ECO 201 Ch 3 Supply and Demand Theory 1 What is demand demand the willingness and ability of buyers to purchase different quantities of a good at different prices during a specific time period market any place people come together to trade Markets have two sides buying side or demand selling side or supply a law of demand as the price of good rises the quantity demanded of the good falls and as the price of a good falls the quantity demanded of the good rises ceteris paribus The price of a good and the quantity demanded of it are inversely related P Qd P Qd quantity demanded the number of units of a good that individuals are willing and able to buy at a particular price during a time period b Four Way to Represent the Law of Demand Words Price of a good rises quantity demanded falls and as price falls quantity demanded rises ceteris paribus Symbols P Qd and P Qd Demand Schedule numerical tabulation of the quantity demanded of a good at different prices the numerical representation of the law of demand Demand Curve graphical representation of the law of demand c Why does Quantity Demanded Go Down as Price Goes Up Two reasons for this People substitute lower priced goods for higher priced goods law of diminishing marginal utility for a given time period the marginal utility or satisfaction gained by consuming equal successive units of a good will decline as the amount consumed increases The more utility you receive from a unit of good the higher the price you are willing to pay for it the less utility you receive from a unit of a good the lower the price you are willing to pay for it d Individual Demand Curve and Market Demand Curve individual demand curve represents the price quantity combinations of a particular good for a single buyer market demand curve represents the price quantity combinations of a good for all buyers Derived by adding up individual demand curves e A Change in Quantity Demanded Versus a Change in Demand change in quantity demanded movement from one point to another point on the same demand curve caused by a change in the price of the good own price price of a good change in demand shift in demand curve increase in demand rightward shift in the demand curve individuals are willing and able to buy more of a good at each and every price decrease in demand leftward shift in demand curve individuals are willing and able to buy less of a good at each and every price 1 ECO 201 Ch 3 Supply and Demand Theory f What factors Cause the Demand Curve to Shift Income normal good good for which demand rises as income rises and falls as income falls Income then DX or Income then DX inferior good good for which demand falls as income rises and rises as income falls Income then DX or Income then DX neutral good good for which demand does not change as income rises or falls People s preferences affect the amount of a good they are willing to buy at a Preferences particular price Prices of Related Goods substitutes two goods that satisfy similar needs or desires If two goods are substitutes the demand for one rises as the price of the other rises or demand for one falls as the price of the other falls complements two goods that are used jointly in consumption If two goods are complements the demand for one rises as the price of the other falls or the demand for one falls as the price of the other rises Number of Buyers Increase in number of buyers may come from heightened birth rate increased immigration or the migration of people from one region of the country to another Decrease in number of buyers may come from increased death rate war or the More buyers higher demand migration of people from one region of the country to another Less buyers lower demand Expectation of Future Price Buyers who expect the price of a good to be higher next month may buy it now thus increasing the current demand for the good Buyers who expect the price of a good to be lower next month may wait until next month to buy it thus decreasing the current demand for the good g Movement Factors and Shift Factors movement factors factors that cause movement along curves Price on the vertical axis shift factors factors that actually shift the curves Income preferences price of related goods number of buyers and expectation of future price 2 ECO 201 Ch 3 Supply and Demand Theory 2 Supply the willingness and ability of sellers to produce and offer to sell different quantities of a good at different prices during a specific time period a law of supply as the price of a good rises the quantity supplied of the good rises and as the price of a good falls the quantity supplied of the good falls ceteris paribus P QS P QS quantity supplied number of units that sellers are willing and able to produce and offer to sell at a particular price upward sloping supply curve graphical representation of the law of supply b Why Most Supply Curves Are Upward Sloping Higher price is an incentive to producers to produce more of the good The incentive comes An upward sloping supply curve simply reflects the fact that costs rise when more units of a in the form of higher profits good are produced Market Supply Curve individual supply curve represents the price quantity combinations for a single seller market supply curve represents the price quantity combinations for all sellers of a particular good Derived by adding up individual supply curves supply schedule numerical tabulation of the quantity supplied of a good at different prices the numerical representation of the law of supply c Changes in Supply Mean Shifts in Supply Curves An increase in the supply of a good means that suppliers are willing and able to produce A decrease in the supply of a good means that suppliers are willing and able to produce and offer to sell more of the good at all prices and offer to sell less of the good at all prices d What Factors Cause the Supply Curve to Shift Prices of the Relevant Resources If the price of the resources required increases then the cost of producing the goods will increase and supply will decrease Technology An advance in technology offers the ability to produce more output with a fixed amount of resources reducing per unit production costs and resulting in an increase in supply Prices of Other Goods Change in the price of one good can lead to a change in the supply of another good Number of Sellers If more sellers begin producing a good the supply curve will shift rightward as a result of increased supply Expectations of