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.