Chapter 1: Appendix The Basics of Demand, Supply, and Equilibrium Managerial Economics in a Global Economy, 5th Edition by Dominick Salvatore Chapter 1: Appendix The Basics of Demand, Supply, and Equilibrium Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 1

Law of Demand A decrease in the price of a good, all other things held constant, will cause an increase in the quantity demanded of the good. An increase in the price of a good, all other things held constant, will cause a decrease in the quantity demanded of the good. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 2

Change in Quantity Demanded Price An increase in price causes a decrease in quantity demanded. P1 P0 Quantity Q1 Q0 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 3

Change in Quantity Demanded Price A decrease in price causes an increase in quantity demanded. P0 P1 Quantity Q0 Q1 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 4

Changes in Demand Change in Buyers’ Tastes Change in Buyers’ Incomes Normal Goods Inferior Goods Change in the Number of Buyers Change in the Price of Related Goods Substitute Goods Complementary Goods Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 5

Change in Demand An increase in demand refers to a rightward shift in the market demand curve. Price P0 Quantity Q0 Q1 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 6

Change in Demand A decrease in demand refers to a leftward shift in the market demand curve. Price P0 Quantity Q1 Q0 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 7

Law of Supply A decrease in the price of a good, all other things held constant, will cause a decrease in the quantity supplied of the good. An increase in the price of a good, all other things held constant, will cause an increase in the quantity supplied of the good. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 8

Change in Quantity Supplied A decrease in price causes a decrease in quantity supplied. Price P0 P1 Quantity Q1 Q0 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 9

Change in Quantity Supplied An increase in price causes an increase in quantity supplied. Price P1 P0 Quantity Q0 Q1 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 10

Changes in Supply Change in Production Technology Change in Input Prices Change in the Number of Sellers Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 11

Change in Supply An increase in supply refers to a rightward shift in the market supply curve. Price P0 Quantity Q0 Q1 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 12

Change in Supply A decrease in supply refers to a leftward shift in the market supply curve. Price P0 Quantity Q1 Q0 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 13

Market Equilibrium Market equilibrium is determined at the intersection of the market demand curve and the market supply curve. The equilibrium price causes quantity demanded to be equal to quantity supplied. Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 14

Market Equilibrium Price D S P Quantity Q Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 15

Market Equilibrium Price D0 D1 S0 An increase in demand will cause the market equilibrium price and quantity to increase. Q1 P1 P0 Quantity Q0 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 16

Market Equilibrium Price D1 D0 S0 A decrease in demand will cause the market equilibrium price and quantity to decrease. Q0 P0 P1 Q1 Quantity Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 17

Market Equilibrium Price An increase in supply will cause the market equilibrium price to decrease and quantity to increase. D0 S0 S1 P0 Q1 P1 Quantity Q0 Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 18

Market Equilibrium Price A decrease in supply will cause the market equilibrium price to increase and quantity to decrease. D0 S1 S0 P1 Q1 Q0 P0 Quantity Prepared by Robert F. Brooker, Ph.D. Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Slide 19