Chapter 3
Demand and Supply
Huanren (Warren) Zhang
Law of demand
• Demand = quantity of a good a consumer is
willing and able to purchase at various prices
• Law of demand = quantity demanded (Qd)
and price (P) are inversely related
Change in the quantity demanded
• movement from one point to another point
on the same demand curve (no shift)
Increase in quantity
demanded
Decrease in quantity
demanded
B
A
A
B
Change in demand
• Shift of the entire demand curve
Factors causing changes in demand
• 1. Income
– Normal goods vs. Inferior goods
• 2. Prices of related goods
– Substitutes vs. Complements
• 3. Expectations
• 4. # of buyers
• 5. Tastes and preferences
Law of Supply
• Supply = maximum quantity a seller is willing
and able to sell at various prices
• Law of supply = Price (P) and quantity
supplied (Qs) are directly related
• Change in the quantity supplied: movement
from one point to another point on the same
supply curve (no shift)
• Change in supply: Shift of the entire supply
curve
Change in supply
Increase in supply
Decrease in supply
Factors causing changes in supply
• 1. Input prices
• 2. Price of related goods in production
– Substitutes vs. Complements in production
• 3. Expectations
• 4. # of sellers
• 5. Technology
Market Equilibrium
• Equilibrium in a market occurs when the price
balances the plans of buyers and sellers.
• When price is greater than equilibrium price, the
quantity supplied exceeds the quantity demanded
– => there is a surplus and a downward pressure on
price
• When price is less than equilibrium price, the
quantity demanded exceeds the quantity supplied
– => there is a shortage and a upward pressure on
price
Market equilibrium
• Equilibrium price =_____
• Equilibrium quantity=
_____
Market equilibrium
• Equilibrium price = $6
• Equilibrium quantity= 20
• At P=$4, there is a ____
(surplus/shortage), causing
a ____ (increase/decrease)
in price
• At P=$8, there is a ____
(surplus/shortage), causing
a ____ (increase/decrease)
in price
Market equilibrium
• Equilibrium price = $6
• Equilibrium quantity= 20
• At P=$4, there is a
shortage, causing a
increase in price
• At P=$8, there is a
surplus, causing a
decrease in price
Changes in equilibrium
• Changes (shifts) in demand
• Changes (shifts) in supply
• Changes (shifts) in both demand and supply
Changes in demand
↑ D → ↑ P and ↑ Q
↓ D → ↓ P and ↓ Q
Changes in demand
How does an increase in income affect the market for cars
(considered as normal goods)?
Changes in supply
↑ S → ↓ P and ↑ Q
↓ S → ↑ P and ↓ Q
Changes in supply
How does an decrease in the price of steel (an input for
producing cars) affect the market for cars?
Simultaneous shifts in demand and supply
• Increase in wages paid to auto workers has
raised incomes
– Decrease S and increase D
• Decrease in S → ↑ P and ↓ Q
• Increase in D → ↑ P and ↑ Q
• Price rises but change in Q in indeterminate
Simultaneous shifts in demand and supply
• Anytime both D & S shift, one component of
equilibrium will always be indeterminate