✔Demand

Demand relates
relates the
the quantity
quantity of
of aa good
good that
that
consumers
consumers would
would purchase
purchase at
at each
each ofof various
various
possible
possible prices,
prices, over
over some
some period
period ofof time.
time.
✔ The
The ceteris
ceteris paribus
paribus condition
condition means
means that
that
we
we look
look at
at only
only one
one relationship
relationship at
at aa time.
time.
✔ Ceteris
Ceteris paribus
paribus is
is the
the Latin
Latin for
for “holding
“holding all
all
else
else equal”.
equal”.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 1

Data Point Price ($) Quantity Demanded
A 5 0
B 4 1
C 3 2
E 2 3
F 1 4
G 0 5

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 2

 The
Thedemand
demandcurve
curveslopes
slopesdownward
5 A downward
Price ($’s)

because
becauseprice
priceand
andquantity
quantitydemanded
demanded
B are
areinversely
inverselyrelated.
related.
4
C
3
E
2
F Demand
1
G
0
1 2 3 4 5 Quantity

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 3

A change in the price of a
good causes a change in the
quantity demanded,
but does not shift
demand

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 4

 A price change
Price ($’s)

would change the

quantity demanded
which involves
movement along the
demand curve.

Demand

Quantity

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 5

 Movement along
Price ($’s)

the demand curve.

Decrease

Increase
Demand

Quantity

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 6

✔ Tastes and Preferences
✔ Substitutes and Complements
✔ Income
- Normal vs. Inferior Goods
✔ Population
✔ Price Expectations

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 7

Demand
Demand Shifts
Shifts LEFT
LEFT

Price
When:
When:
✓
✓ Prices
Prices of
of substitutes
substitutes
decrease
decrease
✓
✓ Prices
Prices of
of complements
complements
increase
increase
✓
✓ Normal
Normal good-income
good-income
decreases
decreases
✓
✓ Inferior
Inferior good-income
good-income D1
increases
increases
Population D2
✓
✓ Population decreases
decreases
✓
✓ Tastes
Tastes && preferences
preferences
turn
turn against
against the
the product
product Quantity

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 8

 Demand
Demand Shifts
Shifts RIGHT
RIGHT When:
When:
Price

✓ Prices
✓ Prices of
of substitutes
substitutes increase
increase
✓ Prices
✓ Prices of
of complements
complements
decrease
decrease
✓ Normal
✓ Normal good-income
good-income
increases
increases
D2 ✓ Inferior
✓ Inferior good-income
good-income
decreases
decreases
D1
✓ Population
✓ Population increases
increases
Quantity ✓ Tastes
✓ Tastes && preferences
preferences turn
turn in
in
favor
favor of
of the
the product
product

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 9

 Supply relates the
quantity of a good that
will be offered for sale at
each of various possible
prices, over some period
of time, ceteris paribus.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 10

Data Point Price ($) Quantity Supplied
H 5 4
I 4 3
J 3 2
K 2 1
L 1 0
M 0 0

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 11

Price ($’s)

H Supply
5
I
4 The
Thesupply
supplycurve
curveslopes
slopes
J upward
upwardbecause
becauseprice
price
3 and
andquantity
quantitysupplied
supplied
K are
aredirectly
directlyrelated.
related.
2

1 L

0
1 2 3 4 5
M Quantity

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 12

✔
✔ Prices
Prices of
of Inputs
Inputs
✔
✔ Technological
Technological Change
Change
✔
✔ Government
Government or or Union
Union Restrictions
Restrictions
✔
✔ Prices
Prices of
of Substitutes
Substitutes inin Production
Production
✔
✔ Prices
Prices of
of Jointly
Jointly Produced
Produced Goods
Goods
✔
✔ Expected
Expected Future
Future Prices
Prices
✔
✔ Number
Number of of Sellers
Sellers

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 13

Price ($’s)

Supply
5
4 A price change
causes movement
3
from one point to
2 another along the
same supply curve.
1

0
1 2 3 4 5 Quantity

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 14

Price ($’s)

Supply
5
Decrease
4
Movement along
3 Increase Supply
2

0
1 2 3 4 5 Quantity

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 15

Supply Shifts LEFT S2
When: $
✓ Sellers expect price to
rise in future. S1
✓ Price of labor or any
input rises.
✓ Government or union
restrictions increase
cost.
✓ Price of substitute in
production rises.
✓ Price of product Quantity
produced jointly falls.
✓ Number of sellers
declines

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 16

 Supply Shifts RIGHT When:
$ S1
✓ Sellers expect price to decline
S2 in future.
✓ Price of labor or any input
falls.
✓ Technological change lowers
cost.
✓ Price of substitute in
production falls.
Quantity
✓ Price of product produced
jointly rises.
✓ Number of sellers increases

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 17

P r i c e ($ ) J a c k 's Q u a n ti ty D e m aJni ldl 's
e dQ u a n tity D e m aMn ad rk
e de t Q D e m a n
5 1 0 1
4 2 1 3
3 3 2 5
2 4 3 7
1 5 4 9
0 6 5 11

Demand
Demand can
can be
be one
one individual’s
individual’s
or
or the
the market
market as
as aa whole
whole

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 18

 Market
Market Demand
Demand Curve
Curve
Price ($) Jill’s Quantity Jack’s Quantity Market Q
Demanded Demanded Demanded
Price ($’s)

5 0 1 1
6 4 1 2 3
3 2 3 5
5 2 3 4 7
1 4 5 9
4 0 5 6 11

2 Jill’s Jack’s
Market Demand
Demand Demand
1

0
1 2 3 4 5 6 7 8 9 10 11
Quantity
©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 19
P r i c e ($ ) W a l l y 's Q u a n ti ty S u pWp lai en d a 's Q u a n ti ty S u M
p palri ke ed t Q S u p p
5 4 5 9
4 3 4 7
3 2 3 5
2 1 2 3
1 0 1 1
0 0 0 0

Supply
Supply cancan be
be from
from one
one firm
firm
or
or all
all firms
firms in
in the
the market.
market.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 20

 Market
Market Supply
Supply Curve
Curve
Wally’s Wanda’s
Supply Supply
Price ($’s)

5
4
Market Supply
3

0
1 2 3 4 5 6 7 8 9
Quantity
©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 21
Price ($) Quantity Demanded
5 1
4 3
3 5
2 7
1 9
0 11
Quantity Supplied Surplus or Shortage
9 8
7 4
5 0
3 -4
1 -8
0 -11

There
There is
is only
only one
one price
price that
that clears
clears
the
the market,
market, meaning
meaning that
that the
the quantity
quantity
supplied
supplied equals
equals the
the quantity
quantity demanded.
demanded.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 22

 Market equilibrium occurs where
Price ($’s)

demand and supply intersect.

5 Supply
Surplus of 4 Pails
Too High 4

P* 3

Too Low 2
Shortage of 4 Pails
1 Demand

0 1 2 3 4 5 6 7 8 9
Q *
Pails of Water
©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 23
The market clearing price and the
resulting quantity traded comprise
what is referred to as the market
equilibrium, meaning that there is no
tendency for either price or quantity
to change, ceteris paribus.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 24

 Snew
Price ($’s)

Price ($’s)
Snew
S

P*
P*

D
D
Q* Quantity Q* Quantity

An increase or decrease in supply.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 25
Price ($’s)

Price ($’s)
S
S
P*
P*

D
Dnew
D Dnew
Q* Q*
Quantity Quantity
An increase or decrease in demand.
©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 26
Case Demand Supply Equilibrium P Equilibrium Q
1 No change Right Fall Rise
2 No change Left Rise Fall
3 Right No change Rise Rise
4 Left No change Fall Fall

Note
Note:: In
In Cases
Cases 1-4
1-4 only
only one
one of
of the
the two
two curves
curves
is
is shifting.
shifting.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 27

Ca se De m a nd Supply Equilibrium P Equilibrium Q
5 Right Right Unknow n Rise
6 Left Left Unknow n Fall
7 Right Left Rise Unknow n
8 Left Right Fa ll Unknow n

Note: In Cases 5-8 both of the curves

are shifting.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 28

✔ Charter Schools: Public schools in
which a non-profit group receives
a contract (i.e. charter) to
operate a school for a limited
period of time.
✔ Vouchers: Monetary amounts
provided by government, free of
charge to parents, which would be
spendable only on the education of
their children, at a school chosen
by the parents.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 29

1.
1. The
The Law
Law of
of demand
demand states
states that
that
consumers
consumers
a.
a. must
must not
not buy
buy more
more than
than they
they need.
need.
b.
b. must
must not
not waste
waste what
what they
they buy.
buy.
c.
c. must
must pay
pay for
for what
what they
they buy.
buy.
d.
d. will
will buy
buy more
more as as price
price falls.
falls.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 30

2.
2. An
An increase
increase in
in the
the price
price of
of football
football
tickets
tickets would
would cause
cause the
the ___________
___________
basketball
basketball tickets
tickets toto __________.
__________.
a.
a. demand
demand for;
for; increase.
increase.
b.
b. supply
supply of;
of; increase.
increase.
c.
c. demand
demand for;
for; decrease.
decrease.
d.
d. supply
supply of;
of; decrease.
decrease.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 31

3.
3. An
An upward
upward sloping
sloping supply
supply curve
curve
means
means that
that
a.
a. consumers
consumers willwill wish
wish toto purchase
purchase more
more at
at
higher
higher prices
prices ..
b.
b. consumers
consumers willwill wish
wish toto purchase
purchase more
more at
at
lower
lower prices.
prices.
c.
c. business
business firms
firms will
will wish
wish to
to sell
sell more
more at
at
higher
higher prices.
prices.
d.
d. business
business firms
firms that
that lower
lower their
their prices
prices
wish
wish to
to sell
sell more.
more.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 32

4.
4. A
A decrease
decrease in
in supply
supply is
is illustrated
illustrated as
as
a. a
a. a downward
downward shift
shift in
in the
the supply
supply
curve.
curve.
b. a
b. a shift
shift to
to the
the left
left in
in the
the supply
supply
curve
curve ..
c. an
c. an upward
upward movement
movement alongalong the
the
supply
supply curve.
curve.
d. a
d. a downward
downward movement
movement alongalong the
the
supply
supply curve.
curve.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 33

5.
5. If
If research
research reveals
reveals that that carrot
carrot juice
juice
cures
cures cancer,
cancer, it
it is
is likely
likely that
that
a.
a. the
the supply
supply of of carrot
carrot juice
juice will
will increase,
increase,
which
which will
will increase
increase the
the quantity
quantity demanded.
demanded.
b.
b. demand
demand for for carrot
carrot juice
juice will
will increase,
increase,
which
which will
will increase
increase the
the quantity
quantity supplied
supplied ..
c.
c. neither
neither the
the demand
demand or or supply
supply of of carrot
carrot
juice
juice will
will increase.
increase.
d.
d. both
both the
the demand
demand andand supply
supply of of carrot
carrot juice
juice
will
will increase.
increase.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 34

6.
6. When
When there
there is
is an
an initial
initial shortage,
shortage,
market
market prices
prices eventually
eventually reach
reach
equilibrium
equilibrium because
because
a. supply
a. supply increases.
increases.
b. price
b. price decreases
decreases ..
c. price
c. price increases.
increases.
d. equilibrium
d. equilibrium output
output falls.
falls.

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 35

 demand
 quantity demanded  quantity supplied
 ceteris paribus  market equilibrium
 shift factors  surplus
 normal goods  shortage
 inferior goods  consumer surplus
 substitutes  marginal benefit
 complements  marginal cost
 supply  charter schools
 vouchers

©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 36