Econ 101:
Microeconomics
Chapter 3:
Supply and Demand
Part 1
Supply and Demand Model

Single most useful tool of economic analysis
• Explains how prices of goods and quantity bought
and sold are determined in certain types of markets

What you will learn in this chapter
• How the model of supply and demand works and how
•
to use it
Strengths and limitations of model
Hall & Leiberman;
Economics: Principles
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Markets

Market: Buyer and seller of a particular good
and service
• Competitive market:
• A market in which there are many buyers and many
sellers so that each has a negligible impact on the market
price
• Perfectly competitive markets:
• In addition to “many buyers and sellers” the goods offered
for sale are all the same.
• Imperfectly competitive markets:
• Markets in which there are just a few buyers and sellers
and goods offered for sale are unique in some way.
Hall & Leiberman;
Economics: Principles
3
Competition in Markets

In perfectly competitive markets each
buyer and seller takes the market price
of a good as a given. “Price takers”.

In imperfectly competitive markets,
individual buyer or seller can influence
the price of the product. “Price setters”.
Hall & Leiberman;
Economics: Principles
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Buyers and Sellers

Buyers and sellers in a market can be
•
•
•
Households
Business firms
Government agencies

All three can be both buyers and sellers in
the same market, but are not always

For purposes of simplification we will follow the
following guidelines
•
In markets for consumer goods, we’ll view business
firms as the only sellers, and households as only
buyers
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Economics: Principles
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Demand

Demand

Quantity Demanded
• A household’s quantity demanded of a good
• Quantity demanded is the amount of a good
that all buyers in the market would choose to
buy over some time period, given
• A particular price they must pay for the good
• All other constraints on households
Hall & Leiberman;
Economics: Principles
6
Demand

Desired purchases are not necessarily the
same as actual purchases

Let’s first consider individual demand for a
particular good

What factors influence the quantity of a good
that a given household would be willing to
purchase?
Hall & Leiberman;
Economics: Principles
7
Determinants of Demand

Own Price
• Law of Demand: Other things equal, when the
price of a good rises the quantity demanded of
the good falls

Income
• Normal Good: Other things equal, an increase in
•
income leads to an increase in quantity
demanded
Inferior Good: Other things equal, an increase in
income leads to a decrease in quantity
demanded.
Hall & Leiberman;
Economics: Principles
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Determinants of Demand

Prices of related goods
• Substitutes: Two goods for which an increase in
•

the price of one, other things equal, lead to an
increase in the quantity demanded of the other.
Complements: Two goods for which an increase
in the price of one, other things equal, leads to a
decrease in the quantity demanded of the other.
Others
• Tastes
• Expectations
• Population
Hall & Leiberman;
Economics: Principles
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Demand Curve

Demand curve
• A graph of the relationship between the price
•

of a good and the quantity demanded, other
things equal.
Each point on the curve shows the total
buyers would choose to buy at a specific price
Law of demand tells us that demand
curves virtually always slope downward
Hall & Leiberman;
Economics: Principles
10
The Demand Curve
Price
Law of demand says that the
demand curve slopes down.
A
Price on the vertical axis;
quantity on the horizontal axis
B
D
Quantity
Hall & Leiberman;
Economics: Principles
11
Individual Demand vs. Market Demand
Consumer 1
demand
Price
8
Consumer 2
demand
Price
15
Quantity
Market
demand
Price
10
25
Quantity
18
Quantity
40
Individual demands are added horizontally to get market demand.
Hall & Leiberman;
Economics: Principles
12
Shifts vs. Movements Along The
Demand Curve

A change in the own price of a good causes
a movement along the demand curve
•

A fall (rise) in price would cause a movement to the right
(left) along the demand curve
A change in income, prices of relative goods
and other factors cause a shift in the demand
curve itself
•
•
Demand curve has shifted to the right of the old curve as
income has risen
A change in any variable that affects demand—except for
the good’s own price—causes the demand curve to shift
Hall & Leiberman;
Economics: Principles
13
A Shift of The Demand Curve
Price per
Bottle
An increase in income
shifts the demand curve for
a good from D1 to D2.
At each price, more goods
are demanded after the
shift
$2.00
B
60,000
Hall & Leiberman;
Economics: Principles
C
D1
D2
80,000
Number of Bottles
per Month
14
Movements Along The Demand Curve
Price
Price increase moves us
leftward along demand curve
A1
P2
Price increase moves us
rightward along demand curve
A
P1
A1
P3
Q2
Q1
Q3
Quantity
Movement along a demand curve
Hall & Leiberman;
Economics: Principles
15
Shifts of The Demand Curve
Price
P1
A
B
D2
Entire demand curve shifts
rightward when:
• income or wealth ↑
• price of substitute ↑
• price of complement ↓
• population ↑
• expected price ↑
• tastes shift toward good
D1
Q1
Q2
Quantity
Rightward shift in demand is called “an increase in demand”.
Hall & Leiberman;
Economics: Principles
16
Shifts of The Demand Curve
Price
P1
B
Entire demand curve shifts
leftward when:
• income or wealth ↓
• price of substitute ↓
• price of complement ↑
• population ↓
• expected price ↓
• tastes shift away from good
A
D1
D2
Q2
Q1
Quantity
A leftward shift in demand is called “a decrease in demand”.
Hall & Leiberman;
Economics: Principles
17
Dangerous Curves: “Change in Quantity
Demanded” vs. “Change in Demand”

Language is important when discussing demand
•
“Quantity demanded” means
•
•
•
•
A particular amount that buyers would choose to buy at a
specific price
It is a number represented by a single point on a demand
curve
When a change in the price of a good moves us along a
demand curve, it is a change in quantity demand
The term demand means
•
•
The entire relationship between price and quantity
demanded—and represented by the entire demand curve
When something other than price changes, causing the entire
demand curve to shift, it is a change in demand
Hall & Leiberman;
Economics: Principles
18
Supply

Supply

Quantity Supplied
• A firm’s quantity supplied of a good
• Quantity supplied is the specific amount of a
good that all sellers in the market would
choose to sell over some time period, given
• A particular price for the good
• All other constraints on firms
Hall & Leiberman;
Economics: Principles
19
Determinants of Supply

Own Price
• Law of Supply: Other things equal, when the price
of a good rises the quantity supplied of the good
rises





Input prices
Technology
Changes in Weather
Expectations
Number of Firms
Hall & Leiberman;
Economics: Principles
20
Supply Curve

Supply curve
• A graph of the relationship between the price
•

of a good and the quantity supplied, other
things equal.
Each point on the curve shows quantity
supplied at a specific price, other things
equal.
Law of supply tells us that supply
curves virtually always slope upward
Hall & Leiberman;
Economics: Principles
21
The Supply Curve
Price
S
Law of supply says that the
supply curve slopes up
B
A
Quantity
Hall & Leiberman;
Economics: Principles
22
A Shift of The Supply Curve
Price
A decrease in transportation
costs shifts the supply curve for
a good from S1 to S2.
S1
S2
At each price, more goods
are supplied after the shift
G
J
Quantity
Hall & Leiberman;
Economics: Principles
23
Movements Along The Supply Curve
Price
A1
P2
Price increase moves us
rightward along supply curve
P1
A
P3
Price decrease moves us
leftward along supply curve
A2
Q2
Q1
Q3
Quantity
Movement along a supply curve
Hall & Leiberman;
Economics: Principles
24
Shifts of The Supply Curve
Price
S1
S2
A
P1
B
Q1
Q2
Entire supply curve shifts
rightward when:
• price of input ↓
• price of alternate good ↓
• number of firms ↑
• expected price ↓
• technological advance
• favorable weather
Quantity
CAUTION: A rightward shift in supply can also be thought as
a downward shift in supply, but it is an increase in supply!!!
Hall & Leiberman;
Economics: Principles
25
Shifts of The Supply Curve
S2
Price
P1
B
Q2
A
S1
Entire supply curve shifts
leftward when:
• price of input ↑
• price of alternate good ↑
• number of firms ↓
• expected price ↑
• unfavorable weather
Q1
Quantity
A leftward shift in supply is called “a decrease in supply”.
Hall & Leiberman;
Economics: Principles
26
Shifts vs. Movements Along The
Supply Curve

A change in the own price of a good causes a
movement along the supply curve
•

A fall (rise) in price would cause a movement to the left (right)
along the demand curve
A change in input prices, prices of related goods,
technology, number of firms, expected prices,
favorable and unfavorable natural events cause a
shift in the supply curve itself
•
•
Supply curve has shifted to the right of the old curve as
transportation costs (input prices) have dropped
A change in any variable that affects supply—except for the good’s
own price—causes the supply curve to shift
Hall & Leiberman;
Economics: Principles
27