1. Chapter 3
Demand and Supply

2. The Law of Demand Demand
How much of a good or service people will purchase at any price during a specified time period, other things being constant.
Simply stated: How much people are willing and able to buy

3. The Law of Demand Price # Qd $ Price $ Qd # Law of Demand
Quantity demanded is inversely related to price, holding other factors constant.
Price # Qd $
Price $ Qd #

4. The Demand Schedule The demand schedule Demand Curve
Table relating prices to quantity demanded
Demand Curve
Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal

5. Demand Schedule

6. Demand Curve
*When drawing a demand curve, price(p) is always on the vertical(y), and quantity(q) is always on the horizontal(x)

7. The Demand Schedule Individual versus market demand curves
The demand of all consumers in the marketplace for a particular good or service
Summation at each price of the quantity demanded by each individual

8. The Horizontal Summation of Two Demand Schedules

9. Normal and Inferior Goods
Normal Goods
Goods for which demand rises as income rises, most goods are normal goods (DVDs, shoes, computers, etc…)
Inferior Goods
Goods for which demand falls as income rises (beans, top ramen)
Now you can afford better goods

10. Shifts in Demand Determinants of demand Income Tastes and preferences
The prices of related goods
Substitutes
butter/margarine
Complements
Computers/printers

11. Shifts in Demand (cont'd)
Substitutes
Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change.
*If the price of butter goes up, the demand for margarine will increase

12. Example: Kids Give Barbie Dolls and Legos the Boot
Barbie dolls and Lego building blocks were among the most popular toys for many years.
Since the early 2000s, annual purchases of such toys have fallen by as much as 25%. The demand for all toys has decreased
At the same time, prices of substitute forms of entertainment, such as video games and computer software, have declined.

13. Shifts in Demand (cont'd)
Complements
Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other.
*If the price of computers go down,
more people will now be able to afford a printer
and the demand will increase.

14. Shifts in Demand (cont'd)
Determinants of demand
Expectations
Future prices
What if you know it will
cost more in a month?
Income – raise?
Product availability– shortage?
Market size (number of buyers)
More people means what???

15. Shifts in Demand (cont'd)
Changes in demand versus changes in quantity demanded
A change in one or more of the non- price determinants (income, tastes, etc.) will lead to a change in demand.
This is a shift of the whole curve.

16. Shifts in Demand (cont'd)
Changes in demand versus changes in quantity demanded
A change in a good’s own price leads to a change in quantity demanded.
This is a movement along the same curve.
∆D is not the same as ∆Qd.

17. Question???
When people realize that Soulja Boy can’t really rap, and that he isn’t that good, will this lead to a change in Demand or a change in Quantity Demanded for his CD?

18. Shifts in Demand (cont'd)
The Determinants of Demand
Inferior Good
Price D3 D2
Decrease in income
increases demand
Increase in income
decreases demand D1
Q/Units

19. Shifts in Demand (cont'd)
The Determinants of Demand
Tastes and Preferences
Price
People realize Soulja Boy is whack! D2 D1
Q/Units

20. Shifts in Demand (cont'd)
The Determinants of Demand
Price of Related Goods: Substitutes
Price
Butter and Margarine
• Price of both = $2/lb
• Price of margarine increases to $3/lb
• Demand for butter increases D2 D1
Q/Butter

21. Shifts in Demand (cont'd)
The Determinants of Demand
Expectations: Income, Future Prices
Price D3 D2
A higher income or expectations of a higher future price will increase demand
A lower income or expectations of a lower future price will decrease demand D1
Q/Units

22. Shifts in Demand (cont'd)
The Determinants of Demand
Market Size (Number of Buyers)
Price D3 D2
Increase in the number of buyers increases demand
Decrease in the number of buyers decreases demand D1
Q/Units

23. Figure 3-5 Movement Along a Given Demand Curve
A change in the price changes the quantity of a good demanded, movement along the curve

24. The Law of Supply Supply
Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal
The amount of a product or service that firms are willing to sell at alternative prices

25. The Law of Supply (cont'd)
The price of a product or service and the quantity supplied are directly related.
P # Qs #
P $ Qs $
Confusing, right? It will make sense when we look at supply and demand combined

26. The Supply Schedule
The supply schedule is a table relating prices to quantity supplied at each price.
Supply Curve
A graphical representation of the supply schedule
Positively sloped line showing direct relationship between price and quantity supplied, all else equal

27. Figure 3-6 The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives, Panel (a)

28. Figure 3-6 The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives, Panel (b)

29. Shifts in Supply Scenario
A new method of manufacturing flash memory pen drives reduces the cost of production dramatically.

30. Figure 3-9 A Shift in the Supply Curve
If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve
If costs increase, supply decreases
If costs decrease, supply increases

31. A Shift in the Supply Curve (cont'd)5 S2 S1 a 4
Price per Flash Memory Pen Drive ($) c 3
When supply increases the quantity supplied will be greater at each price 2 1 2 4 6 8 10 12 14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)

32. A Shift in the Supply Curve (cont'd)5 S2 S1 a 4 b
Price per Flash Memory Pen Drive ($) c 3
When supply increases the quantity supplied will be greater at each price d 2 1 2 4 6 8 10 12 14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)

33. Shifts in Supply (cont'd)
Determinants of supply
Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations
Number of firms in industry

34. Shifts in Supply (cont'd)
Changes in supply versus changes in quantity supplied
A change in one or more of the non- price determinants will lead to a change in supply.
This is a shift of the whole curve. 73

35. Shifts in Supply (cont'd)
Changes in supply versus changes in quantity supplied
A change in a good’s own price leads to a change in quantity supplied.
This is a movement along the same curve.
∆S is not the same as ∆Qs. 74

36. Putting Demand and Supply Together
Equilibrium (Market Clearing) Price
The price that clears the market
The price at which quantity demanded equals quantity supplied
The price where the demand curve intersects the supply curve

37. Figure 3-10 Putting Demand and Supply Together, Panel (b)

38. Putting Demand and Supply Together (cont'd)
Shortages
The situation when quantity demanded is greater than quantity supplied
Qd > Qs
Exist at any price below the market clearing price

39. Putting Demand and Supply Together (cont'd)
Surpluses
The situation when quantity supplied is greater than quantity demanded
Qd < Qs
Exist at any price above the market clearing price

40. Policy Example: Should Shortages in the Ticket Market Be Solved by Scalpers?
If you’ve ever tried to get tickets to the big game you know all about “shortages.”
Since the quantity of tickets is fixed, the price can go pretty high.
Enter the scalper.

41. Issues and Applications: The Market Clearing Prices of Baseball Cards
Various companies, such as Topps and Upper Deck, print sports trading cards that provide photos and stats on pro athletes.
Why are some of the market clearing prices so high?
The answer has to do with demand and supply. (A relatively low supply helps explain the relatively high market clearing price.)
You can buy a “Shoeless” Joe Jackson card for up to $9,000!

42. Table 3-2 Baseball Cards with the Highest Market Clearing Prices

43. Summary Discussion of Learning Objectives
The law of demand says that prices and quantity demanded are inversely related.
At a higher price people buy less, at a lower price people buy more.
Relative prices must be distinguished from money prices, since people respond to changes in relative prices.

44. Summary Discussion of Learning Objectives (cont'd)
A change in quantity demanded versus a change in demand
A change in quantity demanded is a movement along the same demand curve.
A change in demand is a shift of the whole demand curve.

45. Summary Discussion of Learning Objectives (cont'd)
The law of supply states that price and quantity supplied are directly related.
At a high price firms offer more; at a low price firms offer less.
A change in quantity supplied versus a change in supply
A change in quantity supplied is a movement along the same supply curve.
A change in supply is a shift of the whole supply curve.

46. Summary Discussion of Learning Objectives (cont'd)
Determining market price and equilibrium quantity
The demand and supply curves intersect at the market clearing, or equilibrium point.
Surpluses exist if the price of the good is greater than the market price.
Shortages exist when the price of a good is below the market price.

47. End of Chapter 3
Demand and Supply