Supply and Demandin aProduct or Service Market
Kevin L. Woods
CMA, CFM, CTP, MBA
Objectives
•Define and explain demand in a productor service market
•Define and explain supply in a product orservice market
•Determine the equilibrium point in themarket for a specific good or service,given data on supply and demand atdifferent price levels
Objectives Continued
•Understand shifts in demand and supply
•Understand how price ceilings causeshortages
•Understand how price floors causesurpluses
•The schedule of quantities of a good orservice that people are willing and able tobuy at different prices
–Sometimes a schedule is also called a table
Demand
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Hypothetical Daily Demand for Coach Seats on Round-Trip Weekly Flights between Orlando and Chicago
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Table 1 is the DemandSchedule
Figure 1 is the Graph of theDemand Schedule
Figure 1
The line is theDemand Curve
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Price and Quantity Demandedare inversely related
Quantity Demanded is a pointon the Demand Curve
Table 1
Price QD
$500 1,000
450 3,000
400 7,000
350 12,000
300 19,000
250 30,000
200 45,000
150 57,000
100 67,000
Figure 1
Remember, Demand is the entireschedule or the entire curve
Quantity Demanded is a pointon the Demand Curve
Supply
•Is the schedule of quantities of a good orservice that people are willing to sell atvarious prices
Price QS$500 62,000$450 59,000$400 54,000$350 48,000$300 40,000$250 30,000$200 16,000$150 7,000$100 2,000
Supply is the entire scheduleor the entire curve
Price and Quantity Suppliedhave a positive relationship
Price QS$500 62,000$450 59,000$400 54,000$350 48,000$300 40,000$250 30,000$200 16,000$150 7,000$100 2,000
Quantity Supplied is a point onthe curve
Remember, Supply is the entireschedule or the entire curve
Price QS QD$500 62,000 1,000$450 59,000 3,000$400 54,000 7,000$350 48,000 12,000$300 40,000 19,000$250 30,000 30,000$200 16,000 45,000$150 7,000 57,000$100 2,000 67,000
Demand and Supply Curves
Equilibrium priceis the price whereQD = QS
We can find equilibrium priceand quantity by seeing where thesupply and demand curves cross
Price QS QD$500 62,000 1,000$450 59,000 3,000$400 54,000 7,000$350 48,000 12,000$300 40,000 19,000$250 30,000 30,000$200 16,000 45,000$150 7,000 57,000$100 2,000 67,000
Demand and Supply Curves
Equilibrium price = EPMarket price = MP
MP > EP there is a surplus
Surpluses and Shortages
54,000-7,000 = 44,000
Price QS QD$500 62,000 1,000$450 59,000 3,000$400 54,000 7,000$350 48,000 12,000$300 40,000 19,000$250 30,000 30,000$200 16,000 45,000$150 7,000 57,000$100 2,000 67,000
Demand and Supply Curves
Equilibrium price = EPMarket price = MP
Surpluses and Shortages
54,000-7,000 = 44,000
A surplus would force sellers tolower their prices. Eventually,prices would fall back to theequilibrium price
Price QS QD$500 62,000 1,000$450 59,000 3,000$400 54,000 7,000$350 48,000 12,000$300 40,000 19,000$250 30,000 30,000$200 16,000 45,000$150 7,000 57,000$100 2,000 67,000
Demand and Supply Curves
Equilibrium price = EPMarket price = MP
Surpluses and Shortages
57,000-7,000 = 44,000
MP < EP here is a shortage
Price QS QD$500 62,000 1,000$450 59,000 3,000$400 54,000 7,000$350 48,000 12,000$300 40,000 19,000$250 30,000 30,000$200 16,000 45,000$150 7,000 57,000$100 2,000 67,000
Demand and Supply Curves
Equilibrium price = EPMarket price = MP
Surpluses and Shortages
57,000-7,000 = 44,000
A shortage would allow sellers to raisetheir prices. As prices increased peoplewould buy less. Eventually, priceswould move back to the equilibriumprice
Price QS QD$500 62,000 1,000$450 59,000 3,000$400 54,000 7,000$350 48,000 12,000$300 40,000 19,000$250 30,000 30,000$200 16,000 45,000$150 7,000 57,000$100 2,000 67,000
Demand and Supply Curves
Surpluses and Shortages
We can see that the forces of demandand supply work together to establish anequilibrium price at which there are noshortages or surpluses
Table 4
Price QD1 QD2
$500 1,000 12,000
450 3,000 15,000
400 7,000 21,000
350 12,000 30,000
300 19,000 40,000
250 30,000 55,000
200 45,000 63,000
150 57,000 75,000
100 67,000 88,000
The schedule changes from QD1 to QD2
The demand curve shifts to the right from D1 to D2
This is an increase in demand
Shifts in Demand
Table 4
Price QD1 QD2
$500 1,000 12,000
450 3,000 15,000
400 7,000 21,000
350 12,000 30,000
300 19,000 40,000
250 30,000 55,000
200 45,000 63,000
150 57,000 75,000
100 67,000 88,000
The schedule changes from QD2 to QD1
The demand curve shifts to the left from D2 to D1
This is a decrease in demand
Shifts in Demand
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S
D
Shifts in Supply
If the Supply schedulechanges the Supply curveshifts
Supply decreases . . . thecurve shifts to the left
S
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S
D
Shifts in Supply
If the Supply schedulechanges the Supply curveshifts
Supply increases . . . thecurve shifts to the right
S
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S1
D
Shifts in Supply
If the Supply curve is S1what is the equilibrium priceand quantity?
The equilibrium price isapproximately 262 or 263
S2
The equilibrium quantity isapproximately 35,000
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S1
D
Shifts in Supply
If the Supply curve changesto S2 what is the newequilibrium price andquantity?
The new equilibrium priceis approximately 325
S2
The new equilibriumquantity is approximately26,000
Price
Quantity (in thousands)
50
100
150
200
250
300
350
400
450
500
10 20 30 40 50 60 70
S1
D
Shifts in Supply
Is a shift from S1 to S2 anincrease or decrease inSupply?
A decrease
S2
Price Floors and Ceilings
The price can go no lowerthan the floor.
A price floor creates apermanent surplus
The surplus is the amountby which the quantitysupplied is greater than thequantity demanded
Price Floors and Ceilings
The price can go no higherthan the ceiling.
A price ceiling creates apermanent shortage
The shortage is the amountby which the quantitydemanded is greater thanthe quantity supplied
Applications of Supply andDemand
•Interest rates are set by
–Supply and demand
•Wage rates are set by
–Supply and demand
•Rents are determined by
–Supply and demand
•Prices of nearly all goods are determined by
–Supply and demand
•Prices of nearly all services are determined by
–Supply and demand
Hypothetical Demand for and Supply of Loanable Funds
We can see that $600 billion is lent (or borrowed) at an interestrate of 6%
What would happen if the supply of loanable funds increased?
Hypothetical Demand for and Supply of Loanable Funds
The interest rate would decrease to 4% and the amount of moneyborrowed would increase to $800 billion
Hypothetical Demand for and Supply of Loanable Funds
If the demand for loanable funds rises to D2 the interest rate wouldrise to 9% and the amount of money borrowed would rise to $700billion
Price Mechanism(The Forces of Supply & Demand)
•Operates an automatic guidance system
–Sometimes this is called the “invisible hand”
–Efficiently allocates the limited means of productiontoward the satisfaction of human wants
–Provides consumers with an endless stream of goodsand services
Summary
•Demand
•Supply
•Equilibrium Point
•Shifts in Demand and Supply
•Price Ceilings
•Price Floors
Consider the Following
•Professional Athletes: How much is a superstar in theNBA or WBA (such as Shaquille o’Neal, Lebron James,Lisa Leslie, Chamique Holdsclaw) paid compared to anaverage player?
•Automobiles: Do you think you’d pay more for a 1962Corvette or a 2011 Corvette (assuming that both are ingood condition)?
•Rocks: Which costs more, diamonds or gravel?
Construction Nails
Long ago, when houses made of wood were first built, nailswere very expensive. It seems funny to us today, but it’s true.Each nail had to be made by hand, pounded unto shape by ablacksmith. Though it wasn’t difficult, it took time. Even agood blacksmith wouldn’t be able to make more than a fewhundred nails in an entire day. On the other hand, there aremachines today that can manufacture thousands of nails anhour. Because they are so much easier to acquire now-that is,because there is a greater supply of nails-the price hasdropped substantially.