1. Chapter 3
Demand and Supply

2. Demand and Supply
Markets are the institutions that bring together buyers and sellers.
Examples include: farmer’s markets, eBay, Amazon.com, and retail outlets.

3. 1. DEMAND Learning Objectives
Define the quantity demanded of a good or service and illustrate it using a demand schedule and a demand curve.
Distinguish between the following pairs of concepts: demand and quantity demanded, demand schedule and demand curve, movement along and shift in a demand curve.
Identify demand shifters and determine whether a change in a demand shifter causes the demand curve to shift to the right or to the left.

4. 1.1 Price and the Demand Curve
The quantity demanded is the quantity buyers are willing and able to buy of a good or service at a particular price during a particular period, all other things unchanged.
A demand schedule is a table that shows the quantities of a good or service demanded at different prices during a particular period, all other things unchanged.
A demand curve is a graphical representation of a demand schedule.

5. 1.1 Price and the Demand Curve
A change in quantity demanded is a movement along a demand curve that results from a change in price.
The law of demand states that for virtually all goods and services, a higher price leads to a reduction in quantity demanded and a lower price leads an increase in quantity demanded.

6. A Demand Schedule and a Demand Curve
The demand schedule lists points on the demand curve.
Price per pound ($) 9 8 7 6 5 4
Quantity demanded per month (millions of pounds) 10 15 20 25 30 35
25 million pounds of coffee per month are demanded at a price of $6 per pound.
30 million pounds of coffee per month are demanded at a price of $5 per pound.

7. 1.2 Changes in Demand
A change in demand is characterized by a shift in a demand curve.
A demand shifter is a variable that can change the quantity of a good or service demanded at each price.
Preferences
Prices of related goods and services
Complements and Substitutes
Income
Normal and Inferior goods
Demographic characteristics
Buyer expectations

8. An Increase in Demand 6 25 35 Price Old quantity demanded $9 10 8 15 720 6 25 5 30 4 35
New quantity demanded 20 25 30 35 40 45 A A’ D1 D2

9. A Reduction in Demand 6 25 15 Price Old quantity demanded $9 10 8 15 720 6 25 5 30 4 35
New quantity demanded 5 10 15 20 25
A’’ A D3 D1

10. Complements and Supplements
Complements (coffee and doughnuts)
Reducing the price of one…
Increases the demand for the other.
Increasing the price of one…
Reduces the demand for the other.
Substitutes (coffee and tea)
Increasing the price of one…
Increases the demand for the other.
Reducing the price of one…
Reduces the demand for the other.

11. Changes in Price Versus Changes in Demand
curve
A reduction in demand
An increase in demand
Price per unit
A change in price causes a movement
Along the demand curve.
Shifts the demand curve to the left
Shifts the demand curve to the right
Quantity per period

12. 2. Supply Learning Objectives
Define the quantity supplied of a good or service and illustrate it using a supply schedule and a supply curve.
Distinguish between the following pairs of concepts: supply and quantity supplied, supply schedule and supply curve, movement along and shift in a supply curve.
Identify supply shifters and determine whether a change in a supply shifter causes the supply curve to shift to the right or to the left.

13. 2.1 Price and the Supply Curve
The quantity supplied is the quantity sellers are willing to sell of a good or service at a particular price during a particular period, all other things unchanged.
A supply schedule is a table that shows quantities supplied at different prices during a particular period, all other things unchanged.
A supply curve is a graphical representation of a supply schedule.
A change in quantity supplied is characterized by movement along the supply curve caused by a change in price.

14. A Supply Schedule and a Supply Curve
Price per pound ($) 4 5 6 7 8 9
Quantity supplied per month (millions of pounds) 15 20 25 30 35 40
The supply schedule lists points on the supply curve.
30 million pounds of coffee per month are supplied at a price of $7 per pound.
25 million pounds of coffee per month are supplied at a price of $6 per pound.

15. 2.2 Changes in Supply
A change in supply is characterized by a shift in the supply curve.
A supply shifter is a variable that can change the quantity of a good or service supplied at each price.
Prices of factors of production
Returns from alternative activities
Technology
Seller expectations
Natural events
The number of sellers

16. An Increase in Supply 6 25 35 Price Old quantity supplied $4 15 5 20 730 8 35 9 40
New quantity supplied 25 30 35 40 45 50 A A’ S1 S2

17. A Reduction in Supply 6 25 15 Price Old quantity supplied $4 15 5 20 730 8 35 9 40
New quantity supplied 5 10 15 20 25 30
A’’ A S3 S1

18. Changes in Price Versus Changes in Supply
curve
A reduction in supply
An increase in supply
Price per unit
A change in price causes a movement
Along the supply curve.
Shifts the supply curve to the left
Shifts the supply curve to the right
Quantity per period

19. 3 Demand, Supply, and Equilibrium
Learning Objectives
Use demand and supply to explain how equilibrium price and quantity are determined in a market.
Understand the concepts of surpluses and shortages and the pressures on price they generate.
Explain the impact of a change in demand or supply on equilibrium price and quantity.
Explain how the circular flow model provides an overview of demand and supply in product and factor markets and how the model suggests ways in which these markets are linked.

20. 3.1 The Determination of Price and Quantity
The Equilibrium price (market clearing price) is the price at which quantity demanded equals quantity supplied.
The Equilibrium quantity is the quantity demanded and supplied at the equilibrium price.
A Surplus is the amount by which the quantity supplied exceeds the quantity demanded at the current price.
A Shortage is the amount by which the quantity demanded exceeds the quantity supplied at the current price.

21. The Determination of Equilibrium Price and Quantity
Surplus at P = $8
At a price of $8 per pound, 35 million pounds of coffee are supplied
At a price of $8 per pound, 15 million pounds of coffee are demanded S
Equilibrium price and quantity
At a price of $4 per pound, 15 million pounds of coffee are supplied D
At a price of $4 per pound, 35 million pounds of coffee are demanded
Shortage at P = $4

22. 3.2 Shifts in Demand and Supply

23. 3.2 Shifts in Demand and Supply

24. Simultaneous Decreases in Demand and Supply

25. Simultaneous Decreases in Demand and Supply

26. Simultaneous Decreases in Demand and Supply

27. Simultaneous Shifts in Demand and Supply
Shift in Supply
Decrease in supply
Increase in supply
Shifts in Demand
Decrease in demand
Equilibrium price
Equilibrium quantity
Increase in demand

28. 3.3 An Overview of Demand and Supply: The Circular Flow Model
The circular flow model is a model that provides a look at how markets work and how they are related to each other.
The Product markets are markets in which firms supply goods and services demanded by households.
The Factor markets are markets in which households supply factors of production – labor, capital, and natural resources – demanded by firms.

29. 3.3 An Overview of Demand and Supply: The Circular Flow Model
Payments to firms for goods and services
Product markets S S S
Price
Price
Price D D D
Blue jeans
Haircuts
Apartments
Supply goods and services
Demand goods and services
Firms
Households
Demand factors
And supply factors
Factors markets S S S
Price
Price
Price D D D
Textile workers
Barbers
Apartment buildings
Wages paid to household for labor