1. Chapter 3: Demand and Supply
ECON 152 – PRINCIPLES OF MICROECONOMICS
Chapter 3:
Demand and Supply
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

2. Markets
Markets
Arrangements that individuals have for exchanging with one another
Represent the interaction of buyers and sellers

3. Markets Markets Markets for gasoline Markets for labor Stock market
Market for Super Bowl tickets
Compact disk market

4. Markets
Markets
Markets set the prices we pay and receive in a free, competitive environment

5. The Law of Demand Demand
Quantities of specific goods or services that individuals, taken singly or as a group, will purchase at various possible prices, other things being constant

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

7. The Law of Demand What are we holding constant? Income
Price of other goods
Many other factors

8. The Law of Demand Relative prices versus money prices Relative Price
The price of a commodity in terms of another commodity
Money Price
Price we observe today in today’s dollars (absolute, nominal price)

9. The Demand Schedule
The demand schedule is a table relating prices to quantity demanded.
We must consider:
The time dimension
Constant-quality units

10. The Individual Demand Schedule

11. The Individual Demand Curve

12. The Horizontal Summation of Two Demand Schedules

13. The Horizontal Summation of Two Demand Schedules

14. The Market Demand Schedule for Secure Digital Cards

15. The Market Demand Curve for Secure Digital Cards

16. A Shift in the Demand Curve
Ceteris-Paribus Conditions
Determinants of the relationship between price and quantity that are unchanged along a curve
Changes in these factors cause a curve to shift

17. A Shift in the Demand Curve

18. Shifts in Demand Determinants of demand Income Tastes and preferences
Normal goods
Inferior goods
Tastes and preferences
The price of related goods
Complements
Substitutes

19. Shifts in Demand Determinants of demand Expectations
Income
Future prices
Market size (number of buyers)

20. The Determinants of Demand
Shifts in Demand
The Determinants of Demand
Income: Normal Good
Price D3 D2
Increase in income
increases demand
Decrease in income
decreases demand D1
Q/Units

21. The Determinants of Demand
Shifts in Demand
The Determinants of Demand
Income: Inferior Good
Price D3 D2
Decrease in income
increases demand
Increase in income
decreases demand D1
Q/Units

22. Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand
Income: Tastes and Preferences
Price D3 D2
Hybrid vehicles
• Increase in demand
SUVs
• Decrease in demand D1
Q/Units

23. Shifts in Demand Price D2 D1 Q/Butter 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

24. Shifts in Demand Price D3 D2 D1 Q/Speakers The Determinants of Demand
Price of Related Goods: Complements
Price
Speakers and Amplifiers
• Decrease the relative price of amplifiers
• Demand for speakers increases D3 D2
Speakers and Amplifiers
• Increase the relative price of amplifiers
• Demand for speakers decreases D1
Q/Speakers

25. The Determinants of Demand
Shifts in Demand
The Determinants of Demand
Expectations
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

26. The Determinants of Demand
Shifts in Demand
The Determinants of Demand
Population
Price D3 D2
Increase in the population increases demand
Decrease in population decreases demand D1
Q/Units

27. Shifts in Demand 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.

28. Shifts in Demand 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.

29. Movement Along a Given Demand Curve

30. The Law of Supply Supply
The amount of a product or service that firms are willing to sell at alternative prices

31. The Law of Supply Law of Supply
The price of a product or service and the quantity supplied are directly related.
P # Qs #
P $ Qs $

32. 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

33. The Individual Producer’s Supply Schedule

34. The Individual Producer’s Supply Curve

35. Horizontal Summation of Supply Curves

36. Horizontal Summation of Supply Curves

37. The Market Supply Schedule for Secure Digital Cards

38. The Market Supply Curve for Secure Digital Cards

39. Shifts in Supply
In general, non-price changes that lead to higher profits lead to an increase in supply.
In general, non-price changes that lead to lower profits lead to a decrease in supply.

40. Shifts in Supply Determinants of supply Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations
Number of firms in industry

41. The Determinants of Supply
Shifts in Supply
The Determinants of Supply
Cost of Inputs
Price S3 S2 S1
Increase in cost
decreases supply
Decrease in cost increases supply
Q/Units

42. Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply
Technology and Productivity
Price S3 S2 S1
Decreases in productivity decrease supply
Improvements in technology or increases in productivity increase supply
Q/Units

43. The Determinants of Supply
Shifts in Supply
The Determinants of Supply
Taxes and Subsidies
Price S3 S2 S1
Increases in taxes or decreases in subsidies decrease supply
Decreases in taxes or increases in subsidies increase supply
Q/Units

44. The Determinants of Supply
Shifts in Supply
The Determinants of Supply
Price Expectations
Price S3 S2 S1
Expectations of higher future prices decrease supply
Expectations of lower future prices increase supply
Q/Units

45. Shifts in Supply Price S3 S1 S2 Q/Units The Determinants of Supply
Number of Firms in Industry
Price S3 S1 S2
Decrease in the number of firms decreases supply
Increase in the number of firms increases supply
Q/Units

46. Shifts in Supply 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

47. Shifts in Supply 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. 74

48. Putting Demand and Supply Together

49. Putting Demand and Supply Together

50. Putting Demand and Supply Together
Equilibrium
The situation when quantity supplied equals quantity demanded at a particular price
There tends to be no movement of the price of the quantity away from this point unless demand or supply changes.
Equilibrium is a stable point – any point that is not equilibrium is unstable and will not persist.

51. Putting Demand and Supply Together
Shortages
The situation when quantity demanded is greater than quantity supplied
Qd > Qs
Exist at any price below the market clearing price

52. Putting Demand and Supply Together
Surpluses
The situation when quantity supplied is greater than quantity demanded
Qd < Qs
Exist at any price above the market clearing price

53. Chapter 3: Demand and Supply
ECON 152 – PRINCIPLES OF MICROECONOMICS
Chapter 3:
Demand and Supply
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.