© 2003 McGraw-Hill Ryerson Limited Supply and Demand Chapter 4

© 2003 McGraw-Hill Ryerson Limited

Supply and DemandSupply and Demand

Chapter 4Chapter 4


4 - 2

DemandDemand

Demand means a willingness and capacity to pay.


4 - 3

DemandDemand

Prices are the tool by which the market coordinates individual desires.


4 - 4

The Law of DemandThe Law of Demand

Quantity demanded rises as price falls, other things constant.

Quantity demanded falls as price rises, other things constant. Thus, there is an inverse relationship

between price and quantity demanded.


4 - 5

The Law of DemandThe Law of Demand

What accounts for the law of demand? People tend to substitute other goods

for goods whose price has increased.


4 - 6

The Demand CurveThe Demand Curve

The demand curve is the graphic representation of the relationship between price and quantity demanded.

The demand curve slopes downward and to the right. As the price goes up, the quantity

demanded goes down.


4 - 7

The Demand CurveThe Demand Curve

The negative slope tells us that quantity demanded varies indirectly—in the opposite direction—with price.


4 - 8

Other Things ConstantOther Things Constant

“Other things constant” in our definition of demand means that all other factors that affect the analysis are assumed to remain constant, whether they actually remain constant or not.

These factors may include changing tastes, prices of other goods, even the weather.


4 - 9

D

Pri

ce (

per

uni

t)

0

Quantity demanded (per unit of time)

PA

QA

A

A Sample Demand A Sample Demand Curve, Curve, Fig. 4-1, p 84Fig. 4-1, p 84


4 - 10

Shifts in Demand Shifts in Demand Versus Movements Versus Movements Along a Demand CurveAlong a Demand Curve Demand refers to a schedule of

quantities of a good that will be bought per unit of time at various prices, other things constant.

Graphically, it refers to the entire demand curve.


4 - 11

Shifts in Demand Shifts in Demand Versus Movements Versus Movements Along a Demand CurveAlong a Demand Curve Quantity demanded refers to a specific

amount that will be demanded per unit of time at a specific price, other things constant.

Graphically, it refers to a specific point on the demand curve.


4 - 12

Shifts in Demand Shifts in Demand Versus Movements Versus Movements Along a Demand CurveAlong a Demand Curve A movement along a demand curve is

the graphical representation of the effect of a change in price on the quantity demanded.


4 - 13

Shifts in Demand Shifts in Demand Versus Movements Versus Movements Along a Demand CurveAlong a Demand Curve A shift in demand is the graphical

representation of the effect of anything other than price on demand.

The original curve will move to the right or to the left.


4 - 14

Change in Quantity Change in Quantity DemandedDemanded Fig. 4-2a, p 86Fig. 4-2a, p 86

0D1

Change in quantity demanded(a movement along the curve)

B

Pri

ce (

per

uni

t)

Quantity demanded (per unit of time)100

$2

$1

200

A


4 - 15

D0

D1

Shift in Demand, Shift in Demand, Fig. 4-2b, p 86Fig. 4-2b, p 86P

rice

(pe

r u

nit)

Quantity demanded (per unit of time)100

$2

$1

200

B A

Change in demand(a shift of the curve)

250


4 - 16

Shift Factors of Shift Factors of DemandDemand Shift factors of demand are factors that

cause shifts in the demand curve to the right or left.


4 - 17

Shift Factors of Shift Factors of DemandDemand Shift factors of demand include—but are

not limited to—the following: Society's income The prices of other goods Tastes Expectations Population


4 - 18

Shift Factors of Shift Factors of DemandDemand A rise in income may increase demand

for goods. When the prices of substitute goods fall,

you will consume less of the good whose price has not changed.

A change in taste will change demand without a change in price.


4 - 19

Shift Factors of Shift Factors of DemandDemand If you expect your income to rise, you

may consume more now. If you expect prices to fall in the future,

you may put off purchases today.


4 - 20

Shift Factors of Shift Factors of DemandDemand If there is an increase in population,

demand will increase at every price With a population decrease, demand

will decrease as well


4 - 21

The Demand TableThe Demand Table

The demand table assumes all the following: As price rises, quantity demanded

declines. Quantity demanded has a specific

time dimension to it.


4 - 22

The Demand TableThe Demand Table

The demand table assumes all the following: All the products involved are identical

in shape, size, quality, etc. The schedule assumes that

everything else is held constant.


4 - 23

From a Demand Table From a Demand Table to a Demand Curveto a Demand Curve You plot each point in the demand table

on a graph and connect the points to derive the demand curve.


4 - 24

From a Demand Table From a Demand Table to a Demand Curveto a Demand Curve The demand curve graphically conveys

the same information that is on the demand table.


4 - 25

From a Demand Table From a Demand Table to a Demand Curveto a Demand Curve The curve represents the maximum

price that you will pay for various quantities of a good—you will happily pay less.


4 - 26

Price

per

cas

sette

(in

dolla

rs)

A Demand Curve

Quantity of cassettes demanded (per week)1 2 3 4 5 6 7 8 9 10 11 12

13

$6.00

5.00

4.00

3.00

2.00

1.00 .50

0

3.50E

D

C

BFA

From a Demand Table From a Demand Table to a Demand Curve, to a Demand Curve, Fig. 4-3 Fig. 4-3

(a and b), p 87(a and b), p 87

Price per cassette

ABCDE

A Demand Table

Cassette rentals demanded per

week

$0.50 1.002.003.004.00

98642

Demand for cassettes

G


4 - 27

Individual and Market Individual and Market Demand GoodsDemand Goods A market demand curve is the

horizontal sum of all individual demand curves. This is determined by adding the

individual demand curves of all the consumers (“demanders”).


4 - 28

Individual and Market Individual and Market Demand GoodsDemand Goods In reality, the sellers do not add up

individual demand curves. They estimate total market demand for

their product which becomes smooth and downward sloping curve.


4 - 29

Individual and Market Individual and Market Demand GoodsDemand Goods The demand curve is downward sloping

for the following reasons: At lower prices, existing consumers

buy more. At lower prices, new consumers enter

the market.


4 - 30

From Individual From Individual DemandsDemandsto a Market, to a Market, Fig. 4-4 (a and b), p 88Fig. 4-4 (a and b), p 88

(1)Price per cassette

$.0.501.001.502.002.503.003.504.00

(2)Marie’s demand

(3)Pierre’s demand

(2)Cathy’s demand

(3)Market demand

98765432

65432100

11000000

16141197532

ABCDEFGH

Quantity of cassettes demanded per week2

Cathy Pierre Marie

D

A

C

EF

G$4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0Pr

ice p

er c

asse

tte (i

n do

llars

)

4 6 8 10 12 14 16

B

Market demand


4 - 31

SupplySupply

Individuals control the factors of production. Factors of production are the

resources or inputs, necessary to produce goods or services.


4 - 32

SupplySupply

Individuals supply factors of production to intermediaries or firms.


4 - 33

SupplySupply

The analysis of the supply of produced goods has two parts: An analysis of the supply of the factors of

production to households and firms. An analysis of why firms transform those

factors of production into usable goods and services.


4 - 34

The Law of SupplyThe Law of Supply

Quantity supplied rises as price rises, other things constant.

Quantity supplied falls as price falls, other things constant.

Thus, there is a direct relationship between price and quantity supplied.


4 - 35

The Law of SupplyThe Law of Supply

The law of supply is accounted for by two factors: In the face of rising prices, firms arrange their

activities to supply more of the good to the market, substituting production of that good for the production of other goods.

Assuming firms' costs are constant, a higher price means higher profits.


4 - 36

The Supply CurveThe Supply Curve

The supply curve is the graphic representation of the law of supply.

The supply curve slopes upward to the right.

The slope tells us that the quantity supplied varies positively—in the same direction—with the price.


4 - 37

Quantity supplied (per unit of time)

0

S

A

Pric

e (p

er u

nit)

PA

QA

A Sample Supply Curve A Sample Supply Curve Fig. 4-5, p 90Fig. 4-5, p 90


4 - 38

Shifts in Supply Versus Shifts in Supply Versus Movements Along a Movements Along a Supply CurveSupply Curve

Supply refers to a schedule of quantities a seller is willing to sell per unit of time at various prices, other things constant.


4 - 39


If the amount supplied is affected by anything other than a change in price, there will be a shift in supply.

Shift in supply -- the graphic representation of the effect of a change in a factor other than price on supply.


4 - 40


Quantity supplied refers to a specific amount that will be supplied at a specific price.


4 - 41


Changes in price cause changes in quantity supplied represented by a movement along a supply curve.


4 - 42

Change in quantity supplied (a movement along the curve)

Change in Quantity Change in Quantity Supplied Supplied Fig. 4-6a, p 92Fig. 4-6a, p 92

Pric

e (p

er u

nit)


S0

$15A

1,250 1,500

B


4 - 43

Shift in Supply Shift in Supply Fig. 4-6b, p 92Fig. 4-6b, p 92

Pric

e (p

er u

nit)


S0

Shift in Supply(a shift of the curve)

S1

$15A B

1,250 1,500


4 - 44

Shift Factors of SupplyShift Factors of Supply

Shift factors of supply are those factors that cause shifts in the entire supply curve to the left or right.


4 - 45


The following are shift factors of supply: Changes in the prices of inputs used in the

production of a good Changes in technology Changes in suppliers' expectations Changes in taxes and subsidies


4 - 46


Changes in the prices of inputs used in the production of a good. If costs rise, then profits go down, and

there is less incentive to supply. If costs go up substantially, the firm

may even shut down.


4 - 47


Technology makes costs decrease, profits go up, thus the incentive to supply also increases. This is especially true when new

technology replaces labor.


4 - 48


If they expect prices to rise in the future, suppliers may store today's production for an expected windfall later.

If they expect prices to fall in the future, suppliers may sell off more of their inventories today.


4 - 49


If taxes go up, costs also increase, and profits go down, leading suppliers to reduce output.

Government subsidies increase supply, as they reduce costs of production.


4 - 50

From a Supply Table to From a Supply Table to a Supply Curvea Supply Curve To derive a supply curve from a supply

table, you plot each point in the supply table on a graph and connect the points.


4 - 51

From a Supply Table to From a Supply Table to a Supply Curvea Supply Curve The supply curve represents the set of

minimum prices an individual seller will accept for various quantities of a good.


4 - 52

From a Supply Table to From a Supply Table to a Supply Curvea Supply Curve Competing suppliers’ entry into the

market places a limit on the price any supplier can charge.


4 - 53

Individual and Market Individual and Market Supply CurvesSupply Curves The market supply curve is derived by

horizontally adding the individual supply curves of each supplier.


4 - 54

From Individual From Individual Supplies to a Market Supplies to a Market Supply, Supply, Fig 4-7a, p 93Fig 4-7a, p 93

Quantities Supplied

ABCDEFGHI

(1)Price

(in dollars)

(2) Ann’s Supply

(5)MarketSupply

(4)Charlie'sSupply

$0.000.501.001.502.002.503.003.504.00

012345678

001234555

000000022

013579

111415

(3)Barry's Supply


4 - 55

From Individual From Individual Supplies to a Market Supplies to a Market Supply, Supply, Fig 4-7b, p 93Fig 4-7b, p 93

Pric

e pe

r ca

sset

te (

in d

olla

rs)

Charlie Barry Ann

Quantity of cassettes supplied (per week) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

$4.00

3.50

3.00

2.50

2.00

1.50

1.00

0.50

0

I

H

G

F

E

D

C

BA

Market Supply

CA


4 - 56

The Marriage of Supply The Marriage of Supply and Demandand Demand Supply and demand come together to

determine equilibrium quantity and equilibrium price.


4 - 57

Excess Supply and Excess Supply and Excess DemandExcess Demand Excess supply –if quantity supplied is

greater than quantity demanded, prices tend to fall.

Excess demand – prices tend to rise if quantity demanded is greater than quantity supplied.


4 - 58

Price AdjustsPrice Adjusts

The larger the difference between quantity demanded and quantity supplied, the greater the pressure for prices to rise (if there is excess demand) or fall (if there is excess supply.


4 - 59

Price AdjustsPrice Adjusts

When quantity demanded equals quantity supplied, prices have no tendency to change.


4 - 60

B

A

The Marriage of Supply The Marriage of Supply and Demand, and Demand, Fig 4-8, p 96Fig 4-8, p 96

Pric

e pe

r ca

sset

te (

in d

olla

rs) $5.00

4.00

3.50

3.00

2.50

2.00

1.50

1.00

S

D

Quantity of cassettes supplied and demanded (per week)

Excess demand

1 2 3 4 5 6 7 8 9 10 11 12

Excess supply

E


4 - 61

EquilibriumEquilibrium

Equilibrium is a concept in which opposing dynamic forces cancel each other out.


4 - 62


In supply and demand analysis, equilibrium means that the upward pressure on price is exactly offset by the downward pressure on price.


4 - 63


Equilibrium price is the price toward which the invisible hand drives the market.

Equilibrium quantity is the amount bought and sold at the equilibrium price.


4 - 64

What Equilibrium Isn'tWhat Equilibrium Isn't

Equilibrium isn’t a state of the world—it's a characteristic of the model used to look at the world.

Equilibrium isn’t inherently good or bad—but simply a state in which dynamic pressures offset each other.


4 - 65Desirable Desirable Characteristics of Characteristics of Supply/Demand Supply/Demand EquilibriumEquilibrium Consumer surplus – the distance

between the demand curve and the price the consumer pays is net benefit to consumers.


4 - 66Desirable Desirable Characteristics of Characteristics of Supply/Demand Supply/Demand EquilibriumEquilibrium Producer surplus - if a producer

receives more than the price she would be willing to sell the good for, she receives a net benefit.


4 - 67Desirable Desirable Characteristics of Characteristics of Supply/Demand Supply/Demand EquilibriumEquilibrium What's good about equilibrium is that it

makes the combination of consumer and producer surplus as large as it can be.


4 - 68Desirable Desirable Characteristics of Characteristics of Supply/Demand Supply/Demand EquilibriumEquilibrium Markets allow trade, thereby leading to

an increase in the combination of consumer and producer surplus.


4 - 69

Consumer and Producer Consumer and Producer Surplus, Surplus, Fig 4-9, p 98Fig 4-9, p 98

Pric

e

Supply

Demand

Quantity

0

$10987654321

10987654321

Producer Surplus

Consumer Surplus

Lost Surplus


Supply and DemandSupply and Demand

End of Chapter 4End of Chapter 4

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© 2003 McGraw-Hill Ryerson Limited Supply and Demand Chapter 4