Economics 1Paul Samuelson

Basic Elements of Supply and DemandDemand- refers to the quantity of goods and

services that consumers are willing and able to buy at different levels of price

Law of DemandWhen price increases, quantity demanded

decreases. When price decreases, quantity demanded increases, ceteris paribus

All other factors held constantAll thing things are equal.

Quantity demanded tends to fall when price rises because:1. Substitution effect

2. Income effect

Factors Affecting Demand1. Consumer Income2. Price of related goods3. Population4. Tastes and Preferences5. Special Influences

Note that:Models are simplified theories that show the

key relationships among variables.

Often, these relationships are expressed in functions.

- a mathematical concept that shows how

one variable depends on a set of other variables.

Demand Equation: Movement Along the Demand CurveQ = 100- 1p

Quantity Price100 0105 5110 10115 15120 20125 25130 30

Economists when graphing demand curves, always put price on the vertical axis and quantity on the horizontal axis.

Alfred Marshall, conceived of the demand function with a market price as a function of quantity available for sale.

He observed English country markets with numerous sellers bringing their quantities to the marketplace. The demand function specified what price consumers, taken together, would pay for a given quantity.

Today, we assume that consumers take market prices as given and choose quantities that maximize their utilities.

However, Marshall’s influence is so strong that we continue to draw our graphs with price on the vertical axis. Marshall did this because to him, the dependent variable was price and the independent variable was quantity.

HoweverThe modern theory generally conceives of the

demand function with the quantity as the dependent variable and price as independent variable.

Shift in the Demand CurveQ= 8-P+2Y

Suppose: Y=1 Y=2

Movement along the demand Curve

Shift in the Demand Curve

Q = f(P)

Illustrate the law of Demand

Pb, Y, Pop,TP, and SI are held constant

Q= f( Pb, Y, PoP, TP, SI)

Pb, Y, PoP, TP, and SI can change

SupplyQuantity of a good and service that producers

are willing to sell in a given price.

Law of SupplyWhen price increases, quantity supplied

increases. when price decreases, quantity supplied decreases

Factors Affecting the Supply Curve

1. Technology-Computerized manufacturing lowers costs

and increases supply

2. Input Prices-A reduction in the wage paid to autoworkers

lowers production costs

3. Price of Related goods- If truck prices fall, the supply of cars rises.

4. Government Policy-Removing quotas and tariffs on imported

automobiles increases total automobile supply.

5. Special Influences-Internet shopping and auctions allow

consumers t0 compare the prices of different dealers more easily and drives high-cost sellers out of business.

Movement in the Supply curveQs= 50+3P

Shift in the supply curve Qs= 5+P+2TC, TC=2

Market EquilibriumEquilibrium condition: Qd= Qs, is known as

the equilibrium condition equation. The result is equilibrium price (Pe) and equilibrium qunatity (Qe).

Algebraic computationGiven: Qd= 10-P

Qs = 5+ PReq.1. Equilibrium Price (Pe)2. Equilibrium Quantity (Qe)

Solution: Qd = 10-P Qs = 5+P

10-P = 5+P-P+P= 5-102p= -5

Pe = 2.5

10- (2.5) = 5 + (2.5)

Therefore, Qd = Qs = 7.5

Qd Qd P Demand-Supply Balance

Market Condition

Direction of Price Change

5 10 0 -5 Shortage Increase6 9 1 -3 Shortage Increase7 8 2 -1 Shortage Increase7.5 7.5 2.5 0 Equilibrium Neutral8 7 3 1 Surplus Decrease9 6 4 3 Surplus Decrease10 5 5 5 Surplus Decrease