Chapter 3
Supply, Demand, and the
Market Process
7 Learning Goals
1) Investigate and describe consumer behavior
2) Distinguish a change in demand from a
change in quantity demanded
3) Investigate and describe firm behavior
4) Distinguish a change in supply from a change
in quantity supplied
5) Build a market model and illustrate how
equilibrium is reached
6) Demonstrate how markets respond to changes
in demand and supply
7) Recognize how prices and the invisible hand
principle create market order
Please note:
Chapter heading: Consumer Choice and the
Law of Demand
– Skip 2 sections: Consumer Surplus; Responsiveness
of Quantity Demanded to Price Changes: Elastic and
Inelastic Demand Curves
Chapter heading: Producer Choice and the Law
of Supply
– Skip 2 sections: Producer Surplus; Responsiveness
of Quantity Supplied to Price Changes: Elastic and
Inelastic Supply Curves
Consumer Choice and
the Law of Demand
The Law of Demand:
The inverse relationship between price
and quantity demanded; when price rises,
quantity demanded falls
Quantity demanded is a number; it’s how
many units of a good you bought
We usually draw a picture of this
relationship
Graph:
Watch Macro content video: Macro
Chapter 3-Demand curve
Q3.1 In economics, the demand for a good refers to
the amount of the good people
1) would like to have if the good were free.
2) are willing to buy at various prices.
3) need to achieve a minimum standard of living.
4) will buy at alternative income levels.
Changes in Demand
Versus Changes in
Quantity Demanded
Other variables besides price
determine what you buy
Changes:
(1) When price changes, quantity demanded
changes but demand does NOT change
– This is movement along a demand curve
(2) When something else changes, demand
changes (i.e., the relationship changes)
– This is movement of the entire curve
Another way to think about the
difference between demand and
quantity demanded
Why is the consumer buying more (or
less)?
If price is the reason, then quantity
demanded changes; move along the
demand curve
If any variable besides price is the reason,
then demand changes; shift the demand
curve
Graphs:
Watch Macro content video: Macro
Chapter 2-Shift versus moving along
demand curve
Another bad night’s sleep! Perhaps that’s because my
wage is too high. Sleep takes time, and time has valueits opportunity cost. Instead of sleeping, I could be
working and earning a wage. A study of the economics
of sleep a number of years ago showed that higher-wage
people sleep less. Your wage is the price of sleep, and
there is a downward-sloping demand curve for sleep.
The demand curve shifts with other characteristics:
Having young kids at home reduces the amount of sleep
people get, especially women. Additional nonwage
income- inheritances and gifts- has small positive effects
on sleep time, and people say that if they had more
hours in the day, extra sleep is one of the top three
things they would do with that extra time. Because time
is scarce (there will always be only twenty-four hours in a
day), the amount we sleep requires economic decision
making.
Q: If your long-lost relative suddenly left you $1 million,
would you sleep more or less? What factors in your life
cause you to sleep less?
Q3.2 When economists say the quantity demanded
of a product has increased, they mean the
1) demand curve has shifted to the left.
2) demand curve has shifted to the right.
3) price of the product has fallen, and
consequently, consumers are buying more of it.
4) price of the product has risen, and
consequently, consumers are buying less of it.
Q3.3 When economists say the demand for a
product has decreased, they mean
1. the demand curve has shifted to the left.
2. the product price has increased, and as a
consequence, consumers are buying less of the
product.
3. consumers are now willing and able to buy more
of this product at each possible price.
4. the demand curve has shifted to the right.
Producer Choice and the
Law of Supply
Watch video: Catch Me If You Can- Go
fish supply curve
In the movie Catch Me If You Can, Leonardo
DiCaprio winds up in a hotel room (in the 1960s)
with a woman he discovers is a very high-priced
call girl. She says, “You can have me for the
night- just say the right price.” He says “$300,”
and she throws a card at him and says, “Go
fish!” He then says $500, getting the same
answer, then $600, with the same result. He
finally says $1,000, and she agrees. As with
most activities, this transaction, too, has an
upward-sloping supply curve.
Q: Is $600 the opportunity cost of the call girl’s
time? Is $1,000? What does this story tell you
about her opportunity cost?
Goal: Explain and Predict Firm
Behavior
The Law of Supply:
– The positive relationship between price and
quantity supplied; when price rises, quantity
supplied rises
– Quantity supplied is a number; it’s how many
units of a good you made
We usually draw a picture of this
relationship
Graph:
Watch Macro content video: Macro
Chapter 3-Supply curve
Q3.4 According to the law of supply,
1) more of a good is desired by consumers as the
price falls.
2) less of a good is desired by consumers as the
price rises.
3) more of a good will be offered by suppliers as
the price rises.
4) less of a good will be offered by suppliers as the
price rises.
Changes in Supply
Versus Changes in
Quantity Supplied
Other variables determine how
much firms are willing to make
Changes:
(1) When price changes, quantity supplied
changes but supply does NOT change
– This is movement along a supply curve
(2) When something else changes, supply
changes (i.e., the relationship changes)
– This is movement of the entire curve
Another way to think about the
difference between supply and quantity
supplied
Why is the firm producing more (or less)?
If price is the reason, then quantity
supplied changes; move along the supply
curve
If any variable besides price is the reason,
then supply changes; shift the supply
curve
Graphs:
Watch Macro content video: Macro
Chapter3-Shift versus move along supply
curve
Q3.5 Ceteris paribus, an increase in the price of a
good will cause the
1.
2.
3.
4.
quantity demanded of the good to increase.
quantity supplied of the good to increase.
supply of the good to increase.
supply of the good to decrease.
Q3.6 When economists say the supply of a
product has increased, they mean the
1) supply curve has shifted to the right.
2) price of the product has risen, and consequently,
suppliers are producing more of it.
3) supply curve has shifted to the left.
4) amount of the product that consumers are willing
to purchase at various prices has increased.
How Market Prices are
Determined: Supply and
Demand Interact
Graph:
Watch Macro content video: Macro
Chapter 3-Supply and Demand graph
Key points:
– (1) Excess supply and excess demand are NOT
unique points
– (2) Equilibrium IS a unique point
Class Activity: Start with a market in a surplus.
How would you solve the surplus problem
without changing price? Then start with a
market in a shortage. How would you solve the
shortage without changing price?
Watch video: Stossel-Price gouging
Q3.7 (Multiple Answer) Which of the following statements are
true?
1) With a shortage, quantity demanded exceeds quantity
supplied and price will be pushed up
2) With a shortage, quantity supplied exceeds quantity
demanded and price will be pushed up
3) With a shortage, quantity demanded exceeds quantity
supplied and price will be pushed down
4) With a surplus, quantity supplied exceeds quantity
demanded and price will be pushed up
5) With a surplus, quantity demanded exceeds quantity
supplied and price will be pushed down
6) With a surplus, quantity supplied exceeds quantity
demanded and price will be pushed down
How Markets Respond to
Changes in Demand and
Supply
This is called supply and demand
analysis
You don’t have to use graphs but it’s
helpful
Use this 3 step procedure:
– (1) Identify the change
– (2) Determine if Supply or Demand is
affected and how
– (3) Draw and read graph (or reason through
the change)
One of the students in my class is a saxophone player.
Like all reed-instrument players, he buys a lot of reeds
for his instrument. In 2001, bamboo trees in a large part
of the world were infected with a virus that destroyed
much of the bamboo crop. This change shifted the
supply curve of bamboo to the left. This shift raised the
price of bamboo, which is the major input into making
reeds. As a result of this increase in the input price, the
supply curve of reeds shifted leftward, too. The student
noticed that the price of reeds skyrocketed. Being a
smart young fellow, he wisely decreased the amount of
reeds he demanded each month because they now were
more expensive. He moved leftward along his demand
curve for reeds.
Q: As anyone who lives in a warm climate knows,
bamboo is a weed that grows quite rapidly. How long do
you think it will be until the original equilibrium in this
market is restored?
Graph: Decrease in Supply
Watch Macro content video: Macro
Chapter 3-Decrease in supply
Q3.8 If there is a decrease in demand for laptop
computers, we would expect
1. both the price and quantity sold to increase.
2. both the price and quantity sold to decrease.
3. the price to decrease and the quantity sold to
increase.
4. the price to increase and the quantity sold to
decrease.
Q3.9 Which of the following would reduce the price of
DVD players and increase the quantity sold?
1.
2.
3.
4.
an increase in the demand for DVD players
a decrease in the demand for DVD players
a decrease in the supply of DVD players
an increase in the supply of DVD players
What if supply and demand shift
at the same time?
Suppose supply and demand both
decrease
Watch Macro content video: Macro
Chatper 3-Supply and Demand decrease
Q3.10 (Potential Multiple Answer) If there is a
simultaneously an increase in demand and an
increase in supply, we would expect
1. An increase in equilibrium price and an increase
in equilibrium quantity
2. A decrease in equilibrium price and an increase
in equilibrium quantity
3. An increase in equilibrium price and a decrease
in equilibrium quantity
4. A decrease in equilibrium price and a decrease
in equilibrium quantity
Class Activity: Why do you think that the
amount of goods on the shelves of stores
in Tallahassee is about equal to the
amount of goods that consumers want to
buy?
Watch video: Stossel Micro 04-Invisible
hand steak example
Invisible Hand Principle
Adam Smith- An Inquiry into the Nature
and Causes of the Wealth of Nations
Personal self-interest directed by market
prices is a powerful force promoting
economic progress
“Every individual is continually exerting himself to
find out the most advantageous employment for
whatever [income] he can command. It is his own
advantage, indeed, and not that of the society
which he has in view. But the study of his own
advantage naturally, or rather necessarily, leads
him to prefer that employment which is most
advantageous to society…He intends only his own
gain, and he is in this, as in many other cases, led
by an invisible hand to promote an end which was
not part of his intention. By pursuing his own
interest he frequently promotes that of the society
more effectually than when he really intends to
promote it.”
Q3.11 Adam Smith's invisible hand principle stresses
1.
2.
3.
4.
that benevolence is a powerful motivator that encourages
individuals to engage in productive economic activity.
the tendency of the competitive market process to direct
self-interested individuals into activities that enhance the
economic welfare of society.
the potential of government regulation as a means of
bringing the self interest of individuals into harmony with
the economic welfare of society.
the tendency of self-interested individuals to pursue
activities that benefit themselves but harm the overall
economic welfare of society.
Question Answers:
Q3.1 = 2
Q3.2 = 3
Q3.3 = 1
Q3.4 = 3
Q3.5 = 2
Q3.6 = 1
Q3.7 = 1 & 6
Q3.8 = 2
Q3.9 = 4
Q3.10 = 1 & 2
Q3.11 = 2