Chapter 3
Demand and
Supply
The Basics
Markets are the institutions that bring
together buyers and sellers.
◦ Examples include: farmer’s
markets, eBay, Amazon.com, and
retail outlets.
 Demand is the amount of a product that
consumers are willing and able to purchase
at each possible price during a given period
of time, everything else (but price) held
constant. (ceteris paribus)
◦ It is a relationship
between prices and
quantities.
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
Law of Demand: There is an inverse
relationship between the price of a good
and the quantity consumers are willing and
able to purchase during a particular period
of time.
◦ As price of a good rises, consumers buy less.
◦ Demand depicts the quantity-price relationship
ceteris paribus.
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
The quantity demanded is the amount
of a product that people are willing and
able to purchase at one, specific price.
• It is a specific
quantity tied to a
specific price.
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
A graphical
representation
of Demand
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
Change in Quantity Demanded - movement
along the same demand curve in response
to a price change.
◦ Results from a price change
◦ A movement along a curve

Change in Demand - shift in entire demand
curve.
◦ Results from a change in a determinant of
demand (a ceteris paribus variable)
◦ A whole new curve
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Δ delta
Δ stands for CHANGE


The Demand Shifters are factors other than
price that influence demand: income,
tastes, prices of related goods,
expectations, and numbers of buyers.
Δ Demand Shifters leads to Δ DEMAND itself
– ie a whole new demand curve
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
Changes in Consumer Income
◦ Normal goods: goods for which demand
increases as income increases.
◦ Inferior goods: goods for which demand
decreases as income increases.
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
Δ the Number of Buyers

Δ Demographic Characteristics
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
Δ Price of Related Goods
◦ Substitute goods: goods that can be used in place
of each other.
◦ Complementary goods: goods that are used
together.
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
Δ Consumer Expectations
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
Δ Consumer Tastes
and Preferences
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

Supply is the amount of a good or service that
producers are willing and able to offer for sale at
each possible price during a period of time, ceteris
paribus.
◦ It is a price-quantity relationship.
The quantity supplied is the amount sellers are
willing and able to offer for sale during a period of
time at a specific price, ceteris paribus.
◦ It is a specific quantity tied to a specific price
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
Law of Supply - there is a positive
relationship between the price of a product
and the amount of it that will be supplied.
◦ As the price of a product rises, producers will be
willing to supply more.
◦ The height of the supply curve at any quantity
also shows the opportunity cost of producing the
next unit of the good.
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
A graphical
representation
of Demand
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

The production possibility frontier provides one explanation of
why the supply curve has a positive slope
As the quantity of chicken produced increases, the opportunity
cost of producing it increases, as shown by the increasing slope
of the PPF

Δ Quantity Supplied - movement along the
same supply curve in response to a price
change.
◦ Results from Δ price
◦ Movement along a curve

Δ Supply - shift in entire supply curve.
◦ Results from Δ some other variables besides
price. (Δ a ceteris paribus variable)
◦ Whole new curve
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
Δ Resource Prices
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
Δ Technology and
Productivity
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
Δ Expectations of
Producers
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

Δ Number of Producers
Δ Prices of Related Goods or
Services
◦ the opportunity cost of
producing any good is the lost
production of some other good
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
Supply Increases or Decreases

Supply shifts right or left

Supply NEVER, NEVER,
or DOWN!! – not ever.
NEVER goes UP
Note: The textbook uses the Up/Down language in an example in CH 3.
It may be “technically” OK, but it WILL confuse you if you use it!!!
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
When the plans of buyers
and sellers mesh when
tested in the market place,
the market is in
equilibrium


If the
there
If the
there
price is too high,
will be a surplus
price is too low,
will be a shortage

The just right Price where qD = qS
◦ Markets tend towards equilibrium unless
something prevents price adjustments
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Clicker
 Which diagram best represents the effect on the market for beef
of an increase in the cost of corn used as feed for beef cattle?
A: A
A
B: B
C: Can’t tell
B
Clicker
 Which of the charts represents what might happen if a report that eating beef
will increase the likelihood of a fatal heart attacks was newly released.
A: A
B: B
C: Can’t tell
A
B
Clicker
The Graph labeled A would be described as
A.
B.
C.
D.
A decrease in Demand
A decrease in quantity demanded
A decrease in supply
A decrease in quantity supplied
A
B
Clicker
The Graph labeled B would be described as
A.
B.
C.
D.
A decrease in Demand
A decrease in quantity demanded
A decrease in supply
A decrease in quantity supplied
A
B



A surplus occurs whenever qS>qD.
A shortage occurs whenever qD>qS.
Surpluses and shortages can be resolved
with price changes.
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Simultaneous Decreases in
Demand and Supply:
countervailing pressures
Simultaneous
Shifts
Group Project
The Market for Pickup Trucks is in equilibrium. What happens in this market with each of
the following changes? Draw a graphical representation and identify what happens in the
market for Pickup Trucks
to (A) Supply, (B) Demand, (C) Price in the market for pickup trucks, ceteris paribus, (D)
Equilibrium Quantity Demanded and Quantity Supplied?
1. Price of Passenger cars goes up dramatically:
2. A public campaign encouraging conservation of fuel by using public
transportation and small cars whenever possible creates a change in
preferences:
3. The price of tires quadruples:
4. A huge strike hits truck manufacturers, shutting down many plants:
5. Gasoline prices plummet to $0.02 per gallon:
6. The price of steel is cut in half:
7. A major recession strikes and income levels drop:
8. The price of camp trailers drops by 90%:
A
Market for Pick up trucks
C
B
D
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