1

DEMAND&SUPPLY

PART 1 - DEMAND

2WHAT’S THE WORLD LOOK LIKE?

MARKETS bring buyers & sellers together. They facilitate EXCHANGE, and may be FORMAL or INFORMAL arrangements. Each party is pursuing his or her SELF-INTEREST. Each

must see a benefit or the deal is off! Exchange is voluntary.

SUPPLY represents the sellers’ side.

DEMAND depicts the buyers’ side.

3DEMAND At each PRICE (P) HOW MUCH is purchased? (Qd)

of a CONSTANT QUALITY good during a set TIME PERIOD CETERIS PARIBUS (c.p.).

In other words, we’re examining how the amount you buy is affected by changes in the product’s price, with everything else held constant.

4PRICE(the independent variable)can be expressed in 2 ways. MONEY PRICE What’s on the

price tag in today’s dollars. Also known as: “absolute price” “nominal price” “current price”

Coke $1 Burger $2

RELATIVE PRICE

Given a fixed income, if you spend your money one way, what do you give up? Think opportunity cost!

1 Coke = 1/2 Burger

1 Burger = 2 Cokes

5QUANTITY DEMANDEDis the dependent variable.

Qd is INVERSELY RELATED to P.

As P falls, Qd rises;

P Qd

P Qd

This is the

LAW of DEMAND!

as P rises, Qd falls, c.p.

62 Reasons Why P & QdAre Inversely Related

SUBSTITUTION EFFECT

As money price increases, a product’s relative price rises.

The product isn’t such a good value, so consumers switch and buy a substitute.

REAL INCOME EFFECT Our ceteris paribus

assumption holds your money income constant.

So, when a good’s price rises, you can’t afford to buy as much.

Purchasing power falls as price rises, and vice versa.

7DEMANDAsk consumers how many units

of a product they’ll buy at different prices and you’d expect to get results like this:

P Qd

$1 10

$2 8

$3 6

This is a DEMAND SCHEDULE.Consistent with the Law of Demand, it shows Qd falling as P rises, c. p.

8DEMAND

Plot the (Qd, P) values and you have a DEMAND CURVE!

P is always on the vertical axis; Q is always on the horizontal axis!

P Qd

$1 10

$2 8

$3 6

QUANTITY

PRICE

$3

$2

$1

0 2 4 6 8 10

D

9The LOCK-DOWN 6

These are the factors the c.p. assumption holds constant. Break one free and demand shifts. 1 $ INCOME2 TASTES & PREFERENCES3 POPULATION4 PRICE OF RELATED GOODS5 EXPECTATIONS6 WEATHER

LEARN

THESE!

10AN INCREASE IN DEMAND

Shifts the demand curve to the RIGHT. Qd is LARGER at every Price.

WHY? At least 1 of the Lock-Down 6 has broken loose.

P Qd

$1 10

$2 8

$3 6

20

16

120 4 8 12 16 20 Q

P

$3

$2

$1 D D’

11A DECREASE IN DEMAND Shifts the demand curve to the LEFT. Qd is SMALLER at every Price.

WHY? At least 1 of the Lock-Down 6 has broken loose.

P Qd

$1 20

$2 16

$3 12

10

8

60 4 8 12 16 20 Q

P

$3

$2

$1 D’ D

121. Change in INCOME (Y) Normally, consumers buy more

stuff when they have more income. Think about clothes, vacations, dinners out…

When consumer income (Y) and the demand (D) for a product are positively related, we term that product a NORMAL GOOD.

Works the other way, too, though.

In a recession, the demand

for BMWs

generally decreases!

Demand for NORMAL GOODS falls when consumer income falls!

131. Change in INCOME (Y)

In contrast, there are goods we turn to in hard times because they’re all we can afford. Eggs & toast at home instead of dinner out, camping rather than a hotel . . .

When consumer income (Y) and the demand (D) for a product are inversely related, we’re talking about INFERIOR GOODS.

As income rises, demand for INFERIOR GOODS falls and we go back to the “good stuff.”

142. A Change in TASTES & PREFERENCES

When something becomes more popular, the demand for it increases. Think about the “hot” Christmas toy!

And when things go out of style, the demand for them drops. Last year’s fashions… Tape players…

153. Change in POPULATION

More people (either in the total population or in a particular demographic group) generally means higher demand for the goods/services they use.

Think how the demand for everything from milk to toilet paper increases as your family grows!

164. Change in a RELATED GOOD’S PRICE

The demand for one product can be affected by another product’s price change. When 2 goods interact this way, they’re called RELATED GOODS.

SUBSTITUTES (like Coke & Pepsi) are goods which can both fill the same want.

COMPLEMENTS (like hot dogs & buns) are goods you buy and use together.

Let’s see how this works . . .

174. Change in a RELATED GOOD’S PRICESUBSTITUTES can replace each other, so

when the price of one goes up, consumers increase their demand for the competitor’s product - and vice versa. In other words,

The Price of Good #1 & the Demand for Good #2 are positively related.

The price of Pepsi and the demand for Coke move in the same direction.

Peps

i

CO

KE

184. Change in a RELATED GOOD’S PRICE

COMPLEMENTS: goods used together.

Shoppers buy more hot dogs when they go on sale. And what’s a dog without a bun? Demand for hot dog buns shifts to the right (increases).

Price of Good #1 & Demand for Good #2 are negatively related for complements.

A negative change in the hot dog price caused a positive change in demand for buns.

195. A Change in EXPECTATIONS

Consumer demand is also influenced by our thoughts about the future. For example, your opinions regarding FUTURE AVAILABILITY of GOODS FUTURE PRICES FUTURE INCOME

can affect demand today. Let’s see how.

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FUTURE PRICES

If we believe prices will drop soon, we wait for the bargain. Current demand drops. (Ever wait for an after-Christmas sale?)

On the other hand, if you believe prices will rise in the future, you may stock up now to beat the price hike. Current demand rises.

21FUTURE INCOME

Optimism about future income can increase demand for normal goods even before we have any of that cash in hand! Think tax return…

Afraid of being laid off? You might spend less just in case. Demand for normal goods falls; demand for inferior goods rises.

That’s why economists study consumer confidence.

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WEATHER

Demand for ice cream rises and falls with the temperature.

Why are sales for heavy coats slow when we have a mild winter?

The concession at Dunkin Dounuts watch the weather forecast to know whether to stock up on hot coffee or cold drinks.