CHAPTER 3
Supply and Demand
What you will learn in this Chapter
1. What a competitive market is & how it
is described by the supply & demand
model
2. What a demand curve is & the difference
between movements along a demand
curve & shifts of a demand curve
3. What a supply curve is & the difference
between movements along a supply
curve & shifts of a supply curve
4. How the supply & demand curves
determine a market’s equilibrium price
& equilibrium quantity
5. In the case of a shortage or surplus,
how price moves the market back to
equilibrium
1. Supply and Demand
A competitive market is a market in which there are
many buyers and sellers
of the same good or service.
The supply and demand model is a model of how a
competitive market works.
Five key elements in this model:
The demand curve
The supply curve
The set of factors that cause the demand curve to shift, and
the set of factors that cause the supply curve to shift
The equilibrium price
The way the equilibrium price changes when the supply and
demand curves shift
2. Demand Curve
Exercise 1:
Now using demand schedule from problem
5 (p.80), draw the demand curve.
Does this demand curve obey the “law of
demand”?
2. Shifts of the Demand
Curve
Gretzky is
retiring!!!
The
Announcement
Thisincrease
event is in
represented
of
demand
Gretzky’s
shifts
byretirement
the
thetwo
demand
demand
generates
curve
schedules:
to
anthe
increase
right. in
demand,
 Demand
an increase
before the
in the
announcement
quantity demanded at any given
price.
 Demand after the announcement
2. “Movement Along” vs.
“Shift” of the Demand Curve


from
from
it
point
point
AA to
toofofa
Itisisthe
theresult
result
point
fall
B:
C:
theincrease
price
ofin
an in
increase
in the
the
quantity
good.demanded
quantity
reflects
a shift
of
demanded
at any
movement
the
demand
given
price. along
curve
the
demand
curve
Exercise 2:
The price of a can of Coke has increased
from $1 to $3. Does this cause a movement
along or a shift of the demand curve for
Coke? Why?
b) A new scientific research has proven that
Coke drinkers live on average 5 years
longer. Does this finding cause a movement
along or a shift of the demand curve for
Coke? Why?
a)
3. Shifts of the Demand Curve (continued)
A decrease
an
“increaseinin
demand”,means
demand
meansa a
rightwardshift
leftward
shiftofofthe
the demand
demand
curve.
curve:

At
at
any given price,
consumers demand
a smaller
larger quantity
quantity
than before. (D1
(D2)
D1D3)
2. What causes a demand
curve to shift?

Changes in the Prices of Related Goods





one of the goods makes consumers less willing to buy the other
good. Ex.: muffins and donuts.
Complements: Two goods are complements if a fall in the
price of one good makes people more willing to buy the other
good. Ex: petrol and cars.
Changes in Income


Substitutes: Two goods are substitutes if a fall in the price of
Normal Goods: When a rise in income increases the demand
for a good—the normal case—we say that the good is a normal
good.
Inferior Goods: When a rise in income decreases the demand
for a good, it is an inferior good. Ex: instant noodles.
Changes in Tastes
Changes in Expectations
Exercise 3:
What would be the effect of a sharp increase in
the price of tennis balls on the demand for tennis
racquets? Why?
b) What would be the effect of a sharp increase in
the price of Pepsi on the demand for Coke? Why?
c) As Victoria’s income goes up, she buys less instant
noodles. What kind of a good is instant noodles for
Victoria?
d) Following David Beckham and Sting, more men
start to follow the fashion of wearing skirts. What
would the effect of this change in tastes be on the
demand for skirts?
e) Scientists announce that there will be no fish left
in the oceans in 5 years. What would be the effect
of this announcement on demand for sushi?
a)
3. Supply curve
… orhigher
Just
The
as
fordemand
that
the
curvesbeing
price
matter,
normally
the more
slope
offered,
of
any good
the more
they
downwards,
people
will
be willing
will be to
supply to
willing
sell.
curves
part
normally
with
theirslope
hockey
tickets,… :
upwards
Exercise 4:
Now using supply schedule from problem 5
(p.80), draw the demand curve.
Does this supply curve obey the “law of
supply”?
3. Shifts of the Supply Curve
Gretzky is
retiring!!!
of Gretzky’s
retirement
a decrease
in supply,
The decrease
in supply
shiftsgenerates
the supply
curve
to thea left.

Announcement
decrease in the quantity supplied at any given price.
3. Shifts of the Supply Curve
The
Any principal
“decrease
increase in
in
factors that
shift the
supply”
means
a
supply
curve:
rightward
leftward
shift
shiftofofthe
the
supply
supply
curve:
curve:
changes
in the

price of an input
 at any given price,
changes
in
there
is a
andecrease
increase
intechnology
the quantity
supplied.
(S1
S2)
changes
in S3)
expectations.
3. “Movement Along” vs. “Shift”
of the Supply Curve

from
frompoint
pointAAtotopoint
point
C:
B:the
thedecrease
decreaseinin
 It
it is
is the
the
result
result of
of aa
quantity
quantity
supplied
supplied
fall
decrease
in the
in
price
theof
of the
the
reflects
reflects
aashift
movement
good.
quantity
supplied
supply
along the
curve
supplyat
any
given price.
curve
4. Finding the Equilibrium Price and
Quantity

In
this
market
In
Market
equilibrium
Let’s
put
the the
equilibrium
price
is
equilibrium
the
quantity
occurs
supply
curve
and
$250
at point E, where
demanded
is equal
the demand curve
the
to
the
supply
quantity
curve

And
the
for
that
market
on
equilibrium
and
supplied.
the
demand
the
sameisdiagram.
quantity
8,000
curve intersect.
tickets.
5. Why does the market price fall if it is
above the equilibrium price?
Let’s say the market
price of $350 is above
the equilibrium price of
$250
This
creates a surplus
This
surplus will push
the price down until it
reaches the equilibrium
price of $250.
There is a surplus of a good when the quantity supplied exceeds
the quantity demanded. Surpluses occur when the price is above
its equilibrium level.
5. Why does the market price rise if it is
below the equilibrium price?
Let’s say the market
price of $150 is below
the equilibrium price of
$250.
This
creates a
shortage.
This
shortage will push
the price up until it
reaches the equilibrium
price of $250.
There is a shortage of a good when the quantity demanded
exceeds the quantity supplied. Shortages occur when the price is
below its equilibrium level.
The End of Chapter 3
coming attraction:
Chapter 4:
The Market Strikes Back