Chapter 3
Supply and Demand:
In Introduction
Basic Economic Questions to
Answer
What: variety and quantity
 How: technology
 For whom: distribution

To answer the questions:

Economic Systems:
– Centrally Planned Economy
– Free Market Economy
– Mixed Economy
Market Economy

the allocation for resources is
determined by supply and demand
Demand: the buying force
 Supply: the selling force

Demand: the definition
The quantity of a good or service
consumers’ are willing and able to buy
at various prices
 willingness and ability to buy

– willingness: need - necessity
– want – desire
– ability: purchasing power
Demand: the model
Variables: prices, quantity demanded
 Assumption: other things equal
 Hypothesis: (the law of demand)

– Other things equal, a higher price leads to
a smaller quantity demanded and a lower
price results in a larger quantity demanded

Forecast / test / accept – the law
Demand: key points

Demand is a relationship between quantity
demanded and product price
 Qd = f (P)
– quantity demanded is a function of price
– quantity demanded is determined by price

The law of demand:
– Qd and P are negatively related

Demand Curve: downward sloping
 Market demand: the sum of individual
demand
Demand Curve:
Change in Qd and The Law of Demand

Other things equal, higher price for a good leads
people to demand a smaller quantity of the good.
Assumption: Other Things Equal

the other things: factors affecting D
– --price of related goods
• complements vs. substitutes
–
–
–
–
–
--income: normal vs. inferior
--preference
--expectations (prices, income, …)
--population
--others
Qd vs. D
Qd: a number, a corresponding point on
the curve
 Change in Qd: movement along a curve,
caused by change in price only
 D: a relationship, a curve
 Change in D: a shift of the entire curve,
caused by change in other things

An Increase in Demand
Movement Along the Demand Curve
vs. Shift of the Demand Curve
Shifts of the Demand Curve
Supply: the definition

The quantity of a good or service producers
are willing and able to sell at various prices
 willingness and ability to sell
willingness: profitability
ability: production capacity
Supply: the model
Variables: prices, quantity supplied
 Assumption: other things equal
 Hypothesis: (the law of supply)

– Other things equal, a higher price leads to
a larger quantity supplied and a lower price
results in a smaller quantity supplied

Forecast / test / accept  the law
Supply: Key Points





Supply is a relationship between price and
quantity supplied
Qs = f (P)
– Quantity supplied is a function of price
– quantity supplied is determined by price
The Law of Supply:
Qs and P are positively related
Supply Curve: upward sloping
Market supply: the sum of individual supply
The Supply Curve:
change in Qs and the law of supply
Assumption: Other Things Equal

the other things:
factors affecting S
--prices of inputs
goods used to produce other goods
--price of related goods
goods that use the same resources
--technology
--expectations
--others
Qs vs. S

Qs: a number, a corresponding point on
the curve

Change in Qs: movement along a curve,
caused by change in price only

S: a relationship, a curve

Change in S: a shift of the entire curve,
caused by change in other things
Movement Along the Supply Curve vs.
Shift of the Supply Curve
A Decrease in Supply
Shifts of the Supply Curve
The Market:
 Equilibrium
 Change
in D and impacts on Pe and
Qe
 Change in S and impacts on Pe and Qe
Market Equilibrium
Surplus
Shortage
Equilibrium and
Shifts of the Demand Curve
Equilibrium and
Shifts of the Supply Curve
Simultaneous Shifts of
the Demand and Supply Curves
Effects of the “War on Drugs”
Change in D & S
--price of related goods
complements vs.
substitutes
--income: normal vs.
inferior
--preference
--expectations (prices,
income, …)
--population
--others
--prices of inputs
(goods used to
produce
other goods)
--price of related
goods (goods that
use the same
resources)
--technology
--expectations
--others