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Economics 2

Lecture 6: Supply and Demand, Part 1

demand
supply

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Demand

Demand is willingness and ability of buyers to purchase goods and services.

determinants of demand (How many slices of pizza are buyers willing and able to purchase):

1. price of pizza- the law of demand says that people purchase more of something when its price falls
2. income
3. tastes/preferences
4. price of a compliment like beer
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5. price of a substitute like chicken wings

demand

amount people are willing and able to purchase at each possible price

quantity demanded

amount of the product people are willing and able to purchase at a specific price

A demand schedule is a list of the quantities demanded at different prices. When constructing a demand schedule, everything else that might affect demand is held constant. Consider the following demand schedule for pizza for person A:

	   Price       Quantity Demanded
         ($/slice)    (number of slices)

           $2.50               1
            2.00               2
            1.50               3
            1.00               4
            0.50               5
	    

There is an inverse relationship between price and quantity demanded: when price rises the quantity demanded falls. This "law of demand" is due to consumers substituting purchases away from a good whose price has risen towards relatively less expensive goods.

Here is the demand schedule for person B:

	   Price       Quantity Demanded
         ($/slice)    (number of slices)

           $2.50               3
            2.00               4
            1.50               5
            1.00               6
            0.50               7
	    

The market demand schedule is found by adding up the quantity demanded over all buyers at each price.

	   Price       Quantity Demanded
         ($/slice)    (number of slices)

           $2.50           1 + 3 = 4
            2.00           2 + 4 = 6
            1.50           3 + 5 = 8
            1.00           4 + 6 = 10
            0.50           5 + 7 = 12
	    

A demand curve is a graph of the demand schedule.

A change in the price of a good causes a movement along the demand curve. If the price of pizza falls from $2.00 to $0.50, the market moves from point A down the demand curve to point B. The quantity demanded rises from 6 to 12 slices of pizza. The change in the price of pizza has no effect on the demand for pizza. Demand is repesented by the entire demand curve. A change in the price of pizza does not cause any change in the demand curve.

Supply

Supply is willingness and ability of firm to offer goods for sale in a market. A supply schedule is a list of the amounts firm are willing to offer for sale at each of the possible prices.

                 Seller A

	   Price       Quantity Supplied
         ($/slice)    (number of slices)

           $2.50               4
            2.00               3
            1.50               2
            1.00               1
            0.50               0
	    

Businesses are in business to make profits. When the price of a good rises it becomes more profitable to produce that good. So, firms will devote more resources to the production of a good whose price has risen. There is a direct, positive relationship between price and quantity supplied.

                 Seller B

	   Price       Quantity Supplied
         ($/slice)    (number of slices)

           $2.50              10
            2.00               8
            1.50               6
            1.00               4
            0.50               2
	    

The market supply schedule is found by adding up at each price by adding up the quantity supplied by each seller.

	   Price       Quantity Supplied
         ($/slice)    (number of slices)

           $2.50          4 + 10 = 14
            2.00          3 +  8 = 11
            1.50          2 +  6 =  8
            1.00          1 +  4 =  5
            0.50          0 +  2 =  2
	    

A supply curve is a graph of the supply schedule. A supply curve is upward sloping.

David A. Latzko Business and Economics Division Pennsylvania State University, York Campus office: 13 Main Classroom Building phone: (717) 771-4115 fax: (717) 771-4062 e-mail: web: www.yk.psu.edu/~dxl31