Introduction to Macroeconomics
Chapter 3.
Microeconomic Laws of
Demand and Supply
Chapter 3. Laws of Demand & Supply
1. Markets and the Role of Prices
2. Microeconomic Demand and Supply
– Demand
– Supply
3. Demand - Supply Equilibrium
– Equilibrium
– Disequilibrium
4. Shifts in Demand and Supply Curves
5. Case Studies
Introduction to Macroeconomics
1. Markets and the Role of Prices
• Competitive Free Market - many
suppliers and many consumers
(competitive) engaged in trade without
government interference (free).
• Prices - provide a means of
communication between suppliers and
consumers regarding scarcity and wants.
Introduction to Macroeconomics
2. Micro Demand and Supply
• Demand
– Law of Demand
– Demand curve
– Ceteris paribus assumption
• Supply
– Law of Supply
– Supply curve
– Ceteris paribus assumption
Introduction to Macroeconomics
2. Micro Demand and Supply
Law of Demand
• As the price of a product declines
relative to the price of all other goods,
the quantity demanded will increase,
ceteris paribus.
• The demand curve, a graphic
representation of the Law of Demand,
slopes downward to the right
Introduction to Macroeconomics
2. Micro Demand and Supply
Demand Curve
Product Price
50
As price declines
the quantity demanded increases
40
30
20
Demand
10
0
0
10
20
30
40
Quantity Demanded
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60
2. Micro Demand and Supply
Demand Curve Ceteris Paribus Assumption
All other non-price factors that can
affect demand are unchanged:
• Prices of all other goods
• Income
• Tastes
Introduction to Macroeconomics
2. Micro Demand and Supply
Law of Supply
• As the price of a product declines
relative to the price of all other goods,
the quantity supplied will decline,
ceteris paribus.
• The supply curve, a graphic
representation of the Law of Supply,
slopes upward to the right
Introduction to Macroeconomics
2. Micro Demand and Supply
Supply Curve
As price increases
the quantity supplied increases
Product Price
50
Supply
40
30
20
10
0
0
10
20
30
40
Quantity Supplied
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60
2. Micro Demand and Supply
Supply Curve Ceteris Paribus Assumption
All other non-price factors that
can affect supply are unchanged:
• Prices of all inputs
– labor, raw materials, cost of capital
• Prices of all other goods
• Technology
• Environment (e.g., weather)
Introduction to Macroeconomics
3. Demand - Supply Equilibrium
• Equilibrium
• Disequilibrium
– Price floor
– Price ceiling
Introduction to Macroeconomics
3. Demand - Supply Equilibrium
Equilibrium
Price at which quantity supplied equals the quantity demanded
Product Price
50
Supply
40
30
Equilibrium
20
Demand
10
0
0
10
20
30
Quantity
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50
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3. Demand - Supply Equilibrium
Disequilibrium
• Price above the equilibrium level
– quantity demanded < quantity supplied
– surplus (inventory build)
– price floor: price prevented from
dropping to equilibrium level
• Price below the equilibrium level
– quantity demanded > quantity supplied
– shortage (inventory declines)
– price ceiling: price prevented from
Introduction to Macroeconomics
rising to equilibrium level
3. Demand - Supply Equilibrium
Price Floor
50
Demand
Supply
Product Price
40
Price
Floor
30
20
10
0
0
10
20
30
40
50
Quantity
Quantity Demanded < Quantity Supplied
= Surplus
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3. Demand - Supply Equilibrium
Price Ceiling
50
Demand
Supply
Product Price
40
30
20
Price
Ceiling
10
0
0
10
20
30
40
50
Quantity
Quantity Supplied < Quantity Demanded
= Shortage
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4. Shifts in Demand and Supply Curves
• Demand Curve
– Demand vs quantity demanded
– Demand curve shifters
• Supply Curve
– Supply vs quantity supplied
– Supply curve shifters
• Change in equilibrium
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves
Demand vs Quantity Demanded
• “Quantity Demanded” refers to a
point on the demand curve. A
“Change in Quantity Demanded”
refers to a movement along a stable
demand curve
• “Demand” refers to the entire curve. A
“Change in Demand” refers to a shift
in the demand curve.
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves
Change in Quantity Demanded
A change in price
results in a movement along a demand curve
Product Price
50
As price declines
the quantity demanded increases
40
30
20
10
Demand
0
0
10
20
30
40
Quantity Demanded
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50
60
4. Shifts in Demand and Supply Curves
Change in Demand
A change in anything except price
that affects the quantity demanded
results in a shift of the demand curvve
Product Price
50
Increase in Demand:
Demand Curve Shifts Right
40
30
20
10
0
0
10
20
30
Quantity
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50
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4. Shifts in Demand and Supply Curves
Demand Curve Shifters
A change in any variable listed under
the Ceteris Paribus assumptions
Change in
Variable
Income
Demand Curve
Shift
See following slide on
Normal and Inferior Goods
Tastes
Increase in
Preference
Prices of
Related Goods
See following slide on
Complements and Substitutes
Introduction to Macroeconomics
Right
4. Shifts in Demand and Supply Curves
Income: Normal and Inferior Goods
Demand curve will shift with change
in income
• Normal Good - as income increases,
demand for the good also increases
(demand curve shifts right)
• Inferior Good - as income increases,
demand for the good decreases
(demand curve shifts left)
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves
Price of Related Goods
Demand curve will shift with change in
price of related goods
• Complements in Demand - demand
decreases as price of complement increases
– big cars and gasoline
• Substitutes in Demand- demand increases
as price of substitute increases
– butter and margerine
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves
Supply vs Quantity Supplied
• “Quantity Supplied” refers to a point
on the supply curve. A “Change in
Quantity Supplied” refers to a
movement along a stable supply
curve.
• “Supply” refers to the entire curve. A
“Change in Supply” refers to a shift in
the supply curve.
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves
Change in Quantity Supplied
A change in price
results in a movement along a supply curve
Product Price
50
As price declines the quantity
supplied decreases
40
Supply
30
20
10
0
0
10
20
30
Quantity
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40
50
60
4. Shifts in Demand and Supply Curves
Change in Supply
A change in anything except price
that affects the quantity supplied
results in a shift of the supply curvve
Product Price
50
Increase in Supply:
Supply Curve Shifts Right
40
30
20
10
0
0
10
20
30
Quantity
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40
50
60
4. Shifts in Demand and Supply Curves
Supply Curve Shifters
A change in any variable listed under the
Ceteris Paribus assumptions
Change in
Variable
Supply Curve
Shift
Increase
Left
Improvement
Right
Hurricane
Left
Price of Inputs
Technology
Weather
Prices of
Related Goods
Introduction to Macroeconomics
See next slide on complements
and substitutes
4. Shifts in Demand and Supply Curves
Complements and Substitutes in Supply
Supply curve will shift with change in price of
related goods in the production process
• Complements in Supply - supply increases as
price of the complement increases
– beef and leather
• Substitutes in Supply - supply decreases as
price of the substitute increases
– wheat and rye
Introduction to Macroeconomics
4. Shifts in Demand and Supply Curves
Supply Curve Shift and Equilibrium
50
Supply Curve
Shifts Right
Product Price
Demand
40
30
Decrease in
Price
20
Increase in
Quantity
10
0
0
10
20
30
Quantity
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40
50
60
5. Case Studies
• Recessions and microeconomic
markets
• Rent control
• Import quotas
Introduction to Macroeconomics