Demand, Supply &
Market Equilibrium
Business, Computers,
& Information
Technology
Unit 1 Chapter 3
This is the most important ____ all year!
2
REVIEW
1.
2.
3.
4.
5.
6.
7.
8.
What are the 3 economic questions?
What are the 3 types of Economic Systems?
How do the 3 systems differ?
Why do centrally planned economies have inferior
goods?
Describe 2 good & 2 bad things about Communism.
Describe 2 good and 2 bad things about Free
Market Systems.
How does the Invisible Hand factor into this topic?
Discuss 10 things you did last weekend.
3
Connection to Circular Flow Model
1.
2.
3.
4.
Do individuals supply or
demand?
Do business supply or
demand?
Who demands in the
product
market?
Who supplies in
the product market?
4
DEMAND
6
DEMAND DEFINED
What is Demand?
Demand is the different quantities of goods
that consumers are willing and able to buy at
different prices.
(Ex: Bill Gates is able to purchase a Ferrari, but if
he isn’t willing he has NO demand for one)
What is the Law of Demand?
The law of demand states that there is an
INVERSE relationship between price and
quantity demanded.
7
LAW OF DEMAND
As Price Falls…
…Quantity Demanded Rises
As Price Rises…
…Quantity Demanded Falls
Price
Quantity
Demanded
9
Why does the Law of Demand occur?
The law of demand is the result of four
separate behavior patterns that overlap:
1.Common Sense
2. The Substitution effect
3.The Income effect
4.The Law of Diminishing Marginal Utility:
as you consume more units of any good,
the additional satisfaction from each
additional unit will eventually start to
decrease.
11
Can you see the Law of Diminishing Marginal
Utility in Disneyland’s pricing strategy?
Change
N/A
$54
$33
$15
$10
$5
Graphing Demand
14
Shifts in Demand
CHANGES IN DEMAND
 Ceteris paribus-“all other things held
constant.”
 When the ceteris paribus assumption is
dropped, movement no longer occurs along
the demand curve. Rather, the entire demand
curve shifts.
 A shift means that at the same prices, more
people are willing and able to purchase that
good.
Changes in price
DON’T shift
the curve!
This is a change in demand, not a change in
quantity demanded
15
Change in Demand
Demand
Schedule
Price
$5
$4
Quantity
Demanded
Price of Cereal
$5
What if cereal
10
makes
you
smarter?
20
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
17
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
19
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
20
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 30
$4
20 40
Price of Cereal
$5
4
3
2
$3
30 50
$2
50 70
1
$1
80 100
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
21
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 30
$4
20 40
Price of Cereal
Increase in Demand
Prices didn’t change but
people want MORE
cereal
$5
4
3
2
$3
30 50
D2
$2
50 70
1
$1
80 100
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
22
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
What if cereal
causes baldness?
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
24
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
26
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10
$4
20
Price of Cereal
$5
4
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
27
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 0
$4
20 5
Price of Cereal
$5
4
3
2
$3
30 20
$2
50 30
1
$1
80 60
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
28
Change in Demand
Demand
Schedule
Price
Quantity
Demanded
$5
10 0
$4
20 5
Price of Cereal
$5
Decrease in Demand
Prices didn’t change but
people want LESS cereal
4
3
2
$3
30 20
$2
50 30
1
$1
80 60
o
D2
10
20
30
40
50
60
Demand
70
Quantity of Cereal
80
Q
29
Change in Demand
Price of Cereal
Demand
Schedule
Price
$5
Quantity
Demanded
$5
10
$4
20
4
What if the price
of MILK goes up?
3
2
$3
30
$2
50
1
$1
80
o
Demand
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
31
Where do you get the Market Demand?
Billy
Jean
Other Individuals
Market
Price Q Demd
Price Q Demd
Price Q Demd
Price Q Demd
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
$5
$4
$3
$2
$1
1
2
3
5
7
P
0
1
2
3
5
P
$3
P
$3
Q
$3
D
2
Q
10
20
30
50
80
P
$3
D
3
9
17
25
42
68
D
25
Q
D
30
Q
What Causes a Shift in Demand?
5 Shifters (Determinates) of Demand:
1. Tastes and Preferences
2. Number of Consumers
3. Price of Related Goods
Substitutes: If the price of one increases, the
demand for the other will increase (or vice
versa). Ex: If price of Pepsi falls, demand for Coke will…
Complements: If the price of one increase, the
demand for the other will decrease (or vice
versa). Ex: If price of milk increases, demand for
cereal will... Ex: If price of skis falls, demand for ski
boots will...
34
Substitutes
36
Substitutes
37
Substitutes
38
Substitutes
39
Substitutes
40
Substitutes
41
Substitutes
42
Complements
43
Complements
44
What Causes a Shift in Demand?
4. Income
The incomes of consumers change the demand,
but how depends on the type of good.
1. Normal Goods
◦ As income increases, demand increases
◦ As income falls, demand falls
Ex: Luxury cars, Sea Food, jewelry, homes
2. Inferior Goods
◦ As income increases, demand falls
◦ As income falls, demand increases
Ex: Romen noodles, used cars, used clothing
45
What Causes a Shift in Demand?
5. Future Expectations
47
Change in Qd vs. Change in Demand
Price of Cereal
P
$3
There are two ways to increase
quantity from 10 to 20
A
C
B
$2
1. A to B is a change
in quantity
demand (due to a
change in price)
2. A to C is a change
in demand (shift
in the curve)
D2
D1
o
10
20
Quantity of Cereal
Q Cereal
Practice
First identify the determinant (Shifter). Then
decide if demand will increase or decrease
Hamburgers (a normal good)
1.
2.
3.
4.
5.
6.
Population boom # Cons, Inc
Incomes fall due to recession Income, Dec
Price for Carne Asada burritos falls to $1 Subs, Dec
Price increases to $5 for hamburgers No Shift!
New health craze- “No ground beef” Taste/Pref, Dec
Hamburger restaurants announce that they
will significantly increase prices NEXT
month Expect, Inc
7. Government heavily taxes shake and fries
causes their prices to quadruple. Comp, Dec
8. Restaurants lower price of burgers to $.50 No Shift!
51
SUPPLY
54
Supply Defined
What is supply?
Supply is the different quantities of a good that sellers
are willing and able to sell (produce) at different prices.
What is the Law of Supply?
There is a DIRECT (or positive) relationship between
price and quantity supplied.
•As price increases, the quantity producers make
increases
•As price falls, the quantity producers make falls.
Why? Because, at higher prices profit seeking
firms have an incentive to produce more.
EXAMPLE: Mowing Lawns
55
Example of Supply
You own a lawn mower and you are
willing to mow lawns.
How many lawns will you mow at these prices?
Supply
Schedule
Price per
lawn mowed
Quantity
Supplied
$1
$5
$20
$50
$100
$1000
57
GRAPHING SUPPLY
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
58
GRAPHING SUPPLY
Supply
Schedule
Price
$5
$4
Quantity
Supplied
Price of Cereal
Supply
$5
What if new
50
companies
start
making
40
cereal?
30
4
3
2
$3
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
60
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
61
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
62
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50 70
$4
40 60
Price of Cereal
Supply
$5
4
3
2
$3
30 50
$2
20 40
1
$1
10 30
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
63
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50 70
$4
40 60
Price of Cereal
Supply
4
3
2
$3
S2
$5
Increase in Supply
Prices didn’t change but
there is MORE cereal
produced
30 50
$2
20 40
1
$1
10 30
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
64
Change in Supply
Supply
Schedule
Price
$5
$4
Quantity
Supplied
Price of Cereal
Supply
$5
What if a drought
50
destroys
corn
and
wheat
40
crops?
30
4
3
2
$3
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
66
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
67
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50
$4
40
Price of Cereal
Supply
$5
4
3
2
$3
30
$2
20
1
$1
10
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
68
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50 30
$4
40 20
Price of Cereal
Supply
$5
4
3
2
$3
30 10
$2
20 1
1
$1
10 0
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
69
Change in Supply
Supply
Schedule
Price
Quantity
Supplied
$5
50 30
$4
40 20
Price of Cereal
S2
$5
4
3
Decrease in Supply
Prices didn’t change but
there is LESS cereal
produced
2
$3
Supply
30 10
$2
20 1
1
$1
10 0
o
10
20
30
40
50
60
70
Quantity of Cereal
80
Q
70
6 Determinants (SHIFTERS) of Supply
1.
2.
3.
4.
Resource Prices/Availability of inputs
Number of Sellers
Technology
Government Action:Taxes & Subsidies
Subsidies
A subsidy is a government payment that supports a business or market.
Subsidies cause the supply of a good to increase.
Taxes
5.TheOpportunity
government can reduce Cost
the
Regulation
of
Alternative
occurs when the
Regulation
Production
Expectations of Future Profit
supply of some goods by placing an government steps into a market to
excise tax on them. An excise tax affect the price, quantity, or quality of
is a tax on the production or sale of
a good. Regulation usually raises
6.
a good.
costs.
Changes in PRICE don’t shift the curve. It only
causes movement along the curve.
72
Supply Practice
First, identify the determinant (shifter) then
decide if supply will increase or decrease
Shifter
Increase or
Decrease
Left or Right
1
2
3
4
5
6
74
Supply Practice
1. Which determinant (SHIFTER)?
2. Increase or decrease?
3. Which direction will curve shift?
1.
2.
3.
4.
5.
6.
Hamburgers
Mad cow disease kills 20% of cows Res Avail, Dec
Price of burgers increase 30% No Shift!
Government taxes burger producers Gov’t, Dec
Restaurants can produce burgers and/or
tacos. A demand increase causes the
price for tacos to increase 500% Opp. Cost, Dec
New bun baking technology cuts
production time in half Technology, Inc
Minimum wage increases to $10 Res Price, Dec
76
Putting Supply and
Demand Together!!!
78
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
$5 50
3
$4 20
$3 30
$2 50
$1 80
$4 40
2
$3 30
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
79
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
S
P Qs
4
$5 10
$5 50
Equilibrium Price = $3
(Qd=Qs)
$4 40
3
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
2
$3 30
1
o
D
10
20
30
40
50
60
70
Equilibrium Quantity is 30
80
Q
$2 20
$1 10
81
Supply and Demand are put together to determine
equilibrium price and equilibrium quantity
Demand P
Schedule $5
P Qd
3
$4 20
$2 50
$1 80
S
P Qs
4
$5 10
$3 30
Supply
Schedule
2
What if the price
increases to $4?
1
o
$5 50
$4 40
$3 30
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
82
At $4, there is disequilibrium. The quantity
demanded is less than quantity supplied.
Demand P
Schedule $5
P Qd
How much is the
surplus at $4?
Answer: 20
$4 20
$1 80
P Qs
4
3
$2 50
S
Surplus
(Qd<Qs)
$5 10
$3 30
Supply
Schedule
2
$4 40
$3 30
1
o
$5 50
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
83
How much is the surplus if the price is $5?
Demand P
Schedule $5
P Qd
3
$4 20
$2 50
$1 80
S
P Qs
4
$5 10
$3 30
Supply
Schedule
2
What if the Answer:
price 40
decreases to $2?
1
o
D
10
20
30
40
50
60
70
80
Q
$5 50
$4 40
$3 30
$2 20
$1 10
84
At $2, there is disequilibrium. The quantity
demanded is greater than quantity supplied.
Demand P
Schedule $5
P Qd
S
P Qs
4
How much is the
shortage at $2?
Answer: 30
$5 10
3
$4 20
$3 30
$2 50
$1 80
Supply
Schedule
2
o
10
20
30
40
$4 40
$3 30
Shortage
(Qd>Qs)
1
$5 50
D
50
60
70
80
Q
$2 20
$1 10
85
How much is the shortage if the price is $1?
Demand P
Schedule $5
P Qd
Supply
Schedule
S
P Qs
4
$5 10
Answer: 70
3
$4 20
$3 30
$2 50
$1 80
$5 50
$4 40
2
$3 30
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
86
The FREE MARKET system automatically
pushes the price toward equilibrium.
Demand P
Schedule $5
P Qd
Supply
Schedule
S
When there is a
surplus, producers P Qs
lower prices
$5 50
When there is a
shortage, producers $4 40
raise prices
$3 30
4
$5 10
3
$4 20
$3 30
$2 50
$1 80
2
1
o
D
10
20
30
40
50
60
70
80
Q
$2 20
$1 10
87
Shifting Supply and
Demand
88
Assume shifts in supply or demand change
equilibrium P and Q instantaneously
89
Supply and Demand Analysis
Easy as 1, 2, 3
1. Before the change:
• Draw supply and demand
• Label original equilibrium price and quantity
2. The change:
• Did it affect supply or demand first?
• Which determinant caused the shift?
• Draw increase or decrease
3. After change:
• Label new equilibrium?
• What happens to Price? (increase or decrease)
• What happens to Quantity? (increase or decrease)
Let’s Practice!
90
S&D Analysis Practice
1. Before Change (Draw equilibrium)
2. The Change (S or D, Identify Shifter)
3. After Change (Price and Quantity After)
Analyze Hamburgers
1. Price of sushi (a substitute) increases.
Demand Increases
2. New grilling technology cuts production
time in half. Supply Increases
3. Price of burgers falls from $3 to $1.
No Shift. Shortage.
4. Price for ground beef triples.
Supply Decreases
5. Human fingers found in hamburger
92
restaurants. Demand Decreases
Double Shifts
• Suppose the demand for sports cars fell at the
same time as production technology improved.
• Use S&D Analysis to show what will happen to
PRICE and QUANTITY.
If TWO curves shift at the same
time, EITHER price or quantity
will be indeterminate.
94
Use a S&D to explain Change
in Demand, Change in Supply
Go to: Reffonomics.com, Basic Concepts,
S&D
- Demand Chart Interactive
- Supply Chart Interactive
- 10 Supply and Demand Questions
Interactive
(While going through the 10 questions, ask
yourself, are we talking about the Product
Market (Demand) or the Resource Market
(Supply)
96
22. Which of the following will occur in a competitive
market when the price of a good is less than the
equilibrium?
(a) Price will decrease to eliminate the surplus and
restore equilibrium.
(b) Price will decrease to eliminate the shortage and
restore equilibrium.
(c) Price will increase to eliminate the surplus and restore
equilibrium.
(d) Price will increase to eliminate the shortage and
restore equilibrium.
(e) Price will remain constant, because supply will
increase to eliminate the shortage.
98
THAT’S IT!
99