Supply and Demand

Supply and Demand in Perfect Competition• Supply and Demand are the forces that

determine the price and quantity of good in a perfectly competitive market

Supply and Demand in Perfect Competition• Basic Premises▫ There are many buyers and sellers so that no one

can directly affect the market price.▫ The product is sold by many sellers at the same

time▫ Consumer Motivation- consumers wish to

purchase goods at the lowest possible price

• Law of Demand- people will buy less of a product at high prices and more of a product at low prices.

Demand

• Demand (D)- the amount one if willing and able to buy at each price level.

• Quantity Demanded (QD)- the amount of a good or service consumers are prepared to buy at a given price, if all other factors are held constant. (This is a point on a demand curve).

Demand vs. Quantity Demanded

• Therefore, all points of Quantity Demanded = Demand

Demand vs. Quantity Demanded

• Demand Curve- graph showing the quantity demanded at each and every possible price that might prevail in the market at a given time.

P

QD

The line is the demand curve.

A single point on the demand curve is the quantity demanded.

Demand

• Formulas to Remember▫ D+ = P+ Q+▫ Demand Curve shifts to the Right▫ Draw diagram

▫ D- = P- Q-▫ Demand Curve shifts to the Left▫ Draw diagram

Demand

• Price of Substitutes- is a good that can be used in place of another good. Changes in demand for one good will impact demand for the other.▫ Example: Jiffy PB and Skippy PB▫ Example: if the price of Jiffy PB goes up more

people will buy Skippy thus the demand for Skippy will increase.

Factors that Cause a Shift in the Demand Curve

Factors that Cause a Shift in the Demand Curve• Price of Compliment- a good that is used

in conjunction with another good. Changes in demand for one good will impact the demand for the other.▫ Example: Peanut butter and jelly▫ Example: if the price of peanut butter goes down

then more people will buy PB and thus more jelly to go with the PB. Therefore the demand for jelly will increase.

• Consumer Taste Change- Consumers taste or preference change due to advertising, fads, weather, heath concerns, holidays, a change in fashion, etc.

Factors that Cause a Shift in the Demand Curve

• Change in Consumer Income- the amount that consumers earn or are able to spend can change income. ▫ For example: Increases/decreases in wages or

taxes will affect income

Factors that Cause a Shift in the Demand Curve

• Consumer Expectations- Consumers will base present or future decisions on their expectations for the future. ▫ If consumers expect prices to increase in the

future they will buy goods now. If they expect an increase in income they will buy goods now.

Factors that Cause a Shift in the Demand Curve

• Change in the Number of Buyers- increases or decreases in population (population change). ▫ If the population increases, the number of buyers

will increase and so will demand.

Factors that Cause a Shift in the Demand Curve

• Diminishing Marginal Utility- the more of a product a buyer has, the less willing the buyer will be to buy another unit of that product.

Factors that Cause a Shift in the Demand Curve

• Elastic goods- a good is elastic when a change in price causes a relatively larger change in quantity demanded.▫ Examples- goods with many substitutes such as

soda, fruits and vegetables, bread, cars, etc.

ElasticityElastic vs. Inelastic Goods

• Inelastic goods- a good is inelastic when a change in price causes a relatively small change in quantity demanded▫ Examples- goods with little or no substitutes such

as gasoline, heating oil, medications like insulin

ElasticityElastic vs. Inelastic Goods

• Determinants of Elasticity▫ Can the purchase be delayed?▫ Are adequate substitutes available?▫ Does the purchase use a large portion of

income?

Elasticity of Demand

Elasticity of DemandDeterminant of Elasticity

Fresh Tomatoes

Table Salt Gasoline for

particular station

Gasoline in general

Services of

medical doctor

Insulin or other

medication

Butter

Can purchase be delayed?

Yes No Yes No No No Yes

Are adequate substitutes available?

Yes No Yes No No No Yes

Does purchase use

a large portion of income?

No No Yes Yes Yes No No

Type of Elasticity

Elastic Inelastic Elastic Inelastic Inelastic Inelastic Elastic

• Law of Supply- an economic principle which states that the higher the price, the greater the quantity of a good will be offered for sale.

Supply

• Supply (S)- the number of units (of a good) sellers are willing to offer for sale at a particular time at different prices

• Quantity Supplied (QS)- the amount sellers supply to the market at certain price.

Supply

• Supply Curve- the curve which shows the quantity supplied at different prices.

Supply

P

QS

The line is the supply curve.

A single point on the supply curve is the quantity supplied.

• Formulas to Remember▫ S+ = P- Q+▫ Supply Curve shifts to the Right▫ Draw diagram

▫ S- = P+ Q-▫ Supply Curve shifts to the Left▫ Draw diagram

Supply

• Rate of Productivity- the faster employees work, the more you can produce, therefore supply increases▫ The more you can produce in a shorter

period of time increases the amount you can sell (supply increase)

Factors that Change the Supply Curve

• Cost of Production- natural resources and labor ▫ the lower the cost of production the greater the

supply

Factors that Change the Supply Curve

• Availability of Resources- the less available resources are the less that can be produced, thus supply decreases. The more resources available the more that can be produced, thus supplied.

Factors that Change the Supply Curve

• Quality of Resources- better quality of natural resources will cause a business to use less resources, therefore supply will increase.

Factors that Change the Supply Curve

• Government Regulation- decrease in the cost of government regulation will increase profits at lower prices so supply will increase.

Factors that Change the Supply Curve

• Number of Suppliers- as the number of producers of a particular product increases, the amount supplied increases and vice versa.

Factors that Change the Supply Curve

• The point in which the consumers and producers reach an agreement so that goods can be exchanged.

Equilibrium Price (Market Clearing Price)

SD

P

Q

Equilibrium Price

• Maximum price that can be charged for a product.

• The result is a shortage of the product• Example: rent controlled housing

Price Ceiling

• The lowest legal price that can be charged for a product.

• The result is a surplus of the product• Example: minimum wage

Price Floor