Chapter Four: Supply and Demand

The Theory of Supply

Table 4.1: Supply Schedule for Cups of Coffee

Figure 4.1: Supply Curve for Cups of Coffee A supply curve shows the same information as the supply schedule. At higher prices, more cups of coffee are offered for sale.

Figure 4.2: An Increase in Supply A supply curve shifts outward (to the right) when sellers decide to offer a higher quantity for sale at the same price (or charge less for a given quantity).

Figure 4.3: A Decrease in Supply A supply curve shifts backward (to the left) when sellers decide to offer a lower quantity for sale at the same price (or charge more for a given quantity).

The Theory of Demand

Table 4.2: Demand Schedule for Cups of Coffee

Figure 4.4: Demand Curve for Cups of Coffee A demand curve shows the same information as the demand schedule. At higher prices, fewer cups of coffee are demanded.

Figure 4.5: An Increase in Demand A demand curve shifts outward (to the right) when a higher quantity is demanded at the same price (or people are willing to pay more for a given quantity).

Figure 4.6: A Decrease in Demand A demand curve shifts backward (to the left) when a lower quantity is demanded at the same price (or people are willing to pay less for a given quantity).

The Theory of Market Adjustment

Figure 4.7: The Market Adjustment Process At a price of $1.40 per cup, we have a situation of surplus (the quantity supplied exceeds the quantity demanded), and there is downward pressure on price. At a price of $0.80 per cup we have a situation of shortage (the quantity demanded exceeds the quantity supplied), and there is upward pressure on price.

Figure 4.8: Market Equilibrium Equilibrium occurs when the quantity demanded equals the quantity supplied. At this point there is no upward or downward pressure on price.

Figure 4.9: Market Adjustment to an Increase in Supply An increase in supply creates a surplus, and downward pressure on price. The new equilibrium occurs at point E2, with a lower price and a higher quantity sold.

Figure 4.10: Market Adjustment to an Increase in Demand An increase in demand creates a shortage, and upward pressure on price. The new equilibrium occurs at point E2, with a higher price and a higher quantity sold.

Table 4.3: Summary of the Market Effects of Shifts in Supply and Demand

Figure 4.11: Market Adjustment with an Increase in Both Supply and Demand An increase in both supply and demand moves the equilibrium to point E2. The quantity sold has clearly increased but the effect on price is ambiguous.

Table 4.4: Summary of the Market Effects When Both Supply and Demand Shift