Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved. Understanding Economics 6 th edition by Mark
Lovewell
Slide 2
Chapter 2 Demand and Supply Copyright 2012 by McGraw-Hill
Ryerson Limited. All rights reserved.
Slide 3
Learning Objectives After this chapter, you will be able to: 1.
comprehend the nature of demand, changes in quantity demanded,
changes in demand, and the factors that affect demand 2. understand
the nature of supply, changes in quantity supplied, changes in
supply, and the factors that affect supply 3. explain how markets
reach equilibrium the point at which demand and supply meet
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 4
What Is Demand? o Demand is a relationship between a products
price and quantity demanded. Demand is shown using a schedule or
curve. The law of demand states that price and quantity demanded
are inversely related. Market demand is the sum of quantities
demanded by all consumers in a market. Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved.
Slide 5
The Demand Curve Figure 2.1, page 34 Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved. 013 57 9 1113
Quantity Demanded (kg per month) Your Demand Curve for Strawberries
Your Demand Schedule for Strawberries Quantity Demanded (kg per
month) Point on graph Price ($ per kg) $2.50 2.00 1.50 9 7 11 Price
($ per kg) 0.50 1.00 1.50 2.00 2.50 D b a c a b c
Slide 6
Deriving Market Demand Figure 2.2, page 36 Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved. 0123 4 5 67
Quantity Demanded (kg per month) Friends Demand Curve for
Strawberries Individual and Market Demand Schedules for
Strawberries You (D 0 ) Price ($ per kg) $2.50 2.00 1.50 1 2 3 2 3
4 3 5 7 Price ($ per kg) 0.50 1.00 1.50 2.00 2.50 Friend (D 1 )
Market (D m ) (kg per month) 0123 4 5 6 7 Quantity Demanded (kg per
month) Market Demand Curve for Strawberries Price ($ per kg) 0.50
1.00 1.50 2.00 2.50 012 3 4 5 67 Quantity Demanded (kg per month)
Your Demand Curve for Strawberries Price ($ per kg) 0.50 1.00 1.50
2.00 2.50 D0D0 D1D1 DmDm
Slide 7
Changes in Demand (a) Changes in demand: are shown by shifts in
the demand curve are caused by changes in demand factors Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved.
Slide 8
Changes in Demand (b) Figure 2.3, page 37 Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved. 013 5 7 9 1113
Quantity Demanded (millions of kg per year) Market Demand Curve for
Strawberries Market Demand Schedule for Strawberries Quantity
Demanded (millions of kg) Price ($ per kg) $2.50 2.00 1.50 5 7 911
7 9 9 13 Price ($ per kg) 0.50 1.00 1.50 2.00 2.50 D0D0 D1D1 D2D2
(D 2 )(D 0 )(D 1 )
Slide 9
Demand Factors (a) Demand factors include the following: The
number of buyers (an increase causes a rightward demand shift)
Income For normal products, an increase causes a rightward demand
shift. For inferior products, an increase causes a leftward demand
shift. Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 10
Demand Factors (b) Prices of other products For substitute
products, a rise in the other products price causes a rightward
demand shift. For complementary products, a rise in the other
products price causes a leftward demand shift. Consumer preferences
Consumer expectations Copyright 2012 by McGraw-Hill Ryerson
Limited. All rights reserved.
Slide 11
Changes in Quantity Demanded (a) Changes in quantity demanded:
are shown by movements along demand curve are caused by price
changes Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 12
Changes in Quantity Demanded (b) Figure 2.4, page 39 Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved. 0 5000
6000 Quantity Demanded (pairs of skis) Change in Quantity Demanded
Price ($ per pair of skis) 0.50 1.00 1.50 2.00 0 5000 Quantity
Demanded (pairs of skis) Change in Demand Price ($ per pair of
skis) 0.50 1.00 1.50 2.00 a b D0D0 D0D0 D1D1
Slide 13
What Is Supply? Supply: is a relationship between a products
price and quantity supplied is shown using a schedule or curve The
law of supply states there is a direct relationship between price
and quantity supplied. Copyright 2012 by McGraw-Hill Ryerson
Limited. All rights reserved.
Slide 14
The Supply Curve Figure 2.5, page 41 Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved. Market Supply
Schedule for Strawberries Quantity Supplied (millions of kg) Points
on graph Price ($ per kg) $2.50 2.00 1.50 9 13 5 e f d Market
Supply Curve for Strawberries S f e d 013 5 7 9 1113 Quantity
Supplied (millions of kg per year) Price ($ per kg) 0.50 1.00 1.50
2.00 2.50
Slide 15
Changes in Supply (a) Changes in supply: are shown by shifts in
the supply curve are caused by changes in supply factors Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved.
Slide 16
Changes in Supply (b) Figure 2.6, page 42 Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved. Market Supply
Schedule for Strawberries Quantity Supplied (millions of kg) Price
($ per kg) $2.50 2.00 1.50 11 7 9 13 15 3 5 7 S0S0 S1S1 S2S2 Market
Supply Curve for Strawberries 013 5 7 9 1113 Quantity Supplied
(millions of kg per year) Price ($ per kg) 0.50 1.00 1.50 2.00 2.50
15 (S 2 ) (S 0 ) (S 1 )
Slide 17
Supply Factors (a) Supply factors include the following: Number
of producers (an increase causes a rightward supply shift) Resource
prices (an increase causes a leftward supply shift) State of
technology (an improvement causes a rightward supply shift) Prices
of related products (an increase causes a leftward supply shift)
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 18
Supply Factors (b) Changes in nature (for some products, an
improvement causes a rightward supply shift) Producer expectations
(an expectation of lower prices in the future causes an immediate
rightward supply shift) Copyright 2012 by McGraw-Hill Ryerson
Limited. All rights reserved.
Slide 19
Changes in Quantity Supplied (a) Changes in quantity supplied:
are shown by movements along the supply curve are caused by price
changes Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 20
Changes in Quantity Supplied (b) Figure 2.7, page 44 Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved. 0 1 2
Quantity Supplied (millions of kg per year) Change in Quantity
Supplied Price ($ per kg) 20 40 60 80 100 120 Change in Supply 0 1
2 Quantity Supplied (millions of kg per year) Price ($ per kg) 20
40 60 80 100 120 S0S0 S1S1 S0S0 b a
Slide 21
Market Equilibrium (a) When a product is in surplus: there is
excess supply price is pushed down When a product is in shortage:
there is excess demand price is pushed up Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved.
Slide 22
Market Equilibrium (b) Figure 2.8, page 46 Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved. 013 5 7 9 1113
Quantity (millions of kg per year) Market Demand and Supply Curves
for Strawberries Price ($ per kg) 1.00 1.50 2.00 2.50 3.00 S D 15
Market Demand and Supply Schedules for Strawberries Price ($ per
kg) Quantities (millions of kg) DS Surplus (+) or Shortage (-)
(millions of kg) Surplus Shortage b b aa e $3.00 2.50 2.00 1.50
1.00 5 7 9 11 13 11 9 7 5 +8 +4 0 -4 -8
Slide 23
Changes in Equilibrium (a) A rightward demand shift pushes up
both equilibrium price and quantity. A leftward demand shift pushes
down both equilibrium price and quantity. A rightward supply shift
pushes equilibrium price down and equilibrium quantity up. A
leftward supply shift pushes equilibrium price up and equilibrium
quantity down. Copyright 2012 by McGraw-Hill Ryerson Limited. All
rights reserved.
Slide 24
Demand Changes and Equilibrium Figure 2.9, page 47 Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved. 013 5 7 9
1113 Quantity (millions of kg per year) Market Demand and Supply
Curves for Strawberries Price ($ per kg) 1.00 1.50 2.00 2.50 3.00 S
D0D0 15 a $3.00 2.50 2.00 1.50 1.00 Market Demand and Supply
Schedules for Strawberries Price Quantities (D 0 ) (D 1 )(S) ($ per
kg.) (millions of kg) D1D1 b shortage 5 7 9 11 13 9 11 13 15 17 13
11 9 7 5 17
Slide 25
Supply Changes and Equilibrium Figure 2.10, page 48 Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved. 013 5 7 9
1113 Quantity (millions of kg per year) Market Demand and Supply
Curves for Strawberries Price ($ per kg) 1.00 1.50 2.00 2.50 3.00
S0S0 D0D0 15 $3.00 2.50 2.00 1.50 1.00 Market Demand and Supply
Schedules for Strawberries Price Quantities ($ per kg) (millions of
kg) 5 7 9 11 13 11 9 7 5 17 15 13 11 9 17 S1S1 a b (D 0 ) (S 0 )(S
1 ) Surplus
Slide 26
Changes in Equilibrium (b) A simultaneous rightward shift in
demand and supply raises equilibrium quantity, but the effect on
equilibrium price depends on the relative sizes of the two shifts.
if demand shifts rightward more than supply, then price rises if
supply shifts rightward more than demand, then price falls
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 27
Effects of Increases in Demand and Supply Figure 2.11 page 49
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights reserved.
013 5 7 9 1113 Quantity (millions of kg per year) Market Demand and
Supply Curves for Strawberries Price ($ per kg) 1.00 1.50 2.00 2.50
3.00 D0D0 15 a $3.00 2.50 2.00 1.50 1.00 Market Demand and Supply
Schedules for Strawberries Price Quantities (D 0 ) (D 1 ) ( S 0 )
(S 1 ) ($ per kg.) (millions of kg) D1D1 b 5 7 9 11 13 9 11 13 15
17 13 11 9 7 5 17 15 13 11 9 S0S0 S1S1
Slide 28
Changes in Equilibrium (c) A simultaneous rightward shift in
demand and leftward shift in supply raises equilibrium price, but
the effect on equilibrium quantity depends on the relative sizes of
the two shifts. if supply shifts leftward more than demand shifts
rightward, then quantity falls ( greater decrease in supply than
increase in demand) if demand shifts rightward more than supply
shifts leftward, then quantity rises (greater increase in demand
than decrease in supply) Copyright 2012 by McGraw-Hill Ryerson
Limited. All rights reserved.
Slide 29
Effects of a Demand Increase and Supply Decrease Figure 2.12
page 50 Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved. 013 5 7 9 1113 Quantity (millions of kg per year) Market
Demand and Supply Curves for Strawberries Price ($ per kg) 1.00
1.50 2.00 2.50 3.00 D0D0 15 a $3.00 2.50 2.00 1.50 1.00 Market
Demand and Supply Schedules for Strawberries Price Quantities (D 0
) (D 1 ) ( S 0 ) (S 1 ) ($ per kg.) (millions of kg) D1D1 b 5 7 9
11 13 7 9 11 13 15 13 11 9 7 5 17 11 9 7 5 3 S0S0 S1S1
Slide 30
Spoilt for Choice William Stanley Jevons: assumed measurable
utility outlined the law of diminishing marginal utility, which
states that a consumers marginal utility declines as more of a
product is consumed showed how this law can be illustrated using
the downward-sloping marginal utility graph for a given consumer
and product, based on that consumers total utility graph Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved.
Slide 31
Spoilt for Choice (b) Figure A, page 57 Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved. 01 2 34 Cups of
Cappuccino Total Utility Consumers Total and Marginal Utility From
Cappuccino Quantity Consumed (cups) 0123401234 0(a) 12(b) 20(c)
24(d) 26(e) Utility (utils) 4 8 12 16 20 Total Utility (utils)
Marginal Utility (utils) 12(f) 8(g) 4(h) 2(i) 24 28 01 2 34 Cups of
Cappuccino Marginal Utility Utility (utils) 4 8 12 16 a b c d e f g
h i
Slide 32
The Utility-Maximizing Rule Jevons devised the
utility-maximizing rule this rule states a consumer should reach
the same marginal utility per dollar for all products consumed in
mathematical terms: Copyright 2012 by McGraw-Hill Ryerson Limited.
All rights reserved. MU 1 P1P1 MU 2 P2P2 =
Through the Ranks (OLC) Indifference Curves Using indifference
curves, consumer preferences can be shown without the need to
assume measurable utility. An individual consumer must merely rank
his/her options for various bundles of two products in order of
preference. A consumer may prefer one bundle to another, or be
indifferent between the two. Copyright 2012 by McGraw-Hill Ryerson
Limited. All rights reserved.
Slide 35
Through the Ranks (OLC) An Indifference Curve (a) An
indifference curve shows all bundles of two goods to which a
particular consumer is indifferent. The curve is downward-sloping
because, for any point on the curve, all points to the northeast
provide more utility and all points to the southwest provide less
utility. Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 36
Through the Ranks (OLC) An Indifference Curve (b) Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved.
Hamburgers Alices Indifference Curve Alices Indifference Schedule
Milkshakes Hamburgers Point on Graph 4 3 2 4 3 7 Milkshakes 1 2 3 4
I0I0 b a c a c 112 d 0 4 8 d b At each point on the curve, Alice
derives the same level of utility.
Slide 37
Through the Ranks (OLC) The Marginal Rate of Substitution The
absolute value of an indifference curves slope is the marginal rate
of substitution (MRS). An indifference curve is convex, since the
curves MRS diminishes as more of the product on the horizontal axis
(hamburgers), and less on the vertical axis (milkshakes) is
consumed. Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 38
Through the Ranks (OLC) Diminishing Marginal Rate of
Substitution The diminishing marginal rate of substitution occurs
because, as hamburger consumption rises, more hamburgers must be
gained to make the consumer willing to sacrifice another milkshake.
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights
reserved.
Slide 39
Through the Ranks (OLC) A Map of Indifference Curves (a) A map
of indifference curves can be drawn for an individual consumer,
with each indifference curve further to the northeast representing
a higher level of utility Copyright 2012 by McGraw-Hill Ryerson
Limited. All rights reserved.
Slide 40
Through the Ranks (OLC) A Map of Indifference Curves (b)
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights reserved.
Hamburgers A Map of Indifference Curves Milkshakes 1 2 3 4 I0I0 0 4
8 12 I1I1 I2I2 Each curve shows points that give different levels
of utility for Alice.
Slide 41
Through the Ranks (OLC) The Budget Line (a) A consumers budget
line: is drawn based on the assumption that all the consumers
budget is spent on hamburgers and milkshakes has a vertical
intercept equal to the consumers budget divided by the price of
milkshakes has a horizontal intercept equal to the consumers budget
divided by the price of hamburgers Copyright 2012 by McGraw-Hill
Ryerson Limited. All rights reserved.
Slide 42
Through the Ranks (OLC) The Budget Line (b) has a slope whose
absolute value equals the ratio of the two prices (the price of
hamburgers divided by the price of milkshakes) divides the graph
into an attainable region southwest of the line, and an
unattainable region northeast of the line Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved.
Slide 43
Through the Ranks (OLC) The Budget Line (c) Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved. Hamburgers Alices
Budget Line Alices Budget Schedule Milkshakes Hamburgers 5 4 3 2 0
4 Milkshakes 1 2 3 4 2 6 0 4 8 12 10 5 The budget curve shows all
those points Alice can reach with her limited budget. $15/$3
$15/$1.50 1 8 010
Slide 44
Through the Ranks (OLC) The Utility-Maximizing Point (a) The
consumer maximizes utility by reaching the highest possible
indifference curve on the budget line. This utility-maximizing
point occurs on the indifference curve that just touches the budget
line at a single point. Copyright 2012 by McGraw-Hill Ryerson
Limited. All rights reserved.
Slide 45
Through the Ranks (OLC) The Utility-Maximizing Point (b)
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights reserved.
Hamburgers Milkshakes 1 2 3 4 I0I0 0 4 8 12 Alices greatest
achievable utility is on the indifference curve which touches her
budget line at a single point. 10 5 b (4, 3)
Slide 46
Through the Ranks (OLC) Deriving a Demand Curve (a) The
consumers demand curve for hamburgers can be found by tracing out
the results of a change in the price of hamburgers given a constant
money budget and price for milkshakes. Copyright 2012 by
McGraw-Hill Ryerson Limited. All rights reserved.
Slide 47
Through the Ranks (OLC) Deriving a Demand Curve (b) Copyright
2012 by McGraw-Hill Ryerson Limited. All rights reserved.
Hamburgers Milkshakes 1 2 3 4 I1I1 0 4 8 12 A decline in the price
of hamburgers from $1.50 to $1 causes Alices quantity demanded to
rise from 4 to 6, as shown by her demand curve, D. 10 5 b Quantity
(hamburgers per week) Price ($ per hamburger).50 1.00 1.50 D 0 4 8
12 15 e (6,3) I0I0
Slide 48
Chapter 2 The End Copyright 2012 by McGraw-Hill Ryerson
Limited. All rights reserved.