Session 4
Supply and Demand
Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those
of the Federal Reserve Bank of Dallas or the Federal Reserve System.
TEKS
(2) Economics. The student understands the
interaction of supply, demand, and price. The
student is expected to:
(A) understand the effect of changes in price on the
quantity demanded and quantity supplied;
(B) identify the non-price determinants that create
changes in supply and demand, which result in a new
equilibrium price; and
(C) interpret a supply-and-demand graph using
supply-and-demand schedules.
Teaching the Terms
•
•
•
•
•
•
Market
Demand
Supply
Determinants
Surplus
Shortage
Markets
• A market facilitates the interaction of a buyer
and a seller as they complete a transaction
• Buyers, as a group, determine the
demand
• Sellers, as a group, determine the
supply
Characteristics of Competitive Markets
• Identical goods or services
• Enough buyers and sellers so that no
participant can influence the market price –
everyone is a price taker
Demand
•
•
•
•
•
Law of demand
Quantity demanded
Demand schedule
Demand curve
Determinants of demand
The Law of Demand
As the price
rises,
the quantity
demand falls.
Demand
Quantity
$5
$4
$3
$2
$1
10
20
30
40
50
Demand for ____
6
5
4
Price
Price
3
2
1
0
10
20
30
40
Quantity
50
Determinants of Demand
• Income
• Price of related goods
– Complements
– Substitutes
• Tastes or preferences
• Expectations
• Number of buyers
Shifting Demand
8
7
6
Price
5
4
3
2
1
0
10
20
30
Quantity
40
50
Supply
•
•
•
•
•
Law of supply
Quantity supplied
Supply schedule
Supply curve
Determinants of supply
The Law of Supply
As the price
rises,
the quantity
supplied rises.
Supply
Quantity
$5
$4
$3
$2
$1
50
40
30
20
10
Supply of ____
6
5
4
Price
Price
3
2
1
0
10
20
30
40
Quantity
50
Determinants of Supply
•
•
•
•
Input prices
Technology
Expectations
Number of sellers
Shifting Supply
8
7
6
Price
5
4
3
2
1
0
10
20
30
Quantity
40
50
Market Equilibrium
Price
Quantity
Demanded
Quantity
Supplied
$5
$4
$3
$2
$1
10
20
30
40
50
50
40
30
20
10
Market Equilibrium
6
Supply
5
Price
4
3
2
1
Demand
0
10
20
30
Quantity
40
50
Market Equilibrium
Surplus
• Quantity demanded is less than quantity
supplied
Qd < Qs
Equilibrium
• Quantity demanded is equal to quantity
supplied
Qd = Qs
Shortage
• Quantity demanded is greater than
quantity supplied
Qd > Qs
Practice
• Draw the graph.
• Which curve is shifting because of the
changing market conditions? Supply?
Demand? Both?
• Which direction is the shift?
• Draw the shift.
• What is the impact on price and quantity?
Price Controls
• Price Ceiling
– If price is fixed BELOW the market clearing price
– Creates a shortage because Qd > Qs
• Rent controls
• Price Floor
– If price is fixed ABOVE the market clearing price
– Creates a surplus because Qd < Qs
• Minimum wage
Price Elasticity of Demand
• Measures the responsiveness of quantity
demanded to a change in price
• Determinants
– Availability of close substitutes
– Necessities versus luxuries
– Definition of the market (food vs. ice cream vs.
chocolate ice cream)
– Time horizon
Price Elasticity and Total Revenue
• If demand for a good is elastic, price increases
lead to lower total revenue
• If demand for a good is inelastic, price
increases lead to higher total revenue
Price Elasticity of Supply
• Measures the responsiveness of quantity
supplied to a change in price
• Determinants
– Availability of inputs
– Time
Questions?