8/14/2019 Demand and Supply 2- Lecture 2

1/14

The Market System

Demand, Supply and Price

Determination

8/14/2019 Demand and Supply 2- Lecture 2

2/14

The Market System

Market consists of:

Consumers - create a demand for a product

Demand the amount consumers desire to purchase

at various prices

Not what they will buy, but what they

would like to buy!

Effective demand must be willing ANDable to pay

8/14/2019 Demand and Supply 2- Lecture 2

3/14

Individual and Market Demand

Market demand consists of the sumof all individual demand schedulesin the market

Represented by a demand curve

At higher prices, consumers generallywilling to purchase less than at lower

prices Demand curve negative slope,

downward sloping from left to right

8/14/2019 Demand and Supply 2- Lecture 2

4/14

The Demand Curve

Price ()

Quantity Demanded (000s)

Demand

10

5

100 150

The demand curve slopesdownwards from left toright (a negative slope)indicating an inverserelationship between priceand the quantity

demanded. Quantitydemanded will be higherat lower prices than athigher prices. As pricefalls, quantity demandedrises. As price rises,quantity demanded falls.

8/14/2019 Demand and Supply 2- Lecture 2

5/14

The Demand Curve 2

The level of demand determines where on the graph it sits

Low demand nearer the origin

High demand further from the origin (assuming same

scale)

Dependent on a variety of factors Demand curve moves in response

to changing factors

8/14/2019 Demand and Supply 2- Lecture 2

6/14

The Demand Curve 3 Factors influencing demand

D = f (Pn,PnPn-1, Y, T, P, A, E)

Where:

Pn = Price

PnPn-1 = Prices of other goods substitutesand complements

Y = Incomes the level and distributionof income

T = Tastes and fashions P = The level and structure of the population A = Advertising E = Expectations of consumers

8/14/2019 Demand and Supply 2- Lecture 2

7/14

The Demand Curve 4

Changes in any of the factors other thanprice causes the demand curve to shift

either:

Left (Less demanded at each price) or

Right (More demanded at each price)

8/14/2019 Demand and Supply 2- Lecture 2

8/14

The Demand Curve 5

Price ()

Quantity Demanded (000s)

Demand

10

100

D1

D2

10 200

Changes in any of thefactors affectingdemand other than

price cause the entiredemand curve to shiftto the left (lessdemanded at eachprice) or to the right

(more demanded ateach price).

8/14/2019 Demand and Supply 2- Lecture 2

9/14

The Supply Curve

Factors influencing supply:

S = f (Pn, Pn..Pn-1,H, N,F1..Fm,E,Sp)

Where:

Pn = Price

Pn..Pn-1 = Profitability of other goods in production

and prices of goods in joint supply

H = Technology

N = Natural shocks F1..Fm = Costs of production

E = Expectations of producers

Sp = Social factors

8/14/2019 Demand and Supply 2- Lecture 2

10/14

The Supply Curve

Changes in any of the factors OTHERthanprice cause a shift in the supply curve

A shift in supply to the left the amountproducers offer for sale at every pricewill be less

A shift in supply to the right the amountproducers wish to sell at every price increases

HINT: Be careful to not confuse supply goingup and down with the direction of the shift!

8/14/2019 Demand and Supply 2- Lecture 2

11/14

The Supply CurvePrice

Quantity Bought and Sold (000s)

Supply

3

200

7

800

The supply curveslopes upwards from

left to right indicatinga positive relationshipbetween supply andprice. As price rises, itencourages producersto offer more for salewhereas a fall in pricewould lead to thequantity supplied to

fall.

8/14/2019 Demand and Supply 2- Lecture 2

12/14

The Supply CurvePrice

Quantity Bought and Sold (000s)

Supply

4

400

S1

100

S2

900

Changes in any of thefactors affecting supplyother than price willcause the entire supplycurve to shift. A shift tothe left results in alower supply at eachprice; a shift to the

right indicates a greatersupply at each price.

8/14/2019 Demand and Supply 2- Lecture 2

13/14

The MarketPrice ()

Quantity Bought and Sold (000s)

S

D

5

600

D1

300

Surplus

3

450

A shift in the demandcurve to the left willreduce the demand to300 from 500 at aprice of 5. Suppliersdo not have theinformation or time toadjust supplyimmediately and stilloffer 600 for sale at5. This results in amarket surplus (S >

D)

In an attempt to get ridof surplus stock,producers will accept

lower prices. Lowerprices in turn attractsome consumers tobuy. The processcontinues until thesurplus disappears andequilibrium is onceagain reached.

8/14/2019 Demand and Supply 2- Lecture 2

14/14

The MarketPrice ()

Quantity Bought and Sold (000s)

S

D

5

600

S1

100

Shortage

8

350

A shift in the supplycurve to the leftwould lead to lessproducts being

available for sale atevery price.Suppliers wouldonly be able to offer100 units for sale ata price of 5 butconsumers stilldesire to purchase600. This creates a

market shortage. (S< D)

The shortage in themarket would driveup prices as some

consumers areprepared to paymore. The price willcontinue to riseuntil the shortagehas been competedaway and a newequilibrium positionhas been reached.