1. The demand curve
2. The supply curve
3. Market equilibrium and
disequilibrium
4. Comparative statics
5. Price floors
6. Price ceilings
Demand is the relation between
the price of a good and the
quantity that consumers are willing
and able to buy per period, other
things constant.
Law of demand: The quantity of a
good that consumers are willing
and able to buy per period relates
inversely, or negatively, to the price,
other things constant.
When the price of a good falls, that good
becomes cheaper relative to (related) goods, so
consumers tend to substitute that good for other
goods.
I’m taking the subway
more because cab
fares have gone up
A fall in the price of a good increases
consumers’ real income .
The spike in gas prices
has generated a
negative income
effect.
The demand schedule and demand curve for pizza
(b) Demand curve
(a) Demand schedule
a
b
c
d
e
$15
12
9
6
3
Quantity
Demanded
Per week
(millions)
8
14
20
26
32
Price per pizza
Price
per
pizza
a
$15
12
b
c
9
d
6
e
3
D
0
8
The market demand D shows the quantity of pizza
demanded, at various prices, by all consumers.
Price and quantity demanded are inversely related.
14
20
26
32
Millions of pizzas per week
6
Price per pizza
Quantity-demanded is the amount of a
good buyers are willing and able to but
at a specific price, other things constant.
Quantity-demanded
at a price of $12 is
14 million pizzas per
week
$12
Demand
0
14
Millions of pizzas
1.
2.
3.
4.
5.
The price of good X
The price of substitutes
The price of complements
Income
Other factors
An increase in the market demand for pizza
Price per pizza
$15
b
12
An increase in the demand for
pizza is shown by a rightward
shift of the demand curve, so
the quantity demanded
increases at each price.
f
9
6
D’
3
D
0
8
14
20
26
32
Millions of pizzas per week
9
The supply schedule and supply curve for pizza
(b) Supply curve
(a) Supply schedule
S
Quantity
Supplied
Per week
(millions)
$15
12
9
6
3
28
24
20
16
12
$15
Price per pizza
Price
per
pizza
12
9
6
3
0
The market supply S shows the quantity of pizza
supplied, at various prices, by all pizza makers.
Price and quantity supplied are directly related.
12
16
20
24
28
Millions of pizzas per week
10
An increase in the supply of pizza
S
S’
Price per pizza
$15
g
12
h
9
6
An increase in the supply
of pizza is reflected by a
rightward shift of the supply
curve, from S to S’.
Quantity supplied increases
at each price level.
3
0
12
16
20
24
28
Millions of pizzas per week
11
Equilibrium in the pizza market
(a) Market schedules
Millions of pizzas per week
Price per Quantity
pizza
Demanded
$15
12
9
6
3
8
14
20
26
32
Quantity
Supplied
28
24
20
16
12
Surplus or
Shortage
Effect on
Price
Surplus of 20
Surplus of 10
Equilibrium
Shortage of 10
Shortage of 20
Falls
Falls
Remains the same
Rises
Rises
12
Equilibrium in the pizza market
Market equilibrium occurs at:
Price where QD=QS;
S
Point c
(b) Market curves
Price per pizza
$15
Surplus
12
c
9
6
Shortage
3
0
14 16
Above the equilibrium price:
QS>QD;
Surplus;
Downward pressure on P
Below the equilibrium price:
QD>QS;
D
Shortage;
Upward pressure on P
20
24 26
Millions of pizzas per week
Effects of an increase in demand
Price per pizza
S
g
$12
c
9
D’
Increase in demand:
Rightward shift to D’
At P=$9: QD>QS;
shortage
Upward pressure on P
QD decreases
QS increases
New equilibrium g
Higher P
Higher Q
D
0
20
24
30
Millions of pizzas per week
14
Effects of an increase in supply
Price per pizza
S
S’
c
$9
6
d
Increase in supply:
Rightward shift to S’
At P=$9: QS>QD; surplus
Downward pressure on P
QD increases
QS decreases
New equilibrium d
Higher Q
Lower P
D
0
20
26
30
Millions of pizzas per week
15
Indeterminate effect of an increase in both D
and S
(b) Shift of S dominates
(a) Shift of D dominates
S
S’
Price
Price
S
S’’
p’
a
b
a
p
D’
p
p’’
c
D’’
D
D
0
Q
Q’
Units per period
0
Q
Q’’
Units per period
16
Effects of both demand and supply
Change in demand
Change in supply
Demand
increases
Supply
Increases
Equilibrium
price change is
indeterminate.
Equilibrium
quantity increases.
Equilibrium
price rises.
Supply
decreases
Equilibrium
quantity change
is indeterminate.
Demand
decreases
Equilibrium
price falls.
Equilibrium
quantity change
is indeterminate.
Equilibrium
price change is
indeterminate.
Equilibrium
quantity decreases.
17
NBA pay leaps
S2007
Average pay per season (millions)
$4.9
4.0
D2007
3.0
2.0
D1980
S1980
1.0
S – relatively fixed
Big jump in D
Average pay increased
from $170,000 in 1980
to 4,900,000 in 2007.
Number of teams in
NBA increased
Number of players
increased from 300 to
450.
0.17
0
100
200
300
400 450
Players per season
18