Demand and Supply
• Markets are the institutions that
bring together buyers and sellers.
–
Examples include: farmer’s markets,
eBay, Amazon.com, and retail outlets.
1. DEMAND
Learning Objectives
1. Define the quantity demanded of a good or
service and illustrate it using a demand
schedule and a demand curve.
2. Distinguish between the following pairs of
concepts: demand and quantity demanded,
demand schedule and demand curve,
movement along and shift in a demand curve.
3. Identify demand shifters and determine
whether a change in a demand shifter causes
the demand curve to shift to the right or to the
left.
1.1 Price and the Demand
Curve
•
•
•
The quantity demanded is the quantity
buyers are willing and able to buy of a good
or service at a particular price during a
particular period, all other things unchanged.
A demand schedule is a table that shows
the quantities of a good or service demanded
at different prices during a particular period,
all other things unchanged.
A demand curve is a graphical
representation of a demand schedule.
1.1 Price and the Demand
Curve
•
•
A change in quantity demanded is a
movement along a demand curve that results
from a change in price.
The law of demand states that for virtually
all goods and services, a higher price leads to
a reduction in quantity demanded and a lower
price leads an increase in quantity demanded.
A Demand Schedule and a
Demand Curve
9
8
7
6
5
4
Quantity demanded per month
(millions of pounds)
10
15
20
25
30
35
Price per pound
Price per pound ($)
The demand schedule
lists points on the
demand curve.
25 million pounds of
coffee per month are
demanded at a price of
$6 per pound.
9
8
7
6
5
4
3
2
1
0
30 million pounds of
coffee per month are
demanded at a price of
$5 per pound.
0
5
10
15
20
25
30
35
40
Quantity (million of pounds of coffee per month
45
1.2 Changes in Demand
•
A change in demand is characterized by a
shift in a demand curve.
A demand shifter is a variable that can
change the quantity of a good or service
demanded at each price.
•
–
–
Preferences
Prices of related goods and services
• Complements and Substitutes
– Income
• Normal and Inferior goods
– Demographic characteristics
– Buyer expectations
An Increase in Demand
9
8
Price Old
New
quantity
quantity
demanded demanded
10
20
8
15
25
Price per pound
$9
7
A’
A
6
5
4
7
20
30
6
25
35
2
5
30
40
1
4
35
45
D1
D2
3
0
0
5
10 15 20 25 30 35 40 45
Quantity (millions of pounds per month)
A Reduction in Demand
9
8
$9
10
0
8
15
5
7
Price per pound
Price Old
New
quantity
quantity
demanded demanded
A’’
A
6
5
4
7
20
10
6
25
15
2
5
30
20
1
4
35
25
D3
D1
3
0
0
5
10 15 20 25 30 35 40 45
Quantity (millions of pounds per month)
Complements and
Supplements
Complements (coffee and doughnuts)
Reducing the price of one…
Increases the demand for the other.
Increasing the price of one…
Reduces the demand for the other.
Substitutes (coffee and tea)
Increasing the price of one…
Increases the demand for the other.
Reducing the price of one…
Reduces the demand for the other.
Changes in Price Versus
Changes in Demand
Price per unit
Demand
curve
A reduction
in demand
Quantity per period
An increase
in demand
2. Supply
Learning Objectives
1. Define the quantity supplied of a good or
service and illustrate it using a supply
schedule and a supply curve.
2. Distinguish between the following pairs of
concepts: supply and quantity supplied,
supply schedule and supply curve, movement
along and shift in a supply curve.
3. Identify supply shifters and determine
whether a change in a supply shifter causes
the supply curve to shift to the right or to the
left.
2.1 Price and the Supply
Curve
•
•
•
•
The quantity supplied is the quantity sellers
are willing to sell of a good or service at a
particular price during a particular period, all
other things unchanged.
A supply schedule is a table that shows
quantities supplied at different prices during a
particular period, all other things unchanged.
A supply curve is a graphical representation of
a supply schedule.
A change in quantity supplied is
characterized by movement along the supply
curve caused by a change in price.
A Supply Schedule and a
Supply Curve
4
5
6
7
8
9
Quantity supplied per month
(millions of pounds)
15
20
25
30
35
40
Price per pound
Price per pound ($)
9
8
7
6
5
4
3
2
1
0
The supply schedule
lists points on the supply
curve.
30 million pounds of
coffee per month are
supplied at a price of $7
per pound.
25 million pounds of
coffee per month are
supplied at a price of $6
per pound.
0
5
10
15
20
25
30
35
Quantity (million of pounds of coffee per month
40
2.2 Changes in Supply
•
A change in supply is characterized by a
shift in the supply curve.
A supply shifter is a variable that can
change the quantity of a good or service
supplied at each price.
•
–
–
–
–
–
–
Prices of factors of production
Returns from alternative activities
Technology
Seller expectations
Natural events
The number of sellers
An Increase in Supply
9
New
quantity
supplied
$4
15
25
5
20
30
7
Price per pound
Price Old
quantity
supplied
8
A’
A
6
5
4
S1
3
6
25
35
7
30
40
2
8
35
45
1
9
40
50
S2
0
0
5
10 15 20 25 30 35 40 45 50
Quantity (millions of pounds per month)
A Reduction in Supply
9
New
quantity
supplied
$4
15
5
5
20
10
8
7
Price per pound
Price Old
quantity
supplied
A’’
A
6
5
4
6
25
15
7
30
20
2
8
35
25
1
9
40
30
S3
S1
3
0
0
5
10 15 20 25 30 35 40 45
Quantity (millions of pounds per month)
Changes in Price Versus
Changes in Supply
Price per unit
Supply
curve
A reduction
in supply
Quantity per period
An increase
in supply
3 Demand, Supply, and
Equilibrium
Learning Objectives
1. Use demand and supply to explain how
equilibrium price and quantity are determined
in a market.
2. Understand the concepts of surpluses and
shortages and the pressures on price they
generate.
3. Explain the impact of a change in demand or
supply on equilibrium price and quantity.
4. Explain how the circular flow model provides
an overview of demand and supply in product
and factor markets and how the model
suggests ways in which these markets are
linked.
3.1 The Determination of
Price and Quantity
•
•
•
•
The Equilibrium price (market clearing
price) is the price at which quantity
demanded equals quantity supplied.
The Equilibrium quantity is the quantity
demanded and supplied at the equilibrium
price.
A Surplus is the amount by which the
quantity supplied exceeds the quantity
demanded at the current price.
A Shortage is the amount by which the
quantity demanded exceeds the quantity
supplied at the current price.
The Determination of
Equilibrium Price and Quantity
Price per pound
Surplus at P = $8
9
8
7
6
5
4
3
2
1
0
At a price of
$8 per pound,
15 million
pounds of
coffee are
demanded
S
At a price of
$4 per pound,
15 million
pounds of
coffee are
supplied
0
5
10
Equilibrium
price and
quantity
D
Shortage at P = $4
15
20
25
30
35
At a price of $8
per pound, 35
million pounds
of coffee are
supplied
40
Quantity (millions of pounds of coffee per month)
At a price of $4
per pound, 35
million pounds
of coffee are
45 demanded
3.2 Shifts in Demand and
Supply
9
S1
8
Price per pound
7
6
5
4
D2
D1
D2
3
2
1
0
0
5
10
15
20
25
30
35
40
Quantity (millions of pounds of coffee per month)
45
3.2 Shifts in Demand and
Supply
9
S2
8
S2
S1
Price per pound
7
6
5
4
D1
3
2
1
0
0
5
10
15
20
25
30
35
40
Quantity (millions of pounds of coffee per month)
45
Simultaneous Decreases in
Demand and Supply
9
S2
8
S1
Price per pound
7
6
5
4
D1
3
D2
2
1
0
0
5
10
15
20
25
30
35
40
Quantity (millions of pounds of coffee per month)
45
Simultaneous Decreases in
Demand and Supply
9
S1
S2
8
Price per pound
7
6
5
4
D2
D1
3
2
1
0
0
5
10
15
20
25
30
35
40
Quantity (millions of pounds of coffee per month)
45
Simultaneous Decreases in
Demand and Supply
9
S1
S2
8
Price per pound
7
6
5
4
D2
D1
3
2
1
0
0
5
10
15
20
25
30
35
40
Quantity (millions of pounds of coffee per month)
45
Simultaneous Shifts in
Demand and Supply
Shift in Supply
Increase in Decrease in
demand
demand
Shifts in Demand
Decrease in supply
Increase in supply
Equilibrium price
Equilibrium price
Equilibrium quantity
Equilibrium quantity
Equilibrium price
Equilibrium price
Equilibrium quantity
Equilibrium quantity
3.3 An Overview of Demand and
Supply: The Circular Flow Model
•
•
•
The circular flow model is a model that
provides a look at how markets work and how
they are related to each other.
The Product markets are markets in which
firms supply goods and services demanded by
households.
The Factor markets are markets in which
households supply factors of production –
labor, capital, and natural resources –
demanded by firms.
3.3 An Overview of Demand and
Supply: The Circular Flow Model
Payments to firms for goods and services
Product markets
D
Blue jeans
S
Price
S
Price
Price
S
D
D
Apartments
Haircuts
Supply goods and
services
Demand goods
and services
Households
Firms
And supply
factors
S
D
Textile
workers
S
D
Barbers
Price
Factors markets
Price
Price
Demand
factors
S
D
Apartment
buildings
Wages paid to household for labor