1. Chapter 3 - Demand and Supply
Learning Objectives
Explain the law of demand
Distinguish between changes in demand and changes in quantity demanded
Explain the law of supply
Distinguish between changes in supply and changes in quantity supplied
Understand how supply and demand interact to determine equilibrium price and quantity
Chapter 3 - Demand and Supply 3

2. Chapter 3 - Demand and Supply
Did You Know That...
The average price of an apartment-sized condominium has often exceeded the average price of a standalone house?
The relative physical size of items does not determine the prices at which people exchange them for?
By using demand and supply you can develop a better understanding of why relative size of an item typically has little to do with the price at which it sells?
Chapter 3 - Demand and Supply

3. Chapter 3 - Demand and Supply
Markets
Markets
Arrangements that individuals have for exchanging with one another
Represent the interaction of buyers and sellers for goods and services
Markets set the prices we pay and receive.
Automobile market
Health care market
Labor market
Stock market
Chapter 3 - Demand and Supply

4. Chapter 3 - Demand and Supply
The Law of Demand
Demand
A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant
Chapter 3 - Demand and Supply

5. Chapter 3 - Demand and Supply
The Law of Demand
Law of Demand
Quantity demanded is inversely related to price, holding other factors constant.
Price # Qd $
Price $ Qd #
Chapter 3 - Demand and Supply

6. Chapter 3 - Demand and Supply
The Law of Demand
What are we holding constant?
Income
Tastes and preferences
Price of other goods
Many other factors
Chapter 3 - Demand and Supply

7. Chapter 3 - Demand and Supply
The Demand Schedule
The demand schedule
Table relating prices to quantity demanded
We must consider
Time dimension
Constant-quality units
Demand Curve
A graphical representation of the demand schedule
Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal
Chapter 3 - Demand and Supply

8. The Individual Demand Schedule and the Individual Demand Curve
Chapter 3 - Demand and Supply

9. The Individual Demand Schedule and the Individual Demand Curve
Chapter 3 - Demand and Supply

10. Chapter 3 - Demand and Supply
The Demand Schedule
Individual versus market demand curves
Market Demand
The demand of all consumers in the marketplace for a particular good or service
Summation at each price of the quantity demanded by each individual
Chapter 3 - Demand and Supply

11. The Horizontal Summation of Two Demand Curves
Chapter 3 - Demand and Supply

12. The Horizontal Summation of Two Demand Curves
Chapter 3 - Demand and Supply

13. The Market Demand Schedule for Flash Memory Pen Drives
Chapter 3 - Demand and Supply

14. The Market Demand Schedule for Flash Memory Pen Drives
Chapter 3 - Demand and Supply

15. Chapter 3 - Demand and Supply
Shifts in Demand
Scenario
Imagine the federal government gives every student registered in a college, university, or technical school in the United States a notebook computer.
If some factor other than price changes, we can show its effect by moving the entire demand curve, shifting the curve left or right.
Chapter 3 - Demand and Supply

16. A Shift in the Demand Curve
Suppose universities prohibit the use of notebook computers
Suppose the federal government gives every student a notebook computer
Chapter 3 - Demand and Supply

17. Determinants of Demand
Ceteris-Paribus Conditions
Determinants of the relationship between price and quantity that are unchanged along a curve
Changes in these factors cause a curve to shift
Chapter 3 - Demand and Supply

18. Normal and Inferior Goods
Normal Goods
Goods for which demand rises as income rises, most goods are normal goods
Inferior Goods
Goods for which demand falls as income rises
Chapter 3 - Demand and Supply

19. Chapter 3 - Demand and Supply
Shifts in Demand
Determinants of demand
Income
Tastes and preferences
The prices of related goods
Substitutes
Complements
Chapter 3 - Demand and Supply

20. Chapter 3 - Demand and Supply
Shifts in Demand
Substitutes
Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change.
Chapter 3 - Demand and Supply

21. Chapter 3 - Demand and Supply
Shifts in Demand
Complements
Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other.
Chapter 3 - Demand and Supply

22. Chapter 3 - Demand and Supply
Shifts in Demand
Determinants of demand
Expectations
Future prices
Income
Product availability
Market size (number of buyers)
Chapter 3 - Demand and Supply

23. Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand
Income: Normal Good
Price D3 D2
Increase in income
increases demand
Decrease in income
decreases demand D1
Q/Units
Chapter 3 - Demand and Supply

24. Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand
Income: Inferior Good
Price D3 D2
Decrease in income
increases demand
Increase in income
decreases demand D1
Q/Units
Chapter 3 - Demand and Supply

25. Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand
Tastes and Preferences
Price
SUVs
• Decrease in demand D3
Hybrid vehicles
• Increase in demand D2 D1
Q/Units
Chapter 3 - Demand and Supply

26. Shifts in Demand Price D2 D1 Q/Butter The Determinants of Demand
Price of Related Goods: Substitutes
Price
Butter and Margarine
• Price of both = $2/lb
• Price of margarine increases to $3/lb
• Demand for butter increases D2 D1
Q/Butter
Chapter 3 - Demand and Supply

27. Shifts in Demand Price D3 D2 D1 Q/Speakers The Determinants of Demand
Price of Related Goods: Complements
Price
Speakers and Amplifiers
• Decrease the relative price of amplifiers
• Demand for speakers increases D3 D2
Speakers and Amplifiers
• Increase the relative price of amplifiers
• Demand for speakers decreases D1
Q/Speakers
Chapter 3 - Demand and Supply

28. Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand
Expectations: Income, Future Prices
Price D3 D2
A higher income or expectations of a higher future price will increase demand
A lower income or expectations of a lower future price will decrease demand D1
Q/Units
Chapter 3 - Demand and Supply

29. Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand
Market Size (Number of Buyers)
Price D3 D2
Increase in the number of buyers increases demand
Decrease in the number of buyers decreases demand D1
Q/Units
Chapter 3 - Demand and Supply

30. Chapter 3 - Demand and Supply
Shifts in Demand
Changes in demand versus changes in quantity demanded
A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand.
This is a shift of the whole curve.
Chapter 3 - Demand and Supply

31. Chapter 3 - Demand and Supply
Shifts in Demand
Changes in demand versus changes in quantity demanded
A change in a good’s own price leads to a change in quantity demanded.
This is a movement along the same curve.
∆D is not the same as ∆Qd.
Chapter 3 - Demand and Supply

32. Movement Along a Given Demand Curve
A change in the price changes the quantity of a good demanded, movement along the curve
Chapter 3 - Demand and Supply

33. Chapter 3 - Demand and Supply
The Law of Supply
Supply
Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal
The amount of a product or service that firms are willing to sell at alternative prices
Chapter 3 - Demand and Supply

34. Chapter 3 - Demand and Supply
The Law of Supply
Law of Supply
The price of a product or service and the quantity supplied are directly related.
P # Qs #
P $ Qs $
Chapter 3 - Demand and Supply

35. Chapter 3 - Demand and Supply
The Supply Schedule
The supply schedule is a table relating prices to quantity supplied at each price.
Supply Curve
A graphical representation of the supply schedule
Positively sloped line showing direct relationship between price and quantity supplied, all else equal
Chapter 3 - Demand and Supply

36. Chapter 3 - Demand and Supply
The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives
Chapter 3 - Demand and Supply

37. Chapter 3 - Demand and Supply
The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives
Chapter 3 - Demand and Supply

38. Horizontal Summation of Supply Curves
Chapter 3 - Demand and Supply

39. Horizontal Summation of Supply Curves
Chapter 3 - Demand and Supply

40. Chapter 3 - Demand and Supply
The Market Supply Schedule and the Market Supply Curve for Flash Memory Pen Drives
Chapter 3 - Demand and Supply

41. Chapter 3 - Demand and Supply
The Market Supply Schedule and the Market Supply Curve for Flash Memory Pen Drives
Chapter 3 - Demand and Supply

42. Chapter 3 - Demand and Supply
Shifts in Supply
Scenario
A new method of manufacturing flash memory pen drives reduces the cost of production dramatically.
Chapter 3 - Demand and Supply

43. A Shift in the Supply Curve
If costs increase, supply decreases
If costs decrease, supply increases
If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve
Chapter 3 - Demand and Supply

44. A Shift in the Supply Curve5 S2 S1 a 4
Price per Flash Memory Pen Drive ($) c 3
When supply increases the quantity supplied will be greater at each price 2 1 2 4 6 8 10 12 14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
Chapter 3 - Demand and Supply

45. A Shift in the Supply Curve5 S2 S1 a 4 b
Price per Flash Memory Pen Drive ($) c 3
When supply increases the quantity supplied will be greater at each price d 2 1 2 4 6 8 10 12 14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
Chapter 3 - Demand and Supply

46. A Shift in the Supply Curve5 S1 b a 4
When supply decreases the quantity supplied will be less at each price
Price per Flash Memory Pen Drive ($) d c 3 2 1 2 4 6 8 10 12 14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
Chapter 3 - Demand and Supply

47. Chapter 3 - Demand and Supply
Shifts in Supply
Determinants of supply
Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations
Number of firms in industry
Chapter 3 - Demand and Supply

48. Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply
Cost of Inputs
Price S3 S2 S1
Increase in cost
decreases supply
Decrease in cost increases supply
Q/Units
Chapter 3 - Demand and Supply

49. Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply
Technology and Productivity
Price S3 S2 S1
Decreases in productivity decrease supply
Improvements in technology or increases in productivity increase supply
Q/Units
Chapter 3 - Demand and Supply

50. Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply
Taxes and Subsidies
Price S3 S2 S1
Increases in taxes or decreases in subsidies decrease supply
Decreases in taxes or increases in subsidies increase supply
Q/Units
Chapter 3 - Demand and Supply

51. Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply
Price Expectations
Price S3 S2 S1
Expectations of higher future prices decrease supply
Expectations of lower future prices increase supply
Q/Units
Chapter 3 - Demand and Supply

52. Shifts in Supply Price S3 S1 S2 Q/Units The Determinants of Supply
Number of Firms in Industry
Price S3 S1 S2
Decrease in the number of firms decreases supply
Increase in the number of firms increases supply
Q/Units
Chapter 3 - Demand and Supply

53. Chapter 3 - Demand and Supply
Shifts in Supply
Changes in supply versus changes in quantity supplied
A change in one or more of the non-price determinants will lead to a change in supply.
This is a shift of the whole curve.
Chapter 3 - Demand and Supply 73

54. Chapter 3 - Demand and Supply
Shifts in Supply
Changes in supply versus changes in quantity supplied
A change in a good’s own price leads to a change in quantity supplied.
This is a movement along the same curve.
∆S is not the same as ∆Qs.
Chapter 3 - Demand and Supply 74

55. Putting Demand and Supply Together
Equilibrium (Market Clearing) Price
The price that clears the market
The price at which quantity demanded equals quantity supplied
The price where the demand curve intersects the supply curve
Chapter 3 - Demand and Supply

56. Putting Demand and Supply Together
Chapter 3 - Demand and Supply

57. Putting Demand and Supply Together
Chapter 3 - Demand and Supply

58. Putting Demand and Supply Together
Equilibrium
The situation when quantity supplied equals quantity demanded at a particular price
Chapter 3 - Demand and Supply

59. Putting Demand and Supply Together
Shortages
The situation when quantity demanded is greater than quantity supplied
Qd > Qs
Exist at any price below the market clearing price
Chapter 3 - Demand and Supply

60. Putting Demand and Supply Together
Surpluses
The situation when quantity supplied is greater than quantity demanded
Qd < Qs
Exist at any price above the market clearing price
Chapter 3 - Demand and Supply

61. Chapter 3 - Demand and Supply
Policy Example: Should Shortages in the Ticket Market Be Solved by Scalpers?
If you’ve ever tried to get tickets to a big game you know all about “shortages.”
Since the quantity of tickets is fixed, the price can go pretty high.
Enter the scalper.
Chapter 3 - Demand and Supply

62. Shortages of Super Bowl Tickets
Chapter 3 - Demand and Supply

63. Issues and Applications: The Market Clearing Prices of Baseball Cards
Various companies, such as Topps and Upper Deck, print sports trading cards that provide photos and stats on pro athletes.
Why are some of the market clearing prices so high?
The answer has to do with demand and supply. (A relatively low supply helps explain the relatively high market clearing price.)
Chapter 3 - Demand and Supply

64. Baseball Cards with the Highest Market Clearing Prices
Chapter 3 - Demand and Supply

65. Summary Discussion of Learning Objectives
The law of demand says that prices and quantity demanded are inversely related.
At a higher price people buy less, at a lower price people buy more.
Chapter 3 - Demand and Supply

66. Summary Discussion of Learning Objectives
A change in quantity demanded versus a change in demand
A change in quantity demanded is a movement along the same demand curve.
A change in demand is a shift of the whole demand curve.
Chapter 3 - Demand and Supply

67. Summary Discussion of Learning Objectives
The law of supply states that price and quantity supplied are directly related.
At a high price firms offer more; at a low price firms offer less.
A change in quantity supplied versus a change in supply
A change in quantity supplied is a movement along the same supply curve.
A change in supply is a shift of the whole supply curve.
Chapter 3 - Demand and Supply

68. Summary Discussion of Learning Objectives
Determining market price and equilibrium quantity
The demand and supply curves intersect at the market clearing, or equilibrium point.
Surpluses exist if the price of the good is greater than the market price.
Shortages exist when the price of a good is below the market price.
Chapter 3 - Demand and Supply