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DEMAND: An economic principle that describes a consumer's desire and willingness to pay a price

for a specific good or service. Holding all other factors constant, the price of a good or service
increases as its demand increases and vice versa.
SUPPLY: A fundamental economic concept that describes the total amount of a specific good or
service that is available to consumers.
Supply and Demand is an economic model of price determination in a market. t concludes that in
a competitive market, the unit price for a particular good will vary until it settles at a point where the
!uantity demanded by consumers "at current price# will e!ual the !uantity supplied by producers "at
current price#, resulting in an economic e!uilibrium for price and !uantity.
$he four basic laws of supply and demand are:
%. f demand increases "demand curve shifts to the right# and supply remains unchanged, a
shortage occurs, leading to a higher e!uilibrium price.
&. f demand decreases "demand curve shifts to the left# supply remains unchanged, a surplus
occurs, leading to a lower e!uilibrium price.
'. f demand remains unchanged and supply increases "supply curve shifts to the right#, a
surplus occurs, leading to a lower e!uilibrium price.
(. f demand remains unchanged and supply decreases "supply curve shifts to the left#, a
shortage occurs, leading to a higher e!uilibrium price.
Law of Demand and the Demand Curve
)e begin with demand because demand is usually easier to understand from our personal e*periences.
)e are all consumers and we all demand goods and services. Demand is derived from consumers'
tastes and preferences, and it is bound by income. n other words, given a limited income "whether it
be '+,+++ or , million#, the consumer must decide what goods and services to purchase. )ithin his
budget, the consumer will purchase those goods and services that he likes best. -ach consumer will
purchase different things because individual preferences and incomes differ.
$he law of demand holds that other things e!ual, as the price of a good or service rises, its !uantity
demanded falls. $he reverse is also true: as the price of a good or service falls, its !uantity demanded
increases. $his law is a simple, common sense principle. $hink of your trips to the grocery store.
)hen the price of orange .uice rises, for e*ample, you buy less of it. )hen that item is on sale, you
purchase more of it. $his is all that we mean by the law of demand.
$able % lists the monthly !uantity of rental videos demanded by an individual given several different
prices. f the rental price is /,, the consumer rents %+ videos per month. f the price falls to /(, the
!uantity demanded increases to &+ videos, and so on. $he figure titled 0Demand 1urve0 plots the
inverse relationship between price and !uantity demanded.
A demand curve is a graphical
depiction of the law of
demand. )e plot price on the
vertical a*is and !uantity
demanded on the hori2ontal
a*is. As the figure illustrates,
the demand curve has a
negative slope, consistent with
the law of demand.
Demand schedule
A demand schedule, depicted graphically as the demand curve, represents the amount of
some good that buyers are willing and able to purchase at various prices, assuming all determinants of
demand other than the price of the good in !uestion, such as income, tastes and preferences, the price
of substitute goods, and the price of complementary goods, remain the same. 3ollowing the law of
demand, the demand curve is almost always represented as downward4sloping, meaning that as price
decreases, consumers will buy more of the good.
Demand = f {price, income, taste 5 preferences, e*pectations, potential consumers...}
actors that Sh!ft the Demand Curve
1. Chan"e !n consumer !ncomes# As the previous video rental e*ample demonstrated, an
increase in income shifts the demand curve to the right. 6ecause a consumer's demand for
goods and services is constrained by income, higher income levels rela* somewhat that
constraint, allowing the consumer to purchase more products. 1orrespondingly, a decrease in
income shifts the demand curve to the left. )hen the economy enters a recession and more
people become unemployed, the demand for many goods and services shifts to the left.
2. Po$ulat!on chan"e# An increase in population shifts the demand curve to the right. magine a
college town bookstore in which most students return home for the summer. Demand for
books shifts to the left while the students are away. )hen they return, however, demand for
books increases even if the prices are unchanged. As another e*ample, many communities are
e*periencing 0urban sprawl0 where the metropolitan boundaries are pushed ever wider by
new housing developments. Demand for gasoline in these new communities increases with
population. Alternatively, demand for gasoline falls in areas with declining populations.
3. Consumer $references# f the preference for a particular good increases, the demand curve
for that good shifts to the right. 3ads provide e*cellent e*amples of changing consumer
preferences. -ach 1hristmas season some new toy catches the fancy of kids, and parents
scramble to purchase the product before it is sold out. A few years ago, 0$ickle 7e -lmo0
dolls were the rage. n the year &+++ the toy of choice was a scooter. 3or a given price of a
scooter, the demand curve shifts to the right as more consumers decide that they wish to
purchase that product for their children. 8f course, demand curves can shift leftward .ust as
!uickly. )hen fads end suppliers often find themselves with a glut of merchandise that they
discount heavily to sell.
4. Pr!ces of related "oods# f prices of related goods change, the demand curve for the original
good can change as well. 9elated goods can either be substitutes or complements.
%A&LE '
Demand for (!deos
Pr!ce )uant!t* Demanded
, %+
( &+
' '+
& (+
% ,+
o Substitutes are goods that can be consumed in place of one another. f the price of a
substitute increases, the demand curve for the original good shifts to the right. 3or
e*ample, if the price of :epsi rises, the demand curve for 1oke shifts to the right.
1onversely, if the price of a substitute decreases, the demand curve for the original
good shifts to the left. ;iven that chicken and fish are substitutes, if the price of fish
falls, the demand curve for chicken shifts to the left.
o Complements are goods that are normally consumed together. Hamburgers and
french fries are complements. f the price of a complement increases, the demand
curve for the original good shifts to the left. 3or e*ample, if 7cDonalds raises the
price of its 6ig 7ac, the demand for french fries shifts to the left because fewer
people walk in the door to buy the 6ig 7ac. n contrast, f the price of a complement
decreases, the demand curve for the original good shifts to the right. f, for e*ample,
the price of computers falls, then the demand curve for computer software shifts to
the right.
Law of Su$$l* and the Su$$l* Curve
Supply is slightly more difficult to understand because most of us have little direct e*perience on the
supply side of the market. Supply is derived from a producer's desire to ma*imi2e profits. )hen the
price of a product rises, the supplier has an incentive to increase production because he can .ustify
higher costs to produce the product, increasing the potential to earn larger profits. :rofit is the
difference between revenues and costs. f the producer can raise the price and sell the same number of
goods while holding costs constant, then profits increase.
$he law of supply holds that other things e!ual, as the price of a good rises, its !uantity supplied will
rise, and vice versa. $able & lists the !uantity supplied of rental videos for various prices. At ,, the
producer has an incentive to supply ,+ videos. f the price falls to /( !uantity supplied falls to (+, and
so on. $he figure titled 0Supply 1urve0 plots this positive relationship between price and !uantity
supplied.
A supply curve is a graphical depiction of a supply schedule plotting price on the vertical a*is and
!uantity supplied on the hori2ontal a*is. $he supply curve is upward4sloping, reflecting the law of
supply.
Su$$l* schedule
A supply schedule is a table that shows the relationship between the price of a good and the !uantity
supplied. 3irms will produce additional output while the cost of producing an e*tra unit of output is
less than the price they would receive.
%A&LE +
Su$$l* of (!deos
Pr!ce )uant!t* Su$$l!ed
, ,+
( (+
' '+
& &+
% %+
A hike in the cost of raw goods would decrease supply, shifting costs up, while a discount would
increase supply, shifting costs down and hurting producers as producer surplus decreases.
Su$$l*= f {production cost, firms e*pectations of future, no. 8f suppliers}
actors that Sh!ft the Su$$l* Curve
1. Chan"e !n !n$ut costs# An increase in input costs shifts the supply curve to the left. A
supplier combines raw materials, capital, and labor to produce the output. f a furniture maker
has to pay more for lumber, then her profits decline, all else e!ual. $he less attractive profit
opportunities force the producer to cut output. Alternatively, car manufacturer may have to
pay higher labor costs. $he higher labor input costs reduces profits, all else e!ual. 3or a given
price of a car, the manufacturer may trim output, shifting the supply curve to the left.
1onversely, if input costs decline, firms respond by increasing output. $he furniture
manufacturer may increase production if lumber costs fall. Additionally, chicken farmers may
boost chicken output if feed costs decline. $he reduction in feed costs shifts the supply curve
for chicken to the right.
2. ,ncrease !n technolo"*# An increase in technology shifts the supply curve to the right. A
narrow definition of technology is a cost4reducing innovation. $echnological progress allows
firms to produce a given item at a lower cost. 1omputer prices, for e*ample, have declined
radically as technology has improved, lowering their cost of production. Advances in
communications technology have lowered the telecommunications costs over time. )ith the
advancement of technology, the supply curve for goods and services shifts to the right.
3. Chan"e !n s!-e of the !ndustr*# f the si2e of an industry grows, the supply curve shifts to
the right. n short, as more firms enter a given industry, output increases even as the price
remains steady. $he fast4food industry, for e*ample, e*ploded in the latter half of the
twentieth century as more and more fast food chains entered the market. Additionally, on4line
stock trading has increased as more firms have begun delivering that service. 1onversely, the
supply curve shifts to the left as the si2e of an industry shrinks. For example, the supply of
manual typewriters declined dramatically in the %<<+s as the number of producers dwindled.
Sh!ft versus a Movement Alon" a Demand Curve
t is essential to distinguish between a movement along a
demand curve and a shift in the demand curve. A change
in price results in a movement along a fi*ed demand
curve. $his is also referred to as a change in quantity
demanded. 3or e*ample, an increase in video rental prices
from /' to /( reduces !uantity demanded from '+ units to
&+ units. $his price change results in a movement along a
given demand curve. A change in any other variable that
influences !uantity demanded produces a shift in the
demand curve or a change in demand. $he terminology is
subtle but e*tremely important. $he ma.ority of the
confusion that students have with supply and demand
concepts involves understanding the differences between
shifts and movements along curves.
Suppose that incomes in a community rise
because a factory is able to give
employees overtime pay. $he higher
incomes prompt people to rent more
videos. 3or the same rental price, !uantity
demanded is now higher than before.
$able ( and the figure titled 0Shift in the
Demand 1urve0 represent that scenario.
As incomes rise, the !uantity demanded
for videos priced at /( goes from &+
"point A# to (+ "point A'#. Similarly, the
!uantity demanded for videos priced at /'
rises from '+ to ,+. $he entire demand
curve shifts to the right.
A shift in the demand curve changes the e!uilibrium
position. As illustrated in the figure titled 0-!uilibrium
After a Demand 1urve Shift0 the shift in the demand
curve moves the market e!uilibrium from point A to point
6, resulting in a higher price "from /' to /(# and higher
!uantity "from '+ to (+ units#. =ote that if the demand
curve shifted to the left, both the e!uilibrium price and
!uantity would decline.
A Sh!ft versus a Movement Alon" a Su$$l* Curve
As with demand curves, it is essential to distinguish
between a movement along a given supply curve and
a shift in a supply curve. A change in price results in a
movement along a fi*ed supply curve. $his is also
referred to as a change in quantity supplied. 3or
e*ample, if the rental price of videos rises from /' to /(,
!uantity supplied increases from '+ to (+ units. A
change in any other variable that influences !uantity
supplied produces a shift in the supply curve or
a change in supply.
Suppose for e*ample that the video store
purchases its videos from Hollywood nc. but
Hollywood nc. .ust increased its prices. =ow
the video rental store has to pay more to
purchase the videos that it makes available to
customers. 3or a given rental price of videos,
the video store has to reduce the !uantity of
videos it supplies. 3or the same price, !uantity
supplied will be lower than before. $able , and
%A&LE .
Chan"e !n Demand for
(!deos after ,ncomes /!se
Pr!ce
,n!t!al )uant!t*
Demanded
New )uant!t*
Demanded
)uant!t*
Su$$l!ed
/, %+ '+ ,+
0. &+ .1 .1
/' '+ ,+ '+
/& (+ >+ &+
/% ,+ ?+ %+
%A&LE 2
Chan"e !n Su$$l* due to an
,ncrease !n (!deo Costs
Pr!ce
)uant!t*
Demanded
,n!t!al )uant!t*
Su$$l!ed
New )uant!t*
Su$$l!ed
/, %+ ,+ '+
0. +1 (+ +1
/' '+ '+ %+
/& (+ &+ +
/% ,+ %+ +
the figure titled 0Shift in the Supply 1urve0 show this scenario. nitially at a price of /(, !uantity
supplied was (+ "point A#. After the leftward shift of the supply curve, at the same price of /(,
!uantity supplied is only &+ units "point A'#.
-!uilibrium price and !uantity change after a shift in the
supply curve. $he figure titled 0-!uilibrium After a
Supply 1urve Shift0 plots the new e!uilibrium after the
leftward shift of the supply curve. $he e!uilibrium
moves from point A to point 6, resulting in a higher
price "from /' to /(# and lower !uantity "from '+ to &+#.
1onversely, a rightward shift of the supply curve
reduces the e!uilibrium price and increases the
e!uilibrium !uantity.
/eference#
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