1. Chapter 3 Market Demand and Supply
Lecture Slides
Survey of Economics Irvin B. Tucker
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2. Why is this chapter important?
It introduces basic supply and demand analysis
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3. What is demand? Demand represents the choice making behavior of buyers
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4. What does “ceteris paribus” mean?
All else remains the same

5. What is the law of demand?
There is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus
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6. What is a demand curve?
A curve that shows the quantities of a good or service that people are willing and able to buy at different prices
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7. Quantity Demanded (per year)
Exhibit 3-1 An Individual Demand Curve for Blu-rays
Quantity Demanded (per year)
Price per Blu-ray
Point
A $ B C D

8. Exhibit 3-1 Individual’s Demand Curve for Blu-rays20 B 15
Price per Blu-ray (dollars) C 10 D 5
Demand Curve 8 12 16 20
Quantity of Blu-rays (per year)
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9. Why do demand curves have a negative slope?
As the price per unit of a good or service falls, buyers can afford to buy more units per period of time.
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10. The summation of the individual demand schedules in a market
What is market demand?
The summation of the individual demand schedules in a market
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11. Exhibit 3-2 The Market Demand Curve for Blu-rays+
Fred’s Demand Curve
Mary’s Demand Curve =
Market Demand Curve
Price
Price
Price
$20
$20
$20 D1 D2
DTOTAL 5 5 5 2 5 1 7 3 12
Quantity (per year)
Quantity (per year)
Quantity (per year)
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12. Important !
KNOW THE DIFFERENCE BETWEEN A “CHANGE IN THE QUANTITY DEMANDED” AND A “CHANGE IN DEMAND”
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13. When price changes, what happens?
The curve does not shift and there is a “change in the quantity demanded”
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14. Decrease in quantity demanded Increase in quantity demanded
Upward movement along the demand curve
Downward movement along the demand curve
Price Increases
Price decreases
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15. Price per Blu-ray (dollars) Quantity of Blu-rays (millions per year)
Exhibit 3-3(a) A change in price causes a change in the quantity demanded 20 A 15
Price per Blu-ray (dollars) B 10 D 5 10 20 30 40 50
Quantity of Blu-rays (millions per year)
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16. When a variable other than price changes, what happens?
The whole demand curve shifts, stated as “there is a change in demand”
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17. Decrease or increase in demand Change in a nonprice determinant
Leftward or rightward shift in the demand curve
Change in a nonprice determinant
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18. Price per Blu-ray (dollars) Quantity of Blu-rays (millions per year)
Exhibit 3-3(b) When the ceteris paribus assumption is relaxed, the whole curve can shift 20 A B 15
Price per Blu-ray (dollars) 10 D2 5 D1 10 20 30 40 50
Quantity of Blu-rays (millions per year)
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19. What is the conclusion?
Changes in nonprice determinants can produce only a shift in a demand curve and not a movement along the demand curve
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20. Exhibit 3-4 Terminology for changes in price and nonprice determinants of demand
Price Incease
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21. Exhibit 3-4 Two types of Demand Changes Illustrated
Change in Nonprice Determinant Causes
Change in Nonprice Determinant Causes
Price per unit
INCREASE IN DEMAND
DECREASE IN DEMAND
Movement Along Demand Curve
Change in Price Causes D3 D1 D2
Quantity of good or service per unit of time
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22. A shift in a demand curve is caused by a change in:
Number of buyers in the market
Tastes and preferences
Income
Expectations of buyers
Prices of related goods
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23. A decline in the birthrate reduces the demand for baby clothes.
Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve
Nonprice Determinant of Demand
Relationship to Changes in Demand Curve
Shift in the Demand Curve
Examples P 1.
Number of buyers
Direct
Immigration from Mexico increases the demand for Mexican food products in grocery stores. D1 D2 Q P
A decline in the birthrate reduces the demand for baby clothes. D2 D1 Q
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24. Tastes and preferences
Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve
Nonprice Determinant of Demand
Relationship to Changes in Demand Curve
Shift in the Demand Curve
Examples P 2.
Tastes and preferences
Direct
For no apparent reason, consumers want Beanie Babies and demand increases. D1 D2 Q P
After a while, the fad dies and demand declines. D2 D1 Q
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25. Consumers’ incomes increase, and the demand for steaks increases.
Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve
Nonprice Determinant of Demand
Relationship to Changes in Demand Curve
Shift in the Demand Curve
Examples P 3.
Income a. Normal goods
Direct
Consumers’ incomes increase, and the demand for steaks increases. D1 D2 Q P
A decline in income decreases the demand for air travel. D2 D1 Q
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26. Consumers’ incomes increase, and the demand for hamburger decreases.
Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve
Nonprice Determinant of Demand
Relationship to Changes in Demand Curve
Shift in the Demand Curve
Examples P b.
Inferior goods
Inverse
Consumers’ incomes increase, and the demand for hamburger decreases. D2 D1 Q P
A decline in income increases the demand for bus service. D1 D2 Q
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27. Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve
Nonprice Determinant of Demand
Relationship to Changes in Demand Curve
Shift in the Demand Curve
Examples
Expectations of buyers P 4.
Direct
Consumers’ expect that gasoline will be in short supply next month and prices will rise sharply. Consequently, consumers fill the tanks in their cars this month, and there is an increase in demand for gasoline. D1 D2 Q P
Months later consumers expect the price of gasoline to fall soon, and the demand for gasoline decreases. D1 D2 Q
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28. A reduction in the price of tea decreases the demand for coffee.
Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve
Nonprice Determinant of Demand
Relationship to Changes in Demand Curve
Shift in the Demand Curve
Examples P 5.
Prices of related goods
Direct
A reduction in the price of tea decreases the demand for coffee.
a. Substitute goods D1 D2 Q P
An increase in the price of airfares causes higher demand for bus transportation. D1 D2 Q
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29. A higher price for peanut butter decreases the demand for jelly.
Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve
Nonprice Determinant of Demand
Relationship to Changes in Demand Curve
Shift in the Demand Curve
Examples
Complementary goods P b.
Inverse
A decline in the price of cellular service increases the demand for cell phones. D1 D2 Q P
A higher price for peanut butter decreases the demand for jelly. D2 D1 Q
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30. What is a normal good?
Any good for which there is a direct relationship between changes in income and its demand curve
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31. What does a direct relationship between price and quantity mean?
The two variables move in the same direction
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32. What is an inferior good?
Any good for which there is an inverse relationship between changes in income and its demand curve
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33. What does an inverse relationship between price & quantity mean?
It means that the two variables move in opposite directions
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34. What are substitute goods?
Goods that “compete” with one another for consumer purchases
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35. The demand curve for the substitute good increases
What happens when the price increases for a good that has a substitute?
The demand curve for the substitute good increases
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36. The demand curve for the substitute good decreases
What happens when the price decreases for a good that has a substitute?
The demand curve for the substitute good decreases
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37. What are complementary goods?
Goods that are “jointly consumed” with another good
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38. The demand curve for the complementary good decreases
What happens when the price increases for a good that has a complement?
The demand curve for the complementary good decreases
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39. The demand curve for the complementary good increases
What happens when the price decreases for a good that has a complement?
The demand curve for the complementary good increases
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40. The demand curve for the complementary good decreases
What happens when the price increases for a good that has a complement?
The demand curve for the complementary good decreases 40
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41. Supply represents the choice making behavior of sellers
What is supply?
Supply represents the choice making behavior of sellers
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42. What is the law of supply?
There is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus
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43. Quantity Supplied (thousands per year)
Exhibit 3-6 An Individual Supply Curve for Blu-rays
An Individual Seller’s Demand Schedule for Blu-rays
Price per Blu-ray
Point
Quantity Supplied (thousands per year)
A $ B C D
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44. Exhibit 3-6 An Individual Seller’s Supply Curve for Blu-rays20 B 15
Price per Blue-ray (dollars) C 10 D 5 50 10 20 30 40
Quantity of Blu-rays (thousands per year)
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45. Why do supply curves have a positive slope?
Only at a higher price will it be profitable for sellers to incur the higher opportunity cost associated with supplying a larger quantity
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46. What is market supply?
The horizontal summation of all the quantities supplied at various prices that might prevail in the market
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47. Exhibit 3-7 The Market Supply Curve for Blu-rays
Entertain City Supply Curve + =
High Vibes Supply Curve
Market Supply Curve
Price S1
Price S2
Price
STOTAL
$25
$25
$25 15 15 15 15 25 25 35 40 60
Quantity (thousands per year)
Quantity (thousands per year)
Quantity (thousands per year)
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48. IMPORTANT !
KNOW THE DIFFERENCE BETWEEN A “CHANGE IN THE QUANTITY SUPPLIED” AND A “CHANGE IN SUPPLY”
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49. When price changes, what happens?
The curve does not shift and there is a “change in the quantity supplied”
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50. Increase in quantity supplied Decrease in quantity supplied
Downward movement along the supply curve
Upward movement along the supply curve
Price Decreases
Price increases 50
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51. S B A Exhibit 3-8(a) Supply Curve 20 15 10 5 10 20 30 40
A change in price causes a change in the quantity supplied 20 15
Price per Blu-ray (dollars) B 10 A 5 10 20 30 40
Quantity of Blu-rays (thousands per year)
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52. When a variable other than price changes, what happens?
The whole curve shifts and there is a “change in supply”
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53. Decrease or increase in supply Change in nonprice determinant
Leftward or rightward shift in the supply curve
Change in nonprice determinant
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54. S1 S2 Exhibit 3-8(b) Increase in Supply 20 A B 15 10 5 10 20 30 40
Price per Blu-ray (dollars) 15 10 5 10 20 30 40
Quantity of Blu-rays (thousands per year)
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55. What is the conclusion?
Changes in nonprice determinants can produce only a shift in a supply curve and not a movement along the demand curve
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56. Exhibit 3-9 Terminology for changes in price and nonprice determinants of supply55
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57. Exhibit 3-9 Two types of Supply Changes Illustrated
DECREASE IN SUPPLY
Change in Price Causes
INCREASE IN SUPPLY
Price per unit
Movement Along Supply Curve
Change in Nonprice Determinant Causes
Change in Nonprice Determinant Causes
Quantity of good or service per unit of time
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58. A shift in a supply curve is caused by a change in:
Number of sellers in the market
Technology
Resource prices
Taxes and subsidies
Expectations of producers
Prices of other goods and services the firm could produce
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59. Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve
Nonprice Determinant of Supply
Relationship to Changes in Supply Curve
Shift in the Supply Curve
Examples P 1.
Number of sellers
Direct S1
The United States lowers trade restrictions on foreign textiles, and the supply of textiles in the United States increases. S2 Q P S2 S1
A severe drought destroys the orange crop, and the supply of oranges decreases. Q
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60. Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve
Nonprice Determinant of Supply
Relationship to Changes in Supply Curve
Shift in the Supply Curve
Examples P 2.
Technology
Direct S1
New methods of producing automobiles reduce production costs, and the supply of automobiles increases. S2 Q P S2 S1
Technology is destroyed in war, and production costs increase; the result is a decrease in the supply of good X. Q
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61. Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve
Nonprice Determinant of Supply
Relationship to Changes in Supply Curve
Shift in the Supply Curve
Examples P 3.
Resource prices
Inverse S1 S2
A decline in the price of computer chips increases the supply of computers. Q P S2 S1
An increase in the cost of farm equipment decreases the supply of soybeans. Q
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62. Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve
Nonprice Determinant of Supply
Relationship to Changes in Supply Curve
Shift in the Supply Curve
Examples P 4.
Taxes and subsidies
Inverse and direct S2 S1
An increase in the per-pack on cigarettes reduces the supply of cigarettes. Q P S1
A government payment to dairy farmers based on the number of gallons produced increases the supply of milk. S2 Q
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63. Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve
Nonprice Determinant of Supply
Relationship to Changes in Supply Curve
Shift in the Supply Curve
Examples
Expectations P 5.
Inverse S2
Oil companies anticipate a substantial rise in future oil prices, and this expectation causes these companies to decrease their current supply of oil. S1 Q P
Farmers expect the future price of wheat to decline, so they increases the present supply of wheat. S1 S2 Q
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64. Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve
Nonprice Determinant of Supply
Relationship to Changes in Supply Curve
Shift in the Supply Curve
Examples P 6.
Prices of other goods and services
Inverse S2 S1
A rise in brand-name drugs causes drug companies to decrease the supply of generic drugs. Q P S1
A decline in the price of tomatoes causes farmers to increase the supply of cucumbers. S2 Q
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65. What is a market?
Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged
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66. Where is the equilibrium price?
At the price where the quantity demanded and the quantity supplied are equal
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67. Exhibit 3-11Demand, Supply, and Equilibrium for Sneakers (pairs per year)66
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68. Exhibit 3-12 The Supply & Demand for Sneakers
120 S 90
Surplus E
Price per pair (dollars) 60
Shortage 30 D 20 50 80
Quantity of Sneakers (thousands of pairs per year)
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69. What is the price system?
A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices
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70. END