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Seventh Edition
CHAPTER 2
Demand and Supply:
an Introduction
© 2012 McGraw-Hill Ryerson Limited
2-1
CHAPTER 2
Demand and Supply:
an Introduction
Learning Objectives:
1.
2.
3.
4.
Explain the concept of demand
Explain the concept of supply
Explain the term market
Understand the concept of equilibrium
© 2012 McGraw-Hill Ryerson Limited
2-2
CHAPTER 2
Demand and Supply:
an Introduction
Learning Objectives:
5. Understand causes and effects of a change in demand
6. Understand causes and effects of a change in supply
7. Understand why demand and supply determine price
and quantity traded
© 2012 McGraw-Hill Ryerson Limited
2-3
LO1
Demand
• the quantities that consumers are willing and able
to buy over a period of time at
various prices
© 2012 McGraw-Hill Ryerson Limited
2-4
LO1
Demand
• the quantities that consumers are willing and able
to buy over a period of time at
various prices
• must be willing to purchase it
AND
• must have ability to pay for it
© 2012 McGraw-Hill Ryerson Limited
2-5
LO1
Demand
• the quantities that consumers are willing and able
to buy over a period of time at
various prices
• measures quantities in a specific time period,
e.g. a week / month / year
© 2012 McGraw-Hill Ryerson Limited
2-6
LO1
Demand
• the quantities that consumers are willing and able
to buy over a period of time at
various prices
• shows relationship between quantity & price
• price is the most important determinant
• “ceteris paribus” – all else remains the same
© 2012 McGraw-Hill Ryerson Limited
2-7
LO1
Demand
Demand Schedule
• A table showing the various quantities demanded
at different prices
Demand Curve
• A graphic representation of a demand schedule
© 2012 McGraw-Hill Ryerson Limited
2-8
LO1
Demand Schedule
Price Per Case
Quantity Demanded
(cases per month)
$17
18
19
20
21
22
7
6
5
4
3
2
© 2012 McGraw-Hill Ryerson Limited
2-9
LO1
Demand Curve
Price
Price
$17
Quantity
7
18
19
20
6
5
4
21
22
3
2
$19
$18
$17
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
2-10
LO1
Demand Curve
Price
$19
$18
$17
Demand curve
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
2-11
LO1
Demand Curve
Price
$19
$18
$17
Price
$17
Quantity
7
18
19
20
6
5
4
21
22
3
2
B
A
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
2-12
LO1
Demand Curve
Price
$19
$18
$17
- as price increases,
quantity demanded
decreases
- movement is along
an existing demand
line
B
A
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
2-13
LO1
Why the Demand Curve
Slopes Downward
1. Income effect
•
The effect of a price change on real income, and
therefore on quantity demanded
•
Real income is measured in terms of the goods
and services it will buy
•
Real income will increase if prices fall
© 2012 McGraw-Hill Ryerson Limited
2-14
LO1
Why the Demand Curve
Slopes Downward
2. Substitution effect
•
The substitution of one product for another as a
result of a change in their relative prices
© 2012 McGraw-Hill Ryerson Limited
2-15
LO1
Market Demand
• The total demand for a product or service from all
consumers
© 2012 McGraw-Hill Ryerson Limited
2-16
LO1
Market Demand Schedule
Quantity demanded (cases/month)
$/case Tomiko
Abdi
Jan
Market
demand
$18
6
+ 4
+ 9
= 19
$19
5
4
7
16
$20
4
4
6
14
$21
3
3
3
9
$22
2
3
1
6
© 2012 McGraw-Hill Ryerson Limited
2-17
Market Demand Schedule
P
LO1
Market demand is the horizontal
summation of all individual
demands.
22
21
20
19
18
DJAN
DTOMIKO
DABDI
DMARKET
0 2 4 6 8 10 12 14 16 18 20
© 2012 McGraw-Hill Ryerson Limited
Q
2-18
LO1
Self-Test
The table shows the weekly demand for soy milk by
three people in a very small market.
a) Calculate market demand at each price.
Quantity demanded by:
Price
Al
Bo
Cole
$4.00
1
0
0
3.50
1
1
0
3.00
1
1
1
2.50
2
1
1
2.00
2
2
1
© 2012 McGraw-Hill Ryerson Limited
Market
2-19
LO1
Self-Test
The table shows the weekly demand for soy milk by
three people in a very small market.
a) Calculate market demand at each price.
Quantity demanded by:
Price
Al
$4.00
1
3.50
1
3.00
Bo
+
0
Cole
+
Market
0
= 1
1
0
2
1
1
1
3
2.50
2
1
1
4
2.00
2
2
1
5
© 2012 McGraw-Hill Ryerson Limited
2-20
LO2
Supply
• the quantities that producers are willing and able
to supply over a period of time at
various prices
© 2012 McGraw-Hill Ryerson Limited
2-21
LO2
Supply
Supply Schedule
• A table showing the various quantities supplied
per period of time at different prices
Supply Curve
• A graphic representation of the supply schedule
© 2012 McGraw-Hill Ryerson Limited
2-22
LO2
Supply Schedule
Price Per Case
Quantity Supplied
(cases per month)
$18
19
20
21
22
2
3
4
5
6
© 2012 McGraw-Hill Ryerson Limited
2-23
LO2
Supply Curve
Price
Price
$18
Quantity
2
19
20
21
3
4
5
22
6
$20
$19
$18
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
2-24
LO2
Supply Curve
Price
$20
$19
$18
Supply curve
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
2-25
LO2
Supply Curve
Price
$20
$19
$18
- as price increases,
quantity supplied (Qs)
increases
- movement is along an
existing supply line
B
A
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
2-26
LO2
Why the Supply Curve
Slopes Upward
•
•
•
Suppliers are motivated by profit
Higher price means more profit, more suppliers
are willing to produce the product
Costs rise as more is produced, so higher prices
required to supply more
© 2012 McGraw-Hill Ryerson Limited
2-27
LO2
Market Supply Curve
• Total supply from all producers of a product
• Horizontal summation of each individual
producer’s supply curve
Assumptions:
• producers are all making a similar product
• consumers have no preference as to which supplier
or product they use
© 2012 McGraw-Hill Ryerson Limited
2-28
LO2
Market Supply Schedule
Quantity supplied (cases/month)
$/case
Bobbie
2
Other
Brewers
+ 6
Market
Supply
= 8
$18
$19
3
9
12
$20
4
12
16
$21
5
15
20
$22
6
18
24
© 2012 McGraw-Hill Ryerson Limited
2-29
Market Supply Curve
P
22
SBOBBI
+
SOTHER
=
LO2
SMARKET
21
20
19
18
Market supply is the total quantity
of all producers at each price.
0 2 4 6 8 10 12 14 16 18 20
© 2012 McGraw-Hill Ryerson Limited
Q
2-30
Market Equilibrium
LO3. LO4
Market
• A mechanism that allows buyers and sellers to
exchange products or services
Equilibrium
• The point where quantity demanded equals
quantity supplied
• There is neither a shortage nor a surplus
QD = QS
© 2012 McGraw-Hill Ryerson Limited
2-31
LO4
Market Equilibrium
Surplus
• the amount by which quantity supplied is greater
than quantity demanded
• occurs at prices above equilibrium
Shortage
• the amount by which quantity supplied is less than
quantity demanded
• occurs at prices below equilibrium
© 2012 McGraw-Hill Ryerson Limited
2-32
LO4
Market Equilibrium
Quantity supplied (cases/month)
$/case
$18
Market
Supply
8
Market
Demand
_ 22
$19
12
18
-6
$20
16
16
0
$21
20
9
+11
$22
24
6
+18
© 2012 McGraw-Hill Ryerson Limited
Shortage/
Surplus
= -14
2-33
LO4
Market Equilibrium
P
Supply
Demand
The market is in
equilibrium when
QS = QD
$20
16
© 2012 McGraw-Hill Ryerson Limited
Q
2-34
LO4
Shortage
P
Supply
Demand
At a price lower
than equilibrium,
QS < QD
there is a shortage
$20
$18
shortage
16
8
(QS )
22
(QD )
© 2012 McGraw-Hill Ryerson Limited
Q
2-35
LO4
Surplus
P
Supply
Demand
$22
At a price higher
than equilibrium,
QS > QD
there is a surplus
$20
surplus
6
(QD )
16
24
(QS )
© 2012 McGraw-Hill Ryerson Limited
Q
2-36
LO4
Self-Test
The table shows demand and supply for a product.
Calculate the surplus or shortage at each price.
Price
$2.00
2.50
3.00
3.50
4.00
Demand
Supply
60
56
52
48
44
30
36
42
48
54
© 2012 McGraw-Hill Ryerson Limited
Surplus/
Shortage
2-37
LO4
Self-Test
The table shows demand and supply for a product.
Calculate the surplus or shortage at each price.
Price
$2.00
2.50
3.00
3.50
4.00
Demand
Supply
Surplus/
Shortage
60
56
52
48
44
30
36
42
48
54
- 30
© 2012 McGraw-Hill Ryerson Limited
- 20
- 10
0
+ 10
2-38
LO4
Market Adjustments
When there is a Surplus:
• producers drop the price to sell excess stock
• as price drops:
- quantity demanded increases
- quantity supplied falls
• market moves back to equilibrium price, quantity
© 2012 McGraw-Hill Ryerson Limited
2-39
LO4
Market Adjustment - Surplus
P
Supply
Demand
$22
$20
surplus
6
(QD )
16
24
(QS )
© 2012 McGraw-Hill Ryerson Limited
Q
2-40
LO4
Market Adjustment - Surplus
P
Supply
Demand
- Sellers drop price to
sell excess
- Buyers buy more at
lower price
- Sellers supply less
at lower price
- Back to equilibrium
$22
$20
surplus
6
(QD )
16
24
(QS )
© 2012 McGraw-Hill Ryerson Limited
Q
2-41
LO4
Market Adjustments
When there is a Shortage:
• buyers bid up the price
• as price rises:
- quantity demanded decreases
- quantity supplied increases
• market moves back to equilibrium price, quantity
© 2012 McGraw-Hill Ryerson Limited
2-42
LO5
Increase in Demand
Price
D1
-more quantity is
demanded at each price
- caused by a factor other
than price
D2
$20
14
20
© 2012 McGraw-Hill Ryerson Limited
Quantity
2-43
LO5
Determinants of Demand
1. Consumer preferences
• If tastes change, demand changes
2. Consumer incomes
• Normal Products: buy more when income rises,
less when income falls
• Inferior Products: buy more when income falls,
less when income rises
© 2012 McGraw-Hill Ryerson Limited
2-44
LO5
Determinants of Demand
3. Prices of Related Products:
• Products are related if a change in the price of one
product causes a change in demand for the other
product
• Two types of related products:
• Substitutes
• Complements
© 2012 McGraw-Hill Ryerson Limited
2-45
LO5
Determinants of Demand
3. Prices of Related Products
• Substitute Product
• similar products that can be substituted for each
other
• increase in price of one product causes
increased demand for the related product
© 2012 McGraw-Hill Ryerson Limited
2-46
LO5
Determinants of Demand
3. Prices of Related Products
• Complementary Product
• tend to be bought together
• Increase in price of one product causes a
decrease in demand for related product
© 2012 McGraw-Hill Ryerson Limited
2-47
LO5
Determinants of Demand
4. Expectations of future prices, income,
availability
• If prices or incomes expected to rise, consumers
buy more
• If goods expected to be scarcer, buy more now
5. Population size, income, and age
distribution
• Increases in population or incomes cause increase
in demand
• Changes in age distribution affect demand
© 2012 McGraw-Hill Ryerson Limited
2-48
LO5
Self Test
Price
Demand (D1)
Demand (D2)
$2.00
3.00
4.00
10 000
9 600
9 200
11 000
10 600
10 200
Market for pretzels:
• What might have happened to the price of a
complementary product, like beer, to cause the
demand for pretzels to change?
• What might have happened to the price of a
substitute product, like nuts?
© 2012 McGraw-Hill Ryerson Limited
2-49
LO5
Self Test
Price
Demand (D1)
Demand (D2)
$2.00
3.00
4.00
10 000
9 600
9 200
11 000
10 600
10 200
Market for pretzels:
• What might have happened to the price of a
complementary product, like beer, to cause the
demand for pretzels to change? Price of beer fell
• What might have happened to the price of a
substitute product, like nuts? Price of nuts rose
© 2012 McGraw-Hill Ryerson Limited
2-50
LO5
Adjustment to an Increase in Demand
S
When demand
increases, a
shortage is created
and price rises
$22
$20
shortage
D1
14
D2
18 20
© 2012 McGraw-Hill Ryerson Limited
2-51
LO5
Adjustment to a Decrease in Demand
S
When demand
decreases, a
surplus is created
and price drops
$20
$18
D2
8 10
D1
14
© 2012 McGraw-Hill Ryerson Limited
2-52
LO5
Self-Test
What effect will the following changes have upon (i) the demand
for, (ii) the price, and (iii) the quantity traded of commercially
brewed beer?
a. A new medical report praising the healthy
effects of drinking beer
b. A big decrease in the price of home-brewing
kits
c. A rapid increase in population growth
d. Talk of a possible future strike of brewery
workers
e. A possible future recession
© 2012 McGraw-Hill Ryerson Limited
2-53
LO5
Self-Test
What effect will the following changes have upon (i) the demand
for, (ii) the price, and (iii) the quantity traded of commercially
brewed beer?
a. A new medical report praising the healthy
effects of drinking beer D P Q
b. A big decrease in the price of home-brewing
kits
D P Q
c. A rapid increase in population growth D P Q
d. Talk of a possible future strike of brewery
workers D P Q
e. A possible future recession D P Q
© 2012 McGraw-Hill Ryerson Limited
2-54
LO6
Determinants of Supply
1. Prices of Productive Resources
• If the price of a productive resource increases,
firms will supply less
2. Business Taxes
• If business taxes rise, firms will supply less
3. Technology
• An improvement in technology leads to a fall in the
cost of production and an increase in supply
© 2012 McGraw-Hill Ryerson Limited
2-55
LO6
Determinants of Supply
4. Prices of Substitutes in Production
• An increase in the price of one product will cause
a drop in the supply of products that are
substitutes in production
5. Future Expectation of Suppliers
• Lower expected future prices will lead to an
increase in supply
6. Number of Suppliers
• A decrease in the number of suppliers will reduce
market supply
© 2012 McGraw-Hill Ryerson Limited
2-56
LO6
Effects of an Increase in Supply
S1
S2
$20
When supply
increases, a
surplus is created
and price falls
$18
D
14
16
20
© 2012 McGraw-Hill Ryerson Limited
Chapter 2-57
LO6
Effects of a Decrease In Supply
S2
S1
$22
$20
D
12
When supply
decreases, a
shortage is
created and
price rises
14
© 2012 McGraw-Hill Ryerson Limited
Chapter 2-58
Self-Test
Price
$4.00
4.25
Demand
140
130
Supply 1
60
70
4.50
4.75
5.00
120
110
100
80
90
100
5.25
5.50
90
80
110
120
LO6
Supply 2
a. What are equilibrium price and quantity?
b. Supply increases by 50% - what are the new
equilibrium price and quantity?
© 2012 McGraw-Hill Ryerson Limited
2-59
Self-Test
LO6
Price
$4.00
4.25
Demand
140
130
Supply 1
60
70
Supply 2
90
105
4.50
4.75
5.00
120
110
100
80
90
100
120
135
150
5.25
5.50
90
80
110
120
165
180
a. What are equilibrium price and quantity?
b. Supply increases by 50% - what are the new
equilibrium price and quantity?
© 2012 McGraw-Hill Ryerson Limited
2-60
Self-Test 7
LO6
a) A poor harvest in the grape industry results in a
big decrease in the supply of grapes
b) The number of wineries increases
c) The sales tax on wine increases
d) The introduction of a new fermentation method
reduces the time needed for the wine to
ferment
e) The gov’t introduces a subsidy for each bottle
of wine produced domestically
f) The gov’t introduces a quota limiting the
amount of foreign-made wine entering Canada
© 2012 McGraw-Hill Ryerson Limited
2-61
Self-Test 7
LO6
a) A poor harvest in the grape industry results in a
big decrease in the supply of grapes S P Q
b) The number of wineries increases S P Q
c) The sales tax on wine increases S P Q
d) The introduction of a new fermentation method
reduces the time needed for the wine to
S P Q
ferment
e) The gov’t introduces a subsidy for each bottle
of wine produced domestically S P Q
f) The gov’t introduces a quota limiting the
amount of foreign-made wine entering Canada
S
© 2012 McGraw-Hill Ryerson Limited
P
Q
2-62
CHAPTER 2 SUMMARY
Key Concepts to Remember:
•
•
•
•
•
•
•
The concept of demand vs quantity demanded
The concept of supply vs quantity supplied
The term “market”
The concept of equilibrium price and quantity
The determinants of demand and supply
The effects of a change in demand or a change in supply
Why demand and supply determine price, not the reverse
© 2012 McGraw-Hill Ryerson Limited
2-63