DEMAND AND SUPPLY
Economics 2023
Principles of Microeconomics
Dr. McCaleb
Demand and Supply
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Two Questions
 How are prices determined in a competitive market?
 What are the consequences of attempting to manipulate,
manage, or regulate prices in a competitive market?
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TOPIC OUTLINE
I.
Demand
II. Supply
III. Market Equilibrium
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Demand
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DEMAND
 Quantity Demanded and Demand
Quantity demanded
The amount of a good, service, or resource that people are willing
and able to buy during a specified period at a specified price.
The quantity demanded is an amount per unit of time. For example,
the amount per day or per month. Quantity demanded is a number.
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DEMAND
 Quantity Demanded and Demand
Demand
The relationship between the quantity demanded and the price of a
good when all other influences on buying plans remain the same.
Demand is a list of quantities at different prices. Demand is a set of
numbers indicating the quantities demanded at each possible price.
Information on demand is displayed in a demand schedule or
illustrated by a demand curve.
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DEMAND
Demand Schedule and Demand Curve: Example
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DEMAND
 The Law of Demand
Price and quantity demanded are negatively or
inversely related
Ceteris paribus, if the price of a good rises, the quantity demanded
decreases. If the price of a good falls, the quantity demanded
increases.
Because of the law of demand, demand curves are always negatively
sloped.
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DEMAND
 Changes in Quantity Demanded and in Demand
Change in quantity demanded
A change in the quantity of a good that people plan to buy resulting
from a change in the price of the good.
A change in quantity demanded is shown by a move from one pricequantity pair in a demand schedule to a different price-quantity pair.
A change in quantity demanded is shown by a movement along a
fixed demand curve from one price-quantity point to another pricequantity point.
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DEMAND
 Changes in Quantity Demanded and in Demand
Change in demand
A change in the quantity that people plan to buy when any variable
other than the price of the good changes.
A change in demand is shown by a change in the data in a demand
schedule. The quantity demanded at each price changes.
A change in demand is shown by a shift of the demand curve. The
entire curve shifts so that the quantity demanded at each price changes.
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DEMAND
Effect of a Change in
Demand on the Demand
Curve
When demand decreases, the
demand curve shifts leftward from
D0 to D1.
When demand increases, the
demand curve shifts rightward from
D0 to D2.
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The __________ a good is the amount people are
willing and able to buy at a specified price.
1. quantity demanded of
2. demand for
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The law of demand states that, ceteris paribus, an
increase in the price of a good _____ the quantity
demanded so that demand curves are _____.
1. Increases; positively-sloped
2. Increases; negatively-sloped
3. Decreases; positively-sloped
4. Decreases; negatively-sloped
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A change in the price of a good results in a change in
_____ and is shown by a _____ the demand curve.
1. Demand; move along
2. Demand; shift in
3. quantity demanded; move along
4. Quantity demanded; shift in
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DEMAND
 Variables That Influence Demand
The main influences on demand
• Prices of related goods
• Income
• Expectations
• Number of buyers
• Preferences
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DEMAND
 Variables That Influence Demand
Prices of related goods
Any two goods are either unrelated to one another or they are related
goods.
If the two goods are unrelated, a change in the price of one good has
no effect on the demand for the other.
If the two goods are related, a change in the price of one good either
increases or decreases the demand for the other. Related goods can be
either substitutes or complements.
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DEMAND
 Variables That Influence Demand
Substitute
A good that can be consumed in place of another good. Apples and
oranges are substitutes for one another.
The demand for a good increases if the price of a substitute good
rises. The demand for a good decreases if the price of a substitute
good falls.
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DEMAND
 Variables That Influence Demand
Complement
A good that is consumed with another good. Ice cream and fudge
sauce are complements with one another.
The demand for a good increases if the price of a complementary
good falls. The demand for a good decreases if the price of a
complementary good rises.
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DEMAND
 Variables That Influence Demand
Income
Normal good
The demand for a normal good increases if income increases.
Inferior good
The demand for an inferior good decreases if income increases.
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DEMAND
 Variables That Influence Demand
Expectations
Expected future income and expected future prices influence demand
today.
Examples
• If the price of a computer is expected to fall next month, the
demand for computers today decreases.
• If expected future income increases, the demand for computers
today increases.
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DEMAND
 Variables That Influence Demand
Number of buyers
The greater the number of buyers in a market, ceteris paribus, the
larger is the demand for any good. The fewer the number of buyers,
ceteris paribus, the smaller is demand for the good.
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DEMAND
 Variables That Influence Demand
Preferences
When preferences change, the demand for one item increases and the
demand for another item (or items) decreases.
Preferences change, for example, when:
•
people become better informed
•
new goods become available.
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If consumer incomes increase and Coke is a normal
good, the __________ Coke __________.
1. demand for; increases
2. demand for; decreases
3. quantity demanded of; increases
4. quantity demanded of; decreases
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If the price of Pepsi, a substitute for Coke, increases,
the __________ Coke __________.
1. demand for; increases
2. demand for; decreases
3. quantity demanded of; increases
4. quantity demanded of; decreases
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If the price of peanuts, a complement to Coke (at
least in the South), increases, the __________ Coke
__________.
1. demand for; increases
2. demand for; decreases
3. quantity demanded of; increases
4. quantity demanded of; decreases
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Summary: Changes in Quantity Demanded and Changes in Demand
A change in
Price of the good
1. Income
2. Prices of
related goods
3. Number of
buyers
4. BuyersΥ
preferences
5. BuyersΥ
expectations
Causes a
change in
Quantity
demanded
Demand
And is i llustrated by
A movement from one point
along a f ixed demand curve to
another point on the same curve
A shift of the entire demand
curve from one position to
another position (right for an
increase in demand, left for a
decrease in demand)
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Supply
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SUPPLY
 Quantity Supplied and Supply
Quantity supplied
The amount of a good, service, or resource that people are willing
and able to sell during a specified period at a specified price.
The quantity supplied is an amount per unit of time. For example, the
amount per day or per month. Quantity supplied, like quantity
demanded, is a number.
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SUPPLY
 Quantity Supplied and Supply
Supply
The relationship between the quantity supplied and the price of a
good when all other influences on selling plans remain the same.
Supply is a list of quantities at different prices. Supply is a set of
numbers indicating the quantities supplied at each possible price.
Information on supply is displayed in a supply schedule or illustrated
by a supply curve.
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SUPPLY
Supply Schedule and Supply Curve: Example
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SUPPLY
 The Law of Supply
Price and quantity supplied are positively or directly
related
Ceteris paribus, if the price of a good rises, the quantity supplied
increases. If the price of a good falls, the quantity supplied decreases.
Because of the law of supply, supply curves are always positively
sloped.
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SUPPLY
 Changes in Quantity Supplied and in Supply
Change in quantity supplied
A change in the quantity of a good that suppliers plan to sell resulting
from a change in the price of the good.
A change in quantity supplied is shown by a move from one pricequantity pair in a supply schedule to a different price-quantity pair.
A change in quantity supplied is shown by a movement along a fixed
supply curve from one price-quantity point to another price-quantity
point.
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SUPPLY
 Changes in Quantity Supplied and in Supply
Change in supply
A change in the quantity that suppliers plan to sell when any variable
other than the price of the good changes.
A change in supply is shown by a change in the data in a supply
schedule. The quantity supplied at each price changes.
A change in supply is shown by a shift of the supply curve. The entire
curve shifts so that the quantity supplied at each price changes.
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SUPPLY
Effect of a Change in
Supply on the Supply Curve
When supply decreases, the supply
curve shifts leftward from S0 to S1.
When supply increases, the supply
curve shifts rightward from S0 to S2.
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The __________ of a good is the amount people are
willing and able to sell at a specified price.
1. quantity supplied
2. supply
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The law of supply states that, ceteris paribus, an
increase in the price of a good _____ the quantity
supplied so that supply curves are _____.
1. increases; positively-sloped
2. increases; negatively-sloped
3. decreases; positively-sloped
4. decreases; negatively-sloped
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A change in the price of a good results in a change in
_____ and results in a _____ the supply curve.
1. supply; shift in
2. supply; move along
3. quantity supplied; shift in
4. quantity supplied; move along
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SUPPLY
 Variables That Influence Supply
The main influences on supply
• Prices of related goods
• Prices of resources or inputs
• Expectations
• Number of sellers
• Productivity
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SUPPLY
 Variables That Influence Supply
Prices of Related Goods
If two goods are related in supply or production, a change in the
price of one good brings about a change in the supply of the other
good.
Goods that are related in supply may be either substitutes or
complements.
Goods that are related in demand are not necessarily related in
supply. Even if they are related, they may be substitutes in demand
and complements in supply, or they may be complements in demand
but substitutes in supply.
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SUPPLY
 Variables That Influence Supply
Substitute in production
A good that can be produced in place of another good. Trucks and
SUVs are substitutes in an automobile factory. Gasoline and home
heating oil are substitutes in a petroleum refinery.
The supply of a good increases if the price of another good that is a
substitute in production falls. The supply of a good decreases if the
price of another good that is a substitute in production rises.
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SUPPLY
 Variables That Influence Supply
Complement in production
A good that is produced along with another good. Straw is a
complement in production with wheat. Natural gas is often a
complement in production with crude oil.
The supply of a good increases if the price of another good that is a
complement in production rises. The supply a good decreases if the
price of another good that is a complement in production falls.
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SUPPLY
 Variables That Influence Supply
Prices of Resources or Inputs
Resource or input prices influence the cost of production. If it costs
more to produce a good, the supply of the good decreases. If it costs
less to produce a good, the supply increases.
Expectations
Expectations about future prices of both goods and the inputs used to
produce them influence supply.
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SUPPLY
 Variables That Influence Supply
Number of Sellers
The greater the number of sellers in a market, ceteris paribus, the
larger is supply. The smaller the number of sellers, the smaller is
supply.
Productivity
Productivity is output per unit of input.
An increase in productivity lowers costs and therefore increases
supply. A decrease in productivity increases costs and therefore
decreases supply.
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If the wages of oil well drillers increase, the
__________ of oil __________.
1. supply; increases
2. supply; decreases
3. quantity supplied; increases
4. quantity supplied; decreases
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If natural gas and oil are produced together and the
price of natural gas increases, the __________ of oil
__________.
1. supply; increases
2. supply; decreases
3. quantity supplied; increases
4. quantity supplied; decreases
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If the productivity of oil well drillers increases, the
__________ of oil __________.
1. supply; increases
2. supply; decreases
3. quantity supplied; increases
4. quantity supplied; decreases
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Summary: Changes in Quantity Supplied and Changes in Supply
A change in
Price of the good
1. Resource (input)
prices
2. Prices of related
goods
3. Technology
4. Productivity
5. SellersΥ
expectations
Causes a change
And is i llustrated by
in
Quantity supplied A movement from one
point along a fixed
supply curve to another
point on the same curve
Supply
A shift of the entire
supply curve from one
position to another
position (right for an
increase in supply, left
for a decrease in supply)
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Market Equilibrium
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MARKET EQUILIBRIUM
 Market Equilibrium
Definition
When the quantity demanded equals the quantity supplied—when
buyers’ and sellers’ plans are consistent with one another.
Equilibrium: QD = QS
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MARKET EQUILIBRIUM
 Market Equilibrium
Equilibrium price
The price at which the quantity demanded equals the quantity
supplied.
Equilibrium quantity
The quantity bought and sold at the equilibrium price.
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MARKET EQUILIBRIUM
Market Equilibrium:
Illustration
Market equilibrium is at the
intersection of the demand curve
and the supply curve.
The equilibrium price is $1 a bottle.
The equilibrium quantity is 10
million bottles a day.
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MARKET EQUILIBRIUM
 Price: A Market’s Automatic Regulator
Law of market forces
Surplus, or Excess Supply
A surplus or excess supply exists when, at the current market price,
the quantity supplied exceeds the quantity demanded.
When there is a surplus, the price falls.
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MARKET EQUILIBRIUM
Surplus Results in a Fall in
Price
At $1.50 a bottle . . .
• quantity supplied is 11 bottles.
• quantity demanded is 9 bottles.
There is a surplus.
Price falls until the market is in
equilibrium.
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MARKET EQUILIBRIUM
 Price: A Market’s Automatic Regulator
Shortage, or Excess Demand
A shortage or excess demand exists when, at the current market
price, the quantity demanded exceeds the quantity supplied.
When there is a shortage, the price rises.
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MARKET EQUILIBRIUM
Shortage Results in a Rise
in Price
At 75 cents a bottle . . .
• quantity demanded is 11 bottles.
• quantity supplied is 9 bottles.
There is a shortage.
Price rises until the market is in
equilibrium.
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Market equilibrium occurs at the quantity and price
at which
1. quantity demanded equals quantity supplied.
2. demand equals supply.
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If the market price is above the equilibrium price, a
_____ exists and the market price will _____.
1. surplus; rise
2. surplus; fall
3. shortage; rise
4. shortage; fall
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If the market price is below the equilibrium price, a
_____ exists and the market price will _____.
1. surplus; rise
2. surplus; fall
3. shortage; rise
4. shortage; fall
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MARKET EQUILIBRIUM
Effect of an Increase in
Demand on Equilibrium
An increase in demand shifts the
demand curve out or rightward.
The price rises to restore market
equilibrium.
Because of the price increase,
quantity supplied increases along
the supply curve.
Equilibrium quantity increases.
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MARKET EQUILIBRIUM
Effect of a Decrease in
Demand on Equilibrium
A decrease in demand shifts the
demand curve in or leftward.
The price falls to restore market
equilibrium.
Because of the price decrease,
quantity supplied decreases along
the supply curve.
Equilibrium quantity decreases.
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MARKET EQUILIBRIUM
Effect of an Increase in
Supply on Equilibrium
An increase in supply shifts the
supply curve out or rightward.
The price falls to restore market
equilibrium.
Because of the price decrease,
quantity demanded increases along
the supply curve.
Equilibrium quantity increases.
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MARKET EQUILIBRIUM
Effect of a Decrease in
Supply on Equilibrium
A decrease in supply shifts the
supply curve in or leftward.
The price rises to restore market
equilibrium.
Because of the price increase,
quantity demanded decreases along
the supply curve.
Equilibrium quantity decreases.
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MARKET EQUILIBRIUM
Effect of an Increase in
Both Demand and Supply
An increase in demand shifts the
demand curve out or rightward and
an increase in supply shifts the
supply curve out or rightward.
Equilibrium quantity increases.
Equilibrium price might rise or fall
or remain the same.
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MARKET EQUILIBRIUM
Effect of a Decrease in Both
Demand and Supply
A decrease in demand shifts the
demand curve in or leftward and a
decrease in supply shifts the supply
curve in or leftward.
Equilibrium quantity decreases.
Equilibrium price might rise or fall
or remain the same.
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MARKET EQUILIBRIUM
Effect of an Increase in
Demand and a Decrease in
Supply
An increase in demand shifts the
demand curve out or rightward, and
a decrease in supply shifts the
supply curve in or leftward.
Equilibrium price rises.
Equilibrium quantity might
increase, decrease, or remain the
same.
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MARKET EQUILIBRIUM
Effect of a Decrease in
Demand and an Increase in
Supply
A decrease in demand shifts the
demand curve in or leftward, and an
increase in supply shifts the supply
curve out or rightward.
Equilibrium price falls.
Equilibrium quantity might
increase, decrease, or remain the
same.
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MARKET EQUILIBRIUM
 Market Equilibrium Analysis
Analysis of the Variables That Influence Demand and
Supply
How does the event affect demand?
• Increases: Shift the demand curve out or rightward
• Decreases: Shift the demand curve in or leftward
• Unchanged: No shift in demand
How does the event affect supply?
• Increases: Shift the supply curve out or rightward
• Decreases: Shift the supply curve in or leftward
• Unchanged: No shift in supply
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MARKET EQUILIBRIUM
 Market Equilibrium Analysis
Conclusions from the Analysis
How do the shifts in demand and supply affect equilibrium price?
• Increases
• Decreases
• Unchanged
• Cannot be determined
How do the shifts in demand and supply affect equilibrium quantity?
• Increases
• Decreases
• Unchanged
• Cannot be determined
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