The supply-demand model is a tool that is used to understand the factors that influence the price and quantity of a good and why those prices and quantities change over time.

Supply: the quantity of a good and/or service that producers are willing and able to offer for sale at each possible price during a certain time period

Demand: the quantity of a good or service that buyers are willing to and able to buy at all possible prices during a certain time period

Law of demand: as the price of a good increases, the quantity demand of that good decreases

• Movement along the down curve

a→B price decrease leads to increase in quantity demanded

B→ a price increase leads to decreases in quantity demanded

What causes the demand curve to shift

• Increase in population

• Change in income

Increase in demand

Change in income

Normal good: demand increases when income increases

• Most common

Inferior good: demand decreases when income increases

• Demand less

• Genetic engineered food

• Used cars

• Discount clothing

• Canned food

• All seen as bad

Change in prices of related goods and service

Substitute: two goods are substitutes, a decrease in the price of one leads to a decrease in demand for another

• Coke v pepsi

• Usually serve similar functions

complements: two goods are complements a decrease in the price of one good leads to an increase in the demand for the other

• Smartphones and apps

• Usually consumed together

Law of demand - as the price of a increases the quantity demanded of the that good decreases

Equilibrium - Qd=Qs - quantity demanded=quantity supplied

Demand schedule, supply schedule

Chocolate bar market

4.2 Demand

The Demand Curve: The Relationship between Price and Quantity Demanded:

• Quantity demanded- the amount of a good that buyers are willing and able to purchase

• Law of demand- the claim that, other things equal, the quantity demanded of a good falls when the price of the good rises

• Demand schedule- a table that shows the relationship between the price of a good and the quantity demanded

• Demand curve- a graph of the relationship between the price of a good and the quantity demanded

Market Demand versus Individual Demand:

• Market demand- the sum of all individual demands for a particular good or service

• Market demand at each price is the sum of the individuals’ demands

Shifts in the Demand Curve:

• Increase in demand- any change that increases the quantity demanded at every price and shifts the demand curve to the right

• Decrease in demand- any change that reduces the quantity demanded at every price and shifts the demand curve to the left

• There are many variables that can cause a shift in the demand curve

  • Income

  • Prices of related goods

  • Tastes

  • Expectations

  • Number of buyers

The Supply Curve: The Relationship between Price and Quantity Supplied:

• Quantity supplied- the amount of a good that sellers are willing and able to sell

• Law of supply- the claim that other things equal, the quantity supplied of a good rise when the price of the good rises

• Supply schedule- a table that shows the relationship between the price of a good and the quantity supplied

  • Influences how much producers of the good want to sell

• Supply curve- a graph of the relationship between the price of a good and the quantity supplied

Market Supply versus Individual Supply:

• Market supply- the sum of the supplies of all sellers

Shifts in the Supply Curve:

• The market supply curve holds other things constant, the curve shifts when one of its factors change

  • Input prices

  • Technology

  • Expectations

  • Number of sellers

4.3 Supply and Demand Together

Equilibrium:

• Equilibrium- a situation in which the market price has reached the level at which quantity supplied equals quantity demanded

  • Equilibrium price- the price that balances quantity supplied and quantity demanded

  • Equilibrium quantity- the quantity supplied and the quantity demanded at the equilibrium price

  • Surplus- a situation in which quantity supplied is greater than quantity demanded

• Shortage- a situation in which quantity demanded is greater than quantity supplied

• Law of supply and demand- the claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance

Three Steps to Analyzing Changes in Equilibrium:

1. Decide whether the event shifts the supply or demand curve (or perhaps both).

2. Decide in which direction the curve shifts.

3. Use the supply-and-demand diagram to see how the shift changes the equilibrium price and quantity