Econ Supply and Demand

Chapter 3: Supply and Demand

In your reading for this week, you came across certain terms such as the law of demand, the law of supply, and quantity demanded. I am pretty sure for the most part it all seemed too much to grasp. Right? Do not worry I will try to give you a better perspective on how it all works. Let us first start with some terminology.[pic 1]

Let us first start with supply. What is supply? Supply shows the relation of the quantities of goods producers are willing and able to sell at various prices during a given period, other things held constant. You will notice that on a graph the relationship is a positive linear relationship. In other words, suppliers are willing to sell more of their goods at higher prices. An example of this would be tennis shoes. If you have gone to shop for a pair of tennis shoes you might be aware of the enormous selection of tennis shoes. Have you ever wondered why? The reason is that suppliers are willing to produce a great number of tennis shoes as long as they can get higher prices for their goods. The law of supply validates this notion by stating that the quantity of a good supplied in a given time period is usually directly related to its price, other things held constant. Now keep in mind, in economics we refer to “centeris paribus” as “other things held constant.”

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The supply curve serves as an illustration of the quantities supplied by the suppliers at various price. Take for example the following supply curve. It shows you an increase in quantity supplied caused by a change in the price of the product under consideration. One of the things you need to be aware is that when you are dealing with an increase or decrease in quantity supplied, you will be dealing with a movement along the curve. The factor that makes this change possible is price. Take a moment to study the graph below.

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In the above example, we talked about price being factor that causes for a movement along the supply curve. What would happen if instead of a movement along the supply curve, we have a total shift of the supply curve? Would price be the determining factor? I hope your answer was “no”. In fact, price does not factor in this type of scenario. The supply curve would shift due to nonprice factors known as supply shifters. Centeris Paribus no longer applies. The supply shifters are as follows: [pic 4]

1. Change in the price of resources or production cost, including taxes and subsidies.
2. Change in profitability of alternative items that can be produced
3. Changes in the expectations of producers regarding future prices and profits.
4. Changes in technology.
5. Changes in the number of producers.

Let me give you an example. What would happen to the supply of cars if there was a fall in the price of steel?

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Let us now turn to demand. Demand applies to consumer’s needs and wants. The law of demand states that the quantity of a good demand in a given time relates inversely to its price, other things held constant. In simpler terms, the lower the price the higher the demand, and vice versa. An example of this would be the enormous demand of shoes at Wal-Mart. Due to the low prices offered by Wal-Mart, consumers buying more and more dress and fashion shoes at Wal-Mart. You will notice that in this example the only thing I mentioned was price, “ceteris paribus”. Also notice the movement along the demand curve.