Demand and Supply

1
After studying this chapter you will be able to

 Describe a competitive market and think about a

price as an opportunity cost
 Explain the influences on demand
 Explain the influences on supply
 Explain how demand and supply determine prices
and quantities bought and sold
 Use the demand and supply model to make
predictions about changes in prices and quantities

2
 market with lots of sellers
competitive market
and so no or seller can
buyers single buyer
influence the
price
amount of needed to
Moneyprice
the
money buy
good
Relative ratio of its to
the
price of the money
next best
price
money price
alternative

Demand something want can afford

and have a plan to
you
buy
amount
Quantity demanded
consumers

to at time
plan
buy specific price
a or
period
The Demand Law states
as
prices
increase demandeddecrea
quantity
price decrease quantity demanded in crea
as
Market and Prices
A market is any arrangement that enables buyers and
sellers to get information and do business with each
other. of sellers
plenty buyers
A competitive market is a market that has many
buyers and many sellers so no single buyer or seller can
influence the price.
The money price of a good is the amount of money
needed to buy it.
The relative price of a good—the ratio of its money
price to the money price of the next best alternative
good—is its opportunity cost.
3
Demand
meaningful
If you demand something, then you
1.Want it,
2. Can afford it, and

3. Have made a definite plan to buy it.

Wants are the unlimited desires or wishes people have

for goods and services. Demand reflects a decision about
which wants to satisfy.
The quantity demanded of a good or service is the
amount that consumers plan to buy during a particular
time period, and at a particular price.
Tamount consumers
plantobuy 4
Demand else remains the
The Law of Demand y everything same

The law of demand states:

Other things remaining the same, the higher the
price of a good, the smaller is the quantity demanded;
and
the lower the price of a good, the larger is the
quantity demanded.
The law of demand results from
 Substitution effect
 Income effect
5
Demand
for alternatives
look
Substitution Effect
When the relative price (opportunity cost) of a good or
service rises, people seek substitutes for it, so the quantity
demanded of the good or service decreases.

Income Effect
When the price of a good or service rises relative to
income, people cannot afford all the things they
previously bought, so the quantity demanded of the good
or service decreases.

6
 Demand as
pricechanges quantity
demanded
changes
Demand Curve and Demand Schedule
The term demand refers to the entire relationship
between the price of the good and quantity demanded
of the good.
A demand curve shows the relationship between the
quantity demanded of a good and its price when all
other influences on consumers’ planned purchases
remain the same.
p Pi GDI
in
Increase
demand
PI QDT
Decreased
demand
f shiftsright
7
 QD
Movement
in demanded demand along
curve
change quantity
As PP QD T T if

As Pt QD T
only price changes

I because of
in demand changes
Change influences other than
when demand increases shift price
change
right
when demand decreases shift left

The prices of related

substitute can goods
be used instead of the
good a that is used
good
in
complimentarygood good
conjugtion with good
a

or
If the of the substitute good increases
price decreases
of the
complimentary good
the price
the will shift
graph right
Expected future prices
If the expected future of a is increases
price
demanded will increase
quantity shift today
right
Income
 Income
more of most
when income rises people buy
goods graph shifts rightward
and the
Normal when income rises
good rises shifts quantity
demanded right
when income rises
Inferior good quantity
demanded decreases shifts left

income and credit

Expected demand
credit rise
If expected income quantity
of rises
good
Population demanded
If
population
increases
ward
quantity
shifts
rises right
Preferences
demanded
If preference increases quantity
shifts
increases rightward
Demand
Figure 3.1 shows a demand curve for energy bars.

PI GDP
PR QD V

8
Demand
PT Q DV
A rise in the price, other Pt QDT
things remaining the
same, brings a decrease
in the quantity
demanded and a
movement up along the
demand curve.
A fall in the price, other
things remaining the
same, brings an increase
in the quantity
demanded and a
movement down along
the demand curve.

9
Demand

Willingness and
Ability to Pay
A demand curve is also
a willingness-and-
ability-to-pay curve.
The smaller the
quantity available, the
higher is the price that
someone is willing to
pay for another unit.
Willingness to pay
measures marginal
benefit.
10
Demand
A Change in Demand
When some influence on buying plans other than the
price of the good changes, there is a change in demand
for that good.
The quantity of the good that people plan to buy
changes at each and every price, so there is a new
demand curve.
When demand increases, the demand curve shifts
rightward.
When demand decreases, the demand curve shifts
leftward.
11
Demand
Six main factors that change demand are
 The prices of related goods
 Expected future prices
 Income
 Expected future income and credit
 Population
 Preferences

12
Demand
Prices of Related Goods
A substitute is a good that can be used in place of
another good.
A complement is a good that is used in conjunction
with another good.
When the price of substitute for an energy bar rises or
when the price of a complement of an energy bar falls,
the demand for energy bars increases.

13
Demand
Expected Future Prices
If the expected future price of a good rises, current
demand for the good increases and the demand curve
shifts rightward.
Income
When income increases, consumers buy more of most
goods and the demand curve shifts rightward.
A normal good is one for which demand increases as
income increases.
An inferior good is a good for which demand
decreases as income increases.

14
Demand
Expected Future Income and Credit
When expected future income increases or when credit
is easy to obtain, the demand might increase now.
Population
The larger the population, the greater is the demand for
all goods.
Preferences
People with the same income have different demands if
they have different preferences.

15
Demand
Figure 3.2 shows an
increase in demand.
Because an energy
bar is a normal good,
an increase in
income increases the
demand for energy
bars.

16
Demand

A Change in the
Quantity Demanded
Versus a Change in
Demand
Figure 3.3 illustrates
the distinction
between a change in
demand and a change
in the quantity
demanded.

17
Demand Change
in demanded
quantity c affects
Movement Along
onlyprice
the Demand Curve
When the price of
the good changes and
everything else
remains the same, the
quantity demanded
changes and there is a
movement along the
demand curve.

18
Demand in demand
change
A Shift of the Demand
Curve
If the price remains the
same but one of the other
influences on buyers’ plans
changes, demand changes
and the demand curve
shifts.

19
Supply
If a firm supplies a good or service, then the firm
1.Has the resources and the technology to produce it,
2. Can profit from producing it, and

3. Has made a definite plan to produce and sell it.

Resources and technology determine what it is possible

to produce. Supply reflects a decision about which
technologically feasible items to produce.
The quantity supplied of a good or service is the
amount that producers plan to sell during a given time
period at a particular price.

20
 so to more
Supply MC increases produce
increase
price must
The Law of Supply
The law of supply states:
Other things remaining the same, the higher the price
of a good, the greater is the quantity supplied; and
the lower the price of a good, the smaller is the quantity
supplied.
The law of supply results from the general tendency for
the marginal cost of producing a good or service to
increase as the quantity produced increases (Chapter 2,
page 33).
Producers are willing to supply a good only if they can
at least cover their marginal cost of production.
21
Supply
Supply Curve and Supply Schedule
The term supply refers to the entire relationship
between the quantity supplied and the price of a good.
The supply curve shows the relationship between the
quantity supplied of a good and its price when all other
influences on producers’ planned sales remain the same.
P pi OST
PI QSL

22
 QS
in
change supply
Increase factors of
in
production
shifts left
of related
Price goods
substitute
T QS I shifts left
price PT Q ST shifts
complimentarygood right
Price of expected future T
price
shifts left
St
of T
Number suppliers
ST shifts
right
T
Technology
ST shifts
right
State of Nature natural disaster
Str shifts left
Supply

Figure 3.4 shows a

supply curve of
energy bars.
A rise in the price of
an energy bar, other
things remaining the
same, brings an
increase in the
quantity supplied.

23
Supply
A Change in Supply
When some influence on selling plans other than the
price of the good changes, there is a change in supply
of that good.
The quantity of the good that producers plan to sell
changes at each and every price, so there is a new supply
curve.
When supply increases, the supply curve shifts
rightward.
When supply decreases, the supply curve shifts
leftward.

24
Supply
The five main factors that change supply of a good are
 The prices of factors of production
 The prices of related goods produced
 Expected future prices
 The number of suppliers
 Technology
 State of nature

25
Supply
Prices of Factors of Production
If the price of a factor of production used to produce a
good rises, the minimum price that a supplier is willing
to accept for producing each quantity of that good rises.
So a rise in the price of a factor of production decreases
supply and shifts the supply curve leftward.

26
 Substitute PT QSV
Supply Substitute Pt QST
Prices of Related Goods Produced
A substitute in production for a good is another good
that can be produced using the same resources.
The supply of a good increases if the price of a
substitute in production falls.
Goods are complements in production if they must be
produced together.
The supply of a good increases if the price of a
complement in production rises.
PT QST
complimentary
PU QI
complimentary 27
 y

Supply
Expected Future Prices
If the expected future price of a good rises, the supply
of the good today decreases and the supply curve shifts
leftward.
The Number of Suppliers
The larger the number of suppliers of a good, the
greater is the supply of the good. An increase in the
number of suppliers shifts the supply curve rightward.

28
Supply
Technology
Advances in technology create new products and lower
the cost of producing existing products.
So advances in technology increase supply and shift the
supply curve rightward.
The State of Nature
The state of nature includes all the natural forces that
influence production—for example, the weather.
A natural disaster decreases supply and shifts the
supply curve leftward.

29
Supply
Figure 3.5 shows an
increase in supply.
An advance in the
technology for
producing energy bars
increases the supply
of energy bars and
shifts the supply curve
rightward.

30
Supply
A Change in the
Quantity Supplied Versus
a Change in Supply
 Figure 3.6 illustrates
the distinction between a
change in supply and a
change in the quantity
supplied.

31
Supply
Movement Along the
Supply Curve
When the price of the
good changes and other
influences on sellers’
plans remain the same,
the quantity supplied
changes and there is a
movement along the
supply curve.

32
Supply
A Shift of the
Supply Curve
If the price remains
the same but some
other influence on
sellers’ plans changes,
supply changes and
the supply curve
shifts.

33
Market Equilibrium
Equilibrium is a situation in which opposing forces
balance each other. Equilibrium in a market occurs
when the price balances the plans of buyers and sellers.
The equilibrium price is the price at which the
quantity demanded equals the quantity supplied.
The equilibrium quantity is the quantity bought and
sold at the equilibrium price.
 Price regulates buying and selling plans.
 Price adjusts when plans don’t match.

I
34
Market Equilibrium P Pe surplus
so QSI SO QDT
Pt
continue to equilibrium
Price as a Regulator
Figure 3.7 illustrates the
equilibrium price and
equilibrium quantity.
If the price is $2.00 a bar,
the quantity supplied
p Pe
exceeds the quantity
demanded.
There is a surplus of
6 million energy bars.

35
Market Equilibrium PC Pe shortage
P Pe QST so QD I
PT so
If the price is $1.00 a bar, is reached
the quantity demanded an equilibrium
exceeds the quantity
supplied.
There is a shortage of
9 million energy bars.
equilibrium
If the price is $1.50 a bar, the
quantity demanded equals
the quantity supplied.
There is neither a shortage
nor a surplus of energy bars.

36
Market Equilibrium
Price Adjustments p Pe
PI so QSL SO QDT
At any price above the
equilibrium price, a
surplus forces the price
down.
see At any price below the
equilibrium price, a
shortage forces the price
up. PR so QST so QDI
At the equilibrium price,
buyers’ plans and sellers’
plans agree and the price
doesn’t change until some
event changes either
demand or supply.
37
Predicting Changes in Price and Quantity
PT so QST so QDI
An Increase in Demand
Pe and Qe T
Figure 3.8 shows that
when demand
increases the demand
curve shifts rightward.
At the original price,
there is now a shortage.
t

The price rises, and the

quantity supplied increases
along the supply curve.

38
Predicting Changes in Price and Quantity
Pt so Q SW so Q DR

An Increase in Supply Pet Qed

Figure 3.9 shows that
when supply increases
the supply curve shifts
rightward.
At the original price,
there is now a surplus.

The price falls, and the

quantity demanded
increases along the
demand curve.
39
Predicting Changes in Price and Quantity

All Possible Changes in

Demand and Supply
A change demand or
supply or both demand
and supply changes the
equilibrium price and
the equilibrium
quantity.

40
Predicting Changes in Price and Quantity
Change in Demand with
No Change in Supply

When demand increases,

there is a movement up
along the supply curve.

The equilibrium price rises

and the equilibrium
quantity increases.

41
Predicting Changes in Price and Quantity
When demand decreases,
the equilibrium price falls
and the equilibrium
quantity decreases.

42
Predicting Changes in Price and Quantity
Change in Supply with
No Change in Demand

When supply increases,

there is a movement
down along the demand
curve.

The equilibrium price falls

and the equilibrium
quantity increases.

43
Predicting Changes in Price and Quantity

When supply decreases,

the equilibrium price rises

and the equilibrium
quantity decreases.

44
Predicting Changes in Price and Quantity

Increase in Both Demand

and Supply

An increase in demand and

an increase in supply
increase the equilibrium
quantity.

The change in equilibrium

price is uncertain because the
increase in demand raises
the equilibrium price and the
increase in supply lowers it.
45
Predicting Changes in Price and Quantity
Decrease in Both Demand
and Supply

A decrease in both demand

and supply decreases the
equilibrium quantity.

The change in equilibrium

price is uncertain because
the decrease in demand
lowers the equilibrium price
and the decrease in supply
raises it.
46
Predicting Changes in Price and Quantity

Decrease in Demand and

Increase in Supply

A decrease in demand and

an increase in supply lowers
the equilibrium price.

The change in equilibrium

quantity is uncertain because
the decrease in demand
decreases the equilibrium
quantity and the increase in
supply increases it.
47
Predicting Changes in Price and Quantity

Increase in Demand and

Decrease in Supply

An increase in demand and a

decrease in supply raises the
equilibrium price.

The change in equilibrium

quantity is uncertain because
the increase in demand
increases the equilibrium
quantity and the decrease in
supply decreases it.
16 4 0.19 48
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