Introduction to Supply and Demand

Markets are … Consumers and producers Exchange goods/services for payment Most basic is a COMPETITIVE MARKET 5 Elements of S&D Model Demand curve

5 Elements of S&D Model Demand curve Supply curve

5 Elements of S&D Model Demand curve Supply curve Equilibrium

5 Elements of S&D Model Demand curve Supply curve Equilibrium Demand and Supply factors Changes in equilibrium The Demand Curve Chapter 3: Supply and Demand (pages 62-71) Think for a minute… How do we calculate the amount of coffee demanded in a given year? We need a DEMAND SCHEDULE… Demand Schedule and Curve

Price

Quantity Law of Demand ⇑ Price=⇓ Quantity Demanded Downward-sloping curves

Change in quantity demanded Caused by a ∆ in PRICE Demand schedule unchanged Movement along curve

Determinants of Demand M.E.R.I.T. shifts the curve Market size (# consumers) Expectations Related prices Income Tastes and preferences Shifts in Demand Demand shifts with ∆ M.E.R.I.T. Increase = shift to right Decrease = shift to left

Market Size Amount of goods demanded at a given price will change More buyers = ⇑ Demand Fewer buyers = ⇓ Demand Example: Cost of prescription drugs as the population gets older

Expectations Future prices, product availability, and income can shift demand Example: What do you do if the price of gas is expected to fall next week? Example: If the iPhone 5 will be released in October what happens to demand for iPhone 4? Related prices Depends on whether the good is a SUBSTITUTE ⇑P for good 1  ⇑D for good 2 Example: Coffee and Tea COMPLEMENT ⇑P for good 1  ⇓D for good 2 Example: Peanut butter and jelly

Income ⇑Income = ⇑Demand (usually…) True for NORMAL goods INFERIOR goods are different ⇑ Income = ⇓ Demand Example: Bus vs. plane tickets Tastes Favorable change = ⇑ Demand Unfavorable change = ⇓ Demand Example: Winning the Super Bowl increase demand for merchandise (Why?)