Demand and Supply Analysis

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Demand and Supply Analysis
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I The Theory of Demand
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• The quantity demanded of a good or service is the
  amount that consumers are willing and able to buy
  during a given time period at a particular price.

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What determines the Quantity of a good you Demand?

• The price of the good (P)
• Prices of related goods (Po)
• Income (Y)
• Tastes (T)
• Population - Number of Buyers (POP)
• Expected future prices (Pe)

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• A demand schedule lists the quantities
  demanded at each different price(ceteris
  paribus).

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A Demand Schedule
Price Quantity (dollars per pizza) (millions of
pizzas per week)

• 6
• 8
• 9
• 10
• 12

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• Demand curves show the relationship between the
  quantity demanded of a good and its price
  (ceteris paribus).

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DEMAND
Price Quantity dollars
millions of per
pizza pizzas per week

• 6
  
• 8
• 9
• 10
• 12

12
10
9
Price (dollar per pizza)
8
6
0 2 4 6 8 10
Quantity (millions of pizzas per week)
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DEMAND
Price Quantity dollars
millions of per
pizza pizzas per week

• 6
• 8
• 9
• 10
• 12

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DEMAND
Price Quantity dollars
millions of per
pizzas per week

• 6
• 8
• 9
• 10
• 12

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DEMAND
Price Quantity dollars
millions of per
pizza pizzas per week

• 6
• 8
• 9
• 10
• 12

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DEMAND
Price Quantity dollars
millions of per
pizza pizzas per week

• 6
• 8
• 9
• 10
• 12

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DEMAND
Price Quantity dollars
millions of per
pizza pizzas per week

• 6
• 8
• 9
• 10
• 12

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Demand
Price(dollar per pizza)
12
10
9
8
6
0
Quantity (millions of pizzas per week)
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The law of demand

• The law of demand Other things remaining the
  same, the higher the price of a good, the
  smaller is the quantity demanded.
• A change in price results in a movement along the
  demand curve. This is known as a change in the
  quantity demanded.

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What happens to the demand curve if the
other determinants of demand change?

• 1) Price of related goods
• Substitute goods - goods used in place of
  another good.
• bus vs. train, hamburger vs. hot dog,
  oranges vs. grapefruit, pizzas vs. CDs
• an example Consider the demand for
  pizzas. What happens to the demand for
  pizzas if the price of Chinese take-out
  rises?

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What happens to the demand for pizzas if the
price of Chinese take-out rises?
12
10
Price (dollar per pizza)
9
8
6
Demand for Pizzas (Take-out 30.00)
0
Quantity (millions of pizzas per week)
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Price of a Substitute Good Changes

• To determine how the demand for pizzas is
  influenced lets choose a point on the graph and
  ask the question -
• How would we act if the price of take-out (a
  substitute good) changed?

• Pick a point and consider how changes in the
  price of the substitute effect your demand
  for pizzas.

A
Demand for Pizzas (Take-out 30.00)
0
Quantity (millions of pizzas per week)
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• Ask yourself, how would your demand for pizzas at
  9.00 each change if the price of take-out
  increased from 30.00 to 50.00?

• You would demand more pizzas, telling you that
  you would shift the demand curve to the right.
  More pizzas at the same price.

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As demand increases for pizzas, the quantity
demanded at 9 increases from to million units.
Demand for Pizzas (Take-out 30.00)
0
Quantity (millions of pizzas per week)
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What happens to the demand curve if the
other determinants of demand change?

• 1) Price of Related Goods (continued)
• Complement goods - goods used in
  conjunction with another good.
• hamburger and fries, spaghetti and
  sauce, walkman and cassette pizzas
• an example Consider the demand for
  pizzas. What happens to the demand for
  pizzas if the price of Coke increases?

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Hint Pick a point and consider how changes in
the price of the complement good effects your
demand for pizzas.
Demand for Pizzas (Coke 4.00)
0
Quantity (millions of pizzas per week)
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As demand for pizzas decreases, the quantity
demanded at 9 decreases from to million units.
Demand for Pizzas (Coke 4.00)
0
Quantity (millions of pizzas per week)
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What happens to the demand curve if the
other determinants of demand change?

• 2) Income
• A normal good - demand increases as
  income increases.
• an example Suppose your income
  increases. If pizzas are normal goods, will
  you demand more or less pizzas at the
  price of 9.00 a pizza?

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At 9 a pizza, consider how changes in income
effect your demand for pizzas.
Demand for Pizzas (Y 10,000)
0
Quantity (millions of pizzas per week)
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As income rises, your demand for pizzas
increases, the quantity demanded at 9 increases
from to million units.
Demand for Pizzas (Y 10,000)
0
Quantity (millions of pizzas per week)
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What happens to the demand curve if the
other determinants of demand change?

• 2) Income (continued)
• Inferior goods - demand decreases as
  income increases.
• an example Consider the demand for
  beans. If your income increases, and beans
  are inferior goods, will your demand for
  beans increase or decrease at the price of
  3.00?

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The market for beans
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At 2.50 a can, consider how changes in income
effect your demand for beans, an inferior good.
5
4
Price (dollars per can of beans)
3
2
Demand for beans (Y 10,000)
1
0 2 4 6 8 10
Quantity (millions of cans of beans per week)
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The market for beans
As income rises, your demand decreases for
inferior goods. The quantity of cans of beans
demanded at 2.50 decreases from 6 to 4 million
units.
6
5
4
Price (dollars per can of beans)
3
2
Demand for beans (Y 10,000)
1
0 2 4 6 8 10
4
Quantity (millions of cans of beans per week)
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What happens to the demand curve if the
other determinants of demand change?

• 3) Population
• Demand depends on the size and age structure of
  the population.
• an example Suppose the population
  increases. If the population of Chapel Hill
  goes up from 200,000 to 500,000, what will
  happen to the demand for pizzas at the
  price of 9.00 a unit?

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At 9 a pizza, consider how changes in population
effect the demand for pizzas.
Demand for Pizzas (POP 200,000)
0
Quantity (millions of pizzas per week)
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As the population rises, the demand for pizzas
increases, the quantity demanded at 9 increases
from to million units.
Demand for Pizzas (POP 200,000)
0
6
Quantity (millions of pizzas per week)
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What happens to the demand curve if the
other determinants of demand change?

• 4) Preferences
• Demand depends on attitudes towards goods and
  services.
• an example Suppose your preferences
  change. At the price of 9.00 a pizza, will
  you demand more or less pizzas if all at
  once you like pizzas more than any other
  food?

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At 9 a pizza, consider how changes in
preferences effect the demand for pizzas.
T tastes preferences
Demand for Pizzas (T 1)
0
Quantity (millions of pizzas per week)
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As pizzas become more preferred than other food,
demand increases. The quantity demanded at 9
increases from 4 to 6 million units.
Demand for Pizzas (T 1)
0
Quantity (millions of pizzas per week)
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What happens to the demand curve if the
other determinants of demand change?

• 5) Expected future prices
• Demand depends on beliefs regarding the future
  price of goods and services.
• an example Suppose you believe the
  price of pizzas will increase next week
  from 9.00 to 10.00. At
  the current price of 9.00 a pizza, will
  you demand more or less pizzas?

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At 9 a pizza, how will the belief that the
future price of pizza will increase effect demand.
Demand for pizzas ( 9.00)
0
Quantity (millions of pizzas per week)
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If expected future prices for pizzas are higher,
demand for pizzas increases. The quantity
demanded at 9 increases from to million units.
Demand for Pizzas ( 9.00)
0
Quantity (millions of pizzas per week)
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The demand for pizzas

• Changes in demand
• The demand for pizzas
• Decreases if
• The price of a substitute falls
• The price of a complement rises
• Income falls (and pizza is a normal good)
• The population decreases
• The price of a pizza is expected to fall in the
  future

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The demand for pizzas

• Changes in demand
• The demand for pizzas
• Increases if
• The price of a substitute rises
• The price of a complement falls
• Income rises (a pizza is a normal good)
• The population increases
• The price of a pizza is expected to rise in the
  future

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A Change in Demand

• If a determinant of demand other than price
  changes, the demand curve shifts position.
• This is known as a change in demand.

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A change in the quantity demanded versus a change
in demand

• A movement along a demand curve, which results
  from a change in price, shows a change in the
  quantity demanded.
• If some other influence on buyers plans changes,
  holding price constant, there is a change in
  demand.

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A change in the quantity demanded versus a change
in demand
Price
D0
Quantity
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A change in the quantity demanded versus a change
in demand
Price
D0
Quantity