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ECON 1900
Nancy Carson

CHAPTER 3 Demand & Supply ASSUMPTIONS $/kg of • Competitive Apples markets p S ri – many independent c buyers & sellers e – standardized products D quantity Quantity Demanded Quantity demanded depends on : • PRICE (inverse relation with quantity demanded – higher the price lower demanded ) D • Tastes (preferences) influenced by e information , advertising – direct relation – m increase in positive info or taste a • Population (and demographics)direct n d relation •Income (depend on the quality of goods – direct S relation in case of normal goods) inferior goods hi are defined as goods with an inverse relation ft er between income and demand •Prices of Substitutes (Inverse Relation , price for one goes up demand for other goes up) •Prices of Compliments(goods that go together) If the price of hamburger patties increases demand for hamburger buns decreases – Inverse Relation •Expectations-Fear of Scarcity,Price Expectations if expectes the future price of good x to increase then deman of good x increase today DEMAND • shows the relationship between price and quantity demanded (holding fixed all other determinants of demand) • shows the various amounts consumers are willing and able to purchase at each price, during some specified period of time • The height of the demand curve at a particular quantity represents the most consumers are willing to pay for that last unit Demand schedule and graph P Q d Demand $ 1 80 Figure 3-1 6 $ 2 55 5 4 $ 3 35 price 1 $ 4 20 0 0 20 40 60 80 100 quantity $ 5 10 LAW OF DEMAND • all else equal, as price falls, the quantity demanded rises (& vice versa) • supported by: – concept of diminishing marginal utility – income effect (purchasing powers) – substitution effect INDIVIDUAL VS. MARKET DEMAND price QD–1st QD–2nd Q D buyer market buyer $5 10 12 22 $4 20 23 43 $3 35 39 74 $2 55 60 115 $1 80 87 167 Individual Demand 1 Individual Demand 2 $5 $5 $4 $4 $3 $3 p$2ce pr$2e $1 $1 $0 $0 0 20 35 40 60 80 0 20 3940 60 80 quantity quantity Market Demand $5 $4 $3 pr$2e $1 $0 0 50 74 100 150 quantity © 2002 McGraw-Hill Ryerson Ltd. Chapter 3 8 PA D movement along the P1  P  curve 2 Q1Q 2 Q A • change in price  change in quantity demanded CHANGE IN DEMAND P D D’ A An increase in demand is a shift to the right. Q A • when any OTHER determinant changes shift in the demand curve CHANGE IN DEMAND Changes in money incomes: • when income increases demand for NORMAL goods increases (the whole curve shifts to the right) demand for INFERIOR goods decreases CHANGE IN DEMAND P When the price of a SUBSTITUTE increases …the D demand curve shifts to the right Q When the price of a Compliment increases …shifts to the left D Q QUANTITY SUPPLIED Quantity Supplied depends on: • Price (Move up along the Supply Curve if Price increases) constitutes supply curve The rest are supply Shifters • resource (input) prices (Inverse Relation with quantity supplied ,resource price increase curve moves left) • Technology(if improves then supply increase , curves right) • taxes & subsidies(tax Increases supply decreases , curve shifts left) , subsidies Increases supply Increases , Shifts right •prices of other good being produced (If the price of corn goes up , supply goes up , cotton supply goes down) ***Substitutes in production are not the same as Substitutes in Consumption (Corn and cotton can be substitutes in production if there’s only one field ) Compliments of production – firm produces beef & Cow Hide – when the price of beef increases the supply of cow hide increases ,curve shifts right •price expectations(If there’s a possibility of price •today) Inverse relation •number of sellers (Direct Relation , Curve shifts to the right) SUPPLY • shows the relationship between price and quantity supplied (ceteris paribus) • Illustrates
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