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8/12/2019 Microeconomics Ch 3
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M i c r o e c o n o m i c
s
Dr. Karim Kobeissi
8/12/2019 Microeconomics Ch 3
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Chapter 3: Supply &
Demand
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Introduction to Demand
Demand is an economic principle that describes a
consumer's desire, ability, and willingness to pay a
price for a specic good or serice!
Demand can refer to one indiidual consumer or to the
total demand of all consumers in the mar"et (market
demand)!
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Introduction to Demand
# demand schedule is a table thatlists the arious $uantities of aproduct or serice that someone is
willing to buy oer a range ofpossible prices!
Price per Widget 1($) Quantity Demandedo Widget per day
% %( (
%3 )
% *
%+ +
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Introduction to Demand
# demand schedule can be shown aspoints on a graph!
-he graph lists prices on the !ertical a"isand $uantities demanded on thehori#ontal a"is!
.ach point on the graph shows how many
units of the product or serice an indiidualwill buy at a particular price!
-he demand cur!e is the line thatconnects these points!
8/12/2019 Microeconomics Ch 3
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+ 3 ( ) / * 0 + ++
%
%+
%
%3
%(
%
%)
Demand ur!e or Widgets
Demand Cure for 1idgets
Quantity Demanded o Widgets
Price per Widget
1hat
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Introduction to Demand
-he demand cure slopes downward!
-his shows that people are normally willingto buy less of a product at a high price and
more at a low price! #ccording to the la% o demand, $uantity
demanded and price moe in oppositedirections!
+ 3 ( ) / * 0 +++%
%+
%
%3
%(
%
%)
Demand ur!e or Widgets
Demand Cure for
1idgets
Quantity Demanded o Widgets
Price per Widget
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Introduction to Demand
1e buy products for their utility2 thepleasure, usefulness, or satisfaction theygie us!
1hat is your utility for the following
products 45easure your utility by thema6imum amount you would be willing topay for this product7!
Do we hae the same utility forthese goods
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Introduction to Demand
8ne reason the demand cure slopesdownward is due to diminish marginalutility
-he principle o diminishing marginalutility says that our additional satisfactiontends to go down as we consume more andmore units!
-o ma"e a buying decision, we considerwhether the satisfaction we e6pect togain is worth the money we must gie up!
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Changes in Demand
Change in the $uantity demanded
due to a price change occurs #98;the demand cure
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
Demand ur!e or Widgets
Demand Cure for 1idgets
Quantity Demanded o Widgets
Price per Widget
At $3 per Widget, the
Quantity demanded of
widgets is 6.
An increase in the Price of
Widgets from $3 to $4 willlead to a decrease in theQuantity Demanded ofWidgets from 6 to 4.
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Changes in Demand
?rices of related goods a@ect ondemand 0ubstitute goodsa substitute is a
product that can be used in the place ofanother! -he price of the substitute good and demand for the
other good are directly related
Aor e6ample, Co"e ?rice ?epsi Demand
omplementary goodsa complimentis a good that goes well with another good! 1hen goods are complements, there is an inerse
relationship between the price of one and thedemand for the other
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Changes in Demand
Changes in any of the &*, factors(other than price) causes thedemand cure to shift either:
Decrease in Demand shifts to the 9eft49ess demanded at each price7!
8 Increase in Demand shifts to the ight
45ore demanded at each price7!
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Changes in Demand
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
Demand ur!e or Widgets
Demand Cure for 1idgets
Quantity Demanded o Widgets
Price per Widget
( ) * + + +(%
%+
%
%3
%(
%
%)
ncrease in Demand
8rginal Demand Cure
ew Demand Cure
Quantity Demanded o Widets
Price per Widget
e!eral factors willchange the demand forthe good "shift the entiredemand cur!e#
As an eample, supposeconsumer incomeincreases. %he demand forWidgets at all prices will
increase.
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Changes in Demand
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
Demand ur!e or Widgets
Demand Cure for 1idgets
Quantity Demanded o Widgets
Price per Widget
( ) * + +%
%+
%
%3
%(
%
%)Decrease in Demand
8riginal Demand Cure
ew Demand Cure
Quantity Demanded o Widgets
Price per Widget
As an eample, supposeWidgets &ecome lesspopular to own.
Demand will alsodecrease due to changesin factors other than price.
8/12/2019 Microeconomics Ch 3
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Introduction to Supply
0upplyrefers to the arious $uantities ofa good or serice that producers arewilling to sell at all possible mar"et
prices!
Supply can refer to the output of oneproducer or to the total output of allproducers in the mar"et (marketsupply)!
8/12/2019 Microeconomics Ch 3
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Introduction to Supply
# supply scheduleis a table thatshows the $uantities producers arewilling to supply at arious prices
Price per Widget ($) Quantity 0upplied oWidget per day
% +
%( *%3 )
% (
%+
8/12/2019 Microeconomics Ch 3
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Introduction to Supply
# supply schedule can be shown as pointson a graph!
-he graph lists prices on the !ertical a"isand $uantities supplied on the hori#ontala"is!
.ach point on the graph shows how manyunits of the product or serice a producer4or group of producers7 would willing sell ata particular price!
-he supply cur!eis the line that connectsthese points!
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1hat do you notice about the supply cure
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
0upply ur!e or Widgets
Supply Cure
Quantity 0upplied o Widgets
Price per Widget
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I n t r o d u c t i o n t o S u p p l y
#s the price for a good rises, the $uantity
supplied rises and the $uantitydemanded falls! #s the price falls, the$uantity supplied falls and the $uantitydemanded rises!
-he la% o supplyholds that producerswill normally o@er more for sale at higherprices and less at lower prices!
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
0upply ur!e or Widgets
Supply Cure
Quantity 0upplied o Widgets
Price per Widget
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Introduction to Supply
-he reason the supply cure slopesupward is due to costs and prot!
?roducers purchase resources and usethem to produce output! ?roducers will incur costs as they bid
resources away from their alternatie
uses!
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Introduction to Supply
Businesses proide goods and sericeshoping to ma"e a prot!
Prot is the money a business has left
oer after it coers its costs! Businesses try to sell at prices high
enough to coer their costs with someprot left oer!
-he higher the price for a good, the moreprot a business will ma"e after payingthe cost for resources!
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Changes in Supply
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
0upply ur!e or Widgets
Supply Cure
Quantity 0upplied o Widgets
Price per Widget
At $3 per Widget, theQuantity supplied of
widgets is 6.
'f the price of Widgets fellto $(, then the Quantityupplied would fall to 4Widgets.
Change in the $uantity supplied due to a pricechange occurs #98; the supply cure
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C h a n g e s i n S u p p l y
Supply Cures can also shift in response to thefollowing factors:
0ubsidies and ta6es: goernment subsides encourageproduction, while ta6es discourage production
*echnology: improements in production increaseability of rms to supply
2ther goods: businesses consider the price of goodsthey could be producing
3umber of sellers: how many rms are in the mar"et
,6pectations: businesses consider future prices and
economic conditions esource costs: cost to purchase factors of production
will inEuence business decisions
0*23,: factors that shift the supply cure
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Changes in Supply
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
0upply ur!e or Widgets
Supply Cure
Quantity 0upplied o Widgets
Price per Widget
( ) * + + +(%
%+
%
%3
%(
%
%)
ncrease in 0upply
8riginal Supply Cure
ew Supply Cure
Quantities 0upplied o Widgets
Price per Widget
e!eral factors willchange the demand forthe good "shift the entiredemand cur!e#
As an eample, supposethat there is animpro!ement in thetechnology used toproduce widgets.
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Changes in Supply
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
0upply ur!e or Widgets
Supply Cure
Quantity 0upplied o Widgets
Price per Widget
( ) * + +%
%+
%
%3
%(
%
%)
Decrease in 0upply
8riginal Supply Cure
ew Supply Cure
Quantity 0upplied o Widgets
Price per Widget
upply can also decreasedue to factors other than achange in price.
As an eample, supposethat a large num&er ofWidget producers go outof &usiness, decreasingthe num&er of suppliers.
8/12/2019 Microeconomics Ch 3
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Changes in Supply
Changes in any of the factors otherthan pricecauses the supply cureto shift either:
Decrease in Supply shifts to the 9eft49ess supplied at each price7
8
Increase in Supply shifts to the ight45ore supplied at each price7
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Changes in Supply
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Supply and Demand at 1or"
5ar"ets bring buyers and sellerstogether!
-he forces of supply and demandwor" together in mar"ets to establishprices!
In our economy, prices form the basis
of economic decisions!
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Supply and Demand at 1or"
Supply and Demand Schedule can becombined into one chart!
Price perWidget ($)
QuantityDemanded oWidget per day
Quantity0upplied oWidget per day
% +
%( ( *
%3 ) )
% * (
%+ +
8/12/2019 Microeconomics Ch 3
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Supply and Demand at 1or"
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
0upply and Demand or Widgets
Demand Cure
Supply Cure
Quantity o Widgets
Price per Widget
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Supply and Demand at 1or"
# surplus is the amount by which the$uantity supplied is higher than the$uantity demanded!
# surplus signals that the price is too high! #t that price, consumers will not buy all of
the product that suppliers are willing tosupply!
In a competitie mar"et, a surplus will notlast! Sellers will lower their price to selltheir goods!
S l d D d t 1 "
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S up p l y a nd D e ma nd a t 1or "
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
0upply and Demand or Widgets
Demand Cure
Supply Cure
Quantity o Widgets
Price per Widget
uppose that the price inthe Widget mar)et is $4.
At $4, Quantitydemanded will &e 4Widgets
At $4, Quantity suppliedwill &e * Widgets.
At $4, there will &e asurplus of 4 Widgets.
Surplus
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Supply and Demand at 1or"
1hen operating without restriction, our mar"eteconomy eliminates shortages and surpluses!
8er time, a surplus forces the price down and ashortage forces the price up until supply and demandare balanced!
-he point where they achiee balance is the
e4uilibrium price!#t this price, neither a surplus nor ashortage e6ists!
8nce the mar"et price reaches e$uilibrium, ittends to stay there until either supply or
demand changes! 1hen that happens, a temporary surplus or
shortage occurs until the price adFusts to reach anew e$uilibrium price!
S up p l y a nd D e ma nd a t 1or "
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S up p l y a nd D e ma nd a t 1or "
+ 3 ( ) / * 0 + ++%
%+
%
%3
%(
%
%)
0upply and Demand or Widgets
Demand Cure
Supply Cure
Quantity o Widgets
Price per Widget
uppose that the price inthe Widget mar)et is $3.
At $3, Quantity suppliedwill &e 6 Widgets
At $3, Quantitydemanded will &e 6Widgets.
At $3, there will &eneither a surplus or a
shortage.
