Summary: Main Points on Supply and Demand


Click here for ANSWERS TO SELECTED QUESTIONS IN THE TEXT

Powerpoint Presentation for Chapter 4
 

DEMAND

Your quantity demanded of a good at some price is the amount you would buy at that price (during some time period, and assuming that you can buy as much as you want at that price).  Your demand curve for this good graphs your quantity demanded at many different possible prices.

The market quantity demanded at some price is the total amount that all buyers would buy at that price.  The market demand curve graphs the market quantity demanded at many different possible prices.

Demand curves slope downward.

Changes in underlying conditions cause changes in demand (shifts in demand curves). A change in the price of a good affects the quantity demanded in two main ways. The substitution effect of a price change is the change in quantity demanded that results from the change in the opportunity cost of the good. (See the example on page 85 of the text.)  The income effect of a price change is the change in quantity demanded that results from the change in the amount of goods buyers can afford -- see page 84 of the text.

Note: Changes in price cause changes in the quantity demanded, but not changes in demand.

The following graph shows changes in the quantity demanded:

SUPPLY

Your quantity supplied of a good at some price is the amount you would produce and sell at that price (during some time period, and assuming that you can sell as much as you want at that price).  Your supply curve for this good graphs your quantity supplied at many different possible prices.

The market quantity supplied at some price is the total amount that all sellers would prduce and sell at that price.  The market supply curve graphs the market quantity supplied at many different possible prices.

Supply curves slope upward.  (Later in the course, we will discuss some exceptions.)

 Changes in underlying conditions cause changes in supply.

Note: Changes in price cause changes in the quantity supplied, but not changes in supply.

The following graph shows changes in the quantity supplied:

 

EQUILIBRIUM

Market equilibrium is a price and quantity traded at which the quantity supplied equals the quantity demanded. That price is the equilibrium price and that quantity is the equilibrium quantity. Market equilibrium occurs at the point where the supply and demand curves intersect.

If the price is below its equilibrium level, there is a shortage (excess demand), and the price tends to rise toward its equilibrium level. If the price is above its equilibrium level, there is a surplus (excess supply), and the price tends to fall toward the equilibrium. If the price is at its equilibrium level, there is no tendency for the price or the quantity traded to change unless demand or supply changes.
 

CHANGES IN UNDERLYING CONDITIONS AFFECT THE EQUILIBRIUM

Demand describes the behavior of buyers. Supply describes the behavior of sellers. Changes in underlying conditions cause changes in demand or supply (sometimes both, but usually either one or the other).  These changes in demand or supply cause changes in the equilibrium price and quantity.

RELATIVE PRICES AND NOMINAL PRICES

The nominal price of a good is its money price. The relative price of a good in terms of another good is its opportunity cost measured in units of that other good.

Example: Suppose the nominal price of a burger is $4 and the nominal price of a drink is $1.  Then:


 
 

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