Demand A relation showing how much of a good consumers are willing and able to buy at each possible price during a given period of time, other things held constant Law of Demand A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good. An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good.
Demand schedule Demand curve Price Quantity Demanded 1.25 $ 8 1.00 $ 14 0.75 $ 20 0.50 $ 26 0.25 $ 32 $- $0.25 $0.50 $0.75 $1.00 $1.25 2 8 14 20 26 32 Quantity P r i c e D The Demand Curve The demand curve slopes downward because of the law of demand Change in Quantity Demanded Quantity Price P 0
Q 0
P 1
Q 1
An increase in price causes a decrease in quantity demanded. Change in Quantity Demanded Quantity Price P 0
Q 0
P 1
Q 1
A decrease in price causes an increase in quantity demanded. Changes in Quantity Demanded (Increases and Decreases) Q P D decrease in quantity demanded increase in quantity demanded Changes in Demand 1. Changes in demand can be caused by changes in, 1. Consumer Income 2. The prices of related goods Substitute Goods Complementary Goods Consumer expectations The number of consumers in the market Consumer taste Change in Demand Quantity Price P 0
Q 0 Q 1
An increase in demand refers to a rightward shift in the market demand curve. Change in Demand Quantity Price P 0
Q 1 Q 0
A decrease in demand refers to a leftward shift in the market demand curve. Supply A relation showing how much of a good producers are willing and able to sell at each possible price during a given period of time, other things held constant The Law of Supply 1. The quantity of a good supplied is directly related to its price, other things constant Law of Supply A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good. An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good. The Supply Curve Supply schedule Supply curve Price Quantity Supplied 1.25 $ 28 1.00 $ 24 0.75 $ 20 0.50 $ 16 0.25 $ 12 $- $0.25 $0.50 $0.75 $1.00 $1.25 8 12 16 20 24 28 Quantity P r i c e S The supply curve slopes upward because of the law of supply Change in Quantity Supplied Quantity Price P 1
Q 1
P 0
Q 0
A decrease in price causes a decrease in quantity supplied. Change in Quantity Supplied Quantity Price P 0
Q 0
P 1
Q 1
An increase in price causes an increase in quantity supplied. Changes in Quantity Supplied (Increases and Decreases) Q P S decrease in quantity supplied increase in quantity supplied Changes in Supply Changes in supply can be caused by changes in, Production Technology The prices of inputs/resources used in production The prices of alternative goods Producer expectations The number of producers Change in Supply Quantity Price P 0
Q 1 Q 0
An increase in supply refers to a rightward shift in the market supply curve. Change in Supply Quantity Price P 0
Q 1 Q 0
An increase in supply refers to a rightward shift in the market supply curve. Change in Supply Quantity Price P 0
Q 1 Q 0
An increase in supply refers to a rightward shift in the market supply curve. Market equilibrium In equilibrium, the plans of buyers match the plans of sellers Q P S D Q e P e Market Schedules and Equilibrium Market schedules Price Quantity Supplied Quantity Demanded Surplus or Shortage Price 1.25 $ 28 8 Surplus of 20 Fall 1.00 $ 24 14 Surplus of 10 Fall 0.75 $ 20 20 Equilibrium Remain the same 0.50 $ 16 26 Shortage of 10 Rise 0.25 $ 12 32 Shortage of 20 Rise Markets move toward equilibrium. An economic situation is in equilibrium when no individual would be better off doing something different. Anytime there is a change, the economy will move to a new equilibrium. Ex.: What happens when a new checkout line opens at a busy supermarket? Equilibrium and Changes in Demand Q P S D Q e P e D Q e P e Equilibrium and Changes in Supply Q P S D Q e P e Q e P e S Effects of Changes in Both Supply & Demand Demand increases Demand decreases Supply increases Equilibrium price change is indeterminate. Equilibrium quantity increases. Equilibrium price falls. Equilibrium quantity change is indeterminate. Supply decreases Equilibrium price rises. Equilibrium quantity change is indeterminate. Equilibrium price change is indeterminate. Equilibrium quantity decreases. Demand & Supply in Currency Markets Foreign Exchange Rate Price of a foreign currency in terms of the domestic currency Depreciation of the Domestic Currency Increase in the price of a foreign currency relative to the domestic currency Appreciation of the Domestic Currency Decrease in the price of a foreign currency relative to the domestic currency Demand for Dollars Supply of Dollars R = Exchange Rate = Rupee Price of Dollar R = Rs/$ Million $ per day Demand & Supply in Currency Markets Market Check:
A convenient way to test whether a product is in the same market as another one is to ask the following question:
Are there either demand substitutes or supply substitutes to this product? Demand Substitutes If the price of good A rises substantially (holding all else constant), will a significant number of buyers of good A instead purchase good B?
Supply Substitutes If the price of good A rises substantially (holding all else constant), will a significant number of producers of good B decide to produce good A instead? Consumer Surplus The Consumer Surplus is the gains from trade for a Consumer by purchasing a product. This is measured as the difference between what the consumer is actually paying and what the consumer is willing to pay. Total Consumer Surplus in market = Sum of individual consumer surpluses = area below the market demand curve but above the price. Producer Surplus It is the gains from trade for a producer measured as difference in the actual price received by him/her and the price at which he/she is willing to sell the product (minimum price = cost of producing the good) Total Producer Surplus in a market = Sum of individual producer surpluses = Area above the supply curve but below the price.