The Economics
Department, UMR
Presents:
Supply and Demand:
Price and Quantity
Determination in
Competitive Markets
Starring
‹
Demand
‹
Supply
Equilibrium and
Disequilibrium
‹
Featuring
‹The Law of Demand
‹D = D(PENTE)
‹The Tendency of Supply
‹S = S(PENT)
‹Equilibrium/Disequilibrium
In Three Parts
Demand
Supply
Equilibrium/Disequilibrium
Part 1
What is Demand?
‹It is the relationship between
quantity demanded and
price, c.p., within a specific
period
‹Or, it is the relationship
between the maximum
willingness to pay in return
for something of value
Individual vs.
Market Demand
‹Market demand is the
horizontal sum of individual
demands
‹It is market demand that
commands our interest
But Start with Individual
Demand
‹Consider your demand for
peanuts per semester (This is
called “Quantity Demanded,
qd”)
‹We will first look at this
information in a table called a
“Demand Schedule”
Your Demand Schedule
Demand Schedule - a table showing the relationship
between the price of a good and the quantity demanded
per period of time, ceteris paribus. Peanuts are
measured in pounds.
Price of Peanuts ($) Quantity Demanded
per semester
Your Demand Schedule
P ($)
qd
$2.00
5
Your Demand Schedule
P ($)
qd
$2.00
5
$1.50
7
Your Demand Schedule
P ($)
qd
$2.00
5
$1.50
7
$1.00
10
15
Law of Demand
‹The price (willingness to pay) of
a product, service, or activity is
inversely related to the quantity
demanded, ceteris paribus.
‹Applies to Market Demand (but
notice your demand for peanuts
obeyed the law)
Demand Schedules and
Curves
‹Demand Curve - a graph of
the demand schedule showing
the relationship between the
price of a good and the
quantity demanded per period
of time, ceteris paribus.
Individual Demand Curve
P($)
Note: ALWAYS label your axes!
qd per semester
Individual Demand Curve
P($)
2.00
1.50
1.00
0.50
0
5
10
15
qd per semester
Individual Demand Curve
P($)
2.00
A
1.50
1.00
0.50
0
5
10
15
qd per semester
Individual Demand Curve
P($)
A
2.00
B
1.50
1.00
0.50
0
5
7
10
15
qd per semester
Individual Demand Curve
P($)
2.00
A
B
1.50
C
1.00
0.50
0
5
7
10
15
qd per semester
Individual Demand Curve
P($)
2.00
A
B
1.50
C
1.00
d
0.50
0
qd per semester
5
7
10
15
Market Demand Curve
‹The demand curve we just
drew was the Demand for
Peanuts by one person.
‹We want an aggregate
measure of the price,
quantity demanded
relationship--a market
demand
Two Views of Demand
‹WTP - Maximum
willingness to pay for a
given unit of a good
(marginal WTP) or for a
number of units of a good
‹The Law of Demand - P, Qd
relationship
WTP and the Law of
Demand
The max. WTP for the 23rd
unit is $1.50. The quantity
demanded at $2.00 is 15
units per period
P
$2.00
$1.50
D
15
23
Qd/t
Market Demand Schedule
‹Market Demand Schedule - a
table showing the relationship
between the price of a good
and the total quantity
demanded by all consumers
in the market per period of
time, ceteris paribus.
Market Demand Schedule
‹Market Demand is obtained
by summing horizontally the
quantity demanded by each
person at each price
Market Demand Schedule
P($)
5
Mary’s
qd
3
10
2
15
1
Market Demand Schedule
P($)
5
Mary’s John’s
qd
qd
3
12
10
2
8
15
1
3
Market Demand Schedule
P($)
5
Mary’s John’s
qd
qd
3
12
Ling’s
qd
7
10
2
8
5
15
1
3
4
Market Demand Schedule
P($)
5
Mary’s John’s
qd
qd
3
12
Ling’s Market
qd
Qd
7
22
10
2
8
5
15
15
1
3
4
8
Demand Curve
P
Note: the linear demand
is used for convenience
$15
$10
$5
D
8
15
22
Qd/t
Change in D vs. Change in
Qd
‹ Change in Demand - a change in a factor
that effects demand other than the price of
the good, thus there is a change in quantity
demanded at EVERY price.
‹ Change in Quantity Demanded - a
movement along a given demand curvedue only to a change in the price of the
good itself
Change in Demand
‹Increase in demand - demand
curve shifts to the right (or up an increase in WTP)
‹Decrease in demand - demand
curve shifts to the left (or down
- a decrease in WTP)
Increase in Demand
P
D
D’
Qd/t
Increase in Qd
P($)
A
B
D
Qd/t
Behind the Demand Curve
‹A
demand curve is drawn under
the assumption of ceteris paribus all other important factors
remaining unchanged
‹Factors to be considered may be
remembered by D = D(PINTE)
Factors affecting market
demand, PINTE
‹P =
Prices
‹I = income
‹N = number of buyers
‹T = tastes or preferences
‹E = expectations about
future prices and market
conditions
Price of Other Goods
‹The price of substitutes
‹The price of complements
Price of Substitutes
‹What would happen to the
demand for Peanuts if the price
of pretzels fell?
™ The demand for Peanuts would probably
fall since people would buy pretzels instead.
‹There is a positive relationship
between the demand for a good
and the price of its substitutes
Price of Substitutes
‹Thus an increase in the price
of a substitute will increase
the demand for the good
‹And a decrease in the price
of a substitute will decrease
the demand for the good
Price of Complements
‹Complementary goods are
goods used together
‹What if the price of beer
goes up? What ought to
happen to the demand for
Peanuts?
™ It ought to go down, since people want
beer to drink with Peanuts. If the price of
beer rises, the demand for Peanuts will fall.
Price of Complements
‹Thus an increase in the price
of a complement will decrease
the demand for the good
‹And a decrease in the price of
a complement will increase
the demand for the good
Price of Other Goods Summary
‹Thus, either of the following
will increase Demand
•
•
Price of a substitute good increases
Price of a complement good decreases
‹And either of the following
will decrease Demand
•
•
Price of a substitute good decreases
Price of a complement good increases
Income
‹ For most goods there is a
positive relationship between
income and demand. These are
defined as normal goods.
‹For inferior goods, there is an
inverse relationship between
income and demand.
Normal and Inferior Goods
‹Are Peanuts a normal good?
Are they for you? If they
are, upon graduation and a
higher salary you would buy
more peanuts.
‹The question is empirical how do people react?
Normal and Inferior Goods
‹What about Spam?
Is the
relationship between income
and demand positive or
negative, c.p.?
‹Cheaper food products are
examples of inferior goods
Number of Buyers
‹A positive relationship - the greater
the number of buyers, the larger the
total quantity demanded of the good
at a given price. Demand increases,
or the demand curve shifts to the
right.
‹Likewise, if there are fewer buyers in
the market there is less quantity
demanded at every price, so demand
has decreased.
Tastes and Preferences
‹If we find out Peanuts improves
our attractiveness to others, our
willingness to pay for Peanuts
would increase (an upward shift
of the demand curve)
‹If we find out Peanuts are
unhealthy the demand for the
good decreases (a leftward shift
of the curve)
Expectations
‹If we were to hear a new
story about how Peanut
prices were going to go up
would you stock up?
‹If you expect your employer
to begin downsizing would
you reduce your demand for
goods now?
Demand Reminders
‹ Demand curves downward and to the
right.
‹ Changes in only the price of a good
cause changes in the quantity
demanded.
‹ The only demand factor that cannot
cause a change in the demand of a good
is a change in its own price.
‹PINTE factors may alone or jointly
change the demand for a good.
The End
Continue to:
Supply