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Lecture 2 Part 2

This document covers the concepts of demand and supply in a market, including definitions, demand schedules, and curves. It explains the law of demand, the factors that shift demand, and the law of supply along with the variables that influence it. Additionally, it distinguishes between changes in demand and supply versus changes in quantity demanded and supplied.

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Connor Soares
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11 views40 pages

Lecture 2 Part 2

This document covers the concepts of demand and supply in a market, including definitions, demand schedules, and curves. It explains the law of demand, the factors that shift demand, and the law of supply along with the variables that influence it. Additionally, it distinguishes between changes in demand and supply versus changes in quantity demanded and supplied.

Uploaded by

Connor Soares
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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Lecture 2, Part 2

Demand and Supply

Readings: Chapter 3, pp 55-67


Demand and Supply
The demand side of the market
◦ Quantity demanded: The amount of a good or service that
a consumer is willing and able to buy at a given price.

◦ Demand schedule: A table showing the relationship


between the price of a product and the quantity of the
product demanded.

◦ Demand curve: A curve that shows the relationship


between the price of a product and the quantity of the
product demanded.
The demand side of the market
The demand side of the market
o The law of demand: Holding everything else constant, when the
price of a product falls the quantity demanded will increase, and
when the price of a product rises the quantity demanded will
decrease.
o Holding everything else constant: The ceteris paribus condition.

o Ceteris paribus (‘all else being equal’): The requirement that when
analysing the relationship between two variables—such as price and quantity
demanded—other variables must be held constant.
What explains the law of demand?

1.The substitution effect: The change in the quantity demanded of a


good or service that results from a change in price, making the good
or service more or less expensive relative to other goods and services
that are substitutes (holding constant the effect of the price change
on consumer purchasing power).
What explains the law of demand?

2.The income effect: The change in the quantity demanded


of a good or service that results from the effect of a change
in price on consumer purchasing power (holding all other
factors constant).
Another way to think about demand
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Another way to think about demand
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Another way to think about demand
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Another way to think about demand
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Variables that shift market demand
The five most important variables are:

1. Income
2. Prices of related goods
3. Tastes
4. Population and demographics
5. Expected future prices
Shifting the demand curve
Variables that shift market demand

1.Income.
o Normal good: A good for which the demand
increases as income rises and decreases as
income falls.
o Inferior good: A good for which the demand
increases as income falls and decreases as
income rises.
Variables that shift market demand

2.Prices of related goods.

o Substitutes: Goods or services that can be used


for the same or a similar purpose.

o Complements: Goods and services that are used


together.
Variables that shift market demand

3.Tastes.

o A broad category that refers to the many


subjective elements that can influence a
consumer’s plans to buy a good or service.
–Seasons
–Trends/fashion
Variables that shift market demand
4.Population and demographics.

o As the population increases, the demand for


most goods and services will increase.
o Demographics: Changes in the characteristics of
a population with respect to age, race, and
gender.
o Demographics influence the demand for
particular goods and services.
The ageing of the Baby Boom generation

The average age of


populations in many countries
throughout the world is
increasing.
This will change the types of
goods and services demanded
in the future.
Variables that shift market demand

5.Expected future prices.


o Consumers choose when to buy goods and services based on
their expectations regarding future prices relative to
present prices.

o If consumers expect prices to increase in the future, they


have an incentive to increase purchases now, and vice versa.
A change in demand versus a change in quantity demanded

§A change in demand refers to a shift in the demand


curve.

–Occurs due to a change in the variables, other than the


product’s own price, that affect demand.
§A change in the quantity demanded refers to a
movement along the demand curve as a result of a
change in the product’s price.
A change in demand versus a change in quantity demanded
A change in demand: examples

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A change in demand: examples
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A change in demand: examples
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The supply side of the market
o Quantity supplied: The amount of a good or service that a
firm is willing and able to supply at a given price.

o Supply schedule: A table showing the relationship


between the price of a product and the quantity of the
product supplied.

o Supply curve: A curve that shows the relationship


between the price of a product and the quantity of the
product supplied.
The supply side of the market
The supply side of the market

The law of supply: Holding everything else constant,


an increase in the price of a product causes an increase
in the quantity supplied, and a decrease in the price of
a product causes a decrease in the quantity supplied.
Another way to think about supply

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Another way to think about supply

p Supply

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finance Producer Surplus
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Another way to think about supply

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i z z ly s bt a
Variables that shift supply
The five most important variables are:

1.Prices of inputs
2.Technological change
3.Prices of substitutes in production
4.Number of firms in the market
5.Expected future prices
Variables that shift supply
Variables that shift supply
1.Prices of inputs.
o An input is anything used in the production of a good or
service.
o An increase in the cost of an input increases the cost of
production. The firm supplies less.
o A decrease in the cost of an input decreases the cost of
production at every price. The firm supplies more at
every price.
Variables that shift supply

2.Technological change.
o A change in the ability of a firm to produce output with a
given quantity of inputs.

o Technological change allows the firm to produce more


outputs with the same amount of inputs.

o Productivity: The output produced per unit of input.


Variables that shift supply
3.Prices of substitutes in production.
o Substitutes in production are alternative products a firm can
produce with the same resources.
o An increase in the price of a substitute in production decreases
the supply of the initial good, while a decrease in the price of a
substitute in production increases the supply of the initial
good.
X Y
Syd pyla
Variables that shift supply
4.Number of firms in the market.
o When new firms enter the market, supply increases.
o When firms exit the market, supply decreases.

5.Expected future prices.

o If firms expect the price of its product will increase in the future,
they have an incentive to decrease supply now.
Change in supply vs change in the quantity supplied

o A change in supply refers to a shift in the supply curve.

–Occurs due to a change in the variables, other than the


product’s own price, that affect supply.
o A change in the quantity supplied refers to a movement
along the supply curve as a result of a change in the
product’s price.
Change in supply vs change in the quantity supplied
A change in supply: examples

S
P S

input cost

1 L b ly f bt
A change in supply: examples

p So
5

new firms
enter the
market

1 3 ly f bt

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