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Chapter 3:
Demand and Supply
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
2
Markets
• Markets– Arrangements that individuals have for
exchanging with one another– Represent the interaction of buyers and
sellers
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Markets
• Markets– Markets for gasoline– Markets for labor– Stock market– Market for Super Bowl tickets– Compact disk market
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Markets
• Markets– Markets set the prices we pay and receive in
a free, competitive environment
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The Law of Demand
• Demand– Quantities of specific goods or services that
individuals, taken singly or as a group, will purchase at various possible prices, other things being constant
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The Law of Demand
• Law of Demand
– Quantity demanded is inversely related to price, holding other factors constant.
• Price Qd
• Price Qd
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The Law of Demand
• What are we holding constant?– Income – Price of other goods– Many other factors
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The Law of Demand
• Relative prices versus money prices– Relative Price
• The price of a commodity in terms of another commodity
– Money Price• Price we observe today in today’s dollars
(absolute, nominal price)
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The Demand Schedule
• The demand schedule is a table relating prices to quantity demanded.
• We must consider:– The time dimension– Constant-quality units
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The Individual Demand Schedule
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The Individual Demand Curve
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The Horizontal Summationof Two Demand Schedules
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The Horizontal Summationof Two Demand Schedules
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The Market DemandSchedule for Secure Digital Cards
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The Market DemandCurve for Secure Digital Cards
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A Shift in the Demand Curve
• Ceteris-Paribus Conditions
– Determinants of the relationship between price and quantity that are unchanged along a curve
– Changes in these factors cause a curve to shift
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A Shift in the Demand Curve
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Shifts in Demand
• Determinants of demand– Income
• Normal goods• Inferior goods
– Tastes and preferences– The price of related goods
• Complements• Substitutes
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Shifts in Demand
• Determinants of demand– Expectations
• Income• Future prices
– Market size (number of buyers)
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Shifts in Demand
The Determinants of DemandIncome: Normal Good
D1
Q/Units
D2D3
Price
Decrease in incomedecreases demand
Increase in incomeincreases demand
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Shifts in Demand
The Determinants of DemandIncome: Inferior Good
D1
Q/Units
Decrease in incomeincreases demand
Increase in incomedecreases demand
Price
D2D3
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Shifts in Demand
The Determinants of DemandIncome: Tastes and Preferences
D1
Q/Units
Price
D2D3
Hybrid vehicles• Increase in demand
SUVs• Decrease in demand
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Shifts in Demand
The Determinants of DemandPrice of Related Goods: Substitutes
D1
Q/Butter
Butter and Margarine• Price of both = $2/lb.• Price of margarine increases
to $3/lb.• Demand for butter increases
D2
Price
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Shifts in Demand
The Determinants of DemandPrice of Related Goods: Complements
D1
Q/Speakers
Speakers and Amplifiers• Decrease the relative
price of amplifiers• Demand for speakers
increases
D2D3
Speakers and Amplifiers• Increase the relative
price of amplifiers• Demand for speakers
decreases
Price
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Shifts in Demand
The Determinants of DemandExpectations
D1
Q/Units
A higher income or expectations of a higher future price will increase demand
D2D3
A lower income or expectations of a lower future price will decrease demand
Price
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Shifts in Demand
The Determinants of DemandPopulation
D1
Q/Units
Increase in the population increases demand
D2D3
Decrease in population decreases demand
Price
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Shifts in Demand
• Changes in demand versus changes in quantity demanded– A change in one or more of the non-price
determinants (income, tastes, etc.) will lead to a change in demand.
– This is a shift of the whole curve.
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Shifts in Demand
• Changes in demand versus changes in quantity demanded
– A change in a good’s own price leads to a change in quantity demanded.
• This is a movement along the same curve.
– ∆D is not the same as ∆Qd.
Movement Along a Given Demand Curve
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The Law of Supply
• Supply– The amount of a product or service that firms
are willing to sell at alternative prices
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The Law of Supply
• Law of Supply
– The price of a product or service and the quantity supplied are directly related.
• P Qs
• P Qs
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The Supply Schedule
• The supply schedule is a table relating prices to quantity supplied at each price.
• Supply Curve
– A graphical representation of the supply schedule
– Positively sloped line showing direct relationship between price and quantity supplied, all else equal
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The Individual Producer’s Supply Schedule
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The Individual Producer’s Supply Curve
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Horizontal Summationof Supply Curves
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Horizontal Summationof Supply Curves
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The Market Supply Schedule for Secure Digital Cards
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The Market Supply Curve for Secure Digital Cards
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Shifts in Supply
• In general, non-price changes that lead to higher profits lead to an increase in supply.
• In general, non-price changes that lead to lower profits lead to a decrease in supply.
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Shifts in Supply
• Determinants of supply– Cost of inputs– Technology and productivity– Taxes and subsidies– Price expectations– Number of firms in industry
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Shifts in Supply
The Determinants of SupplyCost of Inputs
S1
Q/Units
Decrease in cost increases supply
S2Increase in costdecreases supply
S3
Price
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Shifts in Supply
The Determinants of SupplyTechnology and Productivity
S1
Q/Units
Improvements in technology or increases in productivity increase supply
S2
Decreases in productivity decrease supply
S3
Price
43
Shifts in Supply
The Determinants of SupplyTaxes and Subsidies
S1
Q/Units
Decreases in taxes or increases in subsidies increase supply
S2
Increases in taxes or decreases in subsidies decrease supply
S3
Price
44
Shifts in Supply
The Determinants of SupplyPrice Expectations
S1
Q/Units
Expectations of lower future prices increase supply
S2Expectations of higher future prices decrease supply
S3
Price
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Shifts in Supply
The Determinants of SupplyNumber of Firms in Industry
S1
Q/Units
Increase in the number of firms increases supply
S2Decrease in the number of firms decreases supply
S3
Price
46
Shifts in Supply
• Changes in supply versus changes in quantity supplied– A change in one or more of the non-price
determinants will lead to a change in supply.
– This is a shift of the whole curve.
47
Shifts in Supply
• Changes in supply versus changes in quantity supplied– A change in a good’s own price leads to a
change in quantity supplied.– This is a movement along the same curve.
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Putting Demandand Supply Together
Putting Demandand Supply Together
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Putting Demandand Supply Together
• Equilibrium
– The situation when quantity supplied equals quantity demanded at a particular price
– There tends to be no movement of the price of the quantity away from this point unless demand or supply changes.
– Equilibrium is a stable point – any point that is not equilibrium is unstable and will not persist.
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Putting Demandand Supply Together
• Shortages
– The situation when quantity demanded is greater than quantity supplied
• Qd > Qs
– Exist at any price below the market clearing price
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Putting Demandand Supply Together
• Surpluses
– The situation when quantity supplied is greater than quantity demanded• Qd < Qs
– Exist at any price above the market clearing price
Chapter 3:
Demand and Supply
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
