Understanding Market Forces of Demand and Supply

1. CRC Economics

2. What did you study last time? Chapter 4 The Market Forces of Demand & Supply • Demand CRC Economics

3. What do you study now? Chapter 4 The Market Forces of Demand & Supply • Supply CRC Economics

4. Do you know … • how much of a good/service that a seller sells? • what happens when the price of the good/service changes? • what happens when factors other than the price of the good/service change? • how to find the market supply? CRC Economics

5. 1. How much of a good/service does a seller sell? • The quantity that a seller sells depends on: • the price of the good/service, and • other factors. • Let us define: • Qs as the quantity supplied (how much one is willing and able to sell), and • P as the price of the good/service CRC Economics

6. 1. How much of a good/service does a seller sell? • The general supply function is written as: Qs = f (P, other factors) • The relationship between Qs and P, other factors assumed to be constant, is called supply (S). Qs = f (P), other factors = constant (S) CRC Economics

7. 1. How much of a good/service does a seller sell? • Supply can be expressed as • a schedule (table), • a curve (graph), or • an equation (function). CRC Economics

8. 2. What happens when the price of the good/service changes? • The law of supply • Supply schedule (table) • Supply curve (graph) • Supply equation (function) • A general supply curve • Movement along the supply curve CRC Economics

9. a. The law of supply • Ceteris paribus, if price (P) rises, then quantity supplied (Qs) rises, and vice versa. CRC Economics

10. a. The law of supply • The law of supply states that if other things being the same, sellers would sell more of a good if the price of the good is higher. They would sell less if the price is lower. • Qs = f (P), ceteris paribus, so • if P rises, Qs rises, or • if P falls, Qs falls. CRC Economics

11. b. Supply schedule (table) Point P Qs a $0.0 0 At different prices, a seller would sell different amounts. b $0.5 1 c $1.0 2 d $1.5 3 e $2.0 4 f $2.5 5 g $3.0 6 CRC Economics

12. c. Supply curve (graph) P $4.0 S $3.0 Plotting and connecting the points in the supply schedule, we trace out the supply (S) curve. $2.0 $1.0 Q CRC Economics 0 4 12 2 6 8 10

13. d. Supply equation What is the equation of the supply curve shown? P P = slope*Qs + VI = 1/2 Qs $4.0 S $3.0 $2.0 $1.0 Q CRC Economics 0 4 12 2 6 8 10

14. e. A general supply curve P 3. The supply (S) curve is the curve going through two points A and B. Ceteris paribus, if P is up, Qs is up, and vice versa. B P2 2. When the price rises to P2, the seller is at point B, selling Q2. A P1 • At P1, the seller is • at point A, selling Q1. S O Q CRC Economics Q2 Q1

15. f. Movement along the supply curve, or DQS, is caused by a change in price. P 4. A change in price causes a change in quantity supplied; this is shown as a movement along the existing supply curve. $4.0 S 3. DP => DQs $3.0 $2.0 2. At P=$2, the seller is at point e, selling 4 units. e DP $1.0 • At P=$1, the seller is • at point c, selling 2 units. c Q CRC Economics 0 4 12 2 6 8 10 DQs

16. f. Movement along a supply curve = change in quantity supplied (DQs) P 1. Suppose that consumers are at point A originally. S P2 C An increase in Qs 2b. or P rises, … DP A P0 2a. Then P falls, … DP A decrease in Qs P1 DQs DQs B O Q CRC Economics Q1 Q0 Q2

17. 3. What happens when factors other than the price of the good/service change? • What are other factors? • What happens when other factors change? • Shifts (or changes) in supply CRC Economics

18. a. What are other factors? • Other factors affecting (changing) supply include: • Technology • Prices of resources(natural resources, labor, capital) • Expectations CRC Economics

19. b. What happens when other factors change? • If the price of the good/service is the same and • any of the other factors changes, • then at the same price P, Qs changes, • so supply (S) changes. • This is shown by a shift in the entire supply curve. • If DP = 0, D other factors => DQs = DS CRC Economics

20. 1) What happens when technology changes? • Suppose that a rice farmer uses a new production technology. • At the same price, he or she would be able to produce and sell more rice. • Changes in technology often change the supply of goods/services. CRC Economics

21. 2) What happens when the prices of resources/inputs change? • Suppose that a seller has to pay higher wages to workers. • At the same price, due to higher costs of production, he or she would be able to produce and sell less of a good. • Changes in the prices of resources/inputs change the supply of goods/services. CRC Economics

22. 3) What happens when expectations change? • Suppose that a gas station owner expects that the price of gasoline will go up next week. • He or she would sell less gasoline today, hoping to sell gasoline at higher prices later. • Changes in expectations change the supply of goods/services. CRC Economics

23. c. Shift/change in supply (DS) is caused by a change in other factors. P S0 • At P0, a seller is at • point A on S0, selling Q0. A B P0 2. At the same price, a factor changes, the seller is at point B on S1 selling Q1. 3. A change in other factors causes a shift in the supply curve. S1 O Q CRC Economics Q0 Q1

24. c. Shift in supply =change in supply (DS) P S0 • Suppose that producers • are at point A originally. B A C P0 Decrease in S Increase in S 3. A change in other factors increases supply, shifting the supply curve to the right. S1 2. A change in other factors decreases supply, shifting the supply curve to the left. S2 O Q CRC Economics Q1 Q0 Q2

25. 4. How to find the market supply? • The market supply is the horizontal summation of all individual supplies for a particular good or service. • Qs(market) = S Qs(individual) @each P • A new factor (the number of sellers) is added to the list of other factors. CRC Economics

26. Now you know … • how much of a good/service that a seller sells. • what happens when the price of the good/service changes. • what happens when factors other than the price of the good/service change. • how to find the market supply. CRC Economics

27. Summary • How much of a good/service that a seller sells depends on its price and otherfactors. • When the price of a good increases, a seller would often sell more. • When the price of a good decreases, a seller would often sell less. CRC Economics

28. Summary • The condition is that other factors stay unchanged. • The change in price causes a movement along the existing supply curve. CRC Economics

29. Summary • When other factors change, even at the same price, a seller would often sell a different amount. • The changes in other factors cause shifts in the supply curve. • The market supply is the sum of all sellers’ supplies. CRC Economics

30. Interesting word plays Pay attention to underlined letters/words. Demand down negative downward sloping Supply up positive upward sloping CRC Economics

31. What did you study? Chapter 4 The Market Forces of Demand & Supply • Supply CRC Economics

32. What will you study next? Chapter 4 The Market Forces of Demand & Supply • Market situations • Changes in demand and/or supply CRC Economics

33. See You! Take Care! CRC Economics