Which buyer demands the most at a price of $7

Let's say that you want to eat hot dogs tonight and you go to your local grocery store and put a bag of buns in your cart and head down the aisle to the wieners. When you get to the wiener display you notice that their price has increased significantly so you decide not to eat hot dogs.

What are you going to do with the buns? You should put them back, but if you are like many people you'll put them in the wiener display and move on quickly. But the point is, you were going to buy the buns at their present price they were already in your cart , but when you learned the price of hot dogs increased your demand for buns decreased the demand curve shifted to the left - at the same prices the quantities demanded decreased.

P of wieners D of buns. Of course, if the price of one product decreases cheaper film developing , the demand for its complement film increases. P of one product D of its compliment. Independent goods are goods where if the price of one changes, it has no effect on the demand for to other one. For example, what happens to the demand for paper clips if the price of surfboards increases?

P of one product D of its compliment P of one product D of its compliment. I -- income. Income D for normal goods Income D for normal goods.

So if incomes increase, the demand curve for restaurant meals, and cars, and boats, will shift to the right. At the same prices people will buy more.

Income D for inferior goods Income D for inferior goods. The term "inferior good" does not mean they are of low quality. There is an inverse relationship between income and demand. Examples of inferior goods might include used clothing, potatoes, rice, maybe generic foods. If you lose your job so your income decreases you may shop for clothes at the Salvation Army Thrift Store demand for used clothing increases. What is a normal good for one consumer might be an inferior good for another.

For example, if the income of one family increases they may buy a second small car a normal good , but for another family, an increase in income may mean that they don't buy a small car an inferior good anymore and they buy a mini van instead. Npot D Npot D. Often economists say that an increase in the "number of consumers" will increase demand.

But, if K-Mart has a sale on Pepsi price of Pepsi decreases what happens to the number of consumers buying Pepsi? It will increase. The law of demand says that if price goes down, quantity demanded goes up. So, if they have more customers because the price went down, what happens to demand?

Nothing - price does not change the demand schedule. T -- tastes and preferences. Supply is more difficult for students to understand than demand. We are all consumers demanders , but few of us own a business suppliers. So, remember to think of yourself as a business owner when we discuss supply. Supply is a schedule which shows the various quantities businesses are willing and able to offer for sale at various prices in a given time period, ceteris paribus. Supply is NOT the quantity available for sale.

This is the way the term is often used in the popular press. Supply is the whole schedule with many prices and many quantities. Just like with demand, there is a difference between a change in quantity supplied and a change in supply itself.

So, if the price increases what happens to supply? Price does not change supply, it changes quantity supplied, because supply means the whole schedule with various prices and various quantities. If we plot these points remember any point on a graph simply represents two numbers We get the graph below. If we assume there are quantities and prices in-between those on the schedule we get a supply curve. The law of supply states that there is a direct relationship between price and quantity supplied.

In other words, when the price increases the quantity supplied also increases. This is represented by an upward sloping line from left to right. Why is the law of supply true? Why is the supply curve upward sloping? Why will businesses supply more pizzas only id the price is higher?

I think it is just common sense. If you want the pizza places to work harder and longer and produce more pizzas, you have to pay them more, per pizza. But economists, as social science, want to explain common sense. We know businesses behave this way, but why? There are two explanations for the law of supply and both have to do with increasing costs.

Businesses require a higher price per pizza to produce more pizzas because they have higher costs per pizza. First, there are increasing costs because of the law of increasing costs. In a previous lecture we explained that the production possibilities curve is concave to the origin because of the law of increasing costs. Let's say a pizza place is just opening. The owner figures that they will need five employees.

After putting an ad in the paper there are twenty applicants. Five have had experience working in a pizza place before. They came to the interview clean and on time. The other fifteen had no work experience. Many came late. A few were caught steeling pepperoni on the way out. One spilled flour all over the floor.

Which applicants will be hired? Of course it will be the five with experience and the other fifteen will be rejected because they would be too costly to hire. NOW, if the pizza place wants to produce more pizzas they will need more workers.

This means they will have to hire some of those who were rejected because they were more costly less experienced, etc. So, they will only hire the more costly employees if they can get a higher price to cover the higher costs. Second, there are increasing costs because some resources are fixed. This should not make sense to you. Why would there be increasing costs if we use the same quantity of some resource?

Well, let's say that the size of the kitchen and the number of ovens capital resources are fixed. This means that they don't change. Now, if we want to produce more pizzas you will have to cram more workers into the same size kitchen. As they bump into each other and wait for an oven to be free they still get paid, but the cost per pizza increases.

Therefore they will not produce more pizza unless they can get a higher price to cover these higher per unit costs. So the supply curve should be upward sloping. Market supply is the horizontal summation of the individual supply curves. Instead of looking at how many pizzas one pizza place is willing and able to produce at different prices individual supply , we keep the prices the same and add the quantities of additional pizza places. Prices stay the same, but quantities increase because there are more pizza suppliers.

So the market supply of pizzas is further to the right horizontal than the individual pizza place supply curves. The price of the product P. But there are other determinants of how much business supply besides the price. We call these the Non-Price determinants of Supply. Change in Quantity Supplied Qs. Change in Supply S. A change in supply is a shifting the supply curve because there is a new supply schedule.

The supply curve either moves left or right horizontally since the prices stay the same and only the quantities change and quantity is on the horizontal axis. Many students want to draw the arrows perpendicular to the supply curve. That could get confusing! A change in supply is caused by a change in the non-price determinants of supply.

At the same prices, the quantities supplied will be greater. At the same prices, the quantities supplied will be smaller. Let's look at these determinants on at a time. We must know how they shift the supply curve if we are to use the supply and demand tool to understand how prices are determined in a market economy.

Pe S today Pe S today. If the price of soybeans increases the supply of corn will decrease. The supply curve of corn will shift to the left as farmers plant more soybeans and less corn. P soybeans S corn P soybeans S corn. Remember, price does not change supply, it changes the quantity supplied. The price of resources Pres , improved technology Tech , and taxes and subsidies Tax all affect supply because they change the costs of production.

Pres -- price of resources. For Example: if the autoworkers unions receives a significant wage increase, this will increase the costs of producing cars and decrease the supply of cars S. P autoworkers wages costs of producing cars S cars. Pres costs S Pres costs S. Tech --technology. If the technology did not decrease costs, then it wouldn't be used. If there is a high-tech expensive way to produce a product and a low-cost, low-tech, way to produce the same product, companies that use the low-cost methods will be able to sell the product at a lower price and beat out the high-cost producers.

Improved technology costs S. What has improved technology done to the costs of medical care? For example let's say that there is a disease where with existing low-cost technology, half the patients die. Now, if they invent a new high-cost technology that will save all lives which technology will be used? One product is when half the patients die, the other product is when all patients live. We can't put two products on one supply curve.

Let's use one more medical example. Why do doctors still use low-tech stethoscopes? Isn't here a high-tech electronic stethoscope? Yes there is, so why don't doctors use it? Doctors will use the cheaper technology as long as the results are the same. The low-tech stethoscopes can't always pick out the fetal heart beat. The product changes. So, improved technology will decrease costs and increase supply OR it will increase costs and change the product which we cannot put on one graph.

Tax --taxes and subsidies. Let's discuss the gasoline tax. If the tax on gasoline increases will this affect the demand for gasoline or the supply of gasoline? If you said demand - then which non-price determinant of demand has changed? Taxes costs S Taxes costs S. Who pays the gasoline tax? Who pays the wages of the gas station employees? Whether you answer the consumer of the gas station owner, you have to give the same answer for both questions.

Both taxes and wages are costs to the producer or seller. Higher gasoline taxes do not shift the demand curve, but they may result in a higher price and therefore a decrease in quantity demanded. Subsidies are the opposite of taxes. Instead of the business paying the government, the government pays the business.

There are fewer subsidies than taxes. But let's say the the government wants to encourage the use of solar energy so they put a subsidy or increase one on solar energy equipment.

Subsidies costs S Subsidies costs S. Nprod S Nprod S. Equilibrium means that there is no further tendency to change. When something is at equilibrium, it is at rest, not changing. Like a pendulum. We call this disequilibrium. Eventually, it will stop swinging and achieve equilibrium.

Prices do something similar. They move toward an equilibrium where they come to rest and don't change. But just like you can push a pendulum and cause it to swing and then slow down and achieve equilibrium again, prices can be "pushed" and they will change to a new equilibrium. It is the non-price determinants of demand and supply that "push" prices to a new equilibrium.

We call this "market equilibrium". Sometimes I hear people say that equilibrium is where demand equals supply. Well, let's take a look at what happens if the price is not at equilibrium. If there is a surplus more available than consumers are willing to purchase the price will change - decrease. Twelve dollars is not equilibrium - it will change. If there is a shortage consumers are willing to purchase more than is available the price will change - increase. Six dollars is not equilibrium - it will change.

After we do this, we will put it all together. It all begins with a change in one of the eleven non-price determinants:. We discussed this above and will review it again soon. You can probably guess what will happen to price and quantity and get it correct quite often, but why guess when you can draw the graphs and get it right almost all the time?

So, if demand increases and supply stays the same you get see graph :. This is quite easy, but the key to understanding this are the non-price determinants of supply and demand. We will review them soon.

If supply decreases shifts to the left and demand stays the same you get see graph :. What if BOTH supply and demand change at the same time? This means what happens to price and quantity if a non-price determinant and supply AND a non-price determinant of demand change shifting the graphs at the same time?

Graph it right now and determine what would happen to price and quantity if supply increases and demand decreases. In a face-to-face class I would have my students do this themselves and tell me what happens to P and Q. So let's do it in this distance learning class. What do you get? What happens to price and quantity if supply increases shifts to the right and demand decreases shifts to the left?

The price will decrease, but we cannot tell what happens to quantity. Quantity could increase, it could decrease or it could stay the same. What happens to quantity depends on how much the supply and demand curves shift and since we were not told this, we cannot determine what happens to quantity. Quantity is indeterminant. See the graph below where we can see that if demand decreases a little D2 then the equilibrium quantity will increase, but if the demand curve decreases a lot D4 the equilibrium quantity will decrease.

The price will increase, but we cannot tell what happens to quantity. Try graphing different shifts in D and S and see what happens to quantity. The quantity will increase, but we cannot tell what happens to price. The price could increase, it could decrease or it could stay the same. What happens to the price depends on how much the supply and demand curves shift and since we were not told this, we cannot determine what happens to price. Price is indeterminant. See the graph below where we can see that if supply increases a little S1 then the equilibrium price will increase, but if the supply curve increases a lot S3 the equilibrium price will decrease.

The quantity will decrease, but we cannot tell what happens to price. What happens to price depends on how much the supply and demand curves shift and since we were not told this, we cannot determine what happens to price.

Try graphing different shifts in D and S and see what happens to price. Now let's put it all together. We can use our supply and demand model to understand why prices change. These are the factors in the real world that cause prices to change. We will use supply and demand curves to illustrate how changes in these non-price determinants will affect the price and quantity of a product, ceteris paribus. Before you guess, answer the following questions:.

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