1. Demand, Supply, and Equilibrium
Chapter 17
Demand, Supply, and Equilibrium
17-1
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Objectives Individual and market demand Changes in demand
Individual and market supply
Changes in supply
Graphing supply and demand curves
Finding equilibrium price and quantity
17-2
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3. Demand Defined
Demand is the schedule of quantities of a good or service that people will purchase at various prices
The law of demand: when the price of a good is lowered, more of it is demanded; When it is raised, less is demanded
There is an implicit assumption that there is no change in any other factors
17-3
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4. Individual and Market Demand
The law of demand holds for both individuals and markets
Individual demand is the schedule of quantities that a person would purchase at various prices
Market demand is the schedule of quantities that everyone in the market would buy at various prices
17-4
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5. Table 1, Hypothetical Individual Demand and Market Demand Schedules
Quantity demanded by Venus 30
Price QD $ P r i c e 24 18 12 6
Quantity
17-5
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6. Table 1, Hypothetical Individual Demand and Market Demand Schedules
Quantity demanded by Martina 30
Price QD $ P r i c e 24 18 12 6
Quantity
17-6
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7. Table 1, Hypothetical Individual Demand and Market Demand Schedules
Quantity demanded by Serena 30
Price QD $ P r i c e 24 18 12 6
Quantity
17-7
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8. Table 1, Hypothetical Individual Demand and Market Demand Schedules
Quantity demanded by Lindsay 30
Price QD $ P r i c e 24 18 12 6
Quantity
17-8
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9. Price Venus Martina Serena Lindsay Total $30 0 1 2 1 424 18 12 6
Quantity
17-9
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10. Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 924 18 12 6
Quantity
17-10
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11. Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 9 $20 3 2 5 4 1424 18 12 6
Quantity
17-11
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12. Price Venus Martina Serena Lindsay Total $30 0 1 2 1 4 $25 2 1 3 3 9 $20 3 2 5 4 14 $15 3 3 6 6 1824 18 12 6
Quantity
17-12
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13. Price Venus Martina Serena Lindsay Total $ $ $ $ $ 30 P r i c e 24 18 12 6
Quantity
17-13
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14. Price Venus Martina Serena Lindsay Total $ $ $ $ $ $ 30 P r i c e 24 18 12 6
Quantity
17-14
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15. Price Venus Martina Serena Lindsay Total $ $ $ $ $ $
Market Demand 30 P r i c e 24 18 12 6
Quantity
17-15
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16. What Is the Market? The market is where people buy and sell
Local markets
Gasoline, groceries
Regional
Automobiles
National or international
Computers
EBay has created a global market for goods that previously had purely local markets
17-16
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17. A change in demand would be a change in the schedule
Changes in Demand
A change in demand would be a change in the schedule
Price QD(1) QD(2) $ $ $ $ $ $
17-17
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18. An Increase in Demand
An increase in demand is an increase in the quantity people are willing to purchase at all prices
Price QD(1) QD(2) $ $ $ $ $ $
The demand curve shifts to the right
17-18
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19. An Increase in Demand
A decrease in demand means people are willing to purchase less at all prices
Price QD(1) QD(2) $ $ $ $ $ $
The demand curve shifts to the left
17-19
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20. Changes in Demand
A and B are on the same line, therefore, they are on the same schedule. If they are on the same schedule, there can be no change in demand C A B D1 D2
Move from point A to point B
A change in quantity demanded
17-20
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21. Changes in Demand
Movement from A to B is simply a change in quantity demanded in response to a change in price C A B D1 D2
Move from point A to point B
A change in quantity demanded
17-21
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22. Changes in Demand
There is an increase in demand because people are willing to buy more at all prices on G’s curve which is to the right of F’s curve E G I F H
Move from point F to point G
An increase in demand
17-22
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23. Changes in Demand
There is a decrease in demand because people are willing to buy less at all prices on H’s curve which is to the left of G’s curve E G I F H
Move from point G to point H
A decrease in demand
17-23
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24. Changes in Demand
As long as we remain on the same curve, there is no change in demand E G I F H
Move from point H to point I
A change in quantity in demanded
17-24
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25. Changes in Demand
As long as we remain on the same curve, there is no change in demand L J G K M N
Move from point J to point K
A change in quantity in demanded
17-25
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26. Changes in Demand
From K to L is an increase in demand because L’s demand curve is entirely to the right of K’s curve L J G K M N
Move from point K to point L
An increase in demand
17-26
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27. Changes in Demand
From L to M is a decrease in demand because M’s demand curve is entirely to the left of L’s curve L J G K M N
Move from point L to point M
A decrease in demand
17-27
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28. Changes in Demand
We don’t know on which of an infinite number of possible demand curves N is situated, therefore, the most we can say is that there is a change in demand L J G K M N
Move from point M to point N
A change in demand
17-28
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29. What Causes Changes in Demand?
Changes in income
Changes in the price of related goods and services
Changes in taste and preferences
Changes in price expectations
Changes in population
17-29
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30. Changes in Income
The demand for NORMAL goods varies directly with income
When income goes up people buy more, therefore demand goes up
The demand for INFERIOR goods varies inversely with income
When income goes up people buy less, therefore demand goes down
17-30
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31. Changes in the Price of Related Goods and Services
Goods and services are related in two ways
One can be used as a substitute for the other
Hot dogs and hamburgers; tuna and salmon
One can complement the other
Videos and VCRs; gasoline and cars, tires
17-31
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32. Prices of Substitute Goods
Directly related
The price of hamburgers goes up
The price of hotdogs would also go up
As the price of hamburgers goes up people will buy less hamburgers and more hotdogs. This increases the demand for hotdogs thus increasing the price of hotdogs
17-32
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33. 17-33
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34. Prices of Complementary Goods
Inversely related
Prices of weenies go up the price of hotdog buns goes down
The price of weenies goes up people buy less weenies. If people buy less weenies, they will also buy less hotdog buns
This decreases the demand for hotdog buns and lowers the price of hotdog buns
17-34
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35. 17-35
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36. Changes in Taste and Preferences
Taste and preferences tend to change over time
Smaller cars and less-fattening foods
Preferring designer clothing and brand- name sneakers
Less people are smoking (has been helped by a campaign to reduce smoking)
17-36
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37. Changes in Price Expectations
If people expect the price of something to rise, they rush out to stock up before it does
This increases the demand
If people expect the price of something to fall, they will hold off buying it
This decreases the demand
17-37
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38. Changes in Population
As the nation’s population increases, the demand for particular goods and services increase
General growth increases the demand for food, housing, autos, etc.
The changing age distribution affects demand
In the next three decades there will be a higher demand for retirement homes, nursing homes, wheel chairs, bifocal glasses, etc.
17-38
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39. Supply Defined
Supply is a schedule of quantities of a good or service that people are willing to sell at various prices
As prices rise people are willing to sell more
Thus, there is a positive or direct relationship between price and quantity
Price rises quantity supplied rises
Prices declines quantity supplied declines
We’re assuming there is no change in any of the factors that influence supply
17-39
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40. Individual and Market Supply
Hypothetical Supply of American Cars, 2004 (in thousands)
Daimler Japanese Price GM Ford Chrysler Owned Firms Total
$20, ,447
18, ,976
16, ,618
14, ,648
12, ,858
17-40
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41. Hypothetical Supply of American Cars, 2004
17-41
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42. Changes in Supply 17-42 A change in quantity supplied
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43. Changes in Supply 17-43 An increase in supply
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44. Changes in Supply 17-44 A change in supply
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45. Changes in Supply 17-45 A change in quantity supplied
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46. Changes in Supply 17-46 17-56 An increase in supply
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47. Changes in Supply 17-47 A change in quantity supplied
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48. Changes in Supply 17-48 A decrease in supply
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49. Changes in Supply 17-49 A change in supply
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50. 17-50
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51. 17-51
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52. 17-52
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53. 17-53
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54. 17-54
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55. 17-55
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56. 17-56
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57. Graphing the Demand and Supply Curves
Hypothetical Demand Schedule Price Quantity Demanded(QD) $ $ $ $ $
17-57
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58. Graphing the Demand and Supply Curves
Hypothetical Supply Schedule Price Quantity Supplied (QS) $ $ $ $ $
17-58
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59. Graphing the Demand and Supply Curves
Hypothetical Demand and Supply Schedules Price QD QS $ $ $ $ $
The equilibrium point is where the demand and supply curves cross
17-59
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

60. Graphing the Demand and Supply Curves
Hypothetical Demand and Supply Schedules Price QD QS $ $ $ $ $
Equilibrium price is about $7.20
Equilibrium quantity is 6
17-60
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61. Graphing the Demand and Supply Curves
Above equilibrium price there are surpluses
Price
Price
Price always tends toward equilibrium. If price is above equilibrium, sellers will lower prices until the price declines to the equilibrium price
Price
17-61
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

62. Graphing the Demand and Supply Curves
Below equilibrium price there are shortages
Price always tends toward equilibrium. If price is below equilibrium, buyers will bid prices up until the price rises to the equilibrium price
Price
Price
Price
17-62
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63. Finding Equilibrium Price and Quantity
If we draw our graphs accurately, we can usually find equilibrium price and quantity in a couple of seconds, especially if we’ve used graph paper. But sometime we need to do further analysis to find really accurate equilibrium prices and quantities
Hypothetical Demand and Supply Schedule
Price Quantity Demanded Quantity Supplied $ $ $ $ $
How much is the equilibrium price?
17-63
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

64. Finding Equilibrium Price and Quantity
Hypothetical Demand and Supply Schedule
Price Quantity Demanded Quantity Supplied $ $ $ $ $
How much is the equilibrium price?
First we add a “Units apart” column
17-64
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

65. Finding Equilibrium Price and Quantity
Hypothetical Demand and Supply Schedule
Price Quantity Demanded Units Apart Quantity Supplied $ $ $ $ $
How much is the equilibrium price?
First we add a “Units apart” column
Equilibrium price is a little closer to $13 than to $12
17-65
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

66. Finding Equilibrium Price and Quantity
Hypothetical Demand and Supply Schedule
Price Quantity Demanded Units Apart Quantity Supplied $ $ $ $ $
How much is the equilibrium price?
First we add a “Units apart” column
Equilibrium price is a little closer to $13 than to $12
Therefore, equilibrium price has to be something greater than $12.50 and less than $13
17-66
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

67. Hypothetical Demand and Supply Schedule
Price Quantity Demanded Units Apart Quantity Supplied $ $ $ $ $
How much is the equilibrium quantity?
Equilibrium quantity demanded is closer to 7 than 12. The midpoint between 12 and 7 is Therefore, we know the equilibrium quantity demanded must be something less than 9.5
Equilibrium quantity supplied is closer to 12 than 6. The midpoint between 12 and 6 is 9. Therefore, we know the equilibrium quantity supplied is something more than 9.0
The equilibrium quantity has to be between 9.0 and Anything between 9.1 and 9.4 would be acceptable. I would split the difference and say 9.2 or 9.3
17-67
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68. This is the graph of the previous Demand and Supply schedule
$12.60 plus or minus .05 is about the best you can do
Remember, equilibrium price has to be something greater than $12.50 and less than $13
17-68
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

69. This is the graph of the previous Demand and Supply schedule
$12.60 plus or minus .05 is about the best you can do
Remember, the equilibrium quantity has to be between 9.0 and Anything between 9.1 and 9.4 would be acceptable. I would split the difference and say 9.2 or 9.3
In this instance, this technique proved useful.
17-69
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70. Is This Type of Analysis Necessary?
It isn’t when you’ve got an equilibrium price or quantity that is clearly closer to one figure than to another
You will be able to spot this when you draw your graph
But when the demand and supply curves cross about halfway between two figures, then you will need to go back to the original schedule to figure out more precisely where the equilibrium point lies
17-70
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