1. MACROECONOMICS: EXPLORE & APPLY by Ayers and Collinge
CHAPTER 3
“Demand and Supply”

2. Learning Objectives
Distinguish between the general notions of demand and supply used in ordinary conversation and the precise notions employed in the study of economics.
Explain what it means to shift demand and supply and why shifts might occur.
Describe how the marketplace settles on the equilibrium price and quantity.
Specify how demand and supply shifts cause market equilibriums to change over time.

3. Learning Objectives
5. Identify the changes to equilibrium that result from simultaneous changes in demand and supply.
6. (E&A) Discuss how vouchers use competition to improve the quality of schooling.

4. 3.1 DEMAND
Demand relates the quantity of a good that consumers would purchase at each of various possible prices, over some period of time.
The ceteris paribus condition means that we look at only one relationship at a time.
Ceteris paribus is the Latin for “holding all else equal”.

5. Demand Schedule

6. Demand Curve Demand The demand curve slopes downward
because price and quantity demanded
are inversely related. A 5
Price ($’s) B 4 C 3 E 2
Demand F 1 G 1 2 3 4 5
Quantity

7. Shifting Demand versus Movements along a Demand Curve
A change in the price of a good causes a change in the quantity demanded,
but does not shift demand

8. Changes in Demand vs. Changes in Quantity Demanded
A price change would change the quantity demanded which involves movement along the demand curve.
Price ($’s)
Demand
Quantity

9. Changes in Demand vs. Changes in Quantity Demanded
Movement along the demand curve.
Price ($’s)
Decrease
Increase
Demand
Quantity

10. Demand Shift Factors Tastes and Preferences
Substitutes and Complements
Income
- Normal vs. Inferior Goods
Population
Price Expectations

11. Changes in Demand - Decrease
Demand Shifts LEFT
When:
Prices of substitutes decrease
Prices of complements increase
Normal good-income decreases
Inferior good-income increases
Population decreases
Tastes & preferences turn against the product
Price D2 D1
Quantity

12. Changes in Demand - Increase
Demand Shifts RIGHT When:
Prices of substitutes increase
Prices of complements decrease
Normal good-income increases
Inferior good-income decreases
Population increases
Tastes & preferences turn in favor of the product
Price D2 D1
Quantity

13. 3.2 SUPPLY
Supply relates the quantity of a good that will be offered for sale at each of various possible prices, over some period of time, ceteris paribus.

14. Supply Schedule

15. Supply Curve Supply H Price ($’s) 5 I 4 The supply curve slopes
upward because price
and quantity supplied
are directly related. J 3 K 2 1 L 1 2 3 4 5 M
Quantity

16. Supply Shift Factors Prices of Inputs Technological Change
Government or Union Restrictions
Prices of Substitutes in Production
Prices of Jointly Produced Goods
Expected Future Prices
Number of Sellers

17. Changes in Supply vs. Changes in Quantity Supplied
Price ($’s) 5 4
A price change causes movement from one point to another along the same supply curve. 3 2 1 1 2 3 4 5
Quantity

18. Changes in Supply vs. Changes in Quantity Supplied
Price ($’s) 5
Decrease 4
Movement along Supply
Increase 3 2 1 1 2 3 4 5
Quantity

19. Changes in Supply - Decrease
Supply Shifts LEFT When:
Sellers expect price to rise in future.
Price of labor or any input rises.
Government or union restrictions increase cost.
Price of substitute in production rises.
Price of product produced jointly falls.
Number of sellers declines S2 $ S1
Quantity

20. Changes in Supply - Increase
Supply Shifts RIGHT When:
Sellers expect price to decline in future.
Price of labor or any input falls.
Technological change lowers cost.
Price of substitute in production falls.
Price of product produced jointly rises.
Number of sellers increases $ S1 S2
Quantity

21. Individual Demand to Market Demand
Demand can be one individual’s
or the market as a whole

22. Jack’s Quantity Demanded Jill’s Quantity Demanded
Market Demand Curve
Market Demand
Market Q Demanded 1 3 5 7 9 11
Jack’s Demand
Jack’s Quantity Demanded 1 2 3 4 5 6
Jill’s Demand
Jill’s Quantity Demanded 1 2 3 4 5
Price ($) 5 4 3 2 1 6 5 4 3 2 1
Price ($’s)
Quantity

23. Individual Supply to Market Supply
Supply can be from one firm
or all firms in the market.

24. Market Supply Curve Market Supply Price ($’s) 5 4 3 2 1 1 2 3 4 5 6 7
Wally’s Supply
Wanda’s Supply
Market Supply
Price ($’s) 5 4 3 2 1 1 2 3 4 5 6 7 8 9
Quantity

25. Market Equilibrium There is only one price that clears
the market, meaning that the quantity
supplied equals the quantity demanded.

26. Market Equilibrium P* Q* Market equilibrium occurs where
demand and supply intersect.
Price ($’s) 5
Supply
Surplus of 4 Pails
Too High 4 P* 3
Too Low 2
Shortage of 4 Pails 1
Demand 1 2 3 4 5 6 7 8 9 Q*
Pails of Water

27. 3.3 EQUILIBRIUM
The market clearing price and the resulting quantity traded comprise what is referred to as the market equilibrium, meaning that there is no tendency for either price or quantity to change, ceteris paribus.

28. Changes in Market Equilibrium
Snew S
Price ($’s)
Snew
Price ($’s) S P* P* D D Q*
Quantity Q*
Quantity
An increase or decrease in supply.

29. Changes in Market Equilibrium
Price ($’s)
Dnew
Price ($’s) S
Dnew P* P* D D Q* Q*
Quantity
Quantity
An increase or decrease in demand.

30. Changes in Market Equilibrium
Note: In Cases 1-4 only one of the two curves is shifting.

31. Changes in Market Equilibrium
Note: In Cases 5-8 both of the curves
are shifting.

32. 3.4 EXPLORE & APPLY Policies for Competition and Choice in Schooling
Charter Schools: Public schools in which a non-profit group receives a contract (i.e. charter) to operate a school for a limited period of time.
Vouchers: Monetary amounts provided by government, free of charge to parents, which would be spendable only on the education of their children, at a school chosen by the parents.

33. Test Yourself The Law of demand states that consumers
must not buy more than they need.
must not waste what they buy.
must pay for what they buy.
will buy more as price falls.

34. Test Yourself
2. An increase in the price of football tickets would cause the ___________ basketball tickets to __________.
demand for; increase.
supply of; increase.
demand for; decrease.
supply of; decrease.

35. Test Yourself 3. An upward sloping supply curve means that
consumers will wish to purchase more at higher prices .
consumers will wish to purchase more at lower prices.
business firms will wish to sell more at higher prices.
business firms that lower their prices wish to sell more.

36. Test Yourself 4. A decrease in supply is illustrated as
a downward shift in the supply curve.
a shift to the left in the supply curve .
an upward movement along the supply curve.
a downward movement along the supply curve.

37. Test Yourself
5. If research reveals that carrot juice cures cancer, it is likely that
the supply of carrot juice will increase, which will increase the quantity demanded.
demand for carrot juice will increase, which will increase the quantity supplied .
neither the demand or supply of carrot juice will increase.
both the demand and supply of carrot juice will increase.

38. Test Yourself
6. When there is an initial shortage, market prices eventually reach equilibrium because
supply increases.
price decreases .
price increases.
equilibrium output falls.

39. Terms along the Way demand quantity demanded ceteris paribus
shift factors
normal goods
inferior goods
substitutes
complements
supply
quantity supplied
market equilibrium
surplus
shortage
consumer surplus
marginal benefit
marginal cost
charter schools
vouchers

40. The End!
Next Chapter 4
“The Power of Prices"