Demand and Demand Curves (a)

Demand is the quantity of a good or service purchased at a given price.

The demand curve shows the quantity of the good demanded at each price.

Demand and Demand Curves (c)

Demand curves are downward sloping. As price falls, consumers buy more of the good. The position of an individuals demand curve (but not its slope) also depends on: Income Social trends The price of related goods Expectations about the future

Demand and Demand Curves (d)

Shifts in a Demand Curve versus Movements along a Demand Curve

A change in price is represented by a movement along the demand curve. All other changes that affect demand will shift the demand curve.

Sources of Shifts in the Demand Curves (a)

Tastes Prices of related goods Income Demographics Information Availability of credit Changes in expectations

Sources of Shifts in Demand Curves (b)

Sources of Shifts in Demand Curves (c)

Sources of Shifts in Demand Curves (d)

Sources of Shifts in Demand Curves (e)

Sources of Shift in Demand Curves (f)

Sources of Shift in Demand Curves (f) (cont.)

Supply and Supply Curves Supply is the quantity of goods and services offered in the market at a given price. The supply curve shows the quantity of the good offered for sale at each price.

The Slope of the Supply Curve

Market Supply

Shifts in a Supply Curve versus Movements along a Supply Curve A change in price is represented by a movement along the supply curve. All other changes that affect supply shift the supply curve.

Sources of Shifts in Supply Curves (a)

A change in the price of inputs A change in technology

A change in the natural environment

A change in the availability of credit A change in expectations

Sources of Shifts in Supply Curves (b)

Sources of Shifts in Supply Curves (c) If a new technology improves coffee bean harvesting, the costs of producing coffee fall. This increases the suppliers desire to sell at each price.

The supply increases and the supply curve shifts right.

Law of Supply and Demand (a) In equilibrium, there are no forces or reasons for change. A marble in a bowl is in stable equilibrium. It remains at the bottom if there are no external changes to the system. In a market in equilibrium, neither demanders nor suppliers have an incentive to change their actions.

Law of Supply and Demand (b)

Excess Supply The law of supply and demand predicts that prices will move to equilibrium values. Excess supply causes prices to fall. Suppliers cannot sell all they wish, so they the cut price. Quantity demanded increases along the demand curve to point E0. Quantity supplied decreases along the supply curve to point E0.

Excess Demand

Using Demand and Supply Curves (a)

Using Demand and Supply Curves (b)

Marginal Value Price is related to marginal value not to total value. The price of water can be very low, even though its initial value is immense. The marginal value is why the price of water is relatively low in Alaska and relatively high in New Mexico.

What Determines Price?

Price and Cost (a) Price is not identical to cost but they are related. Price is what an item sells for. Cost is the expense of making an item. When the cost of producing an item increases, the equilibrium price will rise. Why? When cost rises, suppliers will supply less at any price; the supply curve will shift to the left or up.

Price and Cost (b)