Supply and Demand - Chapter 3 - ECON100

Competitive market

Has many buyers and sellers of the same good or service, none of whom can influence the price

The supply demand model

A model of how a competitive market behaves

Five key elements of the supply demand model

1. Demand curve

2. Supply curve 

3. Factors that can shift the demand curve and factors that can shift the supply curve

4. Market equilibrium 

5. changes in market equilibrium

Demand

Represents the behavior of buyers

Demand schedule

A table showing how much of a good or service consumers will want to buy at different prices

Demand curve

Shows the quantity demanded at various prices

A rightward shift means an increase in demand

A leftward shift means a decrease in demand

Quantity demanded

The quantity that buyers are willing and are able to purchase at a particular price 

Law of demand

A higher price for a good leads people to demand a smaller quantity of that good

Complements (effects on demand curve)

If a decrease in the price of one good leads to an increase in demand for another good or vice verse

Consumed together

Examples: Cars and gas, shoes and socks

Normal good (changes in income; effects on demand curve)

Demand increases when income increases

Inferior good (changes in income; effects on demand curve)

Demand decreases when income increases

Example: you eat less ramen when you can afford better food

Changes in taste (effects on demand curve)

Taste and preferences are subjective and vary among consumers

Seasonal changes or fads have predictable effects on demand

Example: The demand for boots in October rises because of the season

Changes in expectations (effects on demand curve)

If consumers have a choice about the timing of a purchase, they buy according to expectations 

Buyers adjust current spending in anticipation of the direction of future prices in order to obtain lowest possible price 

Changes in numbers of consumers (effects on demand curve)

As the population of an economy changes, the number of buyers of a particular good also changes, therefore changing its demand 

Example: When students leaves for summer, the economy on main street changes

Supply schedule

Shows how much of a good or service would be supplied at different prices

Supply curve

Shows the quantity supplied at different prices

A rightward shift shows an increase in supply

A leftward shift shows a decrease in supply

Quantity supplied

Is the quantity that producers are willing and able to sell at a particular price 

Input prices (effects on supply curve)

An increase in the price of an input makes the production more costly for sellers, supply decreases

A fall in the price of an input makes the production less costly for sellers, supply increases

Changes in prices related to goods or services (effects on supply curve)

Inputs used in production have high opportunity cost, sellers will choose to use inputs with the highest profits

Sellers will supply less of a good if profitability falls and vice versa

There are substitutes and complements in production process

Technology (effects on supply curve)

New, better tech enables producers to spend less on inputs, yet still produce the same amount of output 

Supply increases

Expectations (effects on supply curve)

The expectation of a higher price for a good in the future decreases current supply of the good

Example: School supplies not being sold in early summer, they start selling at a higher price later in the summer do to a higher demand

The number of producers (effects on supply curve)

Producer entry implies more sellers in the market, increasing supply

Producer exits implies fewer sellers; decreasing supply

Example: As more firms enter the solar installation market, the number of solar installations increases

Equilibrium price

When quantity supplied = quantity demanded 

The amount of consumers would purchase at this price is matched exactly by the amount producers wish to sell

The price at which this takes place is ______ _____

Market price

Where consumers don’t have time to compare prices, different stores have different prices

In well established markets there is a uniform price, this is _____ ____

Surplus

There is a _____ of a good when the quantity supplied exceeds the quantity demanded

occurs when the price is above its equilibrium level

Does not last: Sellers will reduce prices to get rid of the good

Shortage

When the quantity demanded exceeds the quantity supplied. 

Happens when the price is below equilibrium level 

Does not last: Sellers will realize they can use higher prices 

What happens when the demand curve shifts?

An increase in ____ leads to movement along the supply curve to a higher equilibrium price and a higher equilibrium quantity

What happens when the supply curve shifts?

An increase in ____ leads to a movement along the demand curve to a lower equilibrium price and a higher equilibrium quantity 

Decrease = higher equilibrium price and lower equilibrium quantity 

Simultaneous shifts of demand and supply curve

If the decrease in demand is larger than the decrease in supply, the equilibrium price and quantity falls

If the increase in supply is larger than the decrease in demand, the equilibrium quantity rises as the equilibrium price falls