Dr.Ibrahem Alezee
Chapter Three
Special Note Regarding Demand and Supply
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Relative Prices
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A relative price is the ratio of one price to another
If the price of a candy bar is $1 and the price of a fast food meal is $5, the relative price of a fast food meal is
5 candy bars.
If the price of a hot dog is $2 and the price of a hamburger is $4, the relative price of a hot dog is1/2 of a
hamburger
The opportunity cost of good A in terms of good B is equal to the ratio of the price of good A to the price of
good B.
The opportunity cost of a hot dog in terms of hamburgers is the ratio of the price of a hot dog to the price of a
hamburger.
Demand
Wants, as opposed to demands, are the unlimited desires of the consumer
Demands differ from wants in that demands reflect a decision about which wants to satisfy and a plan to buy
the good, while wants are unlimited and involve no specific plan to acquire the good.
Scarcity guarantees that wants will exceed demands.
The quantity demanded is the amount of a good that consumers plan to purchase at a particular price.
The law of demand states that, other things remaining the same, the higher the price of a good, the smaller is
the quantity of the good demanded.
The law of demand implies that, other things remaining the same, as the price of a cheeseburger rises, the
quantity of cheeseburgers demanded will decrease.
The law of demand states that the quantity of a good demanded varies inversely with its price.
The statement of for example, an increase in the price of a soda causes a decrease in the quantity of soda
demanded, consistent with the law of demand.
The law of demand implies that if nothing else changes, there is a negative relationship between the price of a
good and the quantity demanded.
The price of the good influences people’s buying plans and varies moving along a demand curve.
The law of demand states that other things remaining the same, the higher the price of a good, the smaller is
the quantity demanded.
The law of demand implies that demand curves slope down
Each point on the demand curve reflects the highest price consumers are willing and able to pay for that
particular unit of a good.
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Change in Demand
A drop in the price of a compact disc shifts the demand curve for prerecorded tapes leftward. From that you
know compact discs and prerecorded tapes are substitutes.
A substitute is a good that can be used in place of another good.
People buy more of good 1 when the price of good 2 rises. These goods are complements.
Cola and lemon lime soda are example of pairs of substitutes goods.
The demand for a good increases when the price of a substitute rise and also increases when the price of a
complement rises
A complement is a good used in conjunction with another good
Suppose people buy more of good 1 when the price of good 2 falls. These goods are complements.
As the opportunity cost of a good decreases, people buy more of that good and also more of its complements
People come to expect that the price of a gallon of gasoline will rise next week. As a result, today’s demand
for gasoline increases.
The demand curve for a normal good shift leftward if income decreases or the expected future price falls.
If income increases or the price of a complement falls, the demand curve for a normal good shifts rightward.
If income decreases or the price of a complement rises, the demand curve for a normal good shifts leftward.
A decrease in the price of a game of bowling shifts the demand curve for bowling balls rightward.
Normal Goods
Normal goods are those for which demand decreases as income decreases.
A normal good is a good for which there are very few complements.
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Dr.Ibrahem Alezee
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Most goods are normal goods.
A normal good is a good for which demand increases when income increases.
Inferior Goods
Inferior goods are those for which demand increases as income decreases.
By definition, an inferior good is a good for which demand decreases when income increases.
If a good is an inferior good, then purchases of that good will decrease when income increases.
An inferior good is a good for which demand decreases when income increases.
Falafil is an inferior good. Hence, a decrease in people’s incomes shifts the demand curve for gruel rightward.
Other Influences of Demand
When economists speak of preferences as influencing demand, they are referring to an individual’s attitudes
(preferences) toward goods and services.
An unusually warm winter shifts the demand curve for gloves leftward.
A Change in the Quantity Demanded Versus a Change in Demand
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In 2004 there were 200,000 Honda Cars demanded at a price of $5000. In 2005 there were more than 200,000
Honda Cars demanded at the same price. This increase could be the result of the demand influences other than
the price of Honda Cars.
A change in the price of a good does not shift the good’s demand curve but does cause a movement
along it.
A reduction in the price of a good does not shift the good’s demand curve leftward but does decrease the
quantity demanded.
A decrease in quantity demanded caused by an increase in price is represented by a movement up and to the
left along the demand curve.
A change in the price of a car (A 20 percent increase in the price of a car) alters buying plans for cars but does
NOT shift the demand curve for cars.
The following would shift the demand curve for turkey; an increase in income, a decrease in the price of ham,
and a change in tastes for turkey, but NOT a change in the price of a turkey.
When we say demand increases, we mean that there is a rightward shift of the demand curve.
A decrease in quantity demanded caused by an increase in price is represented by a movement up and to the
left along the demand curve.
An increase of 30 percent in the price of a bike alters buying plans for cars but does NOT shift the demand
curve for bike.
When we say demand increases, we mean that there is a rightward shift of the demand curve.
P
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d
a
c
b
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Quantity
of Orange
In the figure above, movement from point a to point d reflects an increase in demand.
In the figure above, movement from a to c reflects a decrease in demand.
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Dr.Ibrahem Alezee
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In the figure above, movement from a to d reflects reflect a decrease in quantity demanded but not a decrease
in demand.
Any movement to point c and d reflect change in demand (to d increase demand, to c decrease demand)
Supply
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The “law of supply” is illustrated when the demand curve shifts along a stationary supply
curve.
An increasing in the marginal cost explains why supply curves slope upward.
The supply curve slopes upward when graphed against the price of the good, because of
increasing marginal cost.
The quantity supplied of a good is the amount that the producers are planning to sell at a
particular price during a given time period.
The quantity supplied of a good or service is the quantity that a producer is willing to sell at
a particular price during a given time period.
A fall in the price of a good causes producers to reduce the quantity of the good they are
willing to produce. This fact illustrates the law of supply.
Each point on a supply curve represents the lowest price for which a supplier can profitably
sell another unit.
Because of increasing marginal cost, most supply curves have a positive slope.
A supply curve shows the relation between the quantity of a good supplied and the price of
the good. Usually a supply curve has positive slope.
A supply curve differs from a supply schedule because a supply curve is a graph and the
supply schedule is a table.
The price of the good itself. is not held constant while moving along a supply curve, while
other influences (such as expected future prices, the number of sellers, and prices of
resources used in production) are held constant.
The supply curve is graphed with the quantity of a good on the horizontal axis and its price
on the vertical axis.
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Dr.Ibrahem Alezee
price
10
8
6
4
4
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6
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Quantity
In the above figure, at price of $4.0 supplier, supply quantity of zero, because price is not
covering the marginal cost.
The minimum supply price for the fourth unit of the good is $6.0.
Quantity more than four will not be supplied unless price increase to cover the marginal
cost.
Each point on a supply curve represents the lowest price for which a supplier can profitably
sell another unit.
Change in Supply
A decrease in the price of a resource used to produce gasoline, such as crude oil following
shifts the supply curve for gasoline rightward
A decrease in the price of the resources used to produce the good shifts the supply curve
rightward
If a producer can use resources to produce either good A or good B, then A and B are
substitutes in production.
Good A and good B are substitutes in production. The demand for good A increases so that
the price of good A rises. The increase in the price of good A shifts th supply curve of good
B leftward.
Blank tapes and prerecorded tapes are substitutes in production. An increase in the price of
a blank tape will cause an increase in the quantity supplied of prerecorded tapes but not in
the supply.
Good A and good B are substitutes in production. The demand for good A decreases, which
lowers the price of good A. The decrease in the price of good A increases the supply of
good B.
It is expected that the price of a box of orange will increase in one month. This belief will
result in a decrease in current supply of orange.
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Dr.Ibrahem Alezee
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An increase in technology for producing personal computers leads to an increase in the
supply of personal computers.
An increase in the cost of the machinery used to produce X will shift the supply curve for
good X leftward
If the price of a good changes but everything else influencing suppliers’ planned sales
remains constant, there is a movement along the supply curve.
A decrease in the quantity supplied is represented by a movement down the supply curve.
Market Equilibrium
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The equilibrium price and quantity are found at the point where quantity supplied equals
quantity demanded.
The interaction of supply and demand explains both the prices and the quantities of goods
and services.
When the quantity demanded equals quantity supplied then we are at equilibrium.
When the price is below the equilibrium price, the quantity demanded exceeds the
equilibrium quantity. The quantity supplied is less than the equilibrium quantity.
If a market is not in equilibrium, the price will adjust to bring the market to equilibrium.
A price below the equilibrium price results in a shortage.
As the price rises, the quantity demanded decreases while the quantity supplied increases
describes how price adjustments eliminate a shortage.
A shortage causes the price to rise.
If the quantity demanded exceeds the quantity supplied, then there is a shortage and the
price is below the equilibrium price.
If the quantity supplied exceeds the quantity demanded, then there is a surplus and the price
is above the equilibrium price.
The price of a good will fall if there is a surplus at the current price.
When the price is less than the equilibrium price, there will be a shortage, some consumers
will be willing to pay a price higher than the prevailing price, and the price will be forced
higher.
If there exists a shortage in the market for Nokia-mobiles, then the price of a Nokia-mobile
will rise.
The existence of a shortage pushes prices up
A surplus occurs when the price is greater than the equilibrium price.
If the price is above the equilibrium price, then there is a surplus, and market forces will
operate to lower price.
When the price of a good is above the equilibrium price, quantity supplied exceeds quantity
demanded and price falls.
Suppose a market begins in equilibrium. If supply increases, then at the original equilibrium
price the quantity demanded is less than the quantity supplied and a surplus result.
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Dr.Ibrahem Alezee
Price
(dollars per
mobile)
4
8
12
16
20
24
28
32
36
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Price
(dollars per
mobile)
4
8
12
16
20
24
28
32
36
Quantity
demanded
36,000
32,000
28,000
24,000
20,000
16,000
12,000
8,000
4,000
Quantity
supplied
4,000
8,000
12,000
16,000
20,000
24,000
28,000
32,000
36,000
The above table gives the demand and supply schedules for compact mobile. If the price of
a mobile is $8, there is a shortage; and the price of a mobile will rise.
Suppose that the price of a compact mobile increases, resulting in the demand for mobile
decreasing by 8,000 units at all prices, the new equilibrium quantity and equilibrium price
of mobile16,000 and $16.
If the price of a compact disc is $28, there is a surplus and the price of a mobile will fall.
Based on the table, the equilibrium quantity and price of a compact discs is20,000 and $20.
Using the data in the above table, at the price of $16 a mobile, a shortage of 6 thousand
mobile occurs.
Using the data in the above table, at the price of $28 a mobile, a surplus of 16 thousand
mobile occurs.
In the above figure, at a price of $2 in the above figure, there is a shortage of 400 unit
If the good in the above figure is a normal good and income rises, then the new equilibrium
quantity is more than 300 units.
The initial supply and demand curves for a good are illustrated in the above figure. If there
are technological advances in the production of the good, then the new price for the good is
less than $6.
The initial supply and demand curves for a good are illustrated in the above figure. If there
is a rise in the price of the resources used to produce the good, then the new price is more
than $6.
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Dr.Ibrahem Alezee
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In the above figure, a price of $15 per unit would result in a shortage so that the price of
roses will rise.
In the above figure, a price of $35 per unit would result in a surplus.
Based on the above figure, which of the following is true, at a price of $6, quantity
demanded is equal to quantity supplied, at a price of $4, quantity demanded is greater than
quantity supplied, and at a price of $8, quantity demanded is less than quantity supplied.
When the demand for a good decreases, its equilibrium price fall and equilibrium quantity
decreases.
If good A is a normal good and income increases, the equilibrium price of A and the
equilibrium quantity will increase.
A discovery that tea cause migraine, the price of tea falls.
Assume that beef and sheep are substitutes for consumers. There is a drought in the cattle
grazing areas. The drought will cause the demand curve for sheep to shift rightward.
An increase in demand combined with no change in supply causes the equilibrium price to
rise.
Goods A and B are complementary goods (in consumption). The cost of a resource used in
the production of A decreases. As a result, the equilibrium price of B will rise and the
equilibrium price of A will fall.
When demand decreases and supply does not change, the equilibrium price falls and the
equilibrium quantity decreases.
When supply decreases and demand does not change, the equilibrium quantity decreases
and the price rises.
Beef and leather belts are complements in production. If people’s concern about health
shifts the demand curve for beef leftward, the result in the market for leather belts will be a
higher equilibrium price for a leather belt because there is a decrease in the supply of leather
belts.
You observe that the price of a good rises and the quantity decreases. These observations
can be the result of the supply curve shifting leftward.
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Dr.Ibrahem Alezee
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The above figure shows the market for pizza. Figure B shows the effect of a decrease in the
price of a pizza substitute such as hamburgers
The above figure shows the market for pizza. Figure B shows the effect of an increase in the
price of a complement such as soda.
The above figure shows the market for pizza. Figure A shows the effect of an increase in the
price of a substitute such as sandwiches.
The above figure shows the market for pizza. Figure C shows the effect of an increase in the
price of the tomato sauce used to produce pizza.
The above figure shows the market for pizza. Figure A shows the effect of a new report by
the U.S. Surgeon General that pizza, as a part of the Mediterranean diet, contributes to
lower cholesterol levels.
The price of mobile fell over the past decade because a combination of improving
technology, rising incomes, and falling prices of mobiles caused the supply curve of
mobiles to shift rightward faster than the demand curve for mobiles shifted rightward.
An increase in demand combined with a decrease in supply always raises the equilibrium
price.
A decrease in demand combined with an increase in supply definitely causes a fall in the
equilibrium price.
If Q d = 15 – 1.5P and Q s = 5 + 2.5P, then the equilibrium price is
15 – 1.5P = 5 + 2.5P
15 – 5 = 2.5P + 1.5P
10 = 4P
P = 2.5, while the equilibrium quantity is
P= 15 – 1.5 (2.5) = 3.75
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