chapter

Supply and Demand

4

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4.1 Markets

• A market is the process of buyers and sellers

exchanging goods services.
• Supermarkets, the New York Stock Exchange,
drug stores, roadside stands, garage sales,
Internet stores, and restaurants are all markets.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• Buyers, as a group, determine the demand
side of the market, whether it is consumers
purchasing goods or firms purchasing inputs.
• Sellers, as a group, determine the supply side
of the market, whether it is firms selling their
goods or resource owners selling their inputs.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• It is the interaction of buyers and sellers that
determines market prices and output through
the forces of supply and demand.
• In this chapter, we focus on how supply and
demand work in a competitive market.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• A competitive market is one in which a
number of buyers and sellers are offering
similar products and no single buyer or seller
can influence the market price.
• Because most markets contain a large degree
of competitiveness, the lessons of supply and
demand can be applied to many different types
of problems.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4.2 Demand

• According to the law of demand, the quantity

of a good or service demanded varies
inversely with its price, ceteris paribus.
• More directly, other things equal, when the
price of a good or service falls, the quantity
demanded increases.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• An individual demand schedule reveals the
different amounts of a particular good a
person would be willing and able to buy at
various possible prices in a particular time
interval, other things equal.

Elizabeth’s Demand Schedule for Coffee

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• An individual demand curve is a graphical
representation that shows the inverse relationship
between price and quantity demanded.

Elizabeth’s Demand Curve for Coffee

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• Economists usually speak of the demand
curve in terms of large groups of people.
• The horizontal summing of the demand curves
of many individuals is called the market
demand curve for a product.
• The market demand curve shows the amounts
that all the buyers in the market would be
willing and able to buy at various prices.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Creating a Market Demand Curve

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 A Market Demand Curve

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4.3 Shifts in the Demand

• A change in a good's price leads to a change

in quantity demanded, illustrated by moving
along a given demand curve.
• But price is not the only thing that affects the
quantity of a good people buy. The other
factors that influence the demand curve are
called determinants of demand, and they shift
the entire demand curve—a change in
demand.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Some possible demand shifters

• prices of related goods

• incomes of demanders
• number of demanders
• tastes of demanders
• expectations of demanders

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Demand Shifts

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Substitutes
• A major variable that shifts the demand curve is
the prices of related goods.
• Two goods are called substitutes
if an increase in the price of one causes a
decrease in the demand for the other good.
• The opposite also applies: Two goods are
called substitutes if a decrease in the price of
one causes an increase in the demand for the
other good.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Substitute Goods

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Complements

• Two goods are complements if an increase

in the price of one good causes a decrease in
the demand for the other good.
• The opposite is also true: Two goods are
complements if a decrease in the price of one
good causes an increase in the demand for
the other good.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Complementary Goods

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Income

• Generally the consumption of goods and

services is positively related to the income
available to consumers.
• As individuals receive more income, they tend
to increase their purchases of most goods and
services.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Income-Normal Good
• Other things equal, an increase in income
usually leads to an increase in demand for
goods (rightward shift).
• A decrease in income usually leads to a
decrease in the demand for goods (leftward
shift).
• Such goods are called normal goods.
• For example: CDs and movie tickets.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Income-Inferior Good
• Some goods exist for which rising (or falling)
income leads to reduced (or increased)
demand.
• These are called inferior goods. The term
inferior does not refer to the quality of the
good, but it merely shows that when income
changes demand changes in the opposite
direction (inversely).
• For example: thrift shop clothes, store-brand
products, and bus rides.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Normal and Inferior Goods

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Number of Buyers

• The demand for a good or service will vary

with the size of the potential consumer
population—the number of buyers.
• An increase in the potential consumer
population will increase (shift right) the
demand for a good or service.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Consumer’s Preferences and Information

• Changes in fashions, fads, advertising, etc.

can change tastes or preferences.
• An increase in tastes or preferences for a
good or service will increase (shift right) the
demand for a good or service.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Expectations

• An increase in the expected future price of a

good will increase (shift right) the current
demand for it.
• A decrease in the expected future price of a
good will decrease (shift left) the current
demand for it.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Changes in Demand vs. Changes
in Quantity Demanded Revisited:

• If the price of a good changes, we say this

leads to a change in quantity demanded.
• If one of the other factors (determinants of
demand) influencing consumer behavior
changes, we say there is a change in
demand.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Change in Demand Versus Change in Quantity Demanded

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4.4 Supply
• The law of supply states that, other things
equal, the quantity supplied will vary directly
with the price of the good.
• According to the law of supply,
• the higher the price of the good, the greater
the quantity supplied,
• and the lower the price of the good, the
smaller the quantity supplied.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• An individual supply schedule reveals the
different amounts of a product that a producer
is willing and able to supply at various prices in
a particular time interval, other things equal.
• An individual supply curve illustrates that
information graphically.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 An Individual Supply Curve

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• The market supply curve for a product is the
horizontal summation of the supply curves for
individual firms.
• It shows the amount of goods and services
suppliers are willing and
able to supply at various prices.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 A Market Supply Curve

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
4.5 Shifts in the Supply Curve
• Changes in the price of a good lead to
changes in quantity supplied, which are
shown as movements along a given supply
curve.
• Changes in supply occur for other reasons
than changes in the price of the product itself.
• A change in any other factor that can affect
supplier behavior results in a shift of the entire
supply curve.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
These other factors include:

• input prices
• prices of substitutes in production
• expectations
• number of suppliers
• technology
• regulations
• taxes
• subsidies
• weather

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
• An increase in supply shifts the supply curve
to the right.
• A decrease in supply shifts the supply curve to
the left.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Supply Shifts

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Change in Supply vs Change in Quantity Supplied

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
chapter

Bringing Supply and

5 Demand Together

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
5.1 Market Equilibrium
Price and Quantity

The market equilibrium is found at the point at

which the market supply and market demand
curve intersect.
The price at the intersection of the market
demand curve and the market supply curve is
called the equilibrium price.
The quantity at the intersection of the market
demand curve is called the equilibrium quantity.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Market Equilibrium

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
At the equilibrium price, the quantity demanded
equals the quantity supplied—the amount that
buyers are willing and able to buy is exactly
equal to the amount that sellers are willing and
able to produce.
If the market price is at any other price,
their will be a shortage or a surplus.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Markets in Temporary Disequilibrium

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
At a price greater than the equilibrium price,
a surplus, or excess quantity supplied, would exist.
Sellers would be willing to sell more than
demanders would be willing to buy.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Frustrated suppliers would cut their price
and cut back on production, and consumers
would buy more.
This would eliminate the unsold surplus
and return the market to equilibrium.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
At a price less than the equilibrium price, a shortage,
or excess quantity demanded, would exist.
Buyers would be willing to buy more than sellers
would be willing to sell.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Frustrated buyers would compete for the existing
supply, causing the price to rise, and producers
to increase the quantity supplied.
This would decrease the quantity demanded,
eliminate the shortage, and return the market
to equilibrium.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 Markets in Temporary Disequilibrium

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
 5.2 Changes in Equilibrium
Price and Quantity

The demand and/or supply curves will shift when

one of the many determinants of demand or
supply (input prices, prices of related products,
number of suppliers, expectations, technology,
and so on) changes.
These changes (shifts) in the demand and
supply curves will lead to changes in the
equilibrium price and equilibrium quantity.

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
An increase in demand results in a
greater equilibrium price and a
greater equilibrium quantity.
a decrease in demand results in a
lower equilibrium price and a
lower equilibrium quantity.
An Increase in Demand
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
A decrease in supply results in a
higher equilibrium price and a
lower equilibrium quantity. an increase in supply results in a
lower equilibrium price and a
higher equilibrium quantity.
A Decrease in Supply

©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.