8/9/2019 Supply, Demand and Market Equilibrium.pdf
1/82
Supply Demand and
Market Equilibrium
8/9/2019 Supply, Demand and Market Equilibrium.pdf
2/82
Introduction to Demand
The forces of supply and demand work together to set prices. Demand is the desire, willingness, and ability to buy a good or
service.
Supply can refer to one individual consumer or to the total demand
of all consumers in the market (market demand). Based on that definition, which of the following do you have a
demand for?
8/9/2019 Supply, Demand and Market Equilibrium.pdf
3/82
Introduction to Demand
A demand schedule is a table that lists the variousquantities of a product or service that someone is willing to
buy over a range of possible prices.
Price per Widget ($) Quantity Demanded of
Widget per day
$5 2$4 4
$3 6
$2 8
$1 10
8/9/2019 Supply, Demand and Market Equilibrium.pdf
4/82
Introduction to Demand
A demand schedule can be shown as points on a graph.
The graph lists prices on the vertical axis and
quantitiesdemanded on the horizontal axis.
Each point on the graph shows how many units of theproduct or service an individual will buy at a particularprice.
The demand curve is the line that connects these points.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
5/82
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
What do you notice about the demandcurve?
How would you describe the slope of thedemand curve?
Do you think that price and quantitydemanded tend to have this relationship?
8/9/2019 Supply, Demand and Market Equilibrium.pdf
6/82
Introduction to Demand The demand curve slopes downward.
This shows that people are normally willing to buy less of aproduct at a high price and more at a low price.
According to the law of demand, quantity demanded andprice move in opposite directions.
$0
$1
$2
$3
$4$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
8/9/2019 Supply, Demand and Market Equilibrium.pdf
7/82
Introduction to Demand We buy products for their utility- the pleasure, usefulness, or
satisfaction they give us. What is your utility for the following products? (Measure your
utility by the maximum amount you would be willing to payfor this product)
Do we have the same utility for these goods?
8/9/2019 Supply, Demand and Market Equilibrium.pdf
8/82
Introduction to Demand
One reason the demand curve slopes downward is due todiminish marginal utility
The principle of diminishing marginal utility saysthat our additional satisfaction tends to go down as we
consume more and more units.
To make a buying decision, we consider whether thesatisfaction we expect to gain is worth the money we mustgive up.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
9/82
Changes in Demand Change in the quantity demanded due to a price change occurs
ALONG the demand curve
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
At $3 per Widget, theQuantity demanded ofwidgets 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.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
10/82
Changes in Demand
Demand Curves can also shift in response to the followingfactors:
Buyers (# of): changes in the number of consumers
Income: changes in consumers income Tastes: changes in preference or popularity of product/ service
Expectations: changes in what consumers expect to happen in thefuture
Related goods: compliments and substitutes BITER: factors that shift the demand curve
8/9/2019 Supply, Demand and Market Equilibrium.pdf
11/82
Changes in Demand
Prices of related goods affect on demand Substitute goods a substitute is a product that can be used in the
place of another.
The price of the substitute good and demand for the other good are directly
related For example, Coke Price Pepsi Demand
Complementary goods a compliment is a good that goes wellwith another good.
When goods are complements, there is an inverse relationship between theprice of one and the demand for the other
For example, Peanut Butter Jam Demand
8/9/2019 Supply, Demand and Market Equilibrium.pdf
12/82
Changes in Demand
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12 14
PriceperWidget
Quantity Demanded of Widets
Increase in Demand
Orginal Demand Curve
New Demand Curve
Several factors willchange the demand forthe good (shift the entiredemand curve)
As an example, supposeconsumer incomeincreases. The demand forWidgets at all prices will
increase.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
13/82
Changes in Demand
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Demanded of Widgets
Demand Curve for Widgets
Demand Curve for Widgets
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Demanded of Widgets
Decrease in Demand
Original Demand Curve
New Demand Curve
As an example, supposeWidgets become lesspopular to own.
Demand will alsodecrease due to changesin factors other than price.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
14/82
Changes in Demand
Changes in any of the factors other than price causes thedemand curve to shift either:
Decrease in Demand shifts to the Left (Less demanded ateach price)
OR
Increase in Demand shifts to the Right (More demanded at
each price)
8/9/2019 Supply, Demand and Market Equilibrium.pdf
15/82
Demand Practice
8/9/2019 Supply, Demand and Market Equilibrium.pdf
16/82
1. The income of the Pago-Pagans declines
after a typhoon hits the island.
Quantity
Price
DD1
2 P P i d f h b if l
8/9/2019 Supply, Demand and Market Equilibrium.pdf
17/82
2. Pago-Pagan is named on of the most beautiful
islands in the world and tourism to the island
doubles.
Quantity
Price
D
D1
8/9/2019 Supply, Demand and Market Equilibrium.pdf
18/82
3. The price of Frisbees decreases. (Frisbees are a
substitute good for boomerangs)
Quantity
Price
DD1
8/9/2019 Supply, Demand and Market Equilibrium.pdf
19/82
4. The price of boomerang t-shirts decreases, which I
assume all of you know are a complementary good.
Quantity
Price
D
D1
5 Th B M f t d id t dd
8/9/2019 Supply, Demand and Market Equilibrium.pdf
20/82
5. The Boomerang Manufactures decide to add a money
back guarantee on their product, which increases the
popularity for them.
Quantity
Price
D
D1
6 M P b i t b li th t th
8/9/2019 Supply, Demand and Market Equilibrium.pdf
21/82
6. Many Pago-pagans begin to believe that they
may lose their jobs in the near future. (Think
expectations!)
Quantity
Price
DD1
8/9/2019 Supply, Demand and Market Equilibrium.pdf
22/82
7. Come up with your own story about boomerangs and the
Pago-Pagans. Write down the story, draw the change in
demand based on the story, and explain why demand
changed.
Quantity
Price
D
8/9/2019 Supply, Demand and Market Equilibrium.pdf
23/82
Introduction to Supply
Supply refers to the various quantities of a good orservice that producers are willing to sell at all possiblemarket prices.
Supply can refer to the output of one producer or tothe total output of all producers in the market(market supply).
8/9/2019 Supply, Demand and Market Equilibrium.pdf
24/82
Introduction to Supply
A supply schedule is a table that shows the quantitiesproducers are willing to supply at various prices
Price per Widget ($) Quantity Supplied of Widget
per day
$5 10
$4 8$3 6
$2 4
$1 2
8/9/2019 Supply, Demand and Market Equilibrium.pdf
25/82
Introduction to Supply
A supply schedule can be shown as points on a graph.
The graph lists prices on the vertical axis and quantitiessupplied on the horizontal axis.
Each point on the graph shows how many units of theproduct or service a producer (or group of producers)would willing sell at a particular price.
The supply curve is the line that connects these points.
Supply Curve for Widgets
8/9/2019 Supply, Demand and Market Equilibrium.pdf
26/82
What do you notice about the supply curve?
How would you describe the slope of the supplycurve?
Do you think that price and quantity suppliedtend to have this relationship?
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Supplied of Widgets
Supply Curve for Widgets
Supply Curve
8/9/2019 Supply, Demand and Market Equilibrium.pdf
27/82
Introduction to Supply As the price for a good rises, the quantity supplied rises and
the quantity demanded falls. As the price falls, the quantitysupplied falls and the quantity demanded rises.
The law of supply holds that producers will normally offermore for sale at higher prices and less at lower prices.
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWi
dget
Quantity Supplied of Widgets
Supply Curve for Widgets
Supply Curve
8/9/2019 Supply, Demand and Market Equilibrium.pdf
28/82
Introduction to Supply
The reason the supply curve slopes upward is due to costs andprofit.
Producers purchase resources and use them to produce output.
Producers will incur costs as they bid resources away from theiralternative uses.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
29/82
Introduction to Supply
Businesses provide goods and services hoping to make aprofit.
Profit is the money a business has left over after itcovers its costs.
Businesses try to sell at prices high enough to covertheir costs with some profit left over.
The higher the price for a good, the more profit abusiness will make after paying the cost for resources.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
30/82
Changes in Supply
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Supplied of Widgets
Supply Curve for Widgets
Supply Curve
At $3 per Widget, theQuantity supplied ofwidgets is 6.
If the price of Widgets fellto $2, then the QuantitySupplied would fall to 4Widgets.
Change in the quantity supplied due to a price change
occurs ALONG the supply curve
8/9/2019 Supply, Demand and Market Equilibrium.pdf
31/82
Changes in Supply
Supply Curves can also shift in response to the following factors: Subsidies and taxes: government subsides encourage production,
while taxes discourage production
Technology: improvements in production increase ability of firmsto supply
Other goods: businesses consider the price of goods they could beproducing
Number of sellers: how many firms are in the market
Expectations: businesses consider future prices and economicconditions
Resource costs: cost to purchase factors of production willinfluence business decisions
STONER: factors that shift the supply curve
8/9/2019 Supply, Demand and Market Equilibrium.pdf
32/82
Changes in Supply
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Supplied of Widgets
Supply Curve for Widgets
Supply Curve
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12 14
PriceperWidget
Quantities Supplied of Widgets
Increase in Supply
Original Supply Curve
New Supply Curve
Several factors willchange the demand forthe good (shift the entiredemand curve)
As an example, supposethat there is animprovement in thetechnology used toproduce widgets.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
33/82
Changes in Supply
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Supplied of Widgets
Supply Curve for Widgets
Supply Curve
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity Supplied of Widgets
Decrease in Supply
Original Supply Curve
New Supply Curve
Supply can also decrease
due to factors other thana change in price.
As an example, supposethat a large number ofWidget producers go outof business, decreasingthe number of suppliers.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
34/82
Changes in Supply
Changes in any of the factors other than price causes thesupply curve to shift either:
Decrease in Supply shifts to the Left (Less supplied at eachprice)
OR
Increase in Supply shifts to the Right (More supplied at each
price)
8/9/2019 Supply, Demand and Market Equilibrium.pdf
35/82
Supply Practice
8/9/2019 Supply, Demand and Market Equilibrium.pdf
36/82
Cost to Produce Amount of Supply Supply Curve Shifts
Cost of Resources Falls
Cost of Resources
Rises
Productivity Decreases
Productivity Increases
New Technology
Higher Taxes
Lower Taxes
Government Pays
Subsidy
8/9/2019 Supply, Demand and Market Equilibrium.pdf
37/82
1. The government of Pago-Paga adds a
subsidy to boomerang production.
Quantity
Price
SS1
8/9/2019 Supply, Demand and Market Equilibrium.pdf
38/82
2. Boomerang producers also produce Frisbees.
The price of Frisbees goes up.
Quantity
Price
S
S1
8/9/2019 Supply, Demand and Market Equilibrium.pdf
39/82
3. The government of Pago-Paga adds a new
tax to boomerang production.
Quantity
Price
S
S1
8/9/2019 Supply, Demand and Market Equilibrium.pdf
40/82
4. Boomerang producers expect an increase in
the popularity of boomerangs worldwide.
Quantity
Price
SS1
8/9/2019 Supply, Demand and Market Equilibrium.pdf
41/82
5. The price of plastic, a major input in boomerang
production, increases.
Quantity
Price
S
S1
6. Pago-Pagan workers are introduced to coffee as Pago-
8/9/2019 Supply, Demand and Market Equilibrium.pdf
42/82
6. Pago Pagan workers are introduced to coffee as Pago
Paga become integrated into the world market and their
productivity increases drastically.
Quantity
Price
SS1
7. Come up with your own story about boomerangs and the
8/9/2019 Supply, Demand and Market Equilibrium.pdf
43/82
7. Come up with your own story about boomerangs and the
Pago-Pagans. Write down the story, draw the change in
supply based on the story, and explain why supply
changed.
Quantity
Price
S
8/9/2019 Supply, Demand and Market Equilibrium.pdf
44/82
Supply and Demand at Work
Markets bring buyers and sellers together.
The forces of supply and demand work together inmarkets to establish prices.
In our economy, prices form the basis of economicdecisions.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
45/82
Supply and Demand at Work
Supply and Demand Schedule can be combined into onechart.
Price per Widget ($) Quantity Demanded
of Widget per day
Quantity Supplied
of Widget per day
$5 2 10
$4 4 8
$3 6 6
$2 8 4
$1 10 2
8/9/2019 Supply, Demand and Market Equilibrium.pdf
46/82
Supply and Demand at Work
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity of Widgets
Supply and Demand for Widgets
Demand Curve
Supply Curve
8/9/2019 Supply, Demand and Market Equilibrium.pdf
47/82
Supply and Demand at Work
A surplus is the amount by which the quantitysupplied is higher than the quantity demanded.
A surplus signals that the price is too high.
At that price, consumers will not buy all of the productthat suppliers are willing to supply.
In a competitive market, a surplus will not last. Sellerswill lower their price to sell their goods.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
48/82
Supply and Demand at Work
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantit of Wid ets
Supply and Demand for Widgets
Demand Curve
Supply Curve
Suppose that the price inthe Widget market is $4.
At $4, Quantitydemanded will be 4Widgets
At $4, Quantity suppliedwill be 8 Widgets.
At $4, there will be asurplus of 4 Widgets.
Surplus
8/9/2019 Supply, Demand and Market Equilibrium.pdf
49/82
Supply and Demand at Work
A shortage is the amount by which the quantitydemanded is higher than the quantity supplied
A shortage signals that the price is too low.
At that price, suppliers will not supply all of the productthat consumers are willing to buy.
In a competitive market, a shortage will not last. Sellers
will raise their price.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
50/82
Supply and Demand at Work
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Supply and Demand for Widgets
Demand Curve
Supply Curve
Suppose that the price inthe Widget market is $2.
At $2, Quantity suppliedwill be 4 Widgets
At $2, Quantitydemanded will be 8Widgets.
At $2, there will be ashortage of 4 Widgets.
Shortage
8/9/2019 Supply, Demand and Market Equilibrium.pdf
51/82
Supply and Demand at Work
When operating without restriction, our marketeconomy eliminates shortages and surpluses.
Over time, a surplus forces the price down and a shortage forcesthe price up until supply and demand are balanced.
The point where they achieve balance is the equilibrium price.At this price, neither a surplus nor a shortage exists.
Once the market price reaches equilibrium, it tends to staythere until either supply or demand changes.
When that happens, a temporary surplus or shortage occurs until
the price adjusts to reach a new equilibrium price.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
52/82
Supply and Demand at Work
$0
$1
$2
$3
$4
$5
$6
0 2 4 6 8 10 12
PriceperWidget
Quantity of Widgets
Supply and Demand for Widgets
Demand Curve
Supply Curve
Suppose that the price inthe Widget market is $3.
At $3, Quantity suppliedwill be 6 Widgets
At $3, Quantitydemanded will be 6Widgets.
At $3, there will beneither a surplus or a
shortage.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
53/82
Supply and Demand for Boomerangs
8/9/2019 Supply, Demand and Market Equilibrium.pdf
54/82
$0
$2
$4
$6
$8
$10
$12
0 2 4 6 8 10 12
PriceperB
oomerang
Quantity of Boomerangs
Demand
Supply
Surplus
Supply and Demand for Boomerangs
8/9/2019 Supply, Demand and Market Equilibrium.pdf
55/82
$0
$2
$4
$6
$8
$10
$12
0 2 4 6 8 10 12
PriceperB
oomerang
Quantity of Boomerangs
Demand
Supply
Shortage
Supply and Demand for Boomerangs
8/9/2019 Supply, Demand and Market Equilibrium.pdf
56/82
6
$0
$2
$4
$6
$8
$10
$12
0 2 4 6 8 10 12
PriceperB
oomerang
Quantity of Boomerangs
Demand
Supply
Market Equilibrium
12
Supply and Demand for Boomerangs
8/9/2019 Supply, Demand and Market Equilibrium.pdf
57/82
$0
$2
$4
$6
$8
$10
$12
0 2 4 6 8 10 12 14 16
PriceperBoomerang
Quantity of Boomerangs
Original Demand
Supply
New Demand
1. The income of the Chapel Hill townies
8/9/2019 Supply, Demand and Market Equilibrium.pdf
58/82
p
declines after an early loss during March
Madness.
Quantity
Price
D
S
D1
P1
Q1
P2
Q2
2. Chapel Hill is named one of the most
8/9/2019 Supply, Demand and Market Equilibrium.pdf
59/82
p
beautiful towns in North Carolina and
tourism doubles
Quantity
Price
D
S
D1
P2
P1
Q1 Q2
3 Th i f bl ti d (Bl
8/9/2019 Supply, Demand and Market Equilibrium.pdf
60/82
3. The price of blue ties decreases. (Blue
ties are a substitute good for purple ties)
Quantity
Price
D
S
D1
P1
Q1
P2
Q2
4. The Federal government has been warning the
8/9/2019 Supply, Demand and Market Equilibrium.pdf
61/82
public about the possibility of a recession and job
loss in the RDU area. (Think expectations!)
Quantity
Price
D
S
D1
P1
Q1
P2
Q2
8/9/2019 Supply, Demand and Market Equilibrium.pdf
62/82
5. The price of purple striped shirts decreases (Purple
striped shirts are a complement to purple ties)
Quantity
Price
D
S
D1
P1
Q1
P2
Q2
6 The price of silk increases (ties are made
8/9/2019 Supply, Demand and Market Equilibrium.pdf
63/82
6. The price of silk increases (ties are made
with silk).
Quantity
Price
D
S
P2
S1
P1
Q2 Q1
7 Th g t dd b id t ti
8/9/2019 Supply, Demand and Market Equilibrium.pdf
64/82
7. The government adds a subsidy to tie
production.
Quantity
Price
D
S
S1
P1
Q1
P2
Q2
8. After the release ofAlan Greenspans first jazzfl t lb l ti d ti
8/9/2019 Supply, Demand and Market Equilibrium.pdf
65/82
flute album, purple tie producers are expecting a
huge increase in demand and thus an increase in
the price.
Quantity
Price
D
SS1
P1
Q1
P2
Q2
9 Congress enacts new tax on the production of
8/9/2019 Supply, Demand and Market Equilibrium.pdf
66/82
9. Congress enacts new tax on the production of
purple ties.
Quantity
Price
D
S
S1
P1
Q1
P2
Q2
10. As the popularity of purple ties sweeps the
O C d
8/9/2019 Supply, Demand and Market Equilibrium.pdf
67/82
greater Orange County area, new producers
enter the purple tie market.
Quantity
Price
D
S
S1
P1
Q1
P2
Q2
11. Purple ties are named by GQ magazine as a must
8/9/2019 Supply, Demand and Market Equilibrium.pdf
68/82
have for all young professionals. At the same time, a
new textile machine decreases the cost of producing
purple ties.
Quantity
Price
D
S S1
D1
P1
Q1 Q2
12. The price of pink ties (a related good that most purple tie producers also
produce) rises as spring approaches Tie consumers in Chapel Hill begin to
8/9/2019 Supply, Demand and Market Equilibrium.pdf
69/82
produce) rises as spring approaches. Tie consumers in Chapel Hill begin to
expect purple ties to be put on sale since spring is coming, so they put off
purchasing.
Quantity
Price
D
S
S1
D1
P1
Q1Q2
8/9/2019 Supply, Demand and Market Equilibrium.pdf
70/82
Disequilibrium
Describes a market that is not in equilibrium:
the quantity supplied is not equal to the quantity
demanded at the actual price.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
71/82
Elasticity
A measure of the relationship between a change in the quantitydemanded of a particular good and a change in its price. Priceelasticity of demand is a term in economics often used whendiscussing price sensitivity.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
72/82
If a small change in price is accompanied by a large change in
quantity demanded, the product is said to be elastic (orresponsive to price changes). Conversely, a product is inelasticif a large change in price is accompanied by a small amount ofchange in quantity demanded.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
73/82
Factors ffecting Demand
Price of the Product
There is an inverse (negative) relationship between the price ofa product and the amount of that product consumers arewilling and able to buy. Consumers want to buy more of aproduct at a low price and less of a product at a high price. Thisinverse relationship between price and the amount consumersare willing and able to buy is often referred to as The Law ofDemand
.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
74/82
The Consumer's Income
The effect that income has on the amount of a product that
consumers are willing and able to buy depends on the type ofgood we're talking about. For most goods, there is a positive(direct) relationship between a consumer's income and theamount of the good that one is willing and able to buy. In other
words, for these goods when income rises the demand for theproduct will increase; when income falls, the demand for theproduct will decrease. We call these types of goods normalgoods.
The Price of Related Goods
8/9/2019 Supply, Demand and Market Equilibrium.pdf
75/82
The Price of Related Goods
As with income, the effect that this has on the amount that oneis willing and able to buy depends on the type of good we'retalking about. Think about two goods that are typicallyconsumed together. For example, bagels and cream cheese. Wecall these types of goods compliments. If the price of a bagelgoes up, the Law of Demand tells us that we will be
willing/able to buy fewer bagels. But if we want fewer bagels,we will also want to use less cream cheese (since we typicallyuse them together). Therefore, an increase in the price of bagelsmeans we want to purchase less cream cheese. We can
summarize this by saying that when two goods arecomplements, there is an inverse relationship between the priceof one good and the demand for the other good.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
76/82
The Tastes and Preferences of Consumers
This is a less tangible item that still can have a big impact on
demand. There are all kinds of things that can change one's tastesor preferences that cause people to want to buy more or less of aproduct. For example, if a celebrity endorses a new product, thismay increase the demand for a product. On the other hand, if a
new health study comes out saying something is bad for yourhealth, this may decrease the demand for the product. Anotherexample is that a person may have a higher demand for anumbrella on a rainy day than on a sunny day.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
77/82
The Consumer's Expectations
It doesn't just matter what is currently going on - one'sexpectations for the future can also affect how much of aproduct one is willing and able to buy. For example, if you hear
that Apple will soon introduce a new iPod that has morememory and longer battery life, you (and other consumers)may decide to wait to buy an iPod until the new product comesout. When people decide to wait, they are decreasing the
current demand for iPods because of what they expect tohappen in the future.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
78/82
The Number of Consumers in the Market
As more or fewer consumers enter the market this has a directeffect on the amount of a product that consumers (in general)are willing and able to buy. For example, a pizza shop located
near a University will have more demand and thus higher salesduring the fall and spring semesters. In the summers, when lessstudents are taking classes, the demand for their product willdecrease because the number of consumers in the area has
significantly decreased.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
79/82
Production Cost
A cost incurred by a business when manufacturing a good orproducing a service. Production costs combine raw materialand labor. To figure out the cost of production per unit, the costof production is divided by the number of units produced. A
company that knows how much it will cost to produce an item,or produce a service, will have a clearer picture of how to
better price the item or service and what will be the total costto the company.
8/9/2019 Supply, Demand and Market Equilibrium.pdf
80/82
Businesses that know their production costs know the total
expense to the production line, or how much the entire processwill cost to produce the item. If costs are too high, these can bedecreased or possibly eliminated. Production costs can be usedto compare the expenses of different activities within the
company. In production, there are direct costs and indirectcosts. For example, direct costs for manufacturing anautomobile are materials such as the plastic, metal or laborincurred to produce such an item. Indirect costs include
overhead such as rent, salaries or utility expense.
Market supply
8/9/2019 Supply, Demand and Market Equilibrium.pdf
81/82
Supply is the quantity of a good or service that a producer iswilling and able to supply onto the market at a given price in agiven time period. Normally as the market price of acommodity rises, producers will expand their supply onto the
market.
There are three main reasons why supply curves for most
8/9/2019 Supply, Demand and Market Equilibrium.pdf
82/82
There are three main reasons why supply curves for mostproducts slope upwards from left to right giving a positiverelationship between the market price and quantity supplied
When the market price rises (for example following anincrease in consumer demand), it becomes more profitable for
businesses to increase their output. Higher prices send signalsto firms that they can increase their profits by satisfying demand
in the market. When output rises, a firm's costs may rise,therefore a higher price is needed to justify the extra outputand cover these extra costs of production. Higher prices makesit more profitable for other firms to start producing that
product so we may see new firms entering the market leadingto an increase in supply available for consumers to buy Forthese reasons we find that more is supplied at a higher priceh l