1. Copyright © 2005 by McGraw-Hill Ryerson Limited. All rights reserved.
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.

2. Learning Objectives In this chapter, you will:
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

3. Outline of Topics T1 The Role of Demand T2 The Role of Supply
T3 How Competitive Markets Operate

4. T1 The Role of Demand
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) 1

5. The Demand Curve Figure 2.1, page 29
Your Demand Curve for Strawberries
Your Demand Schedule
for Strawberries
2.50 a b
Quantity Demanded
(kg per month)
Point
on graph
2.00
Price
($ per kg) c
1.50
Price ($ per kg) D
$2.50 7 a
1.00
2.00 9 b
0.50
1.50 11 c 1 3 5 7 9 11 13
Quantity Demanded
(kg per month) 3

6. Deriving Market Demand Figure 2.2, page 31
Your Demand Curve for Strawberries
Friend’s Demand Curve for Strawberries
2.50
2.50
2.00
2.00
Price ($ per kg)
1.50
Price ($ per kg)
1.50
1.00
1.00 D0 D1
0.50
0.50 1 2 3 4 5 6 7 1 2 3 4 5 6 7
Quantity Demanded (kg per month)
Quantity Demanded (kg per month)
Market Demand Curve for Strawberries
Individual and Market Demand
Schedules for Strawberries
2.50
Price
($ per
kg)
You
(D0)
Friend
(D1)
Market
(Dm)
2.00
Price ($ per kg)
1.50 Dm
1.00
(kg per month)
0.50
$2.50
2.00
1.50 1 2 3 2 3 4 3 5 7 1 2 3 4 5 6 7
Quantity Demanded (kg per month) 3

7. 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. 2

8. Changes in Demand (b) Figure 2.3, page 32
Market Demand Curve for Strawberries
Market Demand Schedule
for Strawberries
0.50
1.00
1.50
2.00
2.50
Price
($ per kg)
Quantity Demanded
(millions of kg)
(D2)
(D0)
(D1)
Price ($ per kg) D2 D0 D1
$2.50 5 7 9
2.00 7 9 11
1.50 9 11 13 1 3 5 7 9 11 13
Quantity Demanded
(millions of kg per year) 3

9. 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. 4

10. 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.
Substitute Products: products that can be consumed in place of one another
For complementary products, a rise in the other product’s price causes a leftward demand shift.
Complementary products: products that are consumed together
Consumer preferences
Consumer expectations 5

11. Changes in Quantity Demanded (a)
are shown by movements along demand curve
are caused by price changes
See Figure 2.4, page 33

12. Changes in Quantity Demanded (b) Figure 2.4, page 33
5000
6000
Quantity Demanded (pairs of skis)
Change in Quantity Demanded
Price ($ per pair of skis)
0.50
1.00
1.50
2.00
5000
Quantity Demanded (pairs of skis)
Change in Demand
Price ($ per pair of skis)
0.50
1.00
1.50
2.00 a b D0 D0 D1 3

13. 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. 6

14. The Supply Curve Figure 2.5, page 35
Market Supply Curve for Strawberries
Market Supply Schedule
for Strawberries f S
0.50
1.00
1.50
2.00
2.50 e
Price
($ per kg)
Quantity Supplied
(millions of kg)
Points
on graph d
$1.50 5 d
Price ($ per kg)
2.00 9 e
2.50 13 f 1 3 5 7 9 11 13
Quantity Supplied
(millions of kg per year) 3

15. Changes in Supply (a) Changes in supply: The number of producers
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 7

16. Changes in Supply (b) Figure 2.6, page 36
Market Supply Curve for Strawberries S2 S0 S1
Market Supply Schedule
for Strawberries
0.50
1.00
1.50
2.00
2.50
Price
($ per kg)
Quantity Supplied
(millions of kg)
(S2)
(S0)
(S1)
Price ($ per kg)
$2.50 11 13 15
2.00 7 9 11
1.50 3 5 7 1 3 5 7 9 11 13 15
Quantity Supplied
(millions of kg per year) 3

17. 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) 9

18. 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)

19. Changes in Quantity Supplied (a)
are shown by movements along the supply curve
are caused by price changes
See Figure 2.7, page 38

20. Changes in Quantity Supplied (b) Figure 2.7, page 381 2
Quantity Supplied
(millions of kg per year)
Change in Quantity Supplied
Price ($ per kg) 20 40 60 80
100
120
Change in Supply 1 2
Quantity Supplied
(millions of kg per year)
Price ($ per kg) 20 40 60 80
100
120 S0 S0 S1 b a 3

21. 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 10

22. Market Equilibrium Figure 2.8, page 40
Market Demand and Supply Schedules for Strawberries
Market Demand and Supply Curves
for Strawberries S
3.00
Surplus (+)
or Shortage (-)
(millions of kg)
Surplus
Quantities
Price
($ per kg)
2.50
(millions of kg)
D S a a
2.00 e $
Price ($ per kg)
1.50 b b
Shortage
1.00 D 1 3 5 7 9 11 13 15
Quantity
(millions of kg per year)

23. 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. 12

24. Demand Changes and Equilibrium Figure 2.9, page 41
Market Demand and Supply Curves
for Strawberries
Market Demand and Supply
Schedules for Strawberries
Price Quantities
(D0) (D1) (S)
($ per kg.) (millions of kg) S
1.00
1.50
2.00
2.50
3.00 b a
shortage
Price ($ per kg)
$3.00 5 9 13
2.50 7 11 11 D0 D1
2.00 9 13 9
1.50 11 15 7
1.00 13 17 5 1 3 5 7 9 11 13 15 17
Quantity
(millions of kg per year)

25. Supply Changes and Equilibrium Figure 2.10, page 42
Market Demand and Supply Curves
for Strawberries
Market Demand and Supply
Schedules for Strawberries
Price Quantities
($ per kg) (millions of kg) S0 S1
1.00
1.50
2.00
2.50
3.00
Surplus
(D0)
(S0)
(S1) a b
Price ($ per kg)
$3.00 5 13 17
2.50 7 11 15 D0
2.00 9 9 13
1.50 11 7 11
1.00 13 5 9 1 3 5 7 9 11 13 15 17
Quantity
(millions of kg per year)