• is a tabular representation of demand.

For example:

PRICE OF HAMBURGERS	QUANTITY OF HAMBURGERS DEMANDED
$5.00	1
$4.00	2
$3.00	3
$2.00	4
$1.00	5

• is a graphical representation of demand.

For example, plot the points in the above table on a graph.

(Note: It is traditional in economics to place price on the vertical axis and quantity on the horizontal axis.)

There is usually an inverse relationship between the price of something and the quantity demanded of that thing.

• As the price of something becomes more expensive, we tend to buy less of it.
• As the price of something becomes cheaper, we tend to buy m ore of it.

Why?

Economists suggest this inverse relationship is due to:

(1) income effects

and

(2) substitution effects.

Suppose you have $4 in your pocket. If you go to McDonald's and find that Big Macs cost $2.50, then you might buy one Big Mac for lunch.

With that same $4 in your pocket, suppose you go to McDonald's and find Big Macs on sale for 99 cents. You might buy 2 Big Macs for lunch.

In both of these cases, your monetary income is the same ($4). You have more real income (purchasing power) in the second case, however.

• If Big Macs cost $2.50, the most you could buy with $4 is one (with some change left over).
• If Big Macs cost 99 cents, however, you could buy 4 of them with $4 (if you ignore sales tax).

Suppose you go to McDonald's for lunch. On the way there, you are thinking you might enjoy their chicken sandwich today.

When you arrive at the restaurant, you are pleasantly surprised to find that Big Macs are on sale for 99 cents. The chicken sandwich is not on sale and costs $2.49.

Thus, when the price of Big Macs decreases, one of the reasons the quantity demanded increases is that some consumers will substitute away from other products (e.g., chicken sandwiches) and buy the cheaper Big Macs.

(1) income effects, and

(2) substitution effects.

A change in demand means that the demand curve has shifted. At every possible price, there is (probably) a different quantity demanded (than before the shift).

The demand for a particular good may shift because of changes in:

• population. (A larger number of consumers tends to increase the quantity demanded at every possible price.)
• income. (As our income increases, we tend to demand more of most products (i.e., normal goods). There are some products, however, which we tend to buy less of as our income increases (e.g., Raman noodles, macaroni & cheese). These products are referred to as inferior goods.)
• prices of substitute goods. (If Big Macs go on sale, the demand for chicken sandwiches probably decreases.)
• prices of complementary goods. (Complementary goods are products we tend to consume together, such as VCRs and video tape. If VCRs become significantly cheaper, the demand for video tapes probably increases.)
• tastes & preferences. (Beanie Babies are a current fad. Consequently, the demand for them has increased significantly.)

It is extremely important to understand the difference between "demand" and "quantity demanded."

This is the one of the biggest points of confusion among introductory economics students.

• refers to the entire relationship between prices and the quantity of this product or service that people want at each of these prices.
• should be thought of as "the demand curve."

QUANTITY DEMANDED

• refers to one particular point on the demand curve (not the entire curve).
• refers to how much of the product is demanded at one particular price.

With an INCREASE IN DEMAND (for pizza)

• the demand curve (for pizza)has shifted to the right.
• at every possible price, a greater quantity (of pizza) is demanded.

An INCREASE IN DEMAND might be caused by:

• an increase in consumers' income (if pizza is a normal good).
• an increase in the number of consumers.
• an increase in people's preference for pizza (i.e., pizza becomes more popular).
• an increase in the price of a substitute good (e.g., hamburgers).
• a decrease in the price of a complementary good (e.g., root beer).

An Illustration of an Increase in Demand

• the price of pizza has decreased.
• there has been a movement from one point on the demand curve to another point on the same demand curve.

An INCREASE IN QUANTITY DEMANDED (for pizza) is caused by:

• a decrease in the price of pizza

An Illustration of an Increase in Quantity Demanded

REMEMBER: A demand curve tells you how much the quantity of pizza demanded changes when the price of pizza changes.

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SUPPLY

• is a relationship between the price of a product or service and the quantity supplied of this same product or service.

(For example, the supply of pizzas is the relationship between the price of pizzas and the quantity of pizzas supplied at every possible price.)

• is a tabular representation of supply.

For example:

PRICE OF HAMBURGERS	QUANTITY OF HAMBURGERS SUPPLIED
$5.00	5
$4.00	4
$3.00	3
$2.00	2
$1.00	1

• is a graphical representation of supply.

For example, plot the points in the above table on a graph.

(Note: It is traditional in economics to place price on the vertical axis and quantity on the horizontal axis.)

There is usually a direct relationship between the price of something and the quantity supplied of that thing.

• As the price of something becomes more expensive, producers tend to supply more of it.
• As the price of something becomes cheaper, producers tend to supply less of it.

Suppose I need some help with projects around the house (e.g., yard work). Would you be willing to help me this weekend if I offer you $3 per hour? What if I offer $5 per hour? Would you say "yes" if I pay you $10 per hour? What about $20 per hour? What if I pay $50 per hour?

When I ask a room full of people these questions, as the amount I pay increases, the number of people willing to help me increases.

This is an example of a supply curve for labor. As the price of labor (the amount I am willing to pay you) increases, the number of people willing to work for me also increases.

A change in supply means that the supply curve has shifted. At every possible price, there is (probably) a different quantity supplied (than before the shift).

The supply for a particular good may shift because of changes in:

• technology. (Technological innovations tend to shift supply curves to the right. At any given price, a greater quantity tends to be produced.)
• costs of production. (Increase labor costs tend to shift the supply curve for goods to the left.)
• weather. (If we are discussing agricultural products (or construction), good weather shifts the supply curve to the right. Bad weather tends to shifts supply curves to the left.

It is extremely important to understand the difference between "supply" and "quantity supplied."

This is one of the biggest points of confusion among introductory economics students.

• refers to the entire relationship between prices and the quantity of this product or service that producers provide at each of these prices.
• should be thought of as "the supply curve."

QUANTITY SUPPLIED

• refers to one particular point on the supply curve (not the entire curve).
• refers to how much of the product is supplied at one particular price.

• the supply curve (of pizza)has shifted to the right.
• at every possible price, a greater quantity (of pizza) is supplied.

An INCREASE IN SUPPLY of pizza might be caused by:

• the invention of a new type of pizza oven which cooks pizzas twice as fast as current ovens.
• a change in the minimum wage law which allows restaurants to hire workers at a reduced wage.

An Illustration of an Increase in Supply

• the price of pizza has increased.
• there has been a movement from one point on the supply curve to another point on the same supply curve.

An INCREASE IN QUANTITY SUPPLIED (of pizza) is caused by:

• an increase in the price of pizza

An Illustration of an Increase in Quantity Supplied

REMEMBER: A supply curve tells you how much the quantity of pizza supplied changes when the price of pizza changes.

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EQUILIBRIUM

In a market, prices are determined by the interaction of supply and demand. We can represent the supply and demand for a good or service by drawing supply and demand curves.

If we draw these curves on the same graph, the intersection of the supply & demand curves represents the equilibrium point.

The equilibrium point represents the price at which the quantity supplied and the quantity demanded are equal.

It is important because it is efficient.

At the equilibrium price, suppliers want to produce and sell the same quantity which demanders (i.e., consumers) wish to buy at that price.

An Illustration of Equilibrium

At any market price above the equilibrium, the quantity which producers wish to supply (represented by the horizontal distance between the vertical axis and the supply curve at that price) is larger than the quantity which consumers demand (represented by the horizontal distance between the vertical axis and the demand curve).

At prices above the equilibrium, there is a surplus of the product. The quantity supplied exceeds the quantity demanded.

This is not a situation we would expect to be maintained very long. Since some sellers are unable to find buyers for all of their product at current prices, the price of the product will tend to fall and a smaller quantity of the product will be produced. (This represents a move down the supply curve toward the origin.)

When stores at the mall have things which do not sell as quickly as expected, they put them on sale, don't they?

As the price falls in this market, there is an increase in the quantity of this product which is demanded. (This represents a movement down the demand curve.)

At any price above equilibrium, there is pressure for the market price to fall (because the quantity supplied exceeds the quantity demanded). This pressure continues until the market price reaches equilibrium.

An Illustration of How Prices Above Equilibrium Create a Surplus

At any market price below the equilibrium, the quantity which consumers demand (represented by the horizontal distance between the vertical axis and the demand curve) is greater than the quantity which producers wish to supply (represented by the horizontal distance between the vertical axis and the supply curve at that price).

At prices below the equilibrium, there is a shortage of the product. The quantity demanded exceeds the quantity supplied.

This is not a situation we would expect to be maintained very long. Since some buyers are unable to find a seller of the product at current prices, the price of the product will tend to rise and a larger quantity of the product will be produced. (This represents a movement up the supply curve.)

(If I am unable to hire enough people to help me with yard work if I pay only $3 an hour, I have to pay a higher price. If I offer $10 an hour, more people are likely to be willing to work.)

As the price rises in this market, there is an increase in the quantity of this product which is supplied. (This represents a movement up the supply curve.) There also is a decrease in the quantity demanded. (This represents a movement up the demand curve.)

At any price below equilibrium, there is pressure for the market price to rise (because the quantity demanded exceeds the quantity supplied). This pressure continues until the market price reaches equilibrium.

An Illustration of How Prices Below Equilibrium Create a Shortage

In equilibrium,

• there is no pressure for the price to change.
• the quantity supplied equals the quantity demanded.

If a market is not in equilibrium, market forces are pushing it toward equilibrium.

Market prices move up and down because of changes in the supply and demand for the particular product.

BEEF MARKET EXAMPLE

To illustrate this on the demand side, let's examine the market for beef.

Suppose a report on national television suggests that eating beef is bad for your health.

Would this affect the market price for beef?

The report suggesting beef may be harmful causes the demand for beef to decrease.

This means the DEMAND CURVE shifts left. No matter what the price of beef is, people want less of it.

If nothing else changes, what has happened to the equilibrium price of beef?

Since the supply curve has not shifted and the demand curve has shifted left, the new intersection occurs at a lower price and smaller quantity than the initial equilibrium point.

The published report caused the equilibrium price and quantity of beef to fall.

(This was the basis of a lawsuit filed by representatives of the beef industry against talk show host Oprah Winfrey in 1997.)

Market prices move up and down because of changes in the supply and demand for the particular product.

ORANGE JUICE MARKET EXAMPLE

To illustrate this on the supply side, let's examine the market for orange juice.

Most of the oranges grown is Florida are used to make orange juice.

Suppose a series of hurricanes hit Florida and destroy a large portion of the orange groves.

What affect will this have on equilibrium in the orange juice market?

Because orange groves have been destroyed, the supply of orange juice has decreased.

The supply curve has shifted left.

At every possible price, less orange juice is produced than before the orange groves were destroyed.

Since the demand curve has not shifted, the new equilibrium occurs at a higher market price and a smaller quantity of orange juice.

For example, we can use the supply & demand framework to examine minimum wage laws, agricultural price supports, and rent controls.

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