Supply and Demand

DO it

Demand

Marginal Benefit Diminishing, the quantity that supplier put up for sale at various prices. Based on “willingness to pay”

The willingness to pay never exceeds the benefits received

Represented by:

• Price

• Quantity demanded at that price

The Law of Demand

When prices go up, quantity demanded goes down (or at least doesn’t rise), and when prices go down, quantity demanded goes up

• The higher the price the more expensive the good is relative to other goods

• The higher the price the greater proportion of your income necessary to purchase it (Less people buy it)

Substitute

What you use/do instead as the price of a good goes up

Supply

Marginal costs, the amount of product available to be bought based on “willingness to accept”

Observe the quantity that supplier put up for sale at various prices from this we can infer opportunity costs

Representing Supply

Supply is represented as a relationship between two variables

• Price

• Quantity supplied

The Law of Supply

When prices go up, quantity supplied goes up (or at least doesn’t go down) and as prices go down, quantity supplied goes down

• At lower prices, we see only low opportunity cost units supplied

• At higher prices, we see increasingly higher opportunity cost units supplied

Equilibrium

Q_d=Q_s

What if the Price is too High?

Always moving toward equilibrium price

• Excess supply (surplus): P_m>P* → Q_s>Q_d

• Sellers compete to get rid of excess units by cutting prices

  • Q_s and Q_d adjust with price until Q_s = Q_d

What if the Price is too Low?

Excess demand (shortage): P_m < P* → Q_s < Q_d

• Buyers compete to get rare units sellers respond by raising prices

• Q_s and Q_d adjust with price until Q_s = Q_d

What happens when demand increases?

Consumers value the good more than they did previously

• Consumers are WTP higher price for the same quantity

• Marginal benefits go up which increase consumers WTP

• Demand graph shifts right

What happens when demand decreases?

Consumers value the good less than they did previously

• Marginal benefits go down which decreases consumer’s WTP

• Shift graph to the left

• Consumers are WTP lower price for the same quantity

Factors of demand

“Ceteris Paribus” (All else equal)

• Affect shape and positions of D-curve

Tastes and Preferences

• Own personal feelings about the good

• Difficult to observe

  • But we can observe some things from which we can infer

    • New info, seasonal, popularity

Income

• Normal good: When your _____ increases your demand for normal good also increases

• Inferior good: When your _____ increases your demand for inferior goods decreases