1. Chapter 3 Supply and Demand 3-1
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Chapter Objectives
Define and explain demand in a product or service market
Define and explain supply
Determine the equilibrium point in the market for a specific good, given data on supply and demand at different price levels
3-2
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

3. Chapter Objectives Understand what causes shifts in demand and supply
Understand how price ceilings cause shortages
Understand how price floors cause surpluses
3-3
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

4. Demand
The schedule of quantities of a good or service that people are willing and able to buy at different prices
Sometimes a schedule is also called a table
3-4
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

5. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-5
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

6. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-6
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

7. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-7
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

8. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-8
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

9. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-9
Copyright 2003 by The McGraw-Hill Companies, Inc. All rights reserved.

10. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-10
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

11. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-11
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

12. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-12
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

13. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-13
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

14. Hypothetical Daily Demand for Coach Seats on Round-trip Weekly Flights Between Denver and Chicago
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
3-14
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

15. Table 1 is the Demand Schedule
Figure 1 is the Graph of the Demand Schedule
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
Figure 1
The line is the Demand Curve
3-15
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

16. Price and Quantity Demanded are inversely related
Quantity Demanded is a point on the Demand Curve
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
Figure 1
3-16
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

17. Remember, Demand is the entire schedule or the entire curve
Quantity Demanded is a point on the Demand Curve
Table 1
Price QD
$ ,000
,000
,000
,000
,000
,000
,000
,000
,000
Figure 1
3-17
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

18. Supply
Is the “schedule” of quantities of a good or service that people are willing to sell at different prices
3-18
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

19. Supply is the entire schedule or the entire curve
Price QS $ , $ , $ , $ , $ , $ , $ , $ , $ ,000
3-19
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

20. Quantity Supplied is a point on the curve
Price QS $ , $ , $ , $ , $ , $ , $ , $ , $ ,000
3-20
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

21. Demand and Supply Curves
Price QS QD $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000
Equilibrium price is the price where QD = QS
We can find equilibrium price and quantity by seeing where the supply and demand curves cross
3-21
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

22. Demand and Supply Curves Surpluses and Shortages
Price QS QD $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000
54,000-7,000 = 47,000
Equilibrium price = EP Market price = MP
MP > EP there is a surplus
3-22
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

23. Demand and Supply Curves Surpluses and Shortages
Price QS QD $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000
54,000-7,000 = 44,000
A surplus would force sellers to lower their prices. Eventually, prices would fall back to the equilibrium price
Equilibrium price = EP Market price = MP
3-23
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

24. Demand and Supply Curves Surpluses and Shortages
Price QS QD $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000
57,000-7,000 = 50,000
Equilibrium price = EP Market price = MP
MP < EP here is a shortage
3-24
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

25. Demand and Supply Curves Surpluses and Shortages
Price QS QD $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000
57,000-7,000 = 50,000
A shortage would allow sellers to raise their prices. As prices increased people would buy less. Eventually, prices would move back to the equilibrium price
Equilibrium price = EP Market price = MP
3-25
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

26. Demand and Supply Curves Surpluses and Shortages
Price QS QD $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000 $ , ,000
We can see that the forces of demand and supply work together to establish an equilibrium price at which there are no shortages or surpluses
3-26
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

27. The schedule changes from QD1 to QD2
Table 4
Price QD QD2
$ , ,000
, ,000
, ,000
, ,000
, ,000
, ,000
, ,000
, ,000
, ,000
The demand curve shifts to the right from D1 to D2
This is an increase in demand
3-27
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

28. The schedule changes from QD2 to QD1
Table 4
Price QD QD2
$ , ,000
, ,000
, ,000
, ,000
, ,000
, ,000
, ,000
, ,000
, ,000
The demand curve shifts to the left from D2 to D1
This is a decrease in demand
3-28
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

29. Shifts in Supply and Demand Quantity (in thousands)
If the schedule changes the Supply curve shifts
Price S
500 S
450
400
350
300
250
200
Supply decreases the curve shifts to the left
150
100 50 D
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Quantity (in thousands)
3-29

30. Shifts in Supply and Demand Quantity (in thousands)
If the schedule changes the Supply curve shifts
Price S
500 S
450
400
350
300
250
200
150
Supply increases the curve shifts to the right
100 50 D
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Quantity (in thousands)
3-30

31. Shifts in Supply and Demand Quantity (in thousands)
If the Supply curve is S1 what is the equilibrium price and quantity?
Price S2
500 S1
450
400
350
300
250
The equilibrium price is approximately 262 or 263
200
150
The equilibrium quantity is approximately 35,000
100 50 D
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Quantity (in thousands)
3-31

32. Shifts in Supply and Demand Quantity (in thousands)
If the Supply curve changes to S2 what is the new equilibrium price and quantity?
Price S2
500 S1
450
400
350
300
250
The new equilibrium price is approximately 325
200
150
The new equilibrium quantity is approximately 26,000
100 50 D
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Quantity (in thousands)
3-32

33. Shifts in Supply and Demand Quantity (in thousands)
Is a shift from S1 to S2 an increase or decrease in Supply?
Price S2
500 S1
450
400
350
300
250
A decrease
200
150
100 50 D
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.
Quantity (in thousands)
3-33

34. Price Floors and Ceilings
The price can go no lower than the floor.
The surplus is the amount by which the quantity supplied is greater than the quantity demanded
A price floor creates a permanent surplus
3-34
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

35. Price Floors and Ceilings
The price can go no higher than the ceiling.
The shortage is the amount by which the quantity demanded is greater than the quantity supplied
A price ceiling creates a permanent shortage
3-35
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

36. Applications of Supply and Demand
Interest rates are set by
Supply and demand
Wage rates are set by
Rents are determined by
The prices of nearly all goods are determined by
The prices of nearly all services are determined by
3-36
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

37. Hypothetical Demand for and Supply of Loanable Funds
We can see that $600 billion is lent (or borrowed) at an interest rate of 6 percent
What would happen if the supply of loanable funds increased?
3-37
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

38. Hypothetical Demand for and Supply of Loanable Funds
The interest rate would decrease to 4 percent and the amount of money borrowed would increase to $800 billion
3-38
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

39. Hypothetical Demand for and Supply of Loanable Funds
If the demand for loanable funds rises to D2 the interest rate would rise to 9 percent and the amount of money borrowed would rise to $700 billion
3-39
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

40. Last Word
Government sometimes interferes with the free operation of the markets by
Imposing prices floors and price ceilings
This creates the problems of shortages and surpluses
The government may also ensure the smooth operation of the markets by protecting property rights, guaranteeing enforcement of legal contracts, and issuing a supply of money that buyers and sellers readily accept
Property rights are essential to a free and prosperous nation
While governmental interference with the market system can have adverse affects, the government does have a substantial supportive role to play in a market economy.
3-40
Copyright 2005 by The McGraw-Hill Companies, Inc. All rights reserved.