Chapter 3
Supply and Demand
MODERN PRINCIPLES OF ECONOMICS
Third Edition
Outline






The Demand Curve for Oil
Consumer Surplus
What Shifts the Demand Curve?
The Supply Curve for Oil
Producer Surplus
What Shifts the Supply Curve?
2
Definition
Demand Curve:
A function that shows the quantity
demanded at different prices.
Quantity Demanded:
The quantity that buyers are willing
and able to buy at a particular price.
3
Demand
Demand for Oil
Price
Quantity
Demanded
$55
5
$20
25
$5
50
Demand
•
•
Quantity
Demanded
This table shows demand for oil - the quantities
demanded at different prices.
The data can be used to construct a demand curve.
4
Demand Curve
Price
Priceofofoil
oil
per
perbarrel
barrel
Price
Quantity
Demanded
$55
5
$20
25
$5
50
Quantity of
oil (MBD)
5
Tyler Cowen and Alex Tabarrok
Modern Principles: Macroeconomics, Third Edition / Modern Principles of Economics, Third Edition
Copyright © 2015 by Worth Publishers
Reading a Demand Curve
A Demand Curve Can Be Read:
 Horizontally: At a given price, how much are
people willing to buy?
 Vertically: What are people willing to pay for
a given quantity?
7
Reading a Demand Curve
HORIZONTAL: At $20 per barrel, buyers are willing to buy
25m barrels of oil per day.
8
Reading a Demand Curve
VERTICAL: The maximum price that buyers are willing to
pay to purchase 25m barrels per day is $20 per barrel.
9
Self-Check
What quantity is demanded at $15?
a. 10.
b. 50.
c. 75.
$15
Answer: b. 50
10
Self-Check
At what price would 100 be demanded?
a. $5.
b. $1.
c. $10.
$5
Answer: a. $5
11
Law of Demand
 A demand curve is negatively sloped.
 The lower the price, the greater the quantity
demanded.
 Demand summarizes how consumers choose to
use a good, given their preferences and the
possibilities for substitution.
12
Law of Demand
 .
13
Law of Demand
 For example, when the price of oil is high,
consumers will use it only in its most valuable
uses (e.g., gasoline and jet fuel).
 As the price falls, consumers will also use oil in
its less valued uses (heating and rubber
duckies).
 Consumers will buy more oil at lower prices than
at higher prices.
14
Definition
Consumer Surplus:
The consumer’s gain from exchange,
or the difference between the
maximum price a consumer is willing
to pay for a certain quantity and the
market price.
15
Definition
Total Consumer Surplus:
The area beneath the demand curve and
above the price.
Consumer Surplus:
The consumer’s gain from exchange, or the
difference between the maximum price a
consumer is willing to pay for a certain
quantity and the market price.
16
Consumer Surplus
Total consumer surplus with a linear demand curve
17
Self-Check
What is total consumer surplus if market
price is $10?
a. $500.
b. $700.
c. $1400.
70 x ($30-$10)
2
Answer: b. $700
70
18
Shifting the Demand Curve
 An increase in demand shifts the demand
curve to the right.
• At the same price, people are willing to buy
more.
• At the same quantity, people are willing to pay
a higher price.
19
Shifting the Demand Curve
Price of
oil/barrel
An Increase in Demand
Willing to pay a higher
price for same quantity.
$50
Willing to buy more
at the same price.
$25
New Demand
Old Demand
0
70
140
Quantity of Oil
(MBD)
20
Shifting the Demand Curve
 Decrease in demand – shifts the demand
curve to the left.
• At the same price, people are willing to buy
less.
• At the same quantity, people are willing to pay
a lower price.
21
Shifting the Demand Curve
Price of
oil/barrel
A Decrease in Demand
Willing to buy less
at the same price.
$50
Willing to pay a lower price
for the same quantity
$25
Old Demand
New Demand
0
62
74
Quantity of Oil
(MBD)
22
Demand Shifters
Factors That Shift Demand:
1.
2.
3.
4.
5.
6.
Income
Population
Price of substitutes
Price of complements
Expectations
Tastes
23
Demand Shifters
1. Income
 When people get richer, they buy more stuff.
 When an increase in income increases the
demand for a good, it is a normal good.
 Most goods are normal goods.
 When an increase in income decreases the
demand for a good, it is an inferior good.
24
Inferior Goods
25
Self-Check
If iPads are a normal good, when incomes
increase, the demand curve for iPads will:
a. Shift to the right.
b. Shift to the left.
c. Not change.
Answer: a
Higher incomes increase demand for a normal
good, shifting the demand curve to the right.
26
Demand Shifters
2. Population
 An increase in population will increase
demand generally.
 A shift in subpopulations will change the
demand for specific goods and services.
27
Demand Shifters
3. Prices of Substitutes
 A substitute is a good that can be consumed
instead of another good.
 A decrease in the price of a substitute will
decrease demand for the other good.
28
Self-Check
If orange juice and apple juice are substitutes,
an increase in the price of orange juice will:
a. Increase demand for apple juice.
b. Decrease demand for apple juice.
c. Not affect demand for apple juice.
29
Self-Check
If orange juice and apple juice are substitutes,
an increase in the price of orange juice will:
Answer: a – increase demand for apple juice.
A higher price for orange juice will cause some
people to substitute the now lower-priced apple
juice. This increases the demand for apple juice.
30
Demand Shifters
4. Prices of Complements
 Complements are things that go well together.
 A drop in the price of a complement increases
demand for the complementary good.
31
Demand Shifters
5. Expectations
 The expectation of a reduction in future supply
increases the demand today.
6. Tastes
 Changes in tastes caused by fads, fashions,
and advertising can all increase or decrease
demand.
32
Supply Curve
Price of oil per barrel
Price
Quantity
Supplied
$55
50
$20
30
$5
10
Quantity of oil (MBD)
33
Reading a Supply Curve
A Supply Curve Can Be Read:
 Horizontally: At a given price, how much are
suppliers willing to sell?
 Vertically: To produce a given quantity, what
price must sellers be paid?
34
Definition
Supply Curve:
A function that shows the quantity
supplied at different prices.
Quantity Supplied:
The quantity that sellers are willing
and able to sell at a particular price.
35
Law of Supply
Top photo: Dan Lamont/Corbis Bottom: Bettmann/Corbis
 As the price of oil rises, it becomes profitable to
extract from more costly sources.
 As the price rises, the quantity supplied increases.
36
Self-Check
At what price will producers be willing to
supply 50 units?
a. $10.
b. $20.
c. $30.
Answer: a - $10
37
Definition
Producer Surplus:
The producer’s gain from exchange,
or the difference between the market
price and the minimum price at which
a producer would be willing to sell a
particular quantity.
38
Definition
Total Producer Surplus:
The area above the supply curve
and below the price.
39
Producer Surplus
40
Shifting the Supply Curve
 Increase in Supply - shifts the supply
curve to the right.
• At the same price producers are willing to
sell more.
• At the same quantity, producers are willing
to accept a lower price
41
Shifting the Supply Curve
Price of
oil/barrel
Increase in supply
$60
Old supply
New supply
Greater quantity
supplied at the
same price
40
Willing to accept
a lower price for
the same quantity
18
0
60
80
Quantity of Oil
(MBD)
42
Shifting the Supply Curve
 Decrease in supply – shifts the supply
curve to the left.
• At the same price sellers will offer less.
• At the same quantity, sellers demand a
higher price.
43
Shifting the Supply Curve
Price of
oil/barrel
Decrease in supply
New supply
Old supply
$50
Higher price required
for the same quantity
$28
Smaller quantity supplied
at the same price
20
60
Quantity of Oil
(MBD)
44
Supply Shifters
Factors That Shift Supply:
1. Technological innovations and changes in
the price of inputs
2. Taxes and subsidies
3. Expectations
4. Entry or exit of producers
5. Changes in opportunity costs
45
Supply Shifters
1. Technological Innovations
 Improvements in technology can reduce
costs, thus increasing supply.
 A reduction in input prices also reduces costs
and thus has a similar effect.
 Examples: computers, TVs, cars, etc
46
Supply Shifters
2. Taxes and Subsidies
 A tax on output has the same effect as an increase
in costs.
 A subsidy is the reverse of a tax.
47
Supply Shifters
48
Supply Shifters
3. Expectations
 Suppliers who expect prices to increase will
store goods for future sale and sell less today.
 The expectation of a future price increase
therefore decreases current supply.
 Supply curve shifts to the left.
49
Supply Shifters
3. Expectations
A change in producers’
expectations about profitability
will affect supply curves
Windmill production increases as
producers expect sales and
profitability to increase.
50
Supply Shifters
4. Entry or Exit of Producers
 The entry of new producers increases supply,
shifting the curve down and to the right.
51
Supply Shifters
5. Changes in Opportunity Costs
 An increase in opportunity costs shifts the
supply curve up and to the left.
 If the price of wheat increases, the opportunity
cost of growing soybeans increases.
 Some farmers will shift away from producing
soybeans and start producing wheat.
52
Supply Shifters
5. Changes in Opportunity Costs
 The supply curve for soybeans will shift up
and to the left.
53
Self-Check
Suppose a new technology reduces the time it
takes to assemble a car. How would this affect
the supply of cars?
a. Shift supply to the right.
b. Shift supply to the left.
c. It would have no effect on supply.
54
Self-Check
Suppose a new technology reduces the time it
takes to assemble a car. How would this affect
the supply of cars?
Answer: a – producers would be able to
supply more cars at the current price, shifting
the supply curve to the right.
55
Takeaway
 A demand curve shows how customers
respond to higher prices by buying less, and to
lower prices by buying more.
 A supply curve shows how producers respond
to higher prices by producing more, and to
lower prices by producing less.
 The difference between market price and the
maximum a consumer is willing to pay is the
consumer’s gain from exchange or consumer
surplus.
56
Takeaway
 The difference between market price and
the minimum price which a producer is
willing to accept is the producer’s gain from
exchange, or producer surplus.
 An increase in demand means that buyers
want a greater quantity at the same price or,
equivalently, they are willing to pay a higher
price for the same quantity.
57
Takeaway
 An increase in supply means that sellers
are willing to sell a greater quantity at the
same price or, equivalently, they are willing
to sell a given quantity at a lower price.
58
Sources
"Coffee with Cream and Sugar (6703560771)" by TheCulinaryGeek from Chicago,
USA - Coffee with Cream and SugarUploaded by the wub. Licensed under CC BY
2.0 via Wikimedia Commons http://commons.wikimedia.org/wiki/File:Coffee_with_Cream_and_Sugar_(67035
60771).jpg#mediaviewer/File:Coffee_with_Cream_and_Sugar_(6703560771).jpg
"Oh Henry bar". Via Wikimedia Commons http://commons.wikimedia.org/wiki/File:Oh_Henry_bar.jpg#mediaviewer/File:Oh
_Henry_bar.jpg
"Kinderchocolate" by Thegreenj - Own work. Licensed under CC BY-SA 3.0 via
Wikimedia Commons http://commons.wikimedia.org/wiki/File:Kinderchocolate.jpg#mediaviewer/File:K
inderchocolate.jpg
59