Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply and Demand

Supply and Demand

Trading Opportunities: The Price-Taking Model

Each buyer is a price taker.He can buy as much (or as little) of the

good as he wants at some price.He cannot affect the price.

Trading Opportunities: The Price-Taking Model

Each seller is a price taker.She can sell as much (or as little) of the

good as he wants at some price.She cannot affect the price.

Introduction to Demand

How many movies you see this month depends on many conditions.

The price—How much do movie tickets cost?Your tastes—How much do you like movies?Your income—Do you have enough money

to pay for tickets?Prices of other goods—How much would

you have to spend to rent videos or attend concerts?

Demand Schedule for Tickets

Priceof Tickets

Number IWould Buy

Demand Curve for Movie Tickets

80Number of Movie Tickets per Month

2 3 4 5 6 7

Demand

A person’s quantity demanded of a good at some price is the amount she would buy at that price.

Demand

A demand curve graphs the relation between the price of a good and the quantity demanded.

Market Demand

The market quantity demanded of a good at some price is the total amount that all buyers in the market would buy at that price.

Market Demand

A market demand curve graphs the relation between the price of a good and the market quantity demanded.

Individual Demands and Market Demand

PriceArchie’s Quantity

DemandedVeronica’s Quantity

DemandedMarket Quantity

Demanded

$1.20 0 + 0 = 0

1.00 10 + 0 = 10

0.90 15 + 0 = 15

0.80 20 + 10 = 30

0.60 30 + 30 = 60

0.40 40 + 50 = 90

0.20 50 + 70 = 120

0.10 55 + 80 = 135

Market Demand for Sodas

0Sodas per Month

25 50 75 100 125 150 175

0.200.10

0.400.50

0.700.80

1.001.10

0Sodas per Month

25 50 75 100 125 150 175

0.200.10

0.400.50

0.700.80

1.001.10

0.90Archie’s Demand)(

0Sodas per Month

25 50 75 100 125 150 175

0.200.10

0.400.50

0.700.80

1.001.10

0.90Archie’s Demand)( + Veronica’s

Demand )(

0Sodas per Month

25 50 75 100 125 150 175

0.200.10

0.400.50

0.700.80

1.001.10

0.90Archie’s Demand)( + Veronica’s

Demand = Market Demand)( ( )

Conditions Affecting the Quantity Demanded

Personal taste Usefulness Income and wealth Prices of related goods

The Law of Demand

An increase in the price of a good, with no change in other conditions, generally reduces the quantity demanded.

Demand curves have negative (downward) slopes.

Why Demand Curves Slope Downward

Buyers can replace a good with another, cheaper substitute.

People cannot afford to buy as much after a price increase requiring them to turn to cheaper substitutes or less of the higher priced good.

Changes in Demand

A change in demand means a change in the numbers in the demand schedule and a shift in the demand curve.

Changes in Demand

An increase (or rise ) in demand means an increase in the quantity demanded at a given price—shifts the demand curve to the right.

Increase in Demand

Quantity Demanded

PriceOld QuantityDemanded

Increase in Demand

Quantity Demanded

Increase in Demand

Quantity Demanded

New QuantityDemanded

$10 5 8

9 6 10

8 8 12

7 10 15

6 14 18

5 20 24

Increase in Demand

Quantity Demanded

$10 5 8

9 6 10

8 8 12

7 10 15

6 14 18

5 20 24

Changes in Demand

An decrease (or fall ) in demand means an decrease in the quantity demanded at a given price—shifts the demand curve to the left.

Decrease in Demand

Quantity Demanded

Decrease in Demand

Quantity Demanded

5 20D1

Decrease in Demand

Quantity Demanded

$10 5 2

7 10 6

6 14 9

5 20 15D1

Decrease in Demand

Quantity Demanded

$10 5 2

7 10 6

6 14 9

5 20 15D2

Changes in Quantity Demanded Versus Changes in Demand

A change in the quantity demanded means a movement along a demand curve due to a change in price.

The demand curve does not move when the quantity demanded changes.

Changes in Quantity Demanded Versus Changes in Demand

A change in price changes the quantity demanded but not demand.

A change in demand is caused by a change in conditions other than the price of the good.

Change in Quantity Demanded

Quantity

Changes in Conditions That Cause Changes in Demand

Tastes Usefulness Income and Wealth Prices of Related Goods Number of Potential Buyers

Tastes

Tastes (or preferences) are people’s underlying likes and dislikes.

Usefulness

A good’s usefulness is its benefit in creating the products people ultimately want.

Income and Wealth

Income is the amount of money received each year from working, interest on savings, and other sources such as gifts.

A normal good is a good whose demand increases if income rises.

An inferior good is a good whose demand decreases if income rises.

Income and Wealth

Wealth is the value of accumulated past savings, including human wealth.

Prices of Related Goods

Substitutes can be used in place of each other.

An increase in the price of one raises demand for the other.

Complements tend to be used together.

An increase in the price of one reduces demand for the other.

Number of Potential Buyers

Market demand curves shift when the number of potential buyers changes.

Changes in demographics also cause demand changes.

Introduction to Supply

How many rooms you will paint this week depends on many conditions.

Cost of paintYour painting skillsHow much you dislike paintingThe alternative use of your time

Supply Schedule for Painting Services

Price per Room Number I Would Paint

$ 80 0

Supply Curve for Painting Services

50Rooms Painted per Week

Supply

A seller’s quantity supplied of a good at some price is the amount she would sell at that price.

Supply

The quantity supplied describes the behavior of sellers.

It is unrelated to the behavior of buyers.

Supply

A supply schedule lists the various possible prices and quantities supplied.

A supply curve graphs the relation between the price of a good and the quantity supplied.

Market Supply

The market quantity supplied of a good at some price is the total amount that all sellers in the market would sell at that price.

Market Supply

A market supply curve graphs the relation between the price of a good and the market quantity supplied.

A market supply schedule shows the various possible prices of a good and the market quantity supplied at each price.

Individual and Market Supplies

PriceMama’s Quantity

SuppliedPapa’s Quantity

SuppliedMarket Quantity

Supplied

$12 60 + 40 = 100

10 50 + 30 = 80

8 40 + 20 = 60

6 30 + 10 = 40

4 20 + 0 = 20

20 40 60 80 100 Pizzasper Day

Papa’s Supply of Pizza

Mama’s Supply of Pizza

Market Supply of Pizza

Law of Supply

When the price of a good rises, holding constant other conditions, generally the quantity supplied rises.

Supply curves usually have positive slopes.

Changes in Supply

A change in supply means a change in the numbers in the supply schedule and a shift in the supply curve.

Changes in Supply

An increase (or rise) in supply shifts the supply curve to the right.

A decrease (or fall) in supply shifts the supply curve to the left.

Increase in Supply

Quantity Supplied

Increase in Supply

Quantity Supplied

Increase in Supply

Quantity Supplied

Decrease in Supply

Quantity Supplied

Decrease in Supply

Quantity Supplied

Changes in Quantity Supplied Versus Changes in Supply

A change in the quantity supplied means a movement along a supply curve due to a change in price.

The supply curve does not move and the numbers in the supply schedule do not change.

Price changes affect the quantity supplied, but do not change supply.

A change in supply occurs when there is a change in conditions other than price.

Changes in Conditions Causing Changes in Supply

Prices of Inputs Technology Number of Potential Sellers

Prices of Inputs

Increases in the prices of inputs—materials, energy, natural resources, etc.—can decrease supply by reducing the incentive to produce and sell the good.

Technology

Technology advances lower the costs of producing a good and raise the incentive to produce and sell it.

Number of Potential Sellers

Market supply increases when the number of potential sellers rises.

Equilibrium of Supply and Demand

An equilibrium occurs when quantity supplied equals quantity demanded.

The price in an equilibrium is the equilibrium price and the quantity is the equilibrium quantity.

Market Equilibrium

0 Quantity

Market Equilibrium

0 Quantity

Market Equilibrium

Quantity

Market Equilibrium

AEquilibrium

Quantity

Market Equilibrium

AEquilibrium

Equilibrium Price

Quantity

Market Equilibrium

Equilibrium Quantity

AEquilibrium

Quantity

Equilibrium Price

Market Equilibrium

Equilibrium Quantity

AEquilibrium

Quantity

This area shows total spending on the good (Q1 X P1).

Equilibrium Price

Why the Intersection of the Curves Shows Equilibrium

The quantity demanded equals the quantity supplied.

Why the Intersection of the Curves Shows Equilibrium

Disequilibrium is the opposite of equilibrium.

It occurs when the quantity demanded does not equal the quantity supplied at the current price.

Excess Demand (Shortage)

A situation in which the quantity demanded exceeds the quantity supplied.

Excess Demand (Shortage)

If the price is below the equilibrium price, there is a shortage and the price tends to rise toward the equilibrium.

Excess Demand

Quantity

Excess Demand

Quantity

Excess Demand

Quantity

Equilibrium

Excess Demand

Quantity

P1Equilibrium Price Equilibrium

Excess Demand

Quantity

AEquilibrium

P1Equilibrium Price

P0Price below Equilibrium Price

Excess Demand

Quantity

AEquilibrium

P1Equilibrium Price

Excess Demand

Quantity

AEquilibrium

P1Equilibrium Price

Qs0 Qd

Excess Demand

Quantity

AEquilibrium

Quantity Demanded at the Price P0

P1Equilibrium Price

Quantity Supplied at the Price P0

Price below Equilibrium Price

Qs0 Qd

Excess Demand

Quantity

AEquilibrium

P1Equilibrium Price

Excess Demand (shortage)

Price below Equilibrium Price

Qs0 Qd

Excess Supply (Surplus)

A situation in which the quantity supplied exceeds the quantity demanded.

Excess Supply (Surplus)

If the price is above the equilibrium price, there is a surplus and the price tends to fall toward the equilibrium.

Excess Supply

Quantity

Excess Supply

Quantity

Excess Supply

Quantity

Equilibrium

Excess Supply

Quantity

Equilibrium

P1Equilibrium Price

Excess Supply

Quantity

Equilibrium

Price above Equilibrium Price

P1Equilibrium Price

Excess Supply

Quantity

Equilibrium

P1Equilibrium Price

Excess Supply

Quantity

P1Equilibrium Price

Equilibrium

Excess Supply

Quantity

Equilibrium Price

Equilibrium

Excess Supply

Quantity

Excess Supply (surplus)

Equilibrium Price

Equilibrium

Summary of Equilibrium

At the equilibrium price, there is neither a shortage or a surplus.

The price shows no tendency to change unless demand or supply changes.

Effects of Changes in Demand or Supply

Changes in demand and supply cause changes in the equilibrium.

Increase or Decrease in Demand

An increase in demand raises the equilibrium price and quantity.

A decrease in demand lowers the equilibrium price and quantity.

An Increase in Demand

Quantity

A Decrease in Demand

Quantity

Increase or Decrease in Supply

An increase in supply lowers the equilibrium price and raises the equilibrium quantity.

A decrease in supply raises the equilibrium price and lowers the equilibrium quantity.

An Increase in Supply

Quantity

A Decrease in Supply

Quantity

Market Process and Economic Coordination

The market coordinates billions of individual decisions to buy and sell goods and services.

Prices influence all these decisions.

Relative and Nominal Prices

It is important to distinguish between nominal and real prices.

The nominal price of a good is its money price.

The relative price of a good in terms of another good is its

opportunity cost measured in units of that other good.

Relative and Nominal Prices

Which price is on the graph?The price on a graph of demand or

supply is the good's relative price.

Appendix

Algebra of Equilibrium

Demand CurveIf the demand curve is a straight line, it can

be expressed as:

Qd = a - bPwhere

Qd is the quantity demandedP is the price of the gooda and b are positive numbers that depend on buyers'

tastes, incomes, the prices of complements and substitutes and the other conditions that affect demand

Supply CurveIf the supply curve is a straight line, it can

be written as:

Qs = c + dP where

Qs is the quantity suppliedP is the pricec and d are numbers that depend on technology, input costs, and the other conditions that affect supply

EquilibriumAt the equilibrium price P, the quantity

demanded equals the quantity supplied.

In algebraic terms, that means:

Qd = Qs

EquilibriumSubstitute the two equations for Qd and

a-bP = c+dPSolving for equilibrium price:

P = (a-c)/(b+d)Solving for equilibrium quantity:

Q = a - b(a-c)/(b+d)

Supply and Demand

End of Chapter 4

Copyright © 1999 by Harcourt Brace & Company. All rights reserved. Supply and Demand

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