price, a good is also
produced and sold by higher cost
suppliers.
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Change in Supply
Price of
Oil per

Barrel
\$50

Greater
Quantity
Supplied at
the Same
Price

Old
Supply

New
Supply

\$10

Supply

Willing to
Sell Same
Quantity
at Lower
Prices
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20

8
0

Quantity of Oil
(MBD)

Change in Supply
New
Supply

Price of
Oil
per
Barrel

\$10

Smaller
Quantity
Supplied at
the Same
Price

Higher
Price
Needed
to Sell
Same
Quantity

34

Old
Supply

Supply

20

8
0

Quantity of Oil
(MBD)

## What makes the supply curve

shift?

Supply Shifters
Important Supply Shifters
1. Technological Innovations
2. Input Prices
3. Taxes and Subsidies
4. Expectations
5. Entry or Exit of Producers
6. Changes in Opportunity

Costs
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## Important Supply Shifters:

Technological Innovations
1. A technological innovation makes sellers

## willing to offer more at a given price, or sell a

their quantity at a lower price.
A technological innovation lowers costs

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## Important Supply Shifters:

Input Prices
2. A decrease in the price of an input (all

## else equal) increases profits and

encourages more supply (and vice versa)
What will happen to the amount of new

## businesses if the government reduces the

fees and red tape associated with new
rise?

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## Taxes and Subsidies

3. A tax on output reduces profit and makes

## sellers less willing to supply at a given

price, unless they can effectively raise the
price without losing any sales. (for now,
assume they cannot)
A tax on output raises costs and decreases

supply.
Graph the effect on supply of a new cigarette
tax.

39

## Taxes and Subsidies

A subsidy on production makes sellers

## willing to supply a greater quantity at a

given price, or the subsidy allows
producers to sell a given quantity at a
lower price.
A subsidy on production lowers costs and

increases supply.
Graph the effect on supply of a new subsidy
to fast food producers aimed at helping them
market and sell overseas.

40

## Taxes and Subsidies

\$10

\$1
0

\$5
0

\$10

With a \$10 Tax Suppliers Require a \$10 Higher Price to Sell the Same
Quantity

Price of
Supply With \$10 Tax
Oil per
Barrel

\$4
0

41

## Important Supply Shifters:

Expectations
4. The expectation of a higher price for a

## good in the future decreases current

supply of the good if they can store the
good- (and vice versa).

## offerings in anticipation of the

direction of future prices in order to
obtain the highest possible price.

42

Future Expectations
A change in producers

will affect supply curves
Cellphone production increases

## as producers expect sales and

profitability to increase.

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Expectations

Price
per
Unit

Supply Today
with Expectation
of Future Price
Increase

Supply Today

Into Storage

Quantity
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## Entry or Exit of Producers

5. As producers enter and exit the

## market, the overall supply changes.

Entry implies more sellers in the

## market increasing supply.

Exit implies fewer sellers in the
market decreasing supply.
What will happen to the supply of Marijuana in the

## Philippines if the drug is legalized for general use?

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Number of Producers
As more producers enter a market, supply

## the solar installation

market, the number
of solar installations
available for sale
increases
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## Entry or Exit of Producers

Entry Increases Supply

Pric
e

Domestic
Supply

Greater Quantity
Supplied at the
Same Price
Domestic Supply
Imports

Same Quantity
Supplied
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Quantity

## Changes in Opportunity Costs

6. Inputs used in production have

## opportunity costs. Sellers will choose

to use those inputs where the profit is
the highest
Sellers will supply less of a good if the price

## of an alternate good using the same inputs

rises (and vice versa).
Sellers always chase the highest profit goods.

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## Producers have the ability to produce other goods

An increase in the profitability of small cars will

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3- 49

## Changes in Opportunity Costs

Higher (Opportunity) Costs Reduce Supply- Rising Wheat
Prices Reduce Soybean Supply
Price per
Unit
Higher Price
Required to Sell the
Same Quantity
\$7

## Supply with High

Opportunity Costs
Supply with Low
Opportunity Costs

\$5

50

2,000

Smaller Quantity
Supplied at the Same
Price
Quantity of
Soybeans
2,80
(Millions of
0
Bushels)

## What Shifts the Supply Curve?

A change in quantity supplied is NOT the

## same as a change in supply.

Quantity supplied changes only when the price

of a good changes.
It is a movement along a fixed supply curve.

## Supply changes only when a non-price factor

changes.
It is a shift in the entire supply curve.

A
A change
change in
in
Quantity
Quantity Supplied
Supplied
51

A
A change
change
in
in Supply
Supply

Discussion:
Relate the Law of Supply and Demand to

## the ongoing War in Mindanao.

What do you think will happen if the

## government wont subsidize education?

How will it affect the supply and demand
for education?