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Supply and Demand

The Basics
• Demand Supply
Schedule schedule
.
• Price QTY Price QTY
• $3.50 320
$3.50 40
• $3.70 300
$3.70 100
• $3.90 280
• $4.10 260 $3.90 160

• $4.30 240 $4.10 200


• $4.50 200
$4.30 240
• $4.70 160
$4.50 260
• $4.90 120
• $5.10 80 $4.70 280

• $5.30 40 $4.90 300

$5.10 320
What are three tasks that
the price system performs
for our economy?

1. Rationing of goods and services


2. Determination of wages.
3. Allocation of limited resources.
Laws of Supply and
Demand
• What is Demand? • What is Supply?
• The willingness to buy a • Supply is the quantity of a
good or service at all good or service a firm is
prices willing to produce at all
• What is the law of prices.
Demand? • What is the law of
• If nothing else changes, Supply?
the quantity demand of a • If nothing else changes,
good or service is greater firms are willing to supply
at lower prices than a greater quantity of good
higher. or service at higher prices
than lower.
Demand Curve for
Xbox 360
D
A
$500
Price per XBox

B
$450
C
400
E
350
F
300
G
250
H
200
D
0 45 50 55 60 65 70 75
Quantity Demanded
in Billions of Xboxes per Year

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.


Movement along the curve versus
shifts in the Demand curve

D1

D0
Price per Xbox

C
$350

F
250

D1

D0

Quantity Demanded in Billions of Xboxes per year

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.


Factors that will cause a shift
in demand (decrease or increase)

• Price of other goods ( substitute or


complementary)
• Outlook (consumer expectation of future income
and prices)
• Income (normal goods versus inferior goods)
• Number of potential customers (pop.of market)
• Taste (fads or fashions)
Supply Curve for
Xbox 360
a
$500 S
b
450
c
Price per Xbox

400
e
350
f
300
g
250
h
200
S

0 30 40 50 60 70 80 90
Quantity Supplied
in Billions of Xboxes per Year

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.


Movements along versus
Shifts of a Supply Curve

S0

S1

c
Price per XBox

$400

f
310

S0

S1

Quantity Supplied
in Billions of XBox per Year

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.


Factors that will cause a shift
in supply (decrease or increase)

• Productivity (Improvements in machines and production


processes of a good or service)
• Inputs ( Change in the price of inputs required to produce
the good or service.)
• Government Actions (Subsidies, Taxes and Regulations)

• Technology (Improvements in machines and production


processes of a good or service)
• Outputs ( Price changes in other products produced by
the firm)
• Expectations (outlook of future prices and profits)
• Size of Industry (Number of firms in the industry)
Equilibrium

• Equilibrium: The condition that exists when


quantity supplied and quantity demanded are
equal. At equilibrium, there is no tendency for
price to change.
• Shortage or excess demand: The condition that
exists when quantity demanded exceeds quantity
supplied at the current price.
• Surplus or excess supply: The condition that
exists when quantity supplied exceeds quantity
demanded at the current price.
Supply-Demand
Market Equilibrium
D S
A a
$500
Price per xbox 360

450

400
E
350

300
g G
250
D
200
S
0 30 40 50 60 70 80 90
Quantity
in Billions of Xbox 360 per Year

Copyright© 2003 South-Western/Thomson Learning. All rights reserved.


Excess Demand

• Excess demand, or
shortage, is the
condition that exists
when quantity
demanded exceeds
quantity supplied at the
current price.
• When quantity demanded
exceeds quantity supplied,
price tends to rise until
equilibrium is restored.
Excess Supply

• Excess supply, or
surplus, is the condition
that exists when quantity
supplied exceeds
quantity demanded at
the current price.
• When quantity supplied
exceeds quantity demanded,
price tends to fall until
equilibrium is restored.
Changes in
Equilibrium (IRDL)

• Increase in demand leads • Increase in supply leads


to higher equilibrium price to lower equilibrium price
and higher equilibrium and higher equilibrium
quantity. quantity.
Changes in
Equilibrium (IRDL)

• Decrease in demand • Decrease in supply


demand leads to lower leads to higher price and
price and lower quantity lower quantity
exchanged. exchanged.