1. University of Hawai‘i at Mānoa Department of Economics
ECON 130 (003): Principles of Economics (Micro)
Gerard Russo
Lecture #4
Thursday, January 22, 2004

2. LECTURE 4
Introduction to Supply and Demand Analysis

3. The Determinants of Demand
Price
Price of Related Goods
Income
Tastes
Other Factors

4. Isolating Effects Ceteris paribus Other things being equal
Other things held constant

5. The Determinants of Demand
Price (-)
Price of Related Goods
Complements (-)
Substitutes (+)
Income
Normal Goods (+)
Inferior Goods (-)

6. Demand Functions Q = f(P, I, PC, PS, etc.)
The quantity demanded of a good or service is a function of price, income, the price of complementary goods and services, the price of substitute goods and services, et cetera.

7. Russo’s Demand Schedule for Mai Tai Cocktail’s
Price ($ per drink)
Quantity (number of drinks per day)
$12.50
$9.50 1
$7.00 2
$4.50 4
$2.75 6
$1.50 9 $0 14

8. Russo’s Demand per Day for Mai Tai Cocktails

9. The Law of Demand
An increase in price leads to a decrease in the quantity demanded other things held constant.
A decrease in price leads to an increase in the quantity demanded other things held constant.

10. The Law of Demand
$/Q P0 P1
Demand Q1 Q0 Q

11. The Law of Demand
$/Q P1 P0
Demand Q0 Q1 Q

12. $/Q D2 D1 Q The Impact of an Increase in Income on the Demand for a
Normal Good
$/Q D2 D1 Q

13. D1 D2 The Impact of an Decrease in Income on the Demand for a
Normal Good
$/Q D1 D2 Q

14. $/Q D1 D2 Q The Impact of an Increase in Income on the Demand for an
Inferior Good
$/Q D1 D2 Q

15. $/Q D2 D1 Q The Impact of a Decrease in Income on the Demand for an
Inferior Good
$/Q D2 D1 Q

16. $/Q D2 D1 Q The Impact of an Increase in The Price of a Substitute
on the Demand for a Good
$/Q D2 D1 Q

17. $/Q D1 D2 Q The Impact of a Decrease in The Price of a Substitute
on the Demand for a Good
$/Q D1 D2 Q

18. $/Q D1 D2 Q The Impact of an Increase in The Price of a Complement
on the Demand for a Good
$/Q D1 D2 Q

19. $/Q D2 D1 Q The Impact of a Decrease in The Price of a Complement
on the Demand for a Good
$/Q D2 D1 Q

20. The Determinants of Supply
Price
Price of Inputs
Weather
Other Factors

21. The Determinants of Supply
Price (+)
Price of Inputs (-)
Wage Rate
Rental Price of Capital (interest rate)
Energy Cost
Material Cost

22. Supply Function QS = f(P, w, r, etc.)
The quantity supplied of a good or service is a function of price, the wage rate, the interest rate, the prices of other inputs, et cetera.

23. Supply Schedule for Petroleum
Price
($ per barrel)
Quantity (millions of barrels per day)
$2.50
$4.50 1
$7.00 2
$18.50 7
$22.75 16
$31.50 23
$38.00 40

24. Supply of Petroleum per Day

25. The Law of Supply
$/Q
Supply P1 P0 Q0 Q1 Q

26. An Increase in Supply
$/Q S1 S2 Q

27. A Decrease in Supply
$/Q S2 S1 Q

28. Market Equilibrium
$/Q
Supply Pe
Demand Qe Q

29. $/Q Supply P0 Pe Demand QS QD Qe Q Economic Surplus
Puts Downward Pressure
On Price
$/Q
Supply P0 Pe
Demand QS QD Qe Q

30. $/Q Supply Pe P1 Demand QD QS Qe Q Economic Shortage
Puts Upward Pressure
On Price
$/Q
Supply Pe P1
Demand QD QS Qe Q

31. $/Q Supply PFLOOR Demand QS QD Q A Price Floor Above the
Equilibrium Price Generates
An Economic Surplus
$/Q
Supply
PFLOOR
Economic
Surplus
Demand QS QD Q

32. $/Q Supply PCEILING Demand QD QS Q A Price Ceiling Below the
Equilibrium Price Generates
An Economic Shortage
$/Q
Supply
PCEILING
Economic
Shortage
Demand QD QS Q