Macroeconomics
ECON 2301
Fall 2009
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 3
Chapter 3: Supply & Demand
Learning Objectives
1. Explain the law of demand
2. Discuss the difference between money prices
and relative prices
3. Distinguish between changes in demand and
changes in quantity demanded
4. Explain the law of supply
5. Distinguish between changes in supply and
changes in quantity supplied
6. Understand how supply and demand interact to
determine equilibrium price and quantity
Markets
 Markets: Arrangements that individuals have for
exchanging with one another
Represent the interaction of buyers and sellers for
goods and services
Markets set the prices we pay and receive. Examples:
• Automobile market
• Health care market
• Labor market
• Stock market
The Law of Demand
 Demand: how much of a good or service
people will purchase at any price during a
specified time period, other things being
constant (ceteris paribus)
The Law of Demand
 Law of Demand: Quantity demanded is
inversely related to price, holding other
factors constant.
• Price #
Qd $
• Price $
Qd #
The Demand Schedule
 The demand schedule
Table relating prices to quantity demanded
We must consider
• Time dimension
• Constant-quality units
 Demand Curve: A graphical representation of the
demand schedule
Negatively sloped line showing inverse relationship
between price and quantity demanded, all else equal
Figure 3-1 The Individual Demand Schedule
and the Individual Demand Curve, Panel (b)
The Law of Demand (cont'd)
 What are we holding constant?
Tastes and preferences
Income
Price of other goods
Expectations
Demographics
Many other factors
Shifts in Demand (cont'd)
The Determinants of Demand
Tastes and Preferences
Price
Hybrid
vehicles
• Increase in
demand
SUVs
• Decrease in
demand
D3
D1
D2
Q/Units
Determinants of Demand
 Ceteris-Paribus Conditions
Determinants of the relationship between price
and quantity that are unchanged along a curve
Changes in these factors cause a curve
to shift
Shifts in Demand
 Determinants of market demand
Income
• Normal goods
• Inferior goods
The prices of related goods
• Substitutes
• Complements
Tastes and preferences (including demographics!)
Expectations
Number of buyers
Normal and Inferior Goods
 Normal Goods: Goods for which demand
rises as income rises, most goods are
normal goods
 Inferior Goods: Goods for which demand
falls as income rises
Shifts in Demand (cont'd)
Price
The Determinants of
Demand
Income: Normal Good
Increase in income
increases demand
Decrease in
income
decreases
demand
D3
D1
D2
Q/Units
Shifts in Demand (cont'd)
Price
Increase in
income
decreases
demand
The Determinants of
Demand
Income: Inferior Good
Decrease in
income
increases
demand
D3
D1
D2
Q/Units
Shifts in Demand (cont'd)
 Substitutes: Two goods are substitutes
when a change in the price of one causes a
shift in demand for the other in the same
direction as the price change.
Margarine & butter markets:
Pm down  Qd of margarine up
 D for butter down
Shifts in Demand (cont'd)
The Determinants of Demand
Price of Related Goods: Substitutes
Price
Butter & Margarine
• Price of both =
$2/lb
• Price of
margarine
increases to $3/lb
• Demand for
butter increases
D1 D2
Q/Butter
Shifts in Demand (cont'd)
 Complements: Two goods are complements
when a change in the price of one causes an
opposite shift in the demand curve for
the other.
Example: Ppc down  Qd of pc up  D for printers up
Shifts in Demand (cont'd)
The Determinants of Demand
Price of Related Goods: Complements
Price
Speakers and
Amplifiers
• Increase the
relative price
of amplifiers
• Demand for
speakers
decreases
Speakers and
Amplifiers
• Decrease the
relative price of
amplifiers
• Demand for
speakers
increases
D3
D1
D2
Q/Speakers
Announcement:
Revised Office Hours
 Mondays & Wednesdays
 10:00 a.m. – 12:00 noon
 4:00 – 5:00 p.m.
 and by appointment
Shifts in Demand (cont'd)
 Expectations of:
• Future prices
• Income
• Product availability
 Demographics
• Market size (number of buyers)
• Age
• Ethnicity
Shifts in Demand (cont'd)
The Determinants of Demand
Expectations: Income, Future Prices
Price
A higher income or
expectations of a
higher future price
will increase demand
A lower income or
expectations of a
lower future price
will decrease
demand
D3
D1
D2
Q/Units
Shifts in Demand (cont'd)
Price
The Determinants of Demand
Market Size (Number of Buyers)
Decrease in
the number of
buyers
decreases
demand
Increase in
the number of
buyers
increases
demand
D3
D1
D2
Q/Units
Bonus Extra Credit Opportunity
 Attend the presentation, “Is America Going
Socialist,” given by guest speaker, Dr.
Daniel Mitchell of the CATO Institute,
Thursday, September 17, 4:30-5:30 p.m.
 Sign in with me.
 Send a 50-100 word summary of the
economic issues before class, Sept. 28, to
marilyn.spencer@tamucc.edu.
4 points possible
The Demand Schedule (cont’d)
 Individual versus market demand curves
 Market Demand: The demand of all
consumers in the marketplace for a particular
good or service
Equals the summation at each price of the
quantity demanded by each individual
Figure 3-2 The Horizontal Summation of Two
Demand Curves, Panel (a)
Figure 3-2 The Horizontal Summation of Two
Demand Curves, Panels (b), (c), (d)
Figure 3-3 The Market Demand Schedule for Secure
Digital Cards, Panel (a)
Figure 3-3 The Market Demand Schedule for Secure
Digital Cards, Panel (b)
Demand (cont’d)
 Relative prices and money prices
Relative Price: The price of a commodity in
terms of another commodity
Money Price: Price we observe today in
today’s dollars (absolute, or nominal price)
E-Commerce Example: Quality Adjusting
the Price of Broadband Service
 In most U.S. areas, broadband Internet service is
priced at about $15 per month compared to
France, where price is about $36 per month.
 U.S. providers, however, typically offer
broadband speeds of less than 0.77 megabit per
second compared to 20 megabits per second in
France.
 Thus, the U.S. speed-adjusted price is nearly 10
times higher than in France.
Extra Credit Opportunity #3
1. Watch or read a transcript of Pres. Obama’s
televised Sept. 9 address on health care reform.
2. Before class starts, Wednesday, September
16: Email a 50-word summary of the economic
issues involved. My email address is
marilyn.spencer@tamucc.edu.
4 points possible
Shifts in Demand
 Scenario
Imagine the federal government gives every
student registered in a college, university, or
technical school in the United States a
notebook computer.
• If some factor other than price changes, we can
show its effect by moving the entire demand
curve, shifting the curve left or right.
Figure 3-4 A Shift in the Demand Curve
Suppose universities
prohibit the use of
notebook computers
Suppose the federal
government gives
every student a
notebook computer
Shifts in Demand (cont'd)
 Changes in demand versus changes in quantity
demanded
A change in a good’s own price leads to a change in
quantity demanded. This is a movement along the same
curve.
A change in any determinant OTHER THAN PRICE
shifts the D curve, and we call this a change in demand.
This is not the same as a change in Qd from a change in
the price of the good.
The Law of Supply
 Supply
Schedule showing relationship between price
and quantity supplied for a specified time
period, other things being equal
The amount of a product or service that firms
are willing to sell at alternative prices
The Law of Supply (cont'd)
 Law of Supply: The price of a product or
service and the quantity supplied are
directly related.
• P # Qs #
• P $ Qs $
The Supply Schedule
 The supply schedule is a table relating
prices to quantity supplied at each price.
 Supply Curve: A graphical representation
of the supply schedule
Positively sloped line showing direct
relationship between price and quantity
supplied, all else equal
Figure 3-6 The Individual Producer’s Supply Schedule and
Supply Curve for Secure Digital Cards, Panel (a)
Figure 3-6 The Individual Producer’s Supply Schedule and
Supply Curve for Secure Digital Cards, Panel (b)
Figure 3-7 Horizontal Summation of
Supply Curves, Panel (a)
Figure 3-7 Horizontal Summation of Supply
Curves, Panels (b), (c), (d)
Shifts in Supply
 Changes in supply versus changes in
quantity supplied
A change in one or more of the non-price
determinants will lead to a change
in supply. This is a shift of the whole curve.
A change in a good’s own price leads to a
change in quantity supplied. This is a
movement along the same curve.
Shifts in Supply (cont'd)
 Determinants of supply
Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations (AND other expectations)
Number of firms in industry
Figure 3-9 A Shift in the Supply Curve: If
some other factor than price changes, the only way we
can show its effect is by moving the entire supply curve
If costs
increase,
supply
decreases.
If costs decrease,
supply increases.
Price per Flash Memory Pen Drive ($)
Figure 3-9 A Shift in the Supply
Curve (cont’d)
5
S2
S1
a
4
b
c
3
When supply
increases the
quantity supplied
will be greater at
each price.
d
2
1
0
2
4
6
8
10
12
14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
Price per Flash Memory Pen Drive ($)
Figure 3-9 A Shift in the Supply
Curve (cont’d)
S3
5
S1
b
4
d
a
When supply decreases
the quantity supplied will
be less at each price.
c
3
2
1
0
2
4
6
8
10
12
14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
Shifts in Supply (cont'd)
 Determinants of supply
Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations
Number of firms in industry
Shifts in Supply (cont'd)
The Determinants of Supply
Cost of Inputs
Price
S3
S1
S2
Increase in
cost
decreases
supply
Decrease in cost
increases supply.
Q/Units
Shifts in Supply (cont'd)
Price
The Determinants of Supply
Technology and Productivity
S3
S1
S2
Decreases in productivity
decrease supply.
Improvements in
technology or increases
in productivity increase
supply.
Q/Units
Shifts in Supply (cont'd)
Price
The Determinants of Supply
Taxes and Subsidies
S3
S1
S2
Increases in taxes or
decreases in subsidies
decrease supply.
Decreases in taxes or
increases in subsidies
increase supply.
Q/Units
Shifts in Supply (cont'd)
Price
The Determinants of Supply
Price Expectations
S3
S1
S2
Expectations of
higher future prices
decrease supply.
Expectations of
lower future prices
increase supply.
Q/Units
Shifts in Supply (cont'd)
The Determinants of Supply
Number of Firms in Industry
Price
S3
S1
S2
Decrease in the number
of firms decreases supply.
Increase in the
number of firms
increases supply.
Q/Units
Shifts in Supply (cont'd)
 Changes in supply versus changes in
quantity supplied
A change in one or more of the non-price
determinants will lead to a change in supply.
• This is a shift of the whole curve.
A change in a good’s own price leads to a
change in quantity supplied.
• This is a movement along the same curve.
– ∆S is not the same as ∆Qs.
Putting Demand and Supply
Together
 Equilibrium (Market Clearing) Price: The
price that clears the market
The price at which quantity demanded equals
quantity supplied
The price where the demand curve intersects
the supply curve
Figure 3-10 Putting Demand and
Supply Together, Panel (a)
Figure 3-10 Putting Demand and
Supply Together, Panel (b)
Putting D & S Together (cont'd)
 Shortage: The situation when quantity
demanded is greater than quantity supplied
• Qd > Qs
A shortage exists at any price below the
market clearing price
Policy Example: Should Shortages in the
Ticket Market Be Solved by Scalpers?
 If you’ve ever tried to get tickets to the big
game you know all about “shortages.”
 Since the quantity of tickets is fixed, the
price can go pretty high.
 Enter the scalper.
Figure 3-11 Shortages of Super
Bowl Tickets
Bonus Extra Credit Opportunity
 Attend the presentation, “Is America Going
Socialist,” given by guest speaker, Dr.
Daniel Mitchell of the CATO Institute,
Thursday, September 17, 4:00-5:00 p.m.
 Sign in with me.
 Send a 50-100 word summary of the
economic issues before class, Sept. 28, to
marilyn.spencer@tamucc.edu.
4 points possible
Announcement:
Revised Office Hours
 Mondays & Wednesdays
 10:00 a.m. – 12:00 noon
 4:00 – 5:00 p.m.
 and by appointment
Putting D & S Together (cont'd)
 Surplus: The situation when quantity
supplied is greater than quantity demanded
• Qd < Qs
A surplus will exist at any price above the
market clearing price
Examples:
• Sugar & cotton price supports
• Minimum wage
Summary Discussion
of Learning Objectives (cont'd)
 Determining market price and equilibrium
quantity
The demand and supply curves intersect at the
market clearing, or equilibrium point.
Surpluses exist if the price of the good is
greater than the market equilibrium price.
Shortages exist when the price of a good is
below the market equilibrium price.
Assignments to be completed
before class September 21:
Read Chapter 4 & also read the
following end-of-chapter questions:
14th edition: Problems 4-1, 4-3 through 4-8,
and 4-11.
15th edition: Problems 4-2, 4-3, 4-4, 4-7, 4-9,
4-11 and 4-14.