Economics
Combined Version
Edwin G. Dolan
Best Value Textbooks
4th edition
Chapter 2
Supply and Demand
The Basics
Dolan, Microeconomics 4e, Ch. 2
 Demand is the amount of a product that
consumers are willing and able to purchase
at each possible price during a given period
of time, everything else (but price) held
constant. (ceteris paribus)
◦ It is a relationship
between prices and
quantities.
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
Law of Demand: There is an inverse
relationship between the price of a good
and the quantity consumers are willing and
able to purchase during a particular period
of time.
◦ As price of a good rises, consumers buy less.
◦ Demand depicts the quantity-price relationship
ceteris paribus.
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
A graphical
representation
of Demand
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
Change in Quantity Demanded - movement
along the same demand curve in response
to a price change.
◦ Results from a price change
◦ A movement along a curve

Change in Demand - shift in entire demand
curve.
◦ Results from a change in a determinant of
demand (a ceteris paribus variable)
◦ A whole new curve
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

The Demand Shifters are factors other than
price that influence demand: income,
tastes, prices of related goods,
expectations, and numbers of buyers.
Δ Demand Shifters leads to Δ DEMAND itself
– ie a whole new demand curve
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
Changes in Consumer Income
◦ Normal goods: goods for which demand
increases as income increases.
◦ Inferior goods: goods for which demand
decreases as income increases.
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
Δ the Number of Buyers

Δ Demographic Characteristics
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
Δ Price of Related Goods
◦ Substitute goods: goods that can be used in place
of each other.
◦ Complementary goods: goods that are used
together.
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
Δ Consumer Expectations
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
Δ Consumer Tastes
and Preferences
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

Supply is the amount of a good or service that
producers are willing and able to offer for sale at
each possible price during a period of time, ceteris
paribus.
◦ It is a price-quantity relationship.
The quantity supplied is the amount sellers are
willing and able to offer for sale during a period of
time at a specific price, ceteris paribus.
◦ It is a specific quantity tied to a specific price
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
Law of Supply - there is a positive
relationship between the price of a product
and the amount of it that will be supplied.
◦ As the price of a product rises, producers will be
willing to supply more.
◦ The height of the supply curve at any quantity
also shows the opportunity cost of producing the
next unit of the good.
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
A graphical
representation
of Supply
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

The production possibility frontier provides one explanation of
why the supply curve has a positive slope
As the quantity of chicken produced increases, the opportunity
cost of producing it increases, as shown by the increasing slope
of the PPF

Δ Quantity Supplied - movement along the
same supply curve in response to a price
change.
◦ Results from Δ price
◦ Movement along a curve

Δ Supply - shift in entire supply curve.
◦ Results from Δ some other variables besides
price. (Δ a ceteris paribus variable)
◦ Whole new curve
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
Δ Resource Prices
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
Δ Technology and
Productivity
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
Δ Expectations of
Producers
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

Δ Number of Producers
Δ Prices of Related Goods or
Services
◦ the opportunity cost of
producing any good is the lost
production of some other good
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
Supply Increases or Decreases

Supply shifts right or left

Supply NEVER, NEVER,
or DOWN!! – not ever.
NEVER goes UP
Note: The textbook uses the Up/Down language in an example in CH 3.
It may be “technically” OK, but it WILL confuse you if you use it!!!
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
When the plans of buyers
and sellers mesh when
tested in the market place,
the market is in
equilibrium


If the
there
If the
there
price is too high,
will be a surplus
price is too low,
will be a shortage

The just right Price where qD = qS
◦ Markets tend towards equilibrium unless
something prevents price adjustments
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 Which diagram best represents the effect on the market for beef of an increase
in the cost of corn used as feed for beef cattle?
 An increase in the price of an input will shift the supply curve as shown in the
right-hand diagram

Price Floor: price is not allowed to decrease below a
certain level. Examples: minimum wage,
agricultural price supports.
◦ If the floor is above the equilibrium price, then it results in
a surplus.
◦ In the labor market, a “surplus” means unemployment. But
how much?

Price Ceiling: price is not allowed to increase above
a certain level. Example: rent controls.
◦ If the ceiling is below the equilibrium price, then it results
in a shortage.
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

With demand curve in
position D1, the market
would be in
equilibrium at a price
of $13
With a price support
(minimum price) of
$13 and demand curve
D2, there would be a
surplus of milk
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

Rent control (maximum rent) on housing will cause a
shortage of rental housing
The shortage will be greater in the long run, when there
is time to adjust the quantity of housing supplied
Dolan, Economics Combined
Version 4e, Ch. 2



A surplus occurs whenever qS>qD.
A shortage occurs whenever qD>qS.
Surpluses and shortages can be resolved
with price changes.
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The Market for Pickup Trucks is in equilibrium. What happens in
this market with each of the following changes? Draw a graphical
representation and identify what happens in the market for Pickup
Trucks to (A) Supply, (B) Demand, (C) Price in the market for pickup
trucks, ceteris paribus, (D) Equilibrium Quantity Demanded and
Quantity Supplied?
1.
2.
3.
4.
5.
6.
7.
8.
Price of Passenger cars goes up dramatically:
A public campaign encouraging conservation of fuel by using
public transportation and small cars whenever possible creates
a change in preferences:
The price of tires quadruples:
A huge strike hits truck manufacturers, shutting down many
plants:
Gasoline prices plummet to $0.02 per gallon:
The price of steel is cut in half:
A major recession strikes and income levels drop:
The price of camp trailers drops by 90%:
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