Demand

2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair
The Basic Decision-Making Units
A firm is an organization that transforms

resources (inputs) into products (outputs).
Firms are the primary producing units in a
market economy.
An entrepreneur is a person who organizes,
manages, and assumes the risks of a firm,
taking a new idea or a new product and
turning it into a successful business.
Households are the consuming units in an
economy.
The Circular Flow of Economic Activity
The circular flow of

economic activity shows
the connections between
firms and households in
input and output markets.
Input Markets and Output Markets
Output, or product,
markets are the markets
in which goods and
services are exchanged.
Input markets are the

markets in which
resourceslabor, capital,
Payments flow in the opposite and landused to
direction as the physical flow of produce products, are
resources, goods, and services
(counterclockwise). exchanged.
Input Markets
Input markets include:

The labor market, in which households supply
work for wages to firms that demand labor.
The capital market, in which households supply
their savings, for interest or for claims to future
profits, to firms that demand funds to buy capital
goods.
The land market, in which households supply
land or other real property in exchange for rent.
Determinants of Household Demand
A households decision about the quantity of a particular

output to demand depends on:
The price of the product in question.
The income available to the household.
The households amount of accumulated wealth.
The prices of related products available to the
household.
The households tastes and preferences.
The households expectations about future
income, wealth, and prices.
Supply and demand are the two words that
economists use most often.
Supply and demand are the forces that make

market economies work.
Modern microeconomics is about supply,

demand, and market equilibrium.
MARKETS AND COMPETITION
A market is a group of buyers and sellers of a

particular good or service.
The terms supply and demand refer to the

behavior of people . . . as they interact with one
another in markets.
MARKETS AND COMPETITION
Buyers determine demand.
Sellers determine supply

Competitive Markets
A competitive market is a market in which there

are many buyers and sellers so that each has a
negligible impact on the market price.
Competition: Perfect and Otherwise
Perfect Competition
Products are the same
Numerous buyers and sellers so that each has no

influence over price
Buyers and Sellers are price takers
Monopoly
One seller, and seller controls price
Competition: Perfect and Otherwise
Oligopoly
Few sellers
Not always aggressive competition
Monopolistic Competition
Many sellers
Slightly differentiated products
Each seller may set price for its own product
DEMAND
Quantity demanded is the amount of a good that

buyers are willing and able to purchase.
Law of Demand
The law of demand states that, other things equal,
the quantity demanded of a good falls when the price
of the good rises.
Catherines Demand Schedule
The Demand Curve: The Relationship
between Price and Quantity Demanded
Demand Curve
The demand curve is a graph of the relationship
between the price of a good and the quantity
demanded.
Figure 1 Catherines Demand Schedule and Demand
Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
2.00
in price ...
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity
of cones demanded.
Copyright 2004 South-Western
Market Demand versus Individual Demand
Market demand refers to the sum of all

individual demands for a particular good or
service.
Graphically, individual demand curves are

summed horizontally to obtain the market
demand curve.
Shifts in the Demand Curve
Change in Quantity Demanded

Movement along the demand curve.
Caused by a change in the price of the product.
Changes in Quantity Demanded
Price of Ice-
Cream A tax that raises the price of
Cones
ice-cream cones results in a
B movement along the demand
$2.0 curve.
0
1.00 A
D
0 4 8Quantity of Ice-Cream Cones
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers
Change in Demand
A shift in the demand curve, either to the left or right.
Caused by any change that alters the quantity

demanded at every price.
Figure 3 Shifts in the Demand Curve
Price of
Ice-Cream
Cone
Increase
in demand
Decrease
in demand
Demand
curve, D2
Demand
curve, D1
Demand curve, D3
0 Quantity of
Ice-Cream Cones
Copyright2003 Southwestern/Thomson Learning
Consumer Income
As income increases the demand for a normal good
will increase.
As income increases the demand for an inferior good
will decrease.
Consumer Income
Normal Good
Price of Ice-
Cream Cone
$3.0 An increase in
0 income...
2.5
0 Increase
2.0 in demand
0
1.5
0
1.0
0
0.5
0
D2
D1 Quantity
of Ice-
0 1 2 3 4 5 6 7 8 9 10 11 12 Cream
2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair Cones
Consumer Income
Inferior Good
Price of Ice-
Cream Cone
$3.0
0
2.5 An increase in
0 income...
2.0
0 Decrease
1.5 in demand
0
1.0
0
0.5
0
D2 D1 Quantity of
Ice-Cream
0 1 2 3 4 5 6 7 8 9 10 11 12 Cones
Prices of Related Goods

When a fall in the price of one good reduces the
demand for another good, the two goods are called
substitutes.
When a fall in the price of one good increases the
demand for another good, the two goods are called
complements.
Table 1 Variables That Influence Buyers
Copyright2004 South-Western
SUPPLY
Quantity supplied is the amount of a good that

sellers are willing and able to sell.
Law of Supply
The law of supply states that, other things equal, the
quantity supplied of a good rises when the price of
the good rises.
The Supply Curve: The Relationship
between Price and Quantity Supplied
Supply Schedule
The supply schedule is a table that shows the
relationship between the price of the good and the
quantity supplied.
Bens Supply Schedule
The Supply Curve: The Relationship
between Price and Quantity Supplied
Supply Curve
The supply curve is the graph of the relationship
between the price of a good and the quantity
supplied.
Figure 5 Bens Supply Schedule and Supply Curve
Price of
Ice-Cream
Cone
$3.00
2.50
1. An
increase
in price ... 2.00
1.50
1.00
0.50
0 1 2 3 4 5 6 7 8 9 10 11 12 Quantity of
Ice-Cream Cones
2. ... increases quantity of cones supplied.
Market Supply versus Individual Supply
Market supply refers to the sum of all individual

supplies for all sellers of a particular good or
service.
Graphically, individual supply curves are

summed horizontally to obtain the market
supply curve.
Shifts in the Supply Curve
Input prices
Technology
Expectations
Number of sellers
Change in Quantity Supplied

Movement along the supply curve.
Caused by a change in anything that alters the

quantity supplied at each price.
Change in Quantity Supplied
Price of Ice-
Cream Cone S
C
$3.0
0 A rise in the price
of ice cream cones
results in a
movement along the
A supply curve.
1.00
Quantity of
Ice-Cream
0 1 5 Cones
Change in Supply
A shift in the supply curve, either to the left or right.
Caused by a change in a determinant other than

price.
Figure 7 Shifts in the Supply Curve
Price of
Ice-Cream Supply curve, S 3
Supply
Cone
curve, S 1
Supply
Decrease curve, S 2
in supply
Increase
in supply
0 Quantity of
Ice-Cream Cones
Table 2 Variables That Influence Sellers
SUPPLY AND DEMAND TOGETHER
Equilibrium refers to a situation in which the

price has reached the level where quantity
supplied equals quantity demanded.
Equilibrium Price
The price that balances quantity supplied and quantity
demanded.
On a graph, it is the price at which the supply and
demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at
the equilibrium price.
On a graph it is the quantity at which the supply and
demand curves intersect.
Demand Supply
Schedule Schedule
At $2.00, the quantity demanded is

equal to the quantity supplied!
Figure 8 The Equilibrium of Supply and Demand
Price of
Ice-Cream
Cone Supply
Equilibrium price Equilibrium

$2.00
Equilibrium Demand
quantity
0 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Figure 9 Markets Not in Equilibrium
(a) Excess Supply

Price of
Ice-Cream Supply
Cone Surplus
$2.50
2.00
Demand
0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
demanded supplied Cones
Equilibrium
Surplus
When price > equilibrium price, then quantity
supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby
moving toward equilibrium.
Equilibrium
Shortage
When price < equilibrium price, then quantity
demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers
chasing too few goods, thereby moving toward equilibrium.
Figure 9 Markets Not in Equilibrium
(b) Excess Demand

Price of
Ice-Cream Supply
Cone
$2.00
1.50
Shortage
Demand
0 4 7 10 Quantity of
Quantity Quantity Ice-Cream
supplied demanded Cones
Equilibrium
Law of supply and demand

The claim that the price of any good adjusts to bring
the quantity supplied and the quantity demanded for
that good into balance.
Three Steps to Analyzing Changes in
Equilibrium
Decide whether the event shifts the supply or
demand curve (or both).
Decide whether the curve(s) shift(s) to the left or

to the right.
Use the supply-and-demand diagram to see

how the shift affects equilibrium price and
quantity.
Figure 10 How an Increase in Demand Affects the
Equilibrium
Price of
Ice-Cream 1. Hot weather increases
Cone the demand for ice cream . . .
Supply
$2.50 New equilibrium
2.00
2. . . . resulting Initial
in a higher equilibrium
price . . .
D
0 7 10 Quantity of
3. . . . and a higher Ice-Cream Cones
quantity sold.
Three Steps to Analyzing Changes in
Equilibrium
Shifts in Curves versus Movements along
Curves
A shift in the supply curve is called a change in
supply.
A movement along a fixed supply curve is called a
change in quantity supplied.
A shift in the demand curve is called a change in
demand.
A movement along a fixed demand curve is called a
change in quantity demanded.
Figure 11 How a Decrease in Supply Affects the Equilibrium
Price of
Ice-Cream 1. An increase in the
Cone price of sugar reduces
the supply of ice cream. . .
S2
S1
New
$2.50 equilibrium
2.00 Initial equilibrium
2. . . . resulting
in a higher
price of ice
cream . . . Demand
0 4 7 Quantity of
3. . . . and a lower Ice-Cream Cones
quantity sold.
Table 4 What Happens to Price and Quantity When Supply
or Demand Shifts?
Demand in Output Markets
ANNA'S DEMAND
A demand schedule
SCHEDULE FOR is a table showing
TELEPHONE CALLS how much of a given
PRICE
QUANTITY
DEMANDED
product a household
(PER (CALLS PER would be willing to
$
CALL)
0
MONTH)
30
buy at different prices.
0.50 25
3.50 7 Demand curves are
7.00 3
10.00 1
usually derived from
15.00 0 demand schedules.
The Demand Curve
ANNA'S DEMAND
SCHEDULE FOR
The demand curve is
TELEPHONE CALLS a graph illustrating
PRICE
QUANTITY
DEMANDED how much of a given
(PER
CALL)
(CALLS PER
MONTH)
product a household
$ 0
0.50
30
25
would be willing to
3.50
7.00
7
3
buy at different prices.
10.00 1
15.00 0
The Law of Demand
The law of demand

states that there is a
negative, or inverse,
relationship between
price and the quantity of
a good demanded and
its price.
This means that
demand curves slope
downward.
Other Properties of Demand Curves
Demand curves intersect the

quantity (X)-axis, as a result of
time limitations and diminishing
marginal utility.
Demand curves intersect the (Y)-
axis, as a result of limited
incomes and wealth.
Income and Wealth
Income is the sum of all households

wages, salaries, profits, interest
payments, rents, and other forms of
earnings in a given period of time. It is
a flow measure.
Wealth, or net worth, is the total value

of what a household owns minus what
it owes. It is a stock measure.
Related Goods and Services
Normal Goods are goods for which

demand goes up when income is
higher and for which demand goes
down when income is lower.
Inferior Goods are goods for which
demand falls when income rises.
Related Goods and Services
Substitutes are goods that can serve as

replacements for one another; when the
price of one increases, demand for the
other goes up. Perfect substitutes are
identical products.
Complements are goods that go

together; a decrease in the price of one
results in an increase in demand for the
other, and vice versa.
Shift of Demand Versus Movement Along a
Demand Curve
A change in demand is
not the same as a change
in quantity demanded.
In this example, a higher
price causes lower
quantity demanded.
Changes in determinants
of demand, other than
price, cause a change in
demand, or a shift of the
entire demand curve, from
DA to DB.
A Change in Demand Versus a Change in Quantity
Demanded
When demand shifts to

the right, demand
increases. This causes
quantity demanded to be
greater than it was prior to
the shift, for each and
every price level.
A Change in Demand Versus a Change in Quantity
Demanded
To summarize:
Change in price of a good or service
leads to
Change in quantity demanded

(Movement along the curve).
Change in income, preferences, or

prices of other goods or services
leads to
Change in demand
(Shift of curve).
The Impact of a Change in Income
Higher income Higher income

decreases the demand increases the demand
for an inferior good for a normal good
The Impact of a Change in the Price
of Related Goods
Demand for complement good
(ketchup) shifts left
Demand for substitute good (chicken)

shifts right
Price of hamburger rises

Quantity of hamburger
demanded falls
From Household to Market Demand
Demand for a good or service can be

defined for an individual household, or
for a group of households that make up a
market.
Market demand is the sum of all the

quantities of a good or service demanded
per period by all the households buying in
the market for that good or service.
From Household Demand to Market
Demand
Assuming there are only two households in the

market, market demand is derived as follows:
Supply in Output Markets
CLARENCE BROWN'S A supply schedule is a table

SUPPLY SCHEDULE showing how much of a product
FOR SOYBEANS
firms will supply at different
QUANTITY
SUPPLIED prices.
PRICE (THOUSANDS
(PER OF BUSHELS Quantity supplied represents the
BUSHEL) PER YEAR)
$ 2 0 number of units of a product that
1.75
2.25
10
20
a firm would be willing and able to
3.00 30 offer for sale at a particular price
4.00
5.00
45
45
during a given time period.
The Supply Curve and
the Supply Schedule
A supply curve is a graph illustrating how much

of a product a firm will supply at different prices.
CLARENCE BROWN'S 6
Price of soybeans per bushel ($)

SUPPLY SCHEDULE
FOR SOYBEANS 5
QUANTITY
SUPPLIED
4
PRICE (THOUSANDS
(PER OF BUSHELS
3
BUSHEL) PER YEAR) 2
$ 2 0
1.75 10 1
2.25 20
3.00 30 0
4.00 45
5.00 45 0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
The Law of Supply
6 The law of supply

Price of soybeans per bushel ($)
5 states that there is a

4
positive relationship
3
between price and
2
1
quantity of a good
0 supplied.
0 10 20 30 40 50
Thousands of bushels of soybeans
produced per year
This means that
supply curves
typically have a
positive slope.
Determinants of Supply
The price of the good or service.

The cost of producing the good, which in
turn depends on:
The price of required inputs (labor,
capital, and land),
The technologies that can be used to
produce the product,
The prices of related products.
A Change in Supply Versus
a Change in Quantity Supplied
A change in supply is
not the same as a
change in quantity
supplied.
In this example, a higher
price causes higher
quantity supplied, and
a move along the
demand curve.
In this example, changes in determinants of supply, other
than price, cause an increase in supply, or a shift of the
entire supply curve, from SA to SB.
When supply shifts

to the right, supply
increases. This
causes quantity
supplied to be
greater than it was
prior to the shift, for
each and every price
level.
To summarize:
Change in price of a good or service
leads to
Change in quantity supplied

(Movement along the curve).
Change in costs, input prices, technology, or prices of

related goods and services
leads to
Change in supply
(Shift of curve).
From Individual Supply
to Market Supply
The supply of a good or service can be defined

for an individual firm, or for a group of firms that
make up a market or an industry.
Market supply is the sum of all the quantities of

a good or service supplied per period by all the
firms selling in the market for that good or
service.
Market Supply
As with market demand, market supply is the

horizontal summation of individual firms supply
curves.
Market Equilibrium
The operation of the market

depends on the interaction
between buyers and sellers.
An equilibrium is the condition

that exists when quantity supplied
and quantity demanded are equal.
At equilibrium, there is no tendency

for the market price to change.
Market Equilibrium
Only in equilibrium is
quantity supplied
equal to quantity
demanded.
At any price level
other than P0, the
wishes of buyers
and sellers do not
coincide.
Market Disequilibria
Excess demand, or
shortage, is the condition
that exists when quantity
demanded exceeds
quantity supplied at the
current price.
When quantity demanded
exceeds quantity
supplied, price tends to
rise until equilibrium is
restored.
Market Disequilibria
Excess supply, or surplus,

is the condition that exists
when quantity supplied
exceeds quantity
demanded at the current
price.
When quantity supplied

exceeds quantity
demanded, price tends to
fall until equilibrium is
restored.
Increases in Demand and Supply
Higher demand leads to Higher supply leads to

higher equilibrium price and lower equilibrium price and
higher equilibrium quantity. higher equilibrium quantity.
Decreases in Demand and Supply
Lower demand leads to Lower supply leads to

lower price and lower higher price and lower
quantity exchanged. quantity exchanged.
Relative Magnitudes of Change
The relative magnitudes of change in supply and

demand determine the outcome of market equilibrium.
Relative Magnitudes of Change
When supply and demand both increase, quantity

will increase, but price may go up or down.

Demand

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2002 Prentice Hall Business Publishing Principles of Economics, 6/e Karl Case, Ray Fair

The Basic Decision-Making Units

A firm is an organization that transforms

The circular flow of

Input markets are the

Input markets include:

A households decision about the quantity of a particular

Supply and demand are the forces that make

Modern microeconomics is about supply,

A market is a group of buyers and sellers of a

The terms supply and demand refer to the

Buyers determine demand.

Sellers determine supply

A competitive market is a market in which there

Numerous buyers and sellers so that each has no

Not always aggressive competition

Slightly differentiated products

Each seller may set price for its own product

Quantity demanded is the amount of a good that

Market demand refers to the sum of all

Graphically, individual demand curves are

Change in Quantity Demanded

Caused by a change in the price of the product.

Caused by any change that alters the quantity

Prices of Related Goods

Quantity supplied is the amount of a good that

Market supply refers to the sum of all individual

Graphically, individual supply curves are

Change in Quantity Supplied

Caused by a change in anything that alters the

Caused by a change in a determinant other than

Equilibrium refers to a situation in which the

At $2.00, the quantity demanded is

Equilibrium price Equilibrium

(a) Excess Supply

(b) Excess Demand

Law of supply and demand

Decide whether the curve(s) shift(s) to the left or

Use the supply-and-demand diagram to see

$2.50 New equilibrium

2.00 Initial equilibrium

The law of demand

Demand curves intersect the

Income is the sum of all households

Wealth, or net worth, is the total value

Normal Goods are goods for which

Substitutes are goods that can serve as

Complements are goods that go

When demand shifts to

Change in quantity demanded

Change in income, preferences, or

Higher income Higher income

Demand for substitute good (chicken)

Price of hamburger rises

Demand for a good or service can be

Market demand is the sum of all the

Assuming there are only two households in the

CLARENCE BROWN'S A supply schedule is a table

A supply curve is a graph illustrating how much

Price of soybeans per bushel ($)

6 The law of supply

5 states that there is a

The price of the good or service.