1. Economics 101 Lecturer: Jack Wu
Demand and Supply
Economics 101
Lecturer: Jack Wu

2. RISING GASOLINE PRICES
Between September 2004 and September 2005, the monthly average retail price of gasoline jumped from $1.85 per gallon to $3.08 per gallon. Sales of full-size SUVs dropped 16.8% over the same time period (with a particularly sharp 42.5% drop for full-size GM SUVs).

3. ECONOMIC QUESTIONS Why did the gasoline price rise at that time?
Why did the sale of full-size SUVs drop?

4. Demand and Supply
Demand and supply are the two words that economists use most often.
Demand and supply are the forces that make market economies work.
Modern microeconomics is about supply, demand, and market equilibrium.

5. Market
A market is a group of buyers and sellers of a particular good or service.
Can be highly organized
E.g.: agricultural commodities
Can be less organized
E.g.: ice cream
Buyers determine demand.
Sellers determine supply

6. Competitive Market
A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

7. PERFECT COMPETITION完全競爭
Products are the same
Numerous buyers and sellers so that each has no influence over price
Buyers and Sellers are price takers

8. No Competition Monopoly獨佔: One seller, and seller controls price
Monopsony獨買: One buyer, and buyer controls price

9. IMPERFECT COMPETITION不完全競爭
Oligopoly寡佔
Few sellers
Not always aggressive competition
Monopolistic Competition獨佔競爭
Many sellers
Slightly differentiated products
Each seller may set price for its own product

10. DEMAND需求
Quantity demanded 需求量is the amount of a good that buyers are willing and able to purchase.
Law of Demand
The law of demand 需求法則states that, other things equal, the quantity demanded of a good falls when the price of the good rises.

11. DEMAND SCHEDULE需求表 Demand Schedule
The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

12. Example of Demand Schedule
Price Quantity
($ per movie) (movies per month)

13. DEMAND CURVE需求曲線 Demand Curve
The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

14. INDIVIDUAL DEMAND CURVE10
7.50
Price ($ per movie) 5
individual demand curve
2.50
In simplest form, graph will be series of steps; with large number of buyers combined, the graph will smoothen.
Practically, market researchers will perform this on large scale for many potential consumers.
Same construction for goods/services, consumer/industrial demand 1 2 4 7
Quantity (Movies a month)

15. Two Views for every possible price, it shows the quantity demanded
for each unit of item, it shows the maximum price that the buyer is willing to pay

16. Another Example of Demand Schedule

17. Another Way of Demand Curve
Price of
Ice-Cream Cone
$3.00
2.50
1. A decrease
in price
...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of 2.
...
increases quantity
of cones demanded.
Ice-Cream Cones
Copyright © South-Western

18. A negative price case: Negative Price?
Hoover’s special promotion -- two free air tickets (worth more than £400) for purchase of appliance over £100.
promotion attracted over 100,000 customers
Hoover incurred £48 million loss

19. Ceteris Paribus
When a demand curve is drawn, everything but price and quantity demanded is held constant.
Definition: a Latin phrase, translated as “other things being equal”.

20. Market Demand
Market demand refers to the sum of all individual demands for a particular good or service.
Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

21. Market demand as the sum of individual demands (demand schedule)
Price of ice-cream cone
Catherine
Nicholas
Market
$0.00
0.50
1.00
1.50
2.00
2.50
3.00 12 10 8 6 4 2 + 7 5 3 1 = 19 16 13

22. Market demand as the sum of individual demands
Catherine’s
demand +
Nicholas’s
demand =
Market
demand
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
DCatherine
DNicholas
DMarket 12 10 11 9 1 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones 18 2 4 6 8 10 12 14 16
Quantity of Ice-Cream Cones

23. Change in Quantity Demanded
Movement along the demand curve.
Caused by a change in the price of the product.

24. Changes in Quantity Demanded
Price of Ice-Cream Cones
A tax that raises the price of ice-cream cones results in a movement along the demand curve. B
$2.00 A
1.00 D 4 8
Quantity of Ice-Cream Cones

25. Change in Demand Change in Demand
A shift in the demand curve, either to the left or right.
Caused by any change that alters the quantity demanded at every price.

26. Change in Demand Price of Ice-Cream Cone Increase in demand Decrease
curve, D 2
Demand
curve, D 1
Demand curve, D 3
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

27. Shift in the Demand Curve
Consumer income
Prices of related goods
Tastes
Expectations
Number of buyers

28. normal good正常財 – demand increases with income
Demand and Income
Changes in income
normal good正常財 – demand increases with income
inferior good劣等財 – demand falls with income
-- example: potato

29. Inferior Good v.s. Bads Inferior good is different from “bads”.
Examples of “bads”: pollution or garbage

30. Demand and Prices of Related Goods
When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes替代品.
When a fall in the price of one good increases the demand for another good, the two goods are called complements互補品.

31. Case Study Two ways to reduce the quantity of smoking demanded:
-- Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on TV (shift demand curve)
-- Raising the price of cigarettes through tobacco taxes (move along demand curve)

32. Shifts in demand curve vs. movements along demand curve
(a) A Shift in the Demand Curve
(b) A Movement along the Demand Curve
Price of
Cigarettes,
per Pack
A policy to discourage smoking shifts the demand curve to the left
Price of
Cigarettes,
per Pack
A tax that raises the
price of cigarettes
results in a movement
along the demand curve D1 D1 D2
$4.00 C 12 B A
$2.00
2.00 10 20 A 20
Number of Cigarettes Smoked per Day
Number of Cigarettes Smoked per Day

33. Summary variable change Demand Shift Income (Normal) Rise (fall)
Right (left)
Income (Inferior)
Fall (rise)
Left (right)
Price of substitute
Price of complement
Taste
Expected Price
Number of buyers

34. SUPPLY供給
Quantity supplied供給量 is the amount of a good that sellers are willing and able to sell.
Law of Supply
The law of supply供給法則 states that, other things equal, the quantity supplied of a good rises when the price of the good rises.

35. SUPPLY SCHEDULE供給表 Supply Schedule
The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

36. Example of Supply Schedule

37. SUPPLY CURVE供給曲線 Supply Curve
The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

38. increases quantity of cones supplied.
Price of
Ice-Cream
Cone
$3.00
2.50
1. An
increase
in price
...
2.00
1.50
1.00
0.50 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of
Ice-Cream Cones 2.
...
increases quantity of cones supplied.
Copyright©2003 Southwestern/Thomson Learning

39. Two Views For every possible price, it shows the production rate
For each unit of item, it shows the minimum price that the seller is willing to accept

40. Market Supply
Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.
Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

41. Market supply as the sum of individual supplies (supply schedule)
Price of ice-cream cone
Ben
Jerry
Market
$0.00
0.50
1.00
1.50
2.00
2.50
3.00 1 2 3 4 5 + 6 8 = 7 10 13

42. Market supply as the sum of individual supplies
Ben’s
supply +
Jerry’s
supply =
Market
supply
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
$3.00
2.50
2.00
1.50
1.00
0.50
Price of
Ice
Cream
Cones
SBen
SMarket
SJerry 12 10 11 9 1 2 3 4 5 6 7 8
Quantity of Ice-Cream Cones 1 2 3 4 5 6 7
Quantity of
Ice-Cream Cones 18 2 4 6 8 10 12 14 16
Quantity of Ice-Cream Cones

43. Change in Quantity Supplied
Movement along the supply curve.
Caused by a change in price.

44. Change in Quantity Supplied
Price of Ice-Cream Cone S C
$3.00
A rise in the price of ice cream cones results in a movement along the supply curve. A
1.00
Quantity of Ice-Cream Cones 1 5 30

45. Change in Supply Change in Supply
A shift in the supply curve, either to the left or right.
Caused by a change in a determinant other than price.

46. Figure 7 Shifts in the Supply Curve
Price of
Supply curve, S 3
Ice-Cream
curve,
Supply S 1
Cone
Supply
curve, S 2
Decrease
in supply
Increase
in supply
Quantity of
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

47. Shift in the Supply Curve
Input prices
Technology
Expectations
Number of sellers

48. Summary variable change Supply Shift Input (factor) price Rise (fall)
Fall (rise)
Left (right)
Technology
Right (left)
Expected Price
Number of sellers

49. EQUILIBRIUM均衡
Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

50. Equilibrium Price and Quantity
The price that balances quantity supplied and quantity demanded.
On a graph, it is the price at which the supply and demand curves intersect.
Equilibrium Quantity
The quantity supplied and the quantity demanded at the equilibrium price.
On a graph it is the quantity at which the supply and demand curves intersect.

51. Quantity of Ice-Cream Cones
Price of
Ice-Cream
Cone
Supply
Demand
Equilibrium
Equilibrium price
$2.00
Equilibrium
quantity 1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

52. Surplus and Shortage Surplus Shortage
When price > equilibrium price, then quantity supplied > quantity demanded.
There is excess supply or a surplus.
Suppliers will lower the price to increase sales, thereby moving toward equilibrium.
Shortage
When price < equilibrium price, then quantity demanded > the quantity supplied.
There is excess demand or a shortage.
Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

53. Markets not in equilibrium
(a) Excess Supply
(b) Excess demand
Price of
Ice
Cream
Cones
Price of
Ice
Cream
Cones
Supply
Supply
Surplus
Demand
Demand
$2.50 4
Quantity
demanded 10
Quantity
supplied
2.00
$2.00 7 7
1.50 4
Quantity
supplied 10
Quantity
demanded
Shortage
Quantity of Ice-Cream Cones
Quantity of Ice-Cream Cones

54. Alternative Example: #2 Lead Pencils
Price
Quantity demanded
Quantity supplied
0.05
1000
400
0.10
800
500
0.15
600
0.20
700
0.25
200

55. Quick Quiz 1 Draw demand and supply curves
Find equilibrium price and quantity

56. Quick Quiz 2
How would following events shift either the demand or the supply of #2 lead pencil?
-- an increase in the use of standardized exams (using opscan forms)
-- a decrease in the price of ink pens
-- a start of a school year

57. Increase in Demand Price of Ice-Cream 1. Hot weather increases
the demand for ice cream . . .
Cone D D
Supply
New equilibrium
$2.50 10
resulting
in a higher
price . . .
2.00 7
Initial
equilibrium
Quantity of 3.
. . .
and a higher
quantity sold.
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

58. Decrease in Supply Price of 1. An increase in the
price of sugar reduces
the supply of ice cream. . .
Ice-Cream
Cone S2 S1
Demand
New
equilibrium
$2.50 4
resulting
in a higher
price of ice
cream . . .
Initial equilibrium
2.00 7
Quantity of 3.
. . .
and a lower
quantity sold.
Ice-Cream Cones
Copyright©2003 Southwestern/Thomson Learning

59. Summary

60. Discussion
Each of the events listed below has an impact on the market for bicycles.
1.An increase in the price of automobile.
2.A decrease in incomes of consumers if bicycles are a normal good.

61. Discussion-continued
3.An increase in the price of steel used to make bicycle frames. 4.An environmental movement shifts tastes toward bicycling.

62. Discussion-continued
5.Consumers expect the price of bicycles to fall in the future. 6.A technological advance in the manufacture of bicycles.

63. Discussion-continued
7.A reduction in the price of bicycle helmets and shoes.
8.A decrease in incomes of consumers if bicycles are an inferior good.