1.0 Demand and Supply Analysis
CHAPTER 3
Real World Examples
•
FLU SHOTS
•
•
OIL CARTELS
•
•
Illustrates a market shortage
Illustrates how supply shifts change
transportation costs
THE MINIMUM WAGE
•
Illustrates a price floor
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Begin
© Prof. Harmon 2
Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
1
End
1.1 Flu Shots
Each November there never seems
to be enough supply.
Like HealthCare it’s a shortage
problem
Republicans and Democrats debate
whether there should be
government production.
We will use Supply and Demand to
show a graph of this shortage
situation and whether a price floor
is a solution
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
2
End
1.2 Oil Cartels
Rising oil prices effect the prices of
almost everything, and have caused
major unemployment problems in the
US. Two examples:
Transportation costs, US firms have
moved furniture making plants abroad
close to the raw natural resources of
timber forests to reduce shipping costs.
US car manufactures are now
downsizing to “green” cars and Detroit
is shedding jobs.
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
3
End
1.3 Minimum Wage
In the market for unskilled labor the minimum wage is a
policy solution to the outcome of wages below “living”
wage levels.
It is controversial because the wage floor (i.e. raising
the wage above the equilibrium level) disrupts the
market and pits Democrats v Republicans.
We will explore the pros and cons of this
4
Return to First Slide
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
Lecture Outline
1. First Slide of Presentation
2. Demand
A downward sloping curve
3. Supply
A upward sloping curve
4. Market Equilibrium
The process of elimination of surplus and shortages, Econ Lab
5. Government Intervention
Price ceilings and floors, Econ Lab
You can continue to the next slide “Definition of Demand
Curve”, or select a topic and click the hyperlink.
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
5
End
2. DEMAND
Topics Covered:
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.7
Definition
Downward Sloping
Individual & Market Demand
Move v Shift
Move
Shift
Shift Factors
Summary Move v Shift
Demand is covered in slides 6 to 27, you can click on the
subtopics, or simply right mouse click to advance.
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
6
End
2.1 Demand
Demand indicates how much of a good
consumers are both willing and able to
buy at each possible price during a given
time period, other things constant
Emphasis on individual being both willing and
able to buy is critical to demand
Consumer demand and needs are not the
same thing
Need focuses on the willingness and again
ignores the ability to purchase
Need may be a reason society consider
income transfers
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
7
End
2.2.a Downward Sloping
The law says that:
The higher the price, the smaller the quantity
demanded
The lower the price, the larger the quantity
demanded
Specifically, why is more demanded
when the price is lower?
The Substitution Effect
The Income Effect
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
8
End
2.2.b Substitution Effect
Substitution Effect
When the price of a good falls, its
new price. which is now cheaper
relative to the price of similar goods,
makes consumers more willing to
purchase this good
Alternatively, when the price of a
good increases, its new price, which
is now more expensive relative to
the price of similar goods, makes
consumers less willing to purchase
this good
Remember it is the change in the relative price – the
price of one good compared to the prices of other goods
9
– that causes the substitution effect
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.2.c Income Effect
Money income is simply the number of
dollars received per period of time
Real income is person’s income
measured in terms of the goods and
services it can buy  purchasing power
When the price of a good decreases, a
person’s real income increases  increased
ability to buy a good  increase in quantity
demanded
When the price of a good increases  real
income declines  reduces the ability to buy
a good  decline in quantity demanded
10
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.3.a Demand Schedule & Demand Curve for Pizza
(a) Demand Schedule
(b) Demand Curve
Quantity Demanded
per Week (millions)
a) $15
b)
12
c)
9
d)
6
e)
3
$18
8
14
20
26
32
$15
The price is for a 12 inch regular pizza
and the time period is 1 week. The
demand schedule lists possible prices,
along with the quantity demanded at
each price.
Price per Pizza
Price per
Pizza
The demand curve at the right shows
each price / quantity combination listed
in the demand schedule as a point on
the
demand curve.
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2 Demand
3 Supply
a
$12
b
$9
c
$6
d
$3
e
$0
8
14
20
26
32
Millions of Pizzas per week
4 Market Equilibrium
5 Government Intervention
11
End
2.3.b Individual & Market Demand
Individual demand refers to the demand
of an individual consumer
Market demand is the sum of the
individual demands of all consumers in
the market
Important: the convention is that
“demand “ is meant to refer to market
demand
12
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.4 MOVE V SHIFT
Change in Quantity Demanded Compared
to Change in Demand
Change in Quantity Demanded
Refers to a move along the demand curve
Shifts of the Demand Curve (change in
demand)
Refers to moving the entire demand curve
You can click select a topic above, or click
here to skip ahead to the summary of this13
section.
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
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2.5.a Change in Quantity Demanded: MOVE
Demand for pizza is not a specific
quantity, but rather the entire
relation between price and
quantity demanded, and is
represented by the entire demand
curve
a
Price per quart
$15.00
An individual point on the demand
curve shows the quantity demanded
at a particular price
For example, at a price of $12, the
quantity demanded is 14 million
pizzas per week
A change in price,
other things constant,
causes a movement
along a demand curve
b
12.00
c
9.00
d
6.00
e
3.00
D
0
The movement from say, b to c, is a change
in quantity demanded and is shown as a
movement along the demand curve and can
only be caused by a change in price
8
14
20 26
32
Millions of pizzas per week
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
14
End
2.5.b Black Friday: The Super Bowl of Shopping
Black Friday, it is the day when thousands of
people across America spend hours in line – even
camping out -- to get their hands on sharply
discounted products, often in the wee hours of the
morning. Retailers hope Black Friday sales (and the
expanded openings on "Grey Thursday") aren't the
equivalent of a Hollywood film that has a strong
first weekend and then tanks the next.
During the sale quantity demanded increases
After the sale quantity demanded declines
Discuss whether this is move along or shift of the
demand curve.
After Rush, Retailers Try New Shopping Lures By C.
TAN, 11/26, 2007
15
Return to Move V Shift
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.6 Change in Demand: SHIFT
The Demand curve shifts when factors
other than price, change.
Economists also refer to shifts in
demand as a “change in demand”
Demand can either increase, or
decrease as shown in the next 2 slides
Return to Move V Shift
16
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
The original demand curve
is given as D, and assumes
a certain level of money
income.
Suppose market demand
increases from D to D‘ 
consumers now are willing to
buy more pizza at each price.
Price
2.6.a Shifts (changes) in Market Demand: INCREASE
$15
b
12
f
An increase in
demand 
rightward shift in the
demand curve 
consumers are
willing and able to
buy more pizza (by 6
units)at each price.
9
For example, at a price of
$12, the amount of pizza
demanded increases from 14
to 20 million per week as
shown by the movement from
b on demand curve D to point
f on demand curve D'.
6
3
–A change
in one of the
determinants of demand
other than price causes a
shift of a demand curve 
changing demand
D'
D
0
8
14
20
26
Millions of pizzas per week
32
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3 Supply
4 Market Equilibrium
5 Government Intervention
17
End
The original demand curve
is given as D, and assumes
a certain level of money
income.
Suppose market demand
decreases from D‘ to D 
now consumers are less
willing to buy pizza at each
price.
Price
2.6.b Shifts (changes) in Market Demand: DECREASE
$15
b
12
f
A decrease in
demand  leftward
shift in the demand
curve  consumers
are less willing to
buy pizza (by 6
units)at each price.
9
For example, at a price of
6 –A change in one of the
$12, the amount of pizza
determinants of demand
demanded decreases from 20
3 other than price causes a
to 14 million per week as
shift of a demand curve 
shown by the movement point
changing demand
from f on demand curve D‘
0
to b on demand curve D . Return to Shift 8
14
20
D'
D
26
Millions of pizzas per week
32
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
18
End
2.7 Demand Curve Shift Factors
Examples are:
1. Money income of consumers
• Normal Goods Inferior Goods
2. Prices of related goods:
• 2a Substitutes, 2b Complements
3. Consumer expectations
4. Number and composition of consumers in
the market
5. Consumer tastes
Click here to Skip ahead to summary of
Moves v Shifts
Return to Shift
19
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.7.1. Changes in Consumer Income
Goods can be classified into two broad
categories depending on how the
Return to
demand for the good responds to
Shift
Factors
changes in money income
Normal goods: the demand increases when
income increases, and decreases when
income decreases
Inferior goods: the demand decreases
when income increases, and increases when
income decreases
• As income increases, consumers tend to switch
from consuming these goods to consuming
normal goods
McDonald's has been benefitting from the tendency of
cash-strapped consumers to "trade down" from more
pricey eating-out options in the U.S. WSJ 8/8/2008
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
20
End
2.7.2.a Changes in the Prices of Related Goods
The prices of other goods are another of the
factors assumed constant along a given demand
Return to
curve
Shift
Factors
Two general relationships
Two goods are substitutes if an increase in the price
of one shifts the demand for the other rightward
• and, conversely, if a decrease in the price of one shifts the
demand for the other good leftward
Two goods are complements if an increase in the
price of one shifts the demand for the other leftward,
• and conversely, a decrease in the price of one shifts the
demand for the other rightward
21
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3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.7.2.b.Example of Substitutes
• Who’s burgers are better?)
What about homemade?
Return to
Shift
Factors
22
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.7.2.c Example of Complements
• The current run up in the price of gasoline
has decreased the demand for the SUV
gas guzzlers)
Return to
Shift
Factors
Begin
“rising prices at the pump are starting to make
some Americans think twice before buying a gas-23
sucking behemoth. Sales of big SUVs took a
beating in April” (Business Week May 2004)
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.7.3. Changes in Consumer Expectations
A change in consumer expectations with respect to
future prices and future incomes is another of the
factors which shifts demand:
Changes in income expectations
If individuals expect income to increase in the future,
current demand increases and vice versa
Changes in price expectations
Return to
Shift
If individuals expect prices to increase in the future, current
Factors
demand increases.
• For example if consumers expect interest rates to rise (as they
did on: May 25, 2004) then demand for housing increases
Conversely, it decreases if future prices are expected to
decrease
24
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.7.4. Number or Composition of Consumers
Because the market demand curve is the sum of
the individual demand curves, a change in the
number of consumers changes demand:
An increase in the number of consumers  increase in
market demand
A decrease in the number of consumers  decrease in
market demand
Return
to Shift
Demographic changes in the population that Factors
consumes pizza , for example, will change the
demand for pizza
McDonald's has been benefitting from new menu items, expanded
hours and the tendency of cash-strapped consumers to "trade down"
from more pricey eating out options in the U.S. And overseas, it is
benefiting from expansion and organic growth in key markets like
Australia, China and Japan while getting the currency benefits of
the sagging U.S. dollar
Click for News Article
Begin
2 Demand
3 Supply
WSJ 7/23/08
4 Market Equilibrium
5 Government Intervention
25
End
2.7.5 Consumer Tastes
Sarah Palin's Glasses a Hit
They're all all the rage and you
can thank Sarah Palin for that. The
VP nominee's eyeglasses are
flying off the shelves all over the
country.
Yakima's Cascade Eye Center
receives several phone calls a
week, requesting them. The maker
of the glasses is Kazuo Kawasaki
and the frame is titanium.
Currently the glasses are on backorder right now.
Return to
Shift
Factors
26
Source
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
2.8 Summary: shifts v move along
Remember the distinction between a movement along a given
demand curve and a shift of the demand curve
A change in one of the
A change in price, other things Return to determinants of demand
other than price causes a
constant, causes a movement
Shift
along a demand curve 
Factors shift of a demand curve 
changing quantity demanded
changing demand
27
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3. SUPPLY
Topics Covered:
3.1
3.2
3.3
3.4
3.5
3.6
3.7
Definition
Upward Sloping
Individual & Market Supply
Move
Shift
Shift Factors
Summary Move v Shift
Supply is covered in slides 28 to 43, you can click
on the subtopics, or simply right mouse click to 28
advance.
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.1 Definition of Supply
Supply indicates how much of a good producers
are willing and able to offer for sale per period at
each possible price, other things constant
Law of supply states that the quantity supplied is
usually directly related to its price, other things
constant
The lower the price, the smaller the quantity supplied
Conversely, the higher the price, the greater the quantity
supplied
Reasons for Upward Slope
Increased Rewards
Increased Costs
Return to Supply
29
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.2.a Upward Sloping bec. Higher Rewards
Two reasons producers tend to offer
more for sale when the price rises
First, as the price increases, other
things constant, a producer becomes
more willing to supply the good
Prices act as signals to existing and
potential suppliers about the rewards for
producing various goods  higher prices
attract resources from lower-valued uses
30
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.2.b Upward Sloping bec. Higher Costs
Second, higher prices reflect the
producer’s greater cost to supply the
good
The law of increasing opportunity costs 
the marginal cost of production increases as
output increases
Since producers face a higher marginal cost
of production, they must receive a higher
price for that output in order to be able to
increase the quantity supplied
31
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.2.c Supply Schedule and Supply Curve for Pizzas
Supply Schedule
Price per
Pizza
Quantity Supplied
per Week (millions)
$15
12
9
6
3
28
24
20
16
12
S
Price
$15
12
9
6
Both the supply curve and the supply
schedule show the quantities of pizza
supplied per week at various prices by all 3
the pizza makers in the market.
Price and quantity supplied are directly, 0
or positively related.
Producers offer more for sale at higher
prices than at lower prices  the supply
curve
slopes upward.
Begin
2 Demand
3 Supply
12 16 20 24 28
Millions of pizzas per week
Return to Supply
4 Market Equilibrium
5 Government Intervention
32
End
3.3 Individual Supply and Market Supply
Individual supply refers to the supply of
an individual producer
Market supply is the sum of individual
supplies of all producers in the market
Unless otherwise noted, we will be
referring to market supply
33
Return to Supply
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.4 Change in Quantity Supplied: MOVE
Supply of pizza is not a specific
quantity, but rather the entire
relation between price and
quantity supplied, and is
represented by the entire supply
curve
Price
$15
A change in price,
other things constant,
causes a movement
along a supply curve
For example, at a price of $9, the
quantity supplied is 20 million
pizzas per week
C
9
B
6
A
3
The movement from say, c to d, is a change
in quantity supplied and is shown as a
movement along the supply curve and can
only be caused by a change in price
E
D
12
An individual point on the supply
curve shows the quantity supplied at
a particular price
S
0
12 16 20 24 28
Millions of pizzas per week
Return to Supply
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
34
End
3.5.a Shifts of the Supply Curve
The Supply curve shifts when factors
other than price, change.
Economists also refer to shifts in supply
as a “change in supply”
Click here for “Increase in Supply”
Click here for “Decrease in Supply”
Click here to continue ahead to “Shift
Factors”
Return to Supply
35
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.5.b An Increase in the Supply of Pizza
$15.00
Price per quart
Suppose we begin with
the initial supply curve
as S. A new high-tech
oven bakes pizza in half
the time, and the impact
of this is that the supply
curve shifts from S to S'.
The result of the increase
in supply is that more is
supplied at each possible
price. E.g., when the price
is $12, the amount
supplied increases from
24 million to 28 million
pizzas, as shown by the
movement from point g to
point h.
Remember: as with demand, a
rightward shift of supply
represents an increase in supply
S
S'
g
12.00
h
9.00
6.00
3.00
0
12 16 20 24 28
Millions of pizzas per week
Return to Shift
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
36
End
3.5.b Decrease in the Supply of Pizza
2 Demand
3 Supply
$15.00
Price per quart
Suppose we begin with
the initial supply curve
as S. A new safety
precaution doubles the
baking time for a pizza,
and the impact of this is
that the supply curve
shifts to S from S'.
The result of the decrease
in supply is that less is
supplied at each possible
price. E.g., when the price
is $12, the amount
supplied decreases from
28 million to 24 million
pizzas, as shown by the
movement from point h to
Begin
point
g.
Remember: as with demand, a
leftward shift of supply
represents a decrease in supply
S
S'
g
12.00
h
9.00
6.00
3.00
0
12 16 20 24 28
Millions of pizzas per week
Return to Shift
4 Market Equilibrium
5 Government Intervention
37
End
3.6 Supply Curve Shift Factors
Examples of shift factors are:
1. State of technology
2. Prices of relevant resources
3. Producer expectations
4. Number of producers in the market
Click the topic to view the
corresponding slide, or
Click here to Skip ahead to summary of 38
Moves v Shifts
Return to Shift
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.6.1. Changes in Technology
If a more efficient technology is
discovered, production costs fall 
suppliers will be more willing and more
able to supply the good  rightward
shift of the supply curve
Return to shift factors
Example:
Wal-Mart Stores Inc., is eliminating paper
payroll checks in the U.S., transferring
workers' earnings to a debit card if they
decline direct deposit to a bank. A move that
it said will save paper and money. It
estimates the move will save 257,572 pounds
of paper a year. The shift will reduce its
payroll costs. (WSJ 9/3/09)
39
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.6.2. Changes in the Prices of Relevant Resources
Relevant resources are those employed in
the production of the good in question
For example, pizza
• if the price of mozzarella cheese falls, the cost of
pizza production declines  supply increases 
shifts to the right
• Conversely, if the price of some relevant resource
increases  supply decreases  shifts to the left
Other examples:
Farmers are expected to
plant less corn this year
(2008) and that could
mean higher bills at the Return to shift
grocery store.
Hershey again raised
wholesale prices (2008) ,
pushing domestic prices up
nearly 10%, to offset rising
costs for raw materials,40fuel
and transportation.
factors
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.6.3 Changes in Producer Expectations
Changes in producer expectations about the
future can change current supply
• If pizza suppliers expect higher prices in the future, they
may begin to expand today  current supply shifts
rightward
• Conversely, when a good can be easily stored, expecting
future prices to be higher may reduce current supply
• More generally, any change expected to affect future
profitability could shift the supply curve
Example:
Champagne producers agreed to pick
32% fewer grapes this year, leaving
Return
billions of grapes to rot on the
ground,to shift factors
in a move to counter fizzling bubbly
sales around the world amid the
economic downturn. WSJ 9/3/09
41
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.6.4. Changes in the Number of Producers
Since market supply sums the amounts
supplied at each price by all producers,
the market supply depends on the
number of producers in the market
• If that number increases, supply increases 
shifts to the right
• If the number of producers decreases, supply will
decrease  shift to the left
42
Return to shift factors
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
3.7 Summary: shifts v move along
Remember the distinction between a movement along a given
demand curve and a shift of the supply curve
A change in price, other things
constant, causes a movement
along a supply curve 
changing quantity supplied
A change in one of the
determinants of supply other
than price causes a shift of a
supply curve  changing supply
Return to 3. SUPPLY
43
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4 Market Equilibrium
5 Government Intervention
End
4. MARKET EQUILIBRIUM
4.1 The Free Market Dynamic
Surplus, Shortage, Stable outcome
4.2 Solo Shifts
Shifting one curve holding the other constant, examining the
effects on price and quantity
4.3 Simultaneous Shifts
Shifting both curves holding the other constant, examining
the effects on price and quantity
44
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4 Market Equilibrium
5 Government Intervention
End
4.1.a Markets
A market sorts out the conflicting price
perspectives of individual participants – buyers
and sellers
Market represents all the arrangements used
to buy and sell a particular good or service
Markets reduce the transaction costs of
exchange – the costs of time and information
required for exchange
The coordination that occurs through markets
occurs because of Adam Smith’s invisible hand
Surplus, Shortage
45
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2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.1.b Surplus
Suppose the initial
price is $12 
producers supply 24
million pizzas per
week as shown by the
supply curve while
consumers demand
only 14 million 
excess quantity
supplied (or surplus)
of 10 million pizzas
per week
$15.00
Surplus
12.00
c
9.00
6.00
3.00
D
0
The “invisible hand” goes to
work quickly as the
suppliers’ desire to eliminate
the surplus puts downward
pressure on the price, as
symbolized
by the arrow
Begin
pointing down in the graph
2 Demand
S
Price
3 Supply
16
20
24
Millions of pizzas per week
As the price falls, producers reduce their quantity
supplied and consumers increase their quantity
demanded and the market moves towards
equilibrium at point c
4 Market Equilibrium
5 Government Intervention
46
End
4.1.c Shortage
Price
Alternatively, suppose
the price is initially $6
per pizza. At this price $15.00
consumers demand 26
12.00
million pizzas but
producers supply only
9.00
16 million  an excess
quantity demanded (or a
6.00
shortage) of 10 million
pizzas per week.
3.00
S
c
Shortage
D
The “invisible hand”
0
quickly works as producers
16
20
26
notice that the quantity
Millions of pizzas per week
supplied has sold out and
those customers still
As prices increase, producers increase their quantity
demanding pizzas are
supplied and consumers reduce their quantity demanded
grumbling  pressures for
until the equilibrium price of $9 at point c is reached
Beginprices as shown by
higher
47 End
the arrow2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
4.1.d The Invisible Hand at Work
A surplus creates downward pressure
on the price and a shortage creates
upward pressure
At a specific price, so long as quantity
supplied and quantity demanded differ,
prices will tend to change
Note that a shortage or a surplus must
always be defined at a particular price
48
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.1.e Stable Outcome
When the quantity that consumers are
willing and able to pay equals the
quantity that producers are willing and
able to sell, the market reaches
equilibrium  the independent plans of
both buyers and sellers exactly match 
market forces exert no pressure to
change price or quantity
In a diagram this occurs at the point
where the supply and demand curves
intersect.
In other words at the middle of the “X” 49
Return to 4. EQUILIBRIUM
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.2.a Solo Shifts
Once a market reaches equilibrium, that
price and quantity will prevail until one
of the determinants of demand or
supply changes
A change in any one of these determinants
will usually change equilibrium price and
quantity in a predictable way
We will now look at solo shifts, that is
shifting one curve and leaving the other
constant:
• Demand Shift
• Supply Shift
Return to 4. EQUILIBRIUM
50
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.2.b Solo Shift in Demand
The initial equilibrium price
is given by D and S  $9 and
20 million pizzas per week.
Price
S
Now suppose that one of
the determinants of
demand changes in a
$12
way that increases
demand  demand
9
shifts from D to D'.
After demand increases
to D', the amount
demanded at the initial
price of $9 is 30 million
pizzas which exceeds the
amount supplied of 20
million pizzas 
shortage  upward
pressure on price.
Begin
2 Demand
D'
D
0
20
24
30 Millions of pizzas per week
As the price increases, the quantity demanded decreases along the new
demand curve, D', and the quantity supplied increases along the existing
supply curve S until the two quantities are again equal to each other at a
price of $12 and a quantity of 24 million pizzas per week.
3 Supply
4 Market Equilibrium
5 Government Intervention
51
End
4.2.c Summary
Thus, given an upward-sloping demand
curve, an increase in demand  a
rightward shift of the demand curve
increases both the equilibrium price and
quantity
Alternatively, a decrease in demand  a
leftward shift of the demand curve
reduces both the equilibrium price and
quantity
52
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.2.d Solo Shift in Supply
Again, suppose that we begin with S
and D as the initial supply and
demand curves  the amount
demanded at the initial price of
$9.00 is 20 million pizzas.
Suppose supply now increases as
shown by the shift from S to S'.
After supply increases, the amount
supplied at the initial price of $9
increases from 20 to 30 million
pizzas per week  a surplus 
downward pressure on the price 
the quantity supplied declines along
the new supply curve and the
quantity demanded increases along
the existing demand curve until the
new equilibrium is reached at $6
and the quantity is 26 million pizzas
per week
Begin
2 Demand
3 Supply
S
S'
$9
6
20
26 30
Millions of Pizzas per Week
4 Market Equilibrium
5 Government Intervention
D
53
End
4.2.e Summary
An increase in supply  a rightward
shift of the supply curve reduces the
equilibrium price but increases
equilibrium quantity
On the other hand, a decrease in supply
 a leftward shift of the supply curve
increases equilibrium price but
decreases equilibrium quantity
54
Return to Solo Shifts
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.3.a Simultaneous Shifts
As long as only one curve shifts, we can
say for sure what will happen to
equilibrium price and quantity
If both curves shift, however, the
outcome is less obvious
The possibilities are shown in the next
Exhibit
55
Return to 4. EQUILIBRIUM
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.3.b Effects of Changes in Both Supply and Demand
Change in Demand
Change in Supply
Demand increases
Supply
increases
Supply
decreases
Equilibrium
price change
is indeterminate.
Demand decreases
Equilibrium
price falls.
Equilibrium
quantity increases.
Equilibrium
quantity change
is indeterminate.
Equilibrium
price rises.
Equilibrium price
change is indeterminate.
Equilibrium
quantity change
is indeterminate.
Equilibrium
quantity decreases.
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
56
End
4.3.c Summary: Shift in same direction
If demand and supply shift in the
same directions, we can say what
will happen to equilibrium quantity
It will increase if demand increases
and supply increases
It will decrease if demand decreases
and supply decreases
Without reference to the size of
the shifts, we cannot say what will
57
happen to equilibrium price
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.3.d Summary: Shift in opposite directions
If demand and supply shift in
opposite directions, we can say
what will happen to equilibrium
price
It will increase if demand increases
and supply decreases
It will decrease if demand decreases
and supply increases
Without reference to the size of
the shifts, we cannot say what will
58
happen to equilibrium quantity
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
4.3.e Illustration of Increase in Both Supply and Demand:
Indeterminate Effect on Price, Increase in Quantity
a) Assume: Shift in demand dominates
The initial supply and demand
curves are shown as D and S
 p and Q are the initial price
and quantity.
Suppose that supply and
demand both increase 
shift to the right. For a
determinate effect on Price,
further suppose that demand
shifts more than supply as
shown by D' and S'.
In this instance, price and
quantity both increase to p'
and Q'.
S
S'
p'
p
D'
D
0
Q
Q'
Units per period
Conversely, if both demand and supply were to decrease – for example, from D‘ S‘
to D / S, the equilibrium quantity would decrease and the effect on price would be
indeterminate,
unless a further assumption is made about which shift dominates.
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
59
End
4.3.f Illustration of Increase in Both Supply and Demand:
Indeterminate Effect on Price , Increase in Quantity
Assume: Shift in supply dominates
Price
S
Again, suppose both supply and
demand increase but in this case,
supply shifts by more than
demand  price decreases from
p to p"and quantity increases.
S"
p
Alternatively, if both supply and
demand decrease with the shift
in supply dominating  price
will increase and quantity will
decrease.
p"
D"
D
0
Q Q"
Begin
2 Demand
3 Supply
4 Market Equilibrium
Units per period
5 Government Intervention
60
End
4.3.g Flash Module: Illustrate Simultaneous Shifts
D&S
Shift:
Opposite:
P Det.
Q Indet.
Same:
P Indet.
Q Det.
Back
Return to 4. EQUILIBRIUM
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
61
End
5. GOVERNMENT INTERVENTION
From time to time, in Capitalist Economies, the People
determine that market outcomes are unfair.
Two famous examples in our economy are:
The market price received by the American Farmer for his/her
product is too low.
• To compensate the Government intervenes and sets a price floor
(a minimum price) on agricultural produce.
Following WW II, the returning GI faced a situation of a
shortage of rental units in urban areas and unaffordable prices.
• To alleviate the situation the Government intervened and set a
price ceiling (a maximum price) for rental units in large cities.
In the next 4 slides we analyze the government budget
obligation entailed by these commitments.
5.1 Price Floor
5.2 Price Ceiling
5.3 Summary
5.4 Flash Module
62
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
5.1 Effects of a Price Floor
The federal government often regulates the
prices of agricultural commodities in an attempt
to ensure farmers a higher and more stable
income than they would otherwise earn.
Reduction in
Private Market
Sales
Price times
Increase in
Quantity
Supplied
S
To achieve higher prices, the federal
government sets a price floor  a minimum
selling price that is above the equilibrium price
Surplus
$2.50
Suppose it places a $2.50 per gallon price floor
for milk. At this price, farmers supply 24 million
gallons per week, but consumers demand only 14
million gallons  a surplus of 10 million gallons
$1.90
This surplus milk will spoil if it sets on store shelves.
As a result of this price support program, the
government spends billions of dollars buying and
storing surplus agricultural products. (Cost = Green
and Blue rectangles)
Begin
2 Demand
3 Supply
4 Market Equilibrium
Private
Market
Sales
D
0
14 19 24
Millions of gallons per month
5 Government Intervention
63
End
5.2 Effects of a Price Ceiling
Prices can be kept below the equilibrium
levels by establishing a price ceiling, or a
maximum selling price, which is below the
equilibrium price
A common example is rent control in
large cities following WW II. Suppose
$200
the market-clearing rent is $200 per
month with 50,000 rented apartments.
Now suppose the government sets a
maximum rent of $100. At this ceiling
price, 60,000 rental units are demanded,
but only 40,000 are supplied (a shortage).
Begin
3 Supply
S
Rent times
Increase in
Quantity
Demanded
$100
To resolve the shortage the Government can
construct public housing or subsidizing
private construction. (Cost = Green and Blue
rectangles). Also it can impose guidelines for
0
the “fair” allocation of the apartments on the
private market (Yellow rectangle).
2 Demand
Decrease in
Rent Roll from
Private Market
4 Market Equilibrium
Rent
Roll
from
Private
Market
Shortage
D
40 50 60
Thousands of rental units per month
5 Government Intervention
64
End
5.3 Summary: Floors & Ceilings
To have an impact, a price floor must be set above the
equilibrium price and a price ceiling must be set below
the equilibrium price
The intent of the price ceiling is to make the item more
affordable to consumers, the intent of the price floor is
to make the item more profitable for producers.
However, the effect of price floors and ceilings is to
distort markets in that they create a surplus and a
shortage, respectively
In these situations, the Government can assume a budget
obligation to purchase the resulting surplus or produce enough
to eliminate the resulting shortage.
65
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
5.4 Flash Module: Illustrate Price Controls
D&S
Shift:
Opposite:
P Indet. Q
Det.
Same:
P Det.
Q Indet.
Back
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
66
End
END OF PRESENTATION
Clic a pic for review
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
67
End
Begin
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
2 Demand
3 Supply
4 Market Equilibrium
5 Government Intervention
End
Begin
68
End