DEMAND – SUPPLYDEMAND – SUPPLY

The Law of Demand The Law of Demand

Holding all relevant factors constant – quantity demanded is an inverse function of price.

NOTE Terminology

This THE MOST powerful propostiton in economics

DemandDemand

(own) PriceCeteris Paribus Conditions

Ceteris paribus ConditionsCeteris paribus Conditions

Tastes (can’t explain where they come from) Let others do this.

For economists tastes are unexplained Income – normal goods/inferior goods Prices of Other Goods – substitutes and

compliments – the movement explains the relationship.

Expectations – but this can be a trap – be careful – like tastes can be used to explain anything

Size of the market – numbers

TerminologyTerminology

Terminology is criticalChanges in Quantity DemandedChanges in Demand

Changes in DemandChanges in Demand

Intuitive ForecastingDo this for your businessIt will make you richer

Supply – no law of supplySupply – no law of supply

(own) PriceCeteris Paribus Conditions

Ceteris Paribus ConditionsCeteris Paribus Conditions

Price of Factors – this creates rising marginal costs – more later

The level of TechnologyNatural DisruptionsNumber of Firms in marketExpectations

Terminology Again – but Terminology Again – but consistant terminologyconsistant terminologyChanges in quantity suppliedChangesin supply

Changes in SupplyChanges in Supply

Intuitive ForecastingDo this for your business

MARKETSMARKETS

Put Supply & Demand Together – Changes in Supply– Changes in Demand– Think institutive forecasting for your

business

A Theory of Price FormationA Theory of Price Formation

Return to EquilibriumChangesMovements

Government InterventionGovernment Intervention

Price floorsPrice ceilings

IssuesIssues

–Why a bountiful harvest is not good for farmers!!!

– Energy crises in California– Free College– Rent Control

TERMINOLOGYTERMINOLOGY

Changes in quantity demandedCaused by changes in own price represented by a movement along a given demand curve

Changes on DemandCaused by changes in ceteris paribus conditions – represented by a shift in the entire demand curve

What Happens if both Supply What Happens if both Supply and Demand Changeand Demand ChangeAirline Safety RegulationsRaise Cost – decrease supplySafer travel – more demand

Utility – MaximizationUtility – Maximization

Proof that demand curve has a negative slope

Consumer SurplusConsumer Surplus

“Extra Satisfaction for some consumers