1. Kaplan University
Supply and Demand

2. Topics Covered
Supply, Demand, Equilibrium (Quantity, Curves, Schedules)
Law of Demand & Law of Supply
Movements Along Curves
Shifts of Curves
Normal Goods & Inferior Goods
Substitutes & Complements
Price Floors & Price Ceilings (Shortages & Surpluses)

3. Demand
Relates to the quantity of a good that consumers would purchase at each various possible prices, over some period of time…. Ceteris paribus (holding all constant)
Quantity demand is the quantity that consumers would purchase at a given price.
Examples: groceries, clothes, office equipment
Can you think of more every day demand examples?

4. Law of Demand As prices fall, the quantity demanded increases
Price and quantity demanded have an inverse relationship
Examples: airline tickets, sale items, clearance items, etc.

5. Demand Schedules & Demand Curves
A table that shows the relationship between the price of a good and quantity demanded
A demand schedule can be plotted into a curve

6. The Demand Schedule and
LO1
Exhibit 1
The Demand Schedule and
Demand Curve for Pizza
(a) Demand schedule 9 6 3 12
Price per pizza
$15 D
Price
per
pizza
Quantity Demanded
Per week (millions) a b c d e
$15 12 9 6 3 8 14 20 26 32 a b c d e
The market demand D shows the quantity of pizza demanded, at various prices, by all consumers.
Price and quantity demanded are inversely related. 26 20 14 8
Millions of pizzas per week 32
Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

7. Normal Goods & Inferior Goods
It is important to consider normal goods & inferior goods when considering demand...
Demand for normal goods vary directly with income
Example: certain restaurants, cars, clothes, etc.
Demand for inferior goods vary inversely with income
Example: fast food, thrift stores, etc.

8. Substitutes & Complements
It is important to consider substitutes & complements when considering demand...
A substitute is something that takes the place of something else (ie/ brand name, closely related product)
A complement is a good or service that goes well with each other (hotdogs & buns, coffee and cream, etc.)
Can you think of other examples?

9. Demand Shifts Demand shifts when there is a change in any shift factor
An increase in demand moves the demand curve to the right
A decrease in demand moves the demand curve to the left

10. An Increase in the Market
LO1
An Increase in the Market
Demand for Pizza D’ 9 6 3 12
Price per pizza
$15 D
An increase in the demand for pizza is shown by a rightward shift of the demand curve, so the quantity demanded increases at each price. b f
Exhibit 2 26 20 14 8
Millions of pizzas per week 32
Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

11. Demand Shifts
Demand Shifts Left (decrease demand) when the following occurs:
Price of a substitute decreases
Price of a compliment increases
Good is a normal and income decreases
Good is inferior and income increases
Population decreases
Consumers expect price to fall in the future
Tastes and preferences turn against the product

12. Demand Shifts
Demand Shifts Right (increase demand) when the following occurs:
Price of a substitute increases
Price of complement decreases
Good is normal and income increases
Good is inferior and income decreases
Population increases
Consumers expect the price to rise in the future
Tastes and preferences turn in favor of the product

13. Movements in Demand A change in price does not shift demand!
A price change causes a movement along the demand curve to a new quantity demand

14. The Demand Schedule and
LO1
Exhibit 1
The Demand Schedule and
Demand Curve for Pizza
(a) Demand schedule 9 6 3 12
Price per pizza
$15 D
Price
per
pizza
Quantity Demanded
Per week (millions) a b c d e
$15 12 9 6 3 8 14 20 26 32 a b c d e
The market demand D shows the quantity of pizza demanded, at various prices, by all consumers.
Price and quantity demanded are inversely related. 26 20 14 8
Millions of pizzas per week 32
Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

15. Supply
Relates to the quantity of a good that will be offered for sale at each of various possible prices, over some period of time…. Ceteris paribus (holding all constant)
Examples: produce, agriculture, labor
Can you think of more every day supply examples?

16. Law of Supply As price rises, the quantity supplied increases
Price and quantity supply have an direct relationship
Examples: hotels, automobiles, seasonal food items

17. Supply Schedules & Supply Curves
Supply shifts when there is a change in any of its shift factors
An increase in supply moves the supply curve to the right
A decrease in supply moves the supply curve to the left

18. The Supply Schedule and Supply Curve for Pizza
LO2
Exhibit 3
The Supply Schedule and Supply Curve for Pizza
(a) Supply schedule
(b) Supply curve 9 6 3 12
Price per pizza
$15 S
Price
per
pizza
Quantity Supplied
Per week (millions)
$15 12 9 6 3 28 24 20 16
The market supply S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related. 12 16 20 24 28
Millions of pizzas per week
Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

19. Supply Schedules & Supply Curves
A table that shows the relationship between the price of a good and quantity supplied
A supply schedule can be plotted into a curve

20. Supply Shifts Supply shifts left (decreases) when following occurs:
The number of sellers decreases
The price of labor or other input rises
Producers expect the price to rise in the future
Government, labor or other restrictions on production practices increase costs
Price of a jointly produced product falls
The price of a substitute in production rises

21. Supply Shifts Supply shifts right (increases) when following occurs:
The number of sellers increases
The price of labor or other input falls
Producers expect the price to fall in the future
Technological change lowers costs
Price of a jointly produced product rises
The price of a substitute in production falls

22. An Increase in the Supply of Pizza
LO2
Exhibit 4
An Increase in the Supply of Pizza 9 6 3 12
Price per pizza
$15 S S’ g h
An increase in the supply of pizza is reflected by a rightward shift of the supply curve, from S to S’.
Quantity supplied increases at each price level. 12 16 20 24 28
Millions of pizzas per week
Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

23. Movements in Supply A change in price does not shift supply!
A price change causes a movement along the supply curve to a new quantity supplied.

24. The Supply Schedule and Supply Curve for Pizza
LO2
Exhibit 3
The Supply Schedule and Supply Curve for Pizza
(a) Supply schedule
(b) Supply curve 9 6 3 12
Price per pizza
$15 S
Price
per
pizza
Quantity Supplied
Per week (millions)
$15 12 9 6 3 28 24 20 16
The market supply S shows the quantity of pizza supplied, at various prices, by all pizza makers. Price and quantity supplied are directly related. 12 16 20 24 28
Millions of pizzas per week
Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

25. Market Equilibrium
Demand & Supply come together to determine the equilibrium
Market equilibrium is a situation in which there is no tendency for either price or quantity to change

26. Surplus and Shortage
Any price above the equilibrium = surplus (excess of quantity supplied over quantity demanded)
Any price below the equilibrium = shortage (excess of quantity demanded over quantity supplied)

27. Equilibrium in the Pizza Market
LO3
Exhibit 5(b)
Equilibrium in the Pizza Market
(b) Market curves 9 6 3 12
Price per pizza
$15 S
Market equilibrium occurs at:
Price where QD=QS; Point c D
Surplus
Above the equilibrium price:
QS>QD;
Surplus;
Downward pressure on P c
Shortage
Below the equilibrium price:
QD>QS;
Shortage;
Upward pressure on P 14 16 20 24 26
Millions of pizzas per week
Chapter 4 Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved

28. 4 Cases of Shifting Demand And Supply
Equilibrium Price
Equilibrium Quantity 1
No change
Shifts right
Falls
Rises 2
Shifts left 3 4

29. Thinking as an Economist….
Why are cherries so expensive in the winter?
Why do less people shop at high end stores versus dollar stores?
Why do more rich people drive BMWs and Mercedes compared to individuals earning minimum wage?

30. Terms to Consider supply complements demand Law of demand
quantity demand
Law of supply
quantity supply
surplus
Normal goods
shortage
Inferior goods
Market equilibrium
substitutes

31. The End