Understanding Economics
3rd edition
by Mark Lovewell, Khoa Nguyen and Brennan Thompson
Chapter 2
Demand and Supply
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
1
Learning Objectives

In this chapter, you will:
1.
2.
3.
consider the nature of demand, changes in
quantity demanded, changes in demand, and
the factors that affect demand
examine the nature of supply, changes in
quantity supplied, changes in supply, and the
factors that affect supply
see how markets reach equilibrium – the
point at which demand and supply meet
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
2
Outline of Topics



T1 The Role of Demand
T2 The Role of Supply
T3 How Competitive Markets Operate
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
3
T1 The Role of Demand
o
o
What Is Demand? Demand is a relationship
between a product’s price and quantity demanded.
Quantity demanded: the amount of a product
consumers are willing to purchase at each price
• Demand is shown using a schedule or curve. (See
figure 2.1 on page 29)
• Demand curve: a graph that expresses possible
combinations of prices and quantities demanded of a
product
• The law of demand states that price and quantity
demanded are inversely related.
• Market demand : the sum of all consumers’
quantities demanded for a product at each price in a
market. (See Figure 2.2 on page 31)
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4
The Demand Curve
Figure 2.1, page 29
Your Demand Curve for Strawberries
Your Demand Schedule
for Strawberries
Point
on
graph
$2.50
7
a
2.00
9
b
1.50
11
c
Price ($ per kg)
Price
($ per kg)
Quantity
Demanded
(kg per month)
a
2.50
b
2.00
c
1.50
D
1.00
0.50
0
1
3
5
7
9
11
13
Quantity Demanded
(kg per month)
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5
Deriving Market Demand
Figure 2.2, page 31
2.50
2.00
1.50
1.00
D0
0.50
Friend’s Demand Curve for Strawberries
Price ($ per kg)
Price ($ per kg)
Your Demand Curve for Strawberries
You
Friend
Market
($ per
kg)
(D0)
(D1)
(Dm)
$2.50
2.00
1.50
(kg per month)
1
2
3
2
3
4
3
5
7
1.50
1.00
D1
0.50
Market Demand Curve for Strawberries
Price ($ per kg)
Price
2.00
5
0
1
2 3 4
6 7
Quantity Demanded (kg per month)
0
1 2 3
7
5 6
4
Quantity Demanded (kg per month)
Individual and Market Demand
Schedules for Strawberries
2.50
2.50
2.00
Dm
1.50
1.00
0.50
0
1
2
3
4
5
6
7
Quantity Demanded (kg per month)
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6
Changes in Demand (a)

Changes in demand:
 are shown by shifts in the demand curve
 are caused by changes in demand determinants
 Demand determinants: factors that can cause an
increase or a decrease in a product’s demand
 The five main demand determinants (Would be
discussed later)
 Number of buyers in a market
 Their average Income
 Prices of Other Products
 Consumer Preferences
 Consumer Expectations about future prices
and incomes.
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7
Changes in Demand (b)
Figure 2.3, page 32
Market Demand Curve for Strawberries
Market Demand Schedule
for Strawberries
$2.50
2.00
1.50
Quantity Demanded
(millions of kg)
(D2)
(D0)
(D1)
5
7
9
7
9
11
9
11
13
Price ($ per kg)
Price
($ per
kg)
2.50
2.00
1.50
D2
D0
D1
1.00
0.50
0
1
3
5
7
9
11
13
Quantity Demanded
(millions of kg per year)
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8
Demand Determinants (a)

Demand determinants include the following
factors:


The number of buyers (an increase causes a
rightward demand shift)
 Increase in Demand: an increase in the quantity
demanded of a product at all prices
 Decrease in Demand: a decrease in the quantity
demanded of a product at all prices
Income
 For normal products, an increase causes a
rightward demand shift.
 Normal products: products whose demand
changes directly with income
 For inferior products, an increase causes a
leftward demand shift.
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9
Demand Determinants (b)
Inferior products: products whose demand
changes inversely with income
For substitute products, a rise in the other
product’s price causes a rightward demand shift.




For complementary products, a rise in the other
product’s price causes a leftward demand shift.



Substitute Products: products that can be consumed in
place of one another
Complementary products: products that are consumed
together
Consumer preferences
Consumer expectations
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Changes in Quantity Demanded (a)

Changes in quantity demanded:



are shown by movements along demand
curve
are caused by price changes
See Figure 2.4, page 33
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11
Changes in Quantity Demanded (b)
Figure 2.4, page 33
2.00
a
b
1.50
1.00
D0
0.50
0
5000 6000
Quantity Demanded (pairs of skis)
Change in Demand
Price ($ per pair of skis)
Price ($ per pair of skis)
Change in Quantity Demanded
2.00
1.50
1.00
D0
D1
0.50
0
5000
Quantity Demanded (pairs of skis)
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12
T2, The role of Supply



What Is Supply? Supply:
 is a relationship between a product’s price and
quantity supplied
 is shown using a schedule or curve
Quantity supplied:the amount of a product
businesses are willing to supply at each price
 Supply curve: a graph that expresses possible
combinations of prices an quantities supplied of a
product ( see Figure 2.5, page 35)
The law of supply states there is a direct
relationship between price and quantity supplied.
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13
The Supply Curve
Figure 2.5, page 35
Market Supply Curve for Strawberries
Market Supply Schedule
for Strawberries
f
Price Quantity Supplied Points
($ per kg) (millions of kg) on graph
$1.50
5
d
2.00
9
e
2.50
13
f
Price ($ per kg)
2.50
S
e
2.00
d
1.50
1.00
0.50
0
1
3
5
7
9
11
13
Quantity Supplied
(millions of kg per year)
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14
Changes in Supply (a)

Changes in supply:




are shown by shifts in the supply curve
are caused by changes in supply determinants
Supply determinants: factors that can cause an
increase or a decrease in a product’s supply
The six main supply determinants (Would be discussed
closely later)
The number of producers
 Resource prices
 The state of technology
 Changes in nature
 The price of related products
 Producer expectation

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15
Changes in Supply (b)
Figure 2.6, page 36
Market Supply Curve for Strawberries
S2
Market Supply Schedule
for Strawberries
Quantity Supplied
(millions of kg)
(S2)
(S0)
(S1)
$2.50
11
13
15
2.00
7
9
11
1.50
3
5
7
2.50
Price ($ per kg)
Price
($ per
kg)
S0 S1
2.00
1.50
1.00
0.50
0
1
3
5
7
9
11
13
15
Quantity Supplied
(millions of kg per year)
Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
16
Supply Determinants (a)

Supply determinants include the following factors:

Number of producers (an increase causes a rightward
supply shift)
Increase in supply: an increase in the quantity
supplied of a product at all prices
 Decrease in supply: a decrease in the quantity
supplied of a product at all prices




Resource prices (an increase causes a leftward supply
shift because of an increase of costs)
State of technology (an improvement causes a
rightward supply shift)
Prices of related products (example: a declines in
the price of tobacco, the supply for ginseng increases
a rightward supply shift of ginseng)
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17
Supply Determinants (b)


Changes in nature (an improvement
causes a rightward shift for some
products) See other examples on page 37
Producer expectations (an expectation
of lower prices in the future causes an
immediate rightward supply shift)
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18
Changes in Quantity Supplied (a)

Changes in quantity supplied:



are shown by movements along the supply
curve
are caused by price changes
See Figure 2.7, page 38
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19
Changes in Quantity Supplied (b)
Figure 2.7, page 38
Change in Quantity Supplied
S0
120
Price ($ per kg)
Price ($ per kg)
S1
100
a
80
60
40
20
1
S0
120
b
100
0
Change in Supply
2
Quantity Supplied
(millions of kg per year)
80
60
40
20
0
1
2
Quantity Supplied
(millions of kg per year)
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20
T 3, How Competitive Markets Operate



Market Equilibrium: the stable point at which
demand and supply curves intersect ( the quantity
demanded = the quantity supplied)
When a product is in surplus:
 Surplus: an excess of quantity supplied over
quantity demand
 there is excess supply
 price is pushed down
When a product is in shortage:
 Shortage: an excess of quantity demanded over
quantity supplied
 there is excess demand
 price is pushed up
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21
Market Equilibrium
Figure 2.8, page 40
Market Demand and Supply Curves
for Strawberries
Market Demand and Supply
Schedules for Strawberries
Quantities
(millions of kg)
D
S
$3.00
5
13
+8
2.50
7
11
+4
2.00
9
9
0
1.50
11
7
-4
1.00
13
5
-8
Surplus
a
2.50
Price ($ per kg)
Price
($ per
kg)
Surplus (+)
or Shortage
(-)
(millions of
kg)
S
3.00
a
e
2.00
b
b
1.50
Shortage
1.00
D
0
1
9 11 13 15
5
7
Quantity
(millions of kg per year)
3
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22
Changes in Equilibrium




A rightward demand shift pushes up both
equilibrium price and quantity.
A leftward demand shift pushes down
both equilibrium price and quantity.
A rightward supply shift pushes
equilibrium price down and equilibrium
quantity up.
A leftward supply shift pushes equilibrium
price up and equilibrium quantity down.
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23
Demand Changes and Equilibrium
Figure 2.9, page 41
Market Demand and Supply Curves
for Strawberries
S
3.00
Price
2.50
($ per kg.)
Quantities
(D0)
(D1)
(S)
(millions of kg)
$3.00
5
9
13
2.50
7
11
11
2.00
9
13
9
1.50
11
15
7
1.00
13
17
5
Price ($ per kg)
Market Demand and Supply
Schedules for Strawberries
b
a
2.00
1.50
shortage
1.00
0
D0
1
3
5
7
9
11 13 15
D1
17
Quantity
(millions of kg per year)
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24
Supply Changes and Equilibrium
Figure 2.10, page 42
Market Demand and Supply Curves
for Strawberries
S0
3.00
Price
2.50
($ per kg)
Quantities
(D0)
(S0)
(S1)
(millions of kg)
$3.00
5
13
17
2.50
7
11
15
2.00
9
9
13
1.50
11
7
11
1.00
13
5
9
Price ($ per kg)
Market Demand and Supply
Schedules for Strawberries
S1
Surplus
a
2.00
b
1.50
1.00
0
D0
1
3
5
7
9
11 13 15
17
Quantity
(millions of kg per year)
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25