Demand The term demand refers to the

Demand • The term demand refers to the entire relationship between the quantity demanded and the price of a good, other things remaining the same. Demand is described by both the demand schedule and the demand curve.

Examples of Demand • The demand for MP 3 files is the relationship between the price of MP 3 s and the quantity of MP 3 s demanded, holding all other influences on the quantity of MP 3 files bought constant. • Similarly, the demand for MP 3 players is the relationship between the price of MP 3 players and the quantity of MP 3 players demanded, holding all other influences on the quantity of MP 3 files bought constant.

Supply • The term supply refers to the entire relationship between the quantity supplied and the price of a good, other things remaining the same. Supply is described by both the supply schedule and the supply curve.

Examples of Supply • The supply of MP 3 files is the relationship between the price of MP 3 files and the quantity of MP 3 files supplied, holding all other influences on the quantity of MP 3 files sold constant. • Similarly, the supply of MP 3 players is the relationship between the price of MP 3 players and the quantity of MP 3 players supplied, holding all other influences on the quantity of MP 3 files sold constant.

The Buying Decision • The quantity of MP 3 Players that people plan to buy depends on: – The price of a MP 3 Player – The prices of related good (such as tapes, portable CD players, and CDs) – Disposable Income – Expected future prices – Population interested in MP 3 Players • To begin to learn how these factors influence demand, you will look at the law of demand.

Law of Demand • The law of demand states that other things remaining the same, the higher the price of a good, the smaller is the quantity demanded of that good.

Law of Demand Examples • If the price of a movie ticket rises, other things remaining the same, the quantity of movie tickets that people plan to buy decreases. • If the price of a PC falls, other things remaining the same, the quantity of PCs that people plan to buy increases.

Law of Demand • • Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded of that good. Why? For two reasons. – If the price of a good rises, the opportunity cost of using that good rises, so people buy less of that good and more of some substitute goods. This is a substitution effect. – If the price of a good rises, real income falls, so people buy less of all goods including the good whose price has risen. This is a income effect. Price/unit D Number of units

Law of Demand • • • The law of demand can be illustrated by a demand schedule or a demand curve. A demand schedule lists the quantities demanded at each price, holding constant all other influences on buying plans. A demand curve graphs the quantity demanded at each price holding constant all other influences on buying plans. ¨ The demand curve can be interpreted as a willingness to pay curve. ¨ It tells us the highest price that people are willing to pay for a given quantity of the good. Price/unit p D q Number of units

Influences on Demand • A movement along the demand curve: A change in the price of a good, with everything else remaining the same, brings a movement along the demand curve and a change in the quantity demanded. Price/unit A PA B PB QA QB D Number of units

Influences on Demand • A shift of the demand curve: A change in any other influence on buying plans, except the price of the good, brings a shift of the demand curve and a change in demand. Price/unit D 2 D 1 Number of units

The Selling Decision • The quantity of MP 3 Players that firms plan to sell depends on: – The price of a MP 3 Player – The prices of the factors of production used to make MP 3 Players – The prices of related goods (such as tapes, portable CD players, and CDs) – Expected future prices – The number of suppliers – Technology • You are going to learn how these factors influence supply. To begin, you will look at the law of supply.

Law of Supply • The law of supply states that other things remaining the same, the higher the price of a good, the greater is the quantity supplied of that good.

Supply • A supply schedule lists the quantities supplied at each different price when all other influences on the amount producers plan to sell remain the same. • A supply curve shows the relationship between the quantity supplied of a good and its price, holding constant all other influences on producers' planned sales. A supply curve is plotted in a graph that measures the quantity supplied of the good on the x-axis, and the price of the good on the y-axis.

Change in Supply • A change in the quantity supplied at each and every price is called a change in supply. It is illustrated as a shift in the supply curve. An increase in supply is shown by a rightward shift in the supply curve and a decrease in supply is shown by a leftward shift in the supply curve. [Remember, increase = rightward shift and decrease = leftward shift. An increase in supply is not an upward shift in the supply curve. What looks like an upward shift on a graph is actually a leftward shift and is a decrease in supply. ] • A change in the quantity supplied is the change in the quantity of a good that firms plan to sell when the price of the good changes and all other influences on selling plans remain the same. A change in the quantity supplied is illustrated by movement along the supply curve.

Law of Supply • Other things remaining the same, the higher the price of a good, the greater is the quantity supplied of that good. • Why? • If the quantity produced of a good increases, the opportunity cost of producing that good rises. And firms are willing to sell more of a good only if the price rises to cover the opportunity cost of producing it.

Law of Supply • The law of supply can be illustrated by a supply schedule or a supply curve. • A supply schedule lists the quantities supplied at each price, holding constant all other influences on selling plans. Price/unit S Number of units

Supply Curve • The supply curve can be interpreted as a minimum supply price curve. • It tells us the lowest price that firms are willing to accept for supplying a given quantity of the good.

Change in Supply • Four key influences on a firm’s Price/unit selling plans are: – Number of firms that produce a good – Prices of other goods – Prices of factors of production – Technology • When any of these factors change, there is a change in supply—the curve shifts. • A change in supply is shown by a new supply schedule or by a new supply curve, i. e. a shift in the supply curve. • The graph opposite summarizes the effects of these factors. S 1 S 2 Number of units

Change in Supply • A movement along the supply curve describes a change in the price of a good, with everything else remaining the same. • (A change in any other influence on selling plans except the price of the good brings a shift of the supply curve and a change in supply. ) Price/unit PB PA S B A QA QB Number of units

Price Determination • You will cover two topics in your study of price determination: • Price as a regulator • Equilibrium (equilibrium price and equilibrium quantity)

Price as a regulator • The price of a good regulates the quantities demanded and supplied. • The higher the price of a good, other things remaining the same, the smaller is the quantity demanded and the greater is the quantity supplied for that good. • The lower the price of a good, other things remaining the same, the greater is the quantity demanded and the smaller is the quantity supplied for that good. • If the price is too high, there is a surplus of goods and if the price is too low, there is a shortage of goods.

Price as a regulator • If there is a shortage of a good, the price rises, and if there is a surplus of a good, the price falls. • When there is neither a shortage nor a surplus of a good, the quantity demanded equals the quantity supplied and the price does not change. • This price is then the equilibrium price representing the quantity demanded and supplied. The equilibrium quantity is the quantity that is bought and sold.

Equilibrium • You will learn how to predict changes in prices and quantities by studying the effects of: • A change in demand • A change in supply • A change in both demand supply

Effects on Equilibrium from Change in Demand • A change in the demand for Walkmans can result from a change in any of the following: – The price of a substitute for a Walkman, such as a portable CD player – The price of a complement to a Walkman, such as an audio tape – Income – Relevant population – Tastes/Preferences of consumers • If demand increases, both the price and quantity increase (U to Z on next graph). • If demand decreases, both the price and the quantity decrease (U to T on next graph).

Effects on Equilibrium from Change in Demand Price S D 1 to D 2: • Price of a substitute rises • Price of a complement falls • Consumer income increases • Good becomes more appealing Z P 3 U P 2 P 1 T D 2 D 1 D 0 Y 2 Y 6 Y 3 D 1 to D 0: • Price of a substitute falls • Price of a complement rises • Consumer income decreases • Good becomes less appealing Quantity

Effects on Equilibrium from Change in Supply • A change in the supply for Walkmans can result from a change in any of the following: – The price of a factor of production, such as the wage rate of the labor that produces Walkmans – The price of a substitute in production to Walkmans, such as a car tape deck – The number of firms that make Walkmans – The technology used to produce Walkmans • If supply increases, the price falls and quantity increases (See U to Y on next graph). • If supply decreases, the price rises and the quantity decreases (See U to X on next graph).

Effects on Equilibrium from Change in Supply S 2 Price S 1 S 0 P 3 X U P 2 S 1 to S 0: • Price of an input falls • Price of a substitute increases • # of competitors increases • Technology increases input productivity Y P 1 D Y 1 Y 6 Y 4 S 1 to S 2: • Price of an input rises • Price of a substitute falls • # of competitors decreases Quantity

Equilibrium Changes • If both demand supply increase, the quantity increases but the price can rise, fall, or remain unchanged. (U to Z, Y or V) • If both demand supply decrease, the quantity decreases but the price can rise, fall, or remain unchanged. (U to T, X or W) • If demand increases and supply decreases, the price rises but the quantity can increase, decrease, or remain unchanged. (U to X, Z or S) • If demand decreases and supply increases, the price falls but the quantity can increase, decrease, or remain unchanged. (U to T, Y or R)

Equilibrium Changes S 2 Price S 1 S S 0 P 4 Z X P 3 P 2 W U V T P 1 Y D 2 R P 0 D 1 D 0 Y 1 Y 2 Y 6 Y 3 Y 4 Y 5 Quantity