Introduction for Chapter Three --  Understanding Individual Markets : Demand and Supply
In this chapter, the key questions should be done, espcially key questions 3-2, 3-5, and 3-8.  The answers to these questions can be found at the McConnell/Brue textbook site:   http://www.mhhe.com/economics/mcconnell/index1.mhtml

From there, click on "For the Student"   and the "Key Question Answers"

There is also a 10 point Discussion Question in the Discussion List area.  From the Home Page, click "Discussion List", next click "Discussion", and then click "Supply and Demand."  Post your response as a reply.

The following is a review of demand and supply which concentrates on the determinants of demand and supply, the difference between change in demand (supply) and change in quantity demanded (supplied), and the effects on equilibrium price and quantity of a change in demand or supply.

DEMAND

Definition of Demand -- remember that demand is not a quantity.  It is not the quantity of a product purchased. It is the intentions of the buyers about how much of a product they intend to buy at different prices during a particular time period. So it is a set of prices and the quantities which buyers will purchase at each of those prices. It is the "game plan" of the buyers. It is a relationship between quantity demanded and price.  Demand can be shown in the form of a table (schedule), a graph, and an equation.

Know the difference between a change in demand and a change in quantity demanded.

Change in Demand:

The term CHANGE IN DEMAND means that buyers have changed their intentions or changed their minds about how much they are able and willing to buy at each price. (Or they have changed their minds about the price that they are willing to pay for each quantity.) When the demand for a product change, the buyers move to a new demand curve. The demand curve shifts.

INCREASE IN DEMAND:

1. A larger quantity will be demanded at each price.
2. Buyers are willing to pay a higher price for each quantity.
3. The demand curve will shift to the right.

DECREASE IN DEMAND:

1. A smaller quantity will be demanded at each price.
2. Buyers are willing to pay a lower price for each quantity.
3. The demand curve will shift to the left.

A change in demand is caused by a change in one of the determinants of demand:

1. Income and Wealth of the buyers
2. Tastes and Preferences;
3. Prices of Related Goods:

  1. Price of substitutes in use: Two goods which can be used in place of one another.For example, soda and fruit juice are substitutes for many people. The price of soda will influence the demand curve for fruit juice.

  2. b. Price of complementary goods: Two goods which are used in tandem, i.e., together.
        For example, turkey and stuffing mix are complementary goods. The price of turkey will
        influence the demand curve for stuffing mix.

    4. Buyers' Expectations about the Future:    Future Income, Future Price of the Good, Future
        Product Availability.

    5. Number of Buyers in the Market

    Example:  Increase in Demand

    The demand for a product increases from D(1) to D(2) showing that at any price, buyers now intend to purchase a higher quantity than before.  As a result, The equilibrium position changes from 1 to 2.
     

    Equilibrium price increases from P(1) to P(2) and equilibrium quantity increases from Q(1) to Q(2).


     

    Change in Quantity Demanded

    A change in quantity demanded is a movement along a demand curve. A move from one point to another point on the same demand curve. It is caused by a change in the price of the product itself, holding the determinants of demand constant.

    Example: Decrease in Quantity Demanded

    For example, an increase in the price of hamburger, the determinants of demand remaining constant, will result in a decrease in the quantity demanded of hamburger. Buyers will move from one point on the demand curve to another point on the same demand curve.

    In the figure below, price increases from P(1) to P(2).  As a result buyers move from Point A to point B on the same demand curve.  Demand does not change.  Quantity demanded decreases from QD(1) to QD(2).


    SUPPLY

    Definition of Supply -- remember that supply is not a quantity. It is not the quantity of a product sold. It is the intentions of the sellers about how much of a product they are willing and able to offer for sale at different prices during a particular time period. So it is a set of prices and the quantities which sellers will offer for sale at each price. It is the "game plan" of the sellers. It is a relationship between quantity supplied and price. Supply can be shown in the form of a table (schedule), a graph, and an equation.

    Know the difference between a change in supply and a change in quantity supplied.

    Change in Supply:

    A change in supply means the sellers are willing and able to offer for sale a different quantity at each price than they were before.

    The term "change in supply" means that the sellers are moving to a new supply curve. It means that the sellers have changed their intentions about how much they want to sell at each price OR they have changed their minds about the price at which they are willing to offer each quantity for sale.

    INCREASE IN SUPPLY:
    (1) A larger quantity will be supplied at each price.
    (2) Sellers are willing to produce and sell each quantity at a lower price.
    ( 3) The supply curve will shift to the right.

    DECREASE IN SUPPLY:
    (1) A smaller quantity will be supplied at each price.
    (2) Sellers are willing to produce and sell each quantity at a higher price.
    (3) The supply curve will shift to the left.

    A change in supply is caused by a change in one of the determinants of supply:

    1. COSTS OF PRODUCTION

    Costs of Production are determined by a) the type of technology which is used; and b) the
    prices of the resources which must be hired. Taxes on products and subsidies to producers
    can also increase (decrease) costs of production which the producer must pay.

    2. PRICE OF RELATED GOODS

  3. Price of Substitutes in Production. Substitutes in production are two goods which can be produced using the same resources. For example, hand bags and belts are substitutes introduction for leather goods producers. In the case of substitutes in production. The producer produces one or the other.
  4. Price of Joint Goods. Joints goods are two goods which produced at the same time. One product is a by-product of producing the other. For example, sawdust (chips) and lumber are joint goods. The producer produces both goods at the same time. Chips are a by-product of producing lumber.
3. EXPECTATIONS OF THE SELLER ABOUT THE FUTURE.

Expectations of the seller about future product price and about future product sales.

4. WEATHER (For agricultural goods--food and fiber crops)

5. NUMBER OF SELLERS (# OF FIRMS) IN THE INDUSTRY.

Example:  Decrease in Supply

In the example below, the supply for a product decreases.  The supply curve shifts to the left showing that sellers now intend to offer less for sale at each price.  The equilibrium price increases from  P(1) to P(2) and equilibrium quantity decreases from Q(1) to Q(2).

Change in Quantity Supplied

A change in quantity supplied is a movement along a supply curve. A move from one point to another point on the same supply curve. It is caused by a change in the price of the product itself, holding the determinants of supply constant.

Example: Increase in Quantity Supplied

For example, an increase in the price of hamburger, the determinants of supply remaining constant, will result in an increase in the quantity supplied of hamburger. Sellers will move from one point on the supply curve to another point on the same supply curve.

In this example,  the price of a product increases from P(1) to P(2).  As a result, sellers move from point A to point B on the same supply curve.  Supply does not change.  There is an increase in quantity supplied from QS(1) to QS(2).


 
 

Effects on Equilibrium Price and Quantity of a Change in Demand and a Change in Supply

See Pages 53 - 56 in your textbook.

If Demand Decreases: the demand curve shifts to the left; equilibrium price decreases and equilibrium quantity decreases.

If Supply Increases: the supply curve shifts to the right; equilibrium price decreases and equilibrium quantity increases.

If both demand and supply shift at the same time, then you cannot use graphs to determine the effects on equilibrium price and quantity.

Example 1:    Demand increases and supply decreases:

Demand Increases:      Eq Price  increases                Eq Quantity increases
Supply Decreases:       Eq Price  increases                Eq Quantity decreases

Result:                         Eq Price will increases           Eq Quantity:  indeterminate
                                                                                Could increase or decrease depending
                                                                                on the relative shifts in Demand and

Example 2:   Demand increases and supply increases:

Demand Increases:         Eq Price increases                Eq Quantity increases
Supply Increases:           Eq Price decreases               Eq Quantity increases

Result:                           Eq Price:  Indeterminate         Eq Quantity will increases
                                     Could increase or decrease
                                     depending on the relative
                                     shifts in Demand and Supply.