Supply

Demand

Quantity

Price

Pe

QeW.A. Franke College of Business - Dr. D. Foster

Supply & Demand:the basics

Supply

Demand

Quantity

Price

Pe

Qe

Demand = ConsumersLaw of Demand:Law of Demand:

All else equal,the quantity demanded of a good, that consumers

are willing to buy and able to pay for,varies inversely with its price.

Supply = ProducersSupply Relationship:Supply Relationship:

All else equal,the quantity supplied of a good, that producers are

willing to sell and able to produce,varies directly with its price.

Supply

Demand

Quantity

Price

Pe

Qe

DemandA change in the pricethe price of the good will cause a movement alongmovement along the

curve:

Change in Quantity Demanded (ΔQD)

Price

Quantity

Supply

Demand

Quantity

Price

Pe

Qe

DemandA change in some other relevant some other relevant factor of demandfactor of demand for the good will cause a shiftshift in the curve:

Change in Demand (ΔD)

Price

Quantity

D3D1D2

Increase in

Demand

Decrease in

Demand

Supply

Demand

Quantity

Price

Pe

Qe

SupplyA change in the pricethe price of the good will cause a movement alongmovement along the

curve:

Change in Quantity Supplied

(ΔQS)

Price

Quantity

Supply

Demand

Quantity

Price

Pe

Qe

Supply

Price

Quantity

A change in some other some other relevant factor of supplyrelevant factor of supply for the good will cause a

shiftshift in the curve:

Change in Supply (ΔS)

Increase in Supply

Decrease in Supply

S1 S2

S3

Supply

Demand

Quantity

Price

Pe

Qe

Factors that affect Demand•IncomeIncome •Tastes and Preferences Tastes and Preferences •Expectations Expectations •Others (price of substitute/complement goods; Others (price of substitute/complement goods;

size of market)size of market)

Factors that affect Supply

•A change in the costs of production A change in the costs of production •A change in technology A change in technology •A changes in taxes/subsidies/restrictionsA changes in taxes/subsidies/restrictions•Others (price of other goods; expectations; Others (price of other goods; expectations;

size of market ).size of market ).

Supply

Demand

Quantity

Price

Pe

Qe

Putting Demand & Supply Putting Demand & Supply TogetherTogether

At P1 a surplus will drive

down prices.Price

Quantity

Supply

Demand

P1

P2

P3

Q1 Q2 Q3

At P3 a shortage will

drive up prices.

At P2 the market is in equilibrium.

Supply

Demand

Quantity

Price

Pe

Qe

Price Controls - CeilingsPrice Controls - Ceilings

A price ceiling is a A price ceiling is a maximum (legal) maximum (legal) price. price.

To be “effective” it To be “effective” it must be set must be set belowbelow PPee

What problem does What problem does this cause?this cause?

How is it resolved?How is it resolved?

Quantity

Price

Pe

Qe

Supply

DemandP*

QDQS

Supply

Demand

Quantity

Price

Pe

Qe

A price floor is a A price floor is a minimum (legal) minimum (legal) price. price.

To be “effective” it To be “effective” it must be set must be set above above PPee

What problem does What problem does this cause?this cause?

How is it resolved?How is it resolved?Quantity

Price

Pe

Qe

Supply

Demand

Price Controls - FloorsPrice Controls - Floors

P*

QDQS

Supply

Demand

Quantity

Price

Pe

Qe

Supply & Demand ProblemsSupply & Demand Problems

#1. In the market for oranges, what will happen if there is great weather in Florida and California?

Supply

Demand

Price

Quantity

Pe

Qe

Supply

Demand

Quantity

Price

Pe

Qe

Supply

Demand

Price

Quantity

Pe

Qe

New Price

NewQuantity

Costs fall = supply increases

Supply & Demand Supply & Demand ProblemsProblems#1. In the market for oranges, what will

happen if there is great weather in Florida and California?

New Supply

price falls & output rises

Supply

Demand

Quantity

Price

Pe

QeW.A. Franke College of Business - Dr. D. Foster

Supply & Demand:the basics