CHAPTER 4
Demand,
supply and
prices
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
CHAPTER OUTLINE
LEARNING OUTCOMES
4.1 DEMAND AND SUPPLY: AN INTRODUCTORY OVERVIEW
4.2 DEMAND
4.3 SUPPLY
4.4 MARKET EQUILIBRIUM
4.5 CONSUMER SURPLUS AND PRODUCER SURPLUS
IMPORTANT CONCEPTS
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LEARNING OUTCOMES
Once you have studied this chapter you should be able to
• explain the most important determinants of the quantity demanded
• differentiate between a movement along a demand curve and a shift
of the curve
• explain the determinants of the quantity supplied
• distinguish between a movement along a supply curve and a shift of
the curve
• explain how the equilibrium price and quantity are determined
• explain the consumer surplus and the producer surplus
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.1 Demand and supply: an introductory overview
4.1 DEMAND AND SUPPLY:
AN INTRODUCTORY OVERVIEW
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.1 Demand and supply: an introductory overview (cont.)
Figure 4-1 The interaction between households and firms (p. 74)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the curve
4.2 Demand
4.2 DEMAND
Demand
The quantities of a good or service that the potential buyers are
willing and able to buy. Has to be backed by purchasing power.
Differs from wants.
• Demand is a flow concept.
• In microeconomics we focus on demand for particular goods and
services.
• Later in macroeconomics we look at the total demand for all goods and
services in the economy.
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
LO: Explain the most important determinants of the quantity demanded
Market demand
Ddeterminants of demand
• Demand is not affected by the actual outcome in the
market.
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
Market demand (cont.)
LO: Explain the most important determinants of the quantity demanded
• Economic concepts can be expressed as:
Words
Schedules - The demand schedule
Curves - The demand curve
Equations - The demand equation
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
Market demand (cont.)
LO: Explain the most important determinants of the quantity demanded
The quantity of a good demanded in a particular period depends on
(or is a function of) the price of the good, the prices of related
goods, the income of the households, consumers’ taste, the number
of consumers and any other possible influence. Demand is not
determined by the availability or supply of the good.
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
Market demand (cont.)
LO: Explain the most important determinants of the quantity demanded
Let Qd = quantity demanded in a particular period
Px = price
Pg = prices of related goods
Y = households' income during the period
T = taste of the consumers concerned
N = number of consumers in the market concerned
… = allowance for other possible influences
Qd = f(Px, Pg, Y, T, N, …)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
(4-1)
4.2 Demand (cont.)
Market demand (cont.)
LO: Explain the most important determinants of the quantity demanded
Table 4-1 A demand schedule for tomatoes (p. 77)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
Market demand (cont.)
LO: Explain the most important determinants of the quantity demanded
Figure 4-2 Consumers’ weekly demand for tomatoes (p. 77 )
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
Market demand (cont.)
LO: Explain the most important determinants of the quantity demanded
If we assume that Pg, Y, T and N do not change, then equation
is written as:
Qd = f(Px, 𝑃g, 𝑌, 𝑇, 𝑁, …)
(4-2)
Bars above Pg, Y, T and N indicate variables or determinants
are held constant.
This is then usually abbreviated to:
Qd = f(Px) ceteris paribus
(4-3)
See Appendix 4-1 Algebraic analysis of demand and supply (p. 90)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the
curve
Movements along the demand curve and shifts of the curve
Movement along the demand curve
≠
Shift of the demand curve
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the
curve
A movement along a demand curve (a change in the quantity
demanded)
Determinants
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
A movement along a demand curve (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the
curve
Figure 4-3 A movement along a demand curve (p. 78)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the
curve
A shift of the demand curve (a change in demand)
Determinants
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
A shift of the demand curve (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the
curve
Other determinants of demand that cause the demand curve to shift
• A change in the price of a
related good
– Substitutes
Figure 4-4 Two substitutes:
butter and margarine (p. 79)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
A shift of the demand curve (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the
curve
Figure 4-5 Two complements: Xbox consoles and Xbox games (p. 80)
– Complements
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
A shift of the demand curve (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the curve
• A change in the income of consumer
• A change in consumers’ tastes or preferences
• A change in population
• Other influences on demand
– A change in expected future prices
– The distribution of income
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the curve
Demand: a summary
Table 4-2 The market
demand curve: a
summary (p. 82)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.2 Demand (cont.)
LO: Explain the most important determinants of the quantity demanded
LO: Differentiate between a movement along a demand curve and a shift of the
curve
Figure 4-6 A change in the
quantity demanded versus a
change in demand (p. 69)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain the determinants of the quantity supplied
LO: Differentiate between a movement along a supply curve and a shift of the
curve
4.3 Supply
4.3 SUPPLY
Supply
The quantities of a good or service that producers plan to sell at
each possible price during a certain period. Refers to planned
quantities, and is measured over a period of time. Producers must
be willing and able to supply the quantities concerned.
• Supply is a flow concept.
• In microeconomics we focus on supply for particular goods and
services.
• Later in macroeconomics we look at the total supply for all goods and
services.
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
LO: Explain the determinants of the quantity supplied
• Supply can be expressed in four ways:
Words
Schedules - The supply schedule
Curves - The supply curve
Equations - The supply equation
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
LO: Explain the determinants of the quantity supplied
Market supply
The quantity of a good supplied by an individual producer (seller,
firm) in a particular period is a function of the price of the good, the
prices of alternative outputs, the prices of the factors of production,
the expected future prices of the good and the state of technology.
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
Market supply (cont.)
Determinants of supply
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain the determinants of the quantity supplied
4.3 Supply (cont.)
Market supply (cont.)
LO: Explain the determinants of the quantity supplied
Let Qs = quantity of good supplied
Px = price of good
Pg = prices of alternative outputs
Pf = prices of factors of production and other inputs
Pe = expected future prices of tomatoes
Ty = technology
... = allowance for other possible influences
Qs = f(Px, Pg, Pf, Pe, Ty, ...)
(4-5)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
Market supply (cont.)
LO: Explain the determinants of the quantity supplied
As in the case of demand, we focus primarily on the relationship
between the quantity supplied and the price of the good.
We therefore state that:
Qs = f(Px, 𝑃g, 𝑃f, 𝑃e, 𝑇y, ...)
(4-6)
The bars indicate that the relevant variables are held constant.
Or
Qs = f(Px) ceteris paribus
(4-7)
See Appendix 4-1 for an algebraic depiction of supply (p. 90)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
Market supply (cont.)
LO: Explain the determinants of the quantity supplied
Table 4-4 Johnny’s supply schedule of tomatoes (p. 83)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
Market supply (cont.)
LO: Explain the determinants of the quantity supplied
Figure 4-7 Firm’s weekly supply of tomatoes (p. 84)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
Market supply (cont.)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain the determinants of the quantity supplied
4.3 Supply (cont.)
Market supply (cont.)
LO: Explain the determinants of the quantity supplied
See Box 4-1 Other possible determinants of supply (p. 84)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
LO: Explain the determinants of the quantity supplied
LO: Differentiate between a movement along a supply curve and a shift of the
curve
Movements along the supply curve and shifts of the curve
Movement along the supply curve
≠
Shift of the supply curve
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
LO: Explain the determinants of the quantity supplied
LO: Differentiate between a movement along a supply curve and a shift of the curve
Movements along the supply curve (a change in the quantity
supplied)
Determinants
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
Movements along the supply curve (cont.)
LO: Explain the determinants of the quantity supplied
LO: Differentiate between a movement along a supply curve and a shift of the curve
Figure 4-8 A movement along a supply curve: a change in the quantity supplied (p. 85)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
LO: Explain the determinants of the quantity supplied
LO: Differentiate between a movement along a supply curve and a shift of the
curve
Shifts of the supply curve (a change in supply)
Determinants
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
Shifts of the supply curve (cont.)
LO: Explain the determinants of the quantity supplied
LO: Differentiate between a movement along a supply curve and a shift of the curve
Figure 4-9 Shifts of the supply curve: changes in supply (p. 85)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.3 Supply (cont.)
LO: Explain the determinants of the quantity supplied
LO: Differentiate between a movement along a supply curve and a shift of the
curve
Supply: a summary
Table 4-4 The
market supply
curve: a
summary
(p. 86)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.4 Market equilibrium
LO: Explain how the equilibrium price and quantity are
determined
4.4 MARKET EQUILIBRIUM
Equilibrium, excess demand and excess supply
Table 4-5 The demand and supply of tomatoes in a market on a particular day (p. 87)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
LO: Explain how the equilibrium price and quantity are
determined
4.4 Market equilibrium (cont.)
Figure 4-10 Demand, supply and market equilibrium (p. 88)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.5 Consumer surplus and producer surplus
LO: Explain the consumer surplus and the producer surplus
4.5 CONSUMER SURPLUS AND PRODUCER
SURPLUS
Consumer surplus
Figure 4-11 The consumer surplus
(p. 89)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.5 Consumer surplus and producer surplus (cont.)
LO: Explain the consumer surplus and the producer surplus
Producer surplus
Figure 4-12 The producer surplus (p. 89)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
4.5 Consumer surplus and producer surplus (cont.)
LO: Explain the consumer surplus and the producer surplus
Consumer surplus and producer surplus at market equilibrium
Figure 4-13 Consumer surplus and producer surplus at market equilibrium (p. 89)
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
IMPORTANT CONCEPTS
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Demand
Market demand
Complements
Substitutes
Law of demand
Demand schedule
Demand curve
Change in quantity demanded
Movement along demand curve
Change in demand
Shift of demand curve
Normal and inferior goods
Supply
Chapter 4 Demand, supply and prices
ECONOMICS FOR SOUTH AFRICAN STUDENTS 6e
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Market supply
Supply schedule
Supply curve
Change in quantity supplied
Movement along supply curve
Change in supply
Shift of supply curve
Equilibrium
Excess demand (shortage)
Excess supply (surplus)
Consumer surplus
Producer surplus