Module 5
Supply and Demand:
Introduction and Demand
KRUGMAN'S
MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• What a competitive market is and how it is
described by the supply and demand
model
• What the demand curve is
• The difference between movements along
the demand curve and changes in
demand
• The factors that shift the demand curve
I. Supply and Demand: A Model of a
Competitive Market
A. Competitive Market- A
market is an institution or
mechanism which brings
together buyers
(demanders) and sellers
(suppliers) of particular
goods and services.
B. Supply and Demand Model
i
II. The Demand Curve
A. Demand schedule- shows how much of a product consumers
are willing and able to buy at each of a series of possible prices
during a specified time period.
B. Law of Demand1. Other things being equal, as the price increases, the
corresponding quantity demanded falls.
2. Restated, there is an inverse relationship between price and
quantity demanded.
C. Demand curve- The demand schedule graphed
D. Quantity demanded- a point on the line
Demand Schedule and
Demand Curve
Price
Quantity
Price
Quantity
$8
3
$7
5
$6
7
$5
10
$4
12
$3
16
$2
22
III. Understanding Shifts of the
Demand Curve
A. Increase = right- At any price, consumers wish
to buy more.
B. Decrease = left- At any price, consumers wish
to buy less.
B. M.E.R.I.T. shifts demand
1. market size (number of consumers)
2. expectations
3. related prices (complements, substitutes)
4. income (normal, inferior)
5. tastes
Module 6
Supply and Demand:
Supply and Equilibrium
•KRUGMAN'S
•MACROECONOMICS
AP*
Margaret Ray and for
David
Anderson
What you will learn
in this Module:
• What the supply curve is
• The difference between movements along
the supply curve and changes in supply
• The factors that shift the supply curve
• How supply and demand curves determine
a market's equilibrium price and equilibrium
quantity
• In the case of a shortage or surplus, how
price moves the market back to equilibrium
I. The Supply Schedule and
the Supply Curve
A. Supply schedule- shows amounts of a product a producer is
willing and able to produce and sell at each of a series of possible
prices during a specified time period.
B. Supply Curve- a graphical representation of the supply schedule
C. Quantity supplied- a point on the supply curve
D. Law of Supply
1. All else equal, as the price rises, quantity supplied rises.
2. Restated: There is a direct relationship between price and
quantity supplied.
Supply Schedule and
Supply Curve
Price
Quantity
Price
Quantity
$8
22
$7
14
$6
8
$5
6
$4
5
$3
4
$2
3
II. Understanding Shifts of the
Supply Curve
A. Increase = right, At any price, firms wish to produce more.
B. decrease = left, At any price, firms with to produce less.
C. T.R.I.C.E. shifts supply
1. Technology
2. Related prices (complements in production, substitutes in
production)
3. Input prices
4. Competition (number of producers)
5. Expectations
III. Supply, Demand,
and Equilibrium
A. Equilibrium- No individual would
be better off doing something
different
B. Equilibrium price- price where
supply meets demand
C. Equilibrium quantity- quantity
where supply meets demand
D. Market-clearing priceEquilibrium price. It clears the
market. All sellers have buyers,
all buyers have sellers
Finding the Equilibrium Price
and Quantity
equilibrium
price
E
equilibrium
quantity
equilibrium
IV. Why Does the Market Price Fall
If It Is Above the Equilibrium Price?
A. Surplus- When
supply is greater
than demand
B. Producer's
Incentive is to
lower the price and
clear the market
V. Why Does the Market Price Rise
If It is Below the Equilibrium Price?
A. Shortage- When
quantity demanded
exceeds quantity
supplied
B. Consumer's
Incentive- pay more
and get it first, raising
the price to the market
clearing price
Module 7
Supply and Demand:
Changes in Equilibrium
•KRUGMAN'S
•MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• How equilibrium price and quantity are
affected when there is a change in either
supply or demand
• How equilibrium price and quantity are
affected when there is a simultaneous
change in both supply and demand
I. Shifting Demand
A. When demand increases, the equilibrium price
and quantity both increase
Shifting Demand Continued
B. When demand decreases, the equilibrium price
and quantity both decrease
II. Shifting Supply
A. When supply decreases, the equilibrium price
increases and the equilibrium quantity decreases
Shifting Supply Cont.
B. When supply increases, the equilibrium price
decreases and the equilibrium quantity increases
III. Simultaneous Shifts of
Supply and Demand
A. When demand increases and supply decreases
the equilibrium price definitely increases, but
quantity is ambiguous
Simultaneous Shifts of Supply
and Demand
B. When demand decreases and supply increases
the equilibrium price definitely decreases, but
quantity is ambiguous
Simultaneous Shifts of Supply
and Demand
C. When demand and supply increase, the change in
equilibrium price is ambiguous, but equilibrium quantity
definitely increases
Simultaneous Shifts of Supply
and Demand
D. When demand and supply decrease, the change in
equilibrium price is ambiguous, but equilibrium
quantity definitely decreases
Module 8
Supply and Demand: Price
Controls (Ceilings and Floors)
•KRUGMAN'S
•MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The meaning of price controls, one way
government intervenes in markets
• How price controls can create problems
and make a market inefficient
• Why economists are often deeply
skeptical of attempts to intervene in
markets
• Who benefits and who loses from price
controls, and why they are used despite
their well-known problems
I. Why Governments
Control Prices
A. Sometimes the efficient
outcome in the market is judged
as unfair to some groups,
usually those that are
disadvantaged (poor) and
struggling to begin with.
B. How will we deal with this?
1. A price control is a legal
restriction on how high or low a
market price may go.
2. Price controls are enacted by
governments in response to
political pressures from buyers
and sellers.
II. Price Ceilings
A. Legal maximum price
B. If Pe is considered “too high”, then a price ceiling must be set
below the equilibrium price.
C. A price ceiling set above the equilibrium price has no effect or
non binding.
D. Examples
• Oil Prices in1970s
• California electricity
Modeling a Price Ceiling
III. How a Price Ceiling Causes
Inefficiency
A. Inefficient Allocation to
Consumers
B. Wasted Resources
C. Inefficiently Low Quality
D. Black Markets-goods and
services bought and sold
illegally
So Why Are There Price
Ceilings?
• Benefit some- consumers
may have political clout and
persuade government
officials that equilibrium is
too high. (normative)
• Uncertainty- we’ve always
had them
• Lack of understanding
IV. Price Floors
A. Legal minimum price
B. If Pe is considered “too low”, a price floor is set above
the equilibrium price.
C. A price floor set below the equilibrium price has no
effect or non-binding
D. Examples
• Agricultural products
• Minimum wage
Modeling a Price Floor
V. How a Price Floor Causes
Inefficiency
A. Inefficiently Low Quantity
B. Inefficient Allocation of
Sales Among Sellers
C. Wasted Resources
D. Inefficiently High Quality
E. Illegal Activity- Black
market for labor
So Why Are There Price
Floors?
• Benefit some Producers may
have the political clout to
persuade government that
the equilibrium price is
unfairly low. This is a
normative argument.• Disregard
• Lack of understanding
Module 9
Supply and Demand:
Quantity Controls
•KRUGMAN'S
•MACROECONOMICS for AP*
Margaret Ray and David Anderson
What you will learn
in this Module:
• The meaning of quantity controls, another
way government intervenes in markets
• How quantity controls create problems
and can make a market inefficient
• Who benefits and who loses from quantity
controls, and why they are used despite
their well-known problems
I. Controlling Quantities
A. Quantity Control or Quota-an upper limit on the
quantity of some good that can be bought or
sold.
B. Licenses/Permits
• Examples: Fishing, Pollution
The Anatomy of Quantity
Controls
II. The Anatomy of Quantity
Controls
A. Demand Price-Price consumers will pay for that quantity
B. Supply Price- Price suppliers will charge for that quantity
C. Wedge or Quota Rent1. The difference between Demand Price and Supply Price.
2. Earnings that accrue to the license-holder for ownership of the
right to sell the good.
3. It is equal to the market price of the license when the licenses
are traded.
4. We can also think of the quota rent as the opportunity cost the
holder of the license bears for not renting out his license to
another producer.
III. The Cost of Quantity
Controls
A. Inefficiency
B. Deadweight Loss
C. Illegal Activity