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Chapter Four:
Supply and Demand
The Theory of Supply
A Supply Schedule for Coffee
Price ($/cup) 0.70 0.80 0.90 1.00 1.10 1.20 1.30 1.40 1.50 1.60
Cups of Coffee 300 400 500 600 700 800 900 1,000 1,100 1,200Supplied/week
Table 4.1: A Supply Schedule for Coffee
Figure 4.1: The Supply Curve for Cups of Coffee
S1 S2
Figure 4.2: An Increase in Supply
S1S2
Figure 4.3: A Decrease in Supply
The Theory of Demand
Table 4.2: A Demand Schedule for Coffee
A Demand Schedule for Coffee
Price ($/cup) 0.20 0.50 0.80 1.10 1.40 1.70 2.00 2.30
Cups of Coffee Demanded/week 1,000 900 800 700 600 500 400 300
Figure 4.4: The Demand Curve for Cups of Coffee
D1 D2
Figure 4.5: An Increase in Demand
D1D2
Figure 4.6: An Decrease in Demand
The Theory of Market Adjustment
(D=600) (S=1000)
(S=400) (D=800)•
Figure 4.7: Surplus, Shortage, and Equilibrium
1.40
1.10
0.80
S1 S2
Demand
SurplusE1
E2
Figure 4.8: Market Adjustment to an Increase in Supply
D1
Supply
Shortage
E1
E2
D2
Figure 4.9: Market Adjustment to and Increase in Demand
1.40
1.10
600 700 1000 1100
Table 4.3: Effects of Changes in Supply and Demand
Effect on Effect on Equilibrium Price Equilibrium Quantity
Increase in Supply fall rise Decrease in Supply rise fall Increase in Demand rise rise Decrease in Demand fall fall
Quantity
Pric
e
S1S2
D
Q1Q2
P1
P2
Figure 4.10: Price Elasticity of Demand(a) Relatively Price-Elastic Demand
Quantity
Pric
e
S1S2
D
Q1Q2
P1
P2
Figure 14.10: Price Elasticity of Demand(b) Relatively Price-Inelastic Demand
Macroeconomics and the Dynamics of Real-World
Markets
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
Date 3-Dec-90
2-Dec-91
1-Dec-92
1-Dec-93
1-Dec-94
1-Dec-95
2-Dec-96
1-Dec-97
1-Dec-98
1-Dec-99
1-Dec-00
3-Dec-01
Nas
daq
Com
posi
te S
tock
Ind
ex
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Figure 4.11: The Stock Market Bubble of 1999-2000
Source: Yahoo! Finance, Monthly data.
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