1. The cornerstone of the Free Market Economic System
Demand and Supply
The cornerstone of the Free Market Economic System

2. What is Demand?
Demand – “the Willingness and Ability of a buyer to purchase differing quantities of particular good and/or service at different prices.”
There is NO demand for a good or service until this requirement is met
I am Willing to buy a Hummer, but I do not have the Ability to buy one at its current price – I do not have a demand for a Hummer.

3. What is the Law of Demand?
States that:
As the price of a good or service decreases, the quantity demanded will increase,
As the price of a good or service increases the quantity demanded will decrease
There is an INVERSE relationship between the price and quantity demanded

4. Demand Curve The Market for Gasoline Demand Schedule Market Data – sum
of all Individual quantity
demanded/price
combinations
“Quantities Demanded
At different Prices”
$.50
200
$1.00
150
$2.00 50
Bill Sue John The Market
Individual Quantities Demanded
at each price
Market Quantity
Demanded at
each price

5. . . . Demand Curve Demand Schedule Market Data – sum
Market for Gasoline
Demand Curve
Price Of
Gasoline .
Demand Schedule
Market Data – sum
of all Individual quantity
demanded/price
combinations
“Quantities Demanded
At different Prices”
The individual quantities demanded
are added HORIZONTALLY to
derive the MARKET QUANTITY
At each price (at $.50 add
To get 200 gal. of gasoline
$2.00 .
$1.00 .
$.50
Demand* 50 75
100
150
200
300
Quantity of Gasoline

6. . . . Demand Curve Demand Schedule Market Data – sum
Market for Gasoline
Demand Curve
Price Of
Gasoline
The Demand Curve is comprised
of an infinite number of Price/
Quantity Demanded combinations
-a change in the price of gasoline
causes movement ALONG the
Demand Curve .
Demand Schedule
Market Data – sum
of all Individual quantity
demanded/price
combinations
“Quantities Demanded
At different Prices”
The individual quantities demanded
are added HORIZONTALLY to
derive the MARKET QUANTITY
At each price (at $.50 add
To get 200 gal. of gasoline
$2.00 .
$1.00 .
$.50
Demand* 50 75
100
150
200
300
Quantity of Gasoline

7. Determinants of Demand (Factors That Shift The Demand Curve)
Change in Consumer taste/preference
Change in the number of buyers
Change in consumer incomes
Change in the prices of complementary and substitute goods
Change in consumer expectations

8. . . . . . . Demand Curve Income INCREASES We can afford 50% more
Market for Gasoline
Demand Curve
Price Of
Gasoline . .
What shifts the Demand Curve?
Changes in Income
Income INCREASES
We can afford 50% more
gallons of Gasoline at
every price.
$2.00 . .
$1.00 . .
Demand1
$.50
Demand* 50 75
100
150
200
300
Quantity of Gasoline

9. . . . . . . Demand Curve What shifts the Demand Curve?
Market for Gasoline
Demand Curve
Price Of
Gasoline . .
What shifts the
Demand Curve?
Changes in Income
Income DECREASES
We can afford 50% fewer
Gallons of Gasoline at
every price
$2.00 . .
$1.00 . .
$.50
Demand1
Demand* 25 50
100
200
Quantity of Gasoline

10. . . . . . . Demand Curve INCREASES – because of
Market for gasoline
Demand Curve
Price Of . .
What shifts the Demand Curve?
Changes in Number of Buyers
INCREASES – because of
economic opportunities more
people move to Texas.
Texas needs 50% more
Gallons of Gasoline at
every price
$2.00 . .
$1.00 . .
Demand1
$.50
Demand* 50 75
100
150
200
300
Quantity of Gasoline

11. . . . . . . Demand Curve What shifts the Demand Curve?
Market for Gasoline
Demand Curve
Price Of
Gasoline . .
What shifts the
Demand Curve?
Changes in Number of Buyers
DECREASES – because of
economic opportunities more
people move OUT OF Texas
We need 50% fewer
Gallons of Gasoline at
every price
$2.00 . .
$1.00 . .
$.50
Demand1
Demand* 25 50
100
200
Quantity of Gasoline

12. . . . . . . Demand Curve What shifts the Demand Curve?
Market for Oranges
Demand Curve
Price Of
Oranges . .
What shifts the Demand Curve?
Changes in Consumer
Preferences
Consumers express a positive
preference for a good.
“Study shows that eating
an orange a day reduces
cancer risks”
$2.00 . .
$1.00 . .
Demand1
$.50
Demand* 50 75
100
150
200
300
Quantity of Oranges

13. . . . . . . Demand Curve Market for Oranges Price Of Oranges
What shifts the Demand Curve?
Changes in Consumer Preferences
1. Consumers express a negative
Preference for a good.
“Study shows that eating oranges
stunts your growth” (or something
Ridiculous like that…)
$2.00 . .
$1.00 . .
$.50
Demand1
Demand* 25 50
100
200
Quantity of Oranges

14. . . . . . . What shifts the Demand Curve?
Market for Apples
Price Of
Apples . .
What shifts the Demand Curve?
Availability of Substitutes – good that
can be used in place of a
good
“The price of oranges INCREASES
Dramatically because
of a poor harvest.”
$2.00 . .
$1.00 . .
Demand1
$.50
Demand* 50 75
100
150
200
300
Quantity of Apples

15. . . . . . . What shifts the Demand Curve?
Market for Apples
Price Of
Apples . .
What shifts the Demand Curve?
1. Availability of Substitutes
“The price of
Oranges
DECREASES
Dramatically
because of a record
harvest.”
$2.00 . .
$1.00 . .
$.50
Demand1
Demand* 25 50
100
200
Quantity of Apples

16. . . . . . . What shifts the Demand Curve? Changes in the Price of a
Market for Flashlights
Price Of
Flashlights . .
What shifts the Demand Curve?
Changes in the
Price of a
Complement – A good that
is typically used with
another good
“Price of
batteries
DECREASES”
$2.00 . .
$1.00 . .
Demand1
$.50
Demand* 50 75
100
150
200
300
Quantity of Flashlights

17. . . . . . . What shifts the Demand Curve? Changes in the Price of a
Market for Flashlights
Price Of
SUV’s . .
What shifts the Demand Curve?
Changes in the Price of a
Complement -A good that is
typically used with another good
“Battery prices
INCREASE”
$2.00 . .
$1.00 . .
$.50
Demand1
Demand* 25 50
100
200
Quantity of flashlights

18. Demand---The relationship of of one good to another when Income Changes
IF Income INCREASES and the Demand for a good INCREASES, then that good is called a NORMAL GOOD.
Make more money and you want more steak, luxury cars, vacations, etc.
If Income DECREASES and the Demand for a good DECREASES , then that good is called a NORMAL GOOD.
Make less money and you want less steak, fewer luxury cars, fewer vacations, etc

19. Demand---The relationship of of one good to another when Income Changes
If Income INCREASES and the Demand for a good DECREASES, then that good is called an INFERIOR GOOD.
Make more money and you want fewer Hot dogs, fewer Kia’s, fewer vacations to local parks, etc
If Income DECREASES and the Demand for a good INCREASES, then that good is call an INFERIOR GOOD,
Make less money and you want more hot dogs, more Kia’s, more trips to local parks, etc.

20. Substitutes
If two goods are Substitutes: when the Price of Good 1 INCREASES then the DEMAND for the SUBSTITUTE (Good 2) INCREASES.
If two goods are Substitutes: when the Price of Good 1 DECREASES then the DEMAND for the SUBSTITUTE (Good 2) DECREASES
There is a DIRECT relationship when the price of one good changes and the effect on the DEMAND for the other--- SUBSTITUTES!!!

21. Complements
If two goods are Complements: when the Price of Good 1 INCREASES then the DEMAND for the Complement (Good 2) DECREASES.
If two goods are Complements: when the Price of Good 1 DECREASES then the DEMAND for the Complement(Good 2) INCREASES
There is an INVERSE relationship when the price of one good changes and the effect on the DEMAND for the other--- COMPLEMENTS!!!

22. What is Supply?
Supply – “The Willingness and Ability of sellers to produce and offer for sale different quantities of goods and/or services at different prices”
You must now think as a producer – you want to get the highest price possible if you are going to work harder to supply more

23. What is the Law of Supply
States that:
As the price of a good or service increases the quantity supplied will increase
As the price of a good or service decreases the quantity supplied will decrease
There is a DIRECT relationship between price and quantity supplied

24. Supply Curve The Market for Gasoline Supply Schedule Market Data – sum
of all Individual quantity
supplied/price
combinations
“Quantities Supplied
At different Prices”
$.50 50
$1.00
100
$2.00
200
Gas #1 Gas #2 Gas #3 The Market
Individual Quantities Supplied
at each price
Market Quantity
Demanded at
each price

25. S* Supply Curve Quantity Supplied at each price
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
Supply Curve – infinite
Number of price and
quantity combinations
Supply schedule –
Quantity supplied at
Different prices
“THE SAME LOGIC AS
THE DEMAND SCHEDULE”
$2.50 S*
$2.00
$1.50
$1.00
$.50 50
100
150
200
Quantity of Gasoline

26. S* Supply Curve Quantity Supplied at each price
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
Supply Curve – infinite
Number of price and
quantity combinations
Supply schedule –
Quantity supplied at
Different prices
“THE SAME LOGIC AS
THE DEMAND SCHEDULE”
The Supply Curve is comprised
of an infinite number of Price/
Quantity Supplied combinations
-a change in the price of gasoline
causes movement ALONG the
Supply Curve
$2.50 S*
$2.00
$1.50
$1.00
$.50 50
100
150
200
Quantity of Gasoline

27. S* Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
$2.50 S*
$2.00
$1.50
$1.00
$.50 50
100
150
200
Quantity of Gasoline

28. Determinants of Supply Things That Shift Supply Curve
Change in Resource Prices (Input Prices)
Change in Technology
Change in Taxes or Subsidies
Change in producer expectations
Change in number of suppliers
Change in exogenous variables (bad weather, Terrorism, etc)
BOTTOM LINE ON SUPPLY CURVE SHIFTS
Anything that increases the cost of production decreases supply
Anything that decreases the cost of production increases supply

29. S* Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
Change in the price
of the resources used to
make a good
$2.50 S*
$2.00
$1.50
$1.00
$.50 50
100
150
200
Quantity of Gasoline

30. S1 S* Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
Resource Price INCREASES
“Oil prices skyrocket
because of a terrorist
attack on key oil fields
in the Middle East” – The cost
Of producing gasoline INCREASES
By $.50 S1
$2.50
$.50 S*
$2.00
$1.50
$.50
$1.00
$.50
$.50 50
100
150
200
Quantity of Gasoline

31. S* S1 Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
Resource Price DECREASES
“Oil prices decrease
because of new discoveries of
Reserves off the coast of California
– The cost
Of producing gasoline DECREASES
By $.50
$2.50 S*
$2.00 S1
-$.50
$1.50
$1.00
-$.50
$.50
-$50 50
100
150
200
Quantity of Gasoline

32. S1 S* Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
Change in Taxes
Government INCREASES
The Business Tax
On gasoline production– The cost
Of producing gasoline INCREASES
By $.50 S1
$2.50
$.50 S*
$2.00
$1.50
$.50
$1.00
$.50
$.50 50
100
150
200
Quantity of Gasoline

33. S* S1 Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
Change in Taxes
“Government DECREASES the
Business Tax On gasoline
production– The cost
Of producing gasoline DECREASES
By $.50
$2.50 S*
$2.00 S1
-$.50
$1.50
$1.00
-$.50
$.50
-$50 50
100
150
200
Quantity of Gasoline

34. S1 S* Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
Changes in Subsidies
(Payment from govt. to Producer)
– SUBSIDY DECREASES -The cost
of producing gasoline INCREASES
by $.50 S1
$2.50
$.50 S*
$2.00
$1.50
$.50
$1.00
$.50
$.50 50
100
150
200
Quantity of Gasoline

35. S* S1 Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
Changes in Subsidies
(Payment from govt. to Producer)
– SUBSIDY INCREASES -The cost of producing gasoline DECREASES
by $.50
$2.50 S*
$2.00 S1
-$.50
$1.50
$1.00
-$.50
$.50
-$50 50
100
150
200
Quantity of Gasoline

36. S* S1 Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve?
Change in Producer
Expectations/Exogenous variable -
“Gas prices are expected to decrease in the future because of advances in alternative fuels” (producers make gas to get the higher price today”
$2.50 S*
$2.00 S1
-$.50
$1.50
$1.00
-$.50
$.50
-$50 50
100
150
200
Quantity of Gasoline

37. S1 S* Supply Curve Quantity Supplied at each price What SHIFTS the
Market for Gasoline
Price Of
Gasoline
Supply Curve
Quantity Supplied
at each price
What SHIFTS the
Supply Curve? S1
$2.50
$.50 S*
$2.00
$1.50
$.50
Change in Producer
Expectations/Exogenous variable -
“Gas prices are expected to increase in the future because of an impending natural disaster (producers make LESS gas today to get the higher price in the future”
$1.00
$.50
$.50 50
100
150
200
Quantity of Gasoline