You are on page 1of 64

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.

The graph lists prices on the vertical

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)

Demand for Rice

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

the market, market demand is derived as


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
2. Population/No. of buyers
3. Price of Substitutes
4. Price of Complements
5. Expectations
6. Tastes
14

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


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

diapers in the Philippines as birth


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

the demand for SUVs


20

Important Demand Shifters


5. The expectation of a higher (lower) price

for a good in the future increases


(decreases) current demand for the good.
Consumers will adjust their current

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

subjective and will vary


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.

Demand changes only when a non-price

factor (demand shifter) changes.


It is a shift in the entire demand curve.

A
A change
change in
in
Quantity
Quantity
Demanded
Demanded
23

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

What made this oil field happen?


25

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.

The graph lists prices on the vertical

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

28

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

supplied rises and vice versa

29

The Supply Curve


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)

Reading Supply Curves


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.
31

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.
32

Change in Supply
Price of
Oil per

Barrel
$50

Greater
Quantity
Supplied at
the Same
Price

Old
Supply

New
Supply

$10

Lower Costs Increase


Supply

Willing to
Sell Same
Quantity
at Lower
Prices
33

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

Higher Costs Decrease


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
36

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

and increases supply.

37

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
business licenses? What happens if the fees
rise?

38

Important Supply Shifters:

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

Important Supply Shifters:

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

Important Supply Shifters:

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

Supply Without Tax

$4
0

41

Quantity of Oil (MBD)

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).
Sellers will adjust their current

offerings in anticipation of the


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

42

Future Expectations
A change in producers

expectations about profitability


will affect supply curves
Cellphone production increases

as producers expect sales and


profitability to increase.

43

Important Supply Shifters:

Expectations

Expectations Can Shift the Supply Curve

Price
per
Unit

Supply Today
with Expectation
of Future Price
Increase

Supply Today

Into Storage

Quantity
44

Important Supply Shifters:

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?

45

Number of Producers
As more producers enter a market, supply

increases (and vice versa)

As more firms enter

the solar installation


market, the number
of solar installations
available for sale
increases
46

Important Supply Shifters:

Entry or Exit of Producers


Entry Increases Supply

Pric
e

Domestic
Supply

Greater Quantity
Supplied at the
Same Price
Domestic Supply
Plus Canadian
Imports

Lower Price for the


Same Quantity
Supplied
47

Quantity

Important Supply Shifters:

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.

48

Changes in Opportunity Costs

Producers have the ability to produce other goods


An increase in the profitability of small cars will

decrease the supply of SUVs

49
3- 49

Important Supply Shifters:

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?

Next meeting: Market Equilibrium