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Chapter 3
Demand and Supply
© 2005 Thomson
Economic Principles
Individual and market demand
Market-day, short-run and
long-run supply
Determination of equilibrium
price and quantity
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Price Formation
Market price is a reflection of
people’s willingness to buy and sell.
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Measuring Market Demand
A change in quantity demanded
shows:
• People’s willingness to buy specific
quantities of a good or service at
specific prices.
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Measuring Market Demand
Law of demand
• The inverse relationship between price
and quantity demanded.
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Measuring Market Demand
Demand schedule
• A schedule which shows the specific
quantity of a good or service that people
are willing and able to buy at different
prices.
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Measuring Market Demand
Aggregate the demand of many
individuals into market demand by:
• Adding up the quantities purchased by
all consumers at given market prices.
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Measuring Market Demand
If each of the seven dwarfs buys
three cups of coffee per week at
Snow White’s Café at a price of
$1/cup, what is market quantity
demanded at a price of $1?
• 3 + 3 + 3 + 3 + 3 + 3 + 3 = 21.
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Measuring Supply
Supply schedule
• It is a schedule showing the specific
quantity of a good or service that suppliers
are willing and able to provide at different
prices.
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Measuring Supply
Market-day supply
• A market situation in which the quantity
of a good supplied is fixed, regardless of
price.
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Measuring Supply
A supply curve graphs the
relationship between price and
quantity supplied.
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Measuring Supply
The supply curve is upwardsloping.
• Higher prices provide sellers with an
incentive to increase quantity
supplied.
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Measuring Supply
If there are three builders in a
small town, and if each supplies 4
houses per year at a price of
$150,000, what is market quantity
supplied at this price?
• 4 + 4 + 4 = 12.
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EXHIBIT 1A INDIVIDUAL DEMAND CURVES FOR FISH
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EXHIBIT 1B INDIVIDUAL DEMAND CURVES FOR FISH
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EXHIBIT 2
THE MARKET DEMAND CURVE
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Exhibit 2: The Market Demand Curve
The curve in Exhibit 2 represents:
• The market demand for fish.
• It is the sum of all individual
demands for fish.
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EXHIBIT 3
MARKET-DAY SUPPLY CURVE
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Exhibit 3: Market-Day Supply Curve
The market-day supply curve for
fish is a vertical line because:
• Fishermen cannot change the quantity
they supply, once the day’s catch is in.
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EXHIBIT 4
EXCESS DEMAND
AND EXCESS
SUPPLY
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Exhibit 4: Excess Demand
and Excess Supply
The quantity of fish purchased,
when price rises from $5 to $8:
• Remains at 6,000.
• The market-day supply curve is
a vertical line.
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Exhibit 4: Excess Demand
and Excess Supply
The relationship between quantity
demanded and quantity supplied
at a price of $8 is:
• Quantity demanded is 4,500.
• Quantity supplied is 6,000.
• Excess supply of 1,500.
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Exhibit 4: Excess Demand
and Excess Supply
The relationship between quantity
demanded and quantity supplied
at a price of $4 is:
• Quantity demanded is 6,500.
• Quantity supplied is 6,000.
• Excess demand of 500.
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Exhibit 4: Excess Demand
and Excess Supply
The relationship between quantity
demanded and quantity supplied at
a price of $5 is:
• They are equal.
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Determining Equilibrium Price
What is unique about the
Equilibrium Price?
• Quantity demanded is equal to quantity
supplied.
• There is neither an excess supply nor an
excess demand.
• Price gravitates toward the equilibrium
price, in well-functioning competitive
markets.
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EXHIBIT 5
MARKET-DAY,
SHORT-RUN,
AND LONG-RUN
SUPPLY
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Exhibit 5: Market-Day,
Short-Run, and Long-Run Supply
The short-run supply curve slopes
upward, while the market-day supply
curve is a vertical line because:
• If price rises, then in the short-run
suppliers are able to increase the use of
some but not all of the resources they use
to produce goods and services.
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Exhibit 5: Market-Day,
Short-Run, and Long-Run Supply
The short-run supply curve slopes
upward, while the market-day supply
curve is a vertical line because:
• The short-run suppliers are able to:
• Make modest increases in quantity supplied
if price rises.
• Make modest decreases in quantity
supplied if price falls
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Exhibit 5: Market-Day,
Short-Run, and Long-Run Supply
The short-run supply curve slopes
upward, while the market-day supply
curve is a vertical line because:
• This results in a short-run supply
curve which is steeply upward-sloping.
• The quantity supplied is fixed on
the market-day supply curve.
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Exhibit 5: Market-Day,
Short-Run, and Long-Run Supply
The long-run supply curve is less
steep than the short-run supply
curve because:
• Suppliers are able to change the quantity of all
resources they use to produce goods and services
during this time interval.
• A given increase in price will result in a
larger increase in quantity supplied in
the long run than in the short run.
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Change in Demand
A change in price will not
result in a change in demand.
• A change in price results in a change
in quantity demanded.
• A change in demand is caused by factors
other than a change in the price of that
good.
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Change in Demand
A change in a consumer’s income
will result in a change in
demand.
• A change in a consumer’s income will
cause the demand curve to shift.
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EXHIBIT 6
CHANGE IN DEMAND
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Exhibit 6: Change in Demand
In Exhibit 6, when the demand curve
shifts from D to D′, the equilibrium
price and quantity demanded:
• The equilibrium price rises from $5 to $6.
• The quantity demanded rises from
6,000 to 6,500.
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Exhibit 6: Change in Demand
If fish are a normal good and
consumer incomes have increased,
the demand will shift from D to D′.
• If a good is normal, then an increase
in consumer income will increase
demand.
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Exhibit 6: Change in Demand
In Exhibit 6, when the demand curve
shifts from D to D″, the equilibrium
price and quantity demanded:
• The equilibrium price falls from $5 to $4.
• The quantity demanded falls from
6,000 to 5,500.
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Exhibit 6: Change in Demand
If fish and beef are substitutes, then a
decrease in the price of beef will cause
demand to shift from D to D″.
If the price of beef declines:
• The quantity of beef demanded will increase.
• The demand curve for fish will shift left.
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Changes in Demand
What happens to the demand for
software when computer hardware
and software are complements, and
the price of hardware declines:
• A decline in hardware prices will increase
the quantity of hardware demanded.
• If more hardware is purchased, the
result will be more software purchased,
since they are complements.
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Changes in Demand
What happens to the demand for
software when computer hardware
and software are complements, and
the price of hardware declines:
• The increase in the quantity of software
demanded was caused by a factor other
than the price of software.
• The demand for software will increase.
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Changes in Demand
If consumers anticipate that
computer hardware will become
considerably cheaper in the coming
months, today’s demand for
hardware:
• Today’s demand will decrease (shift to the
left).
• Some consumers will delay their purchase
in anticipation of lower future prices.
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Changes in Demand
The demand for day-old bakery
goods if consumer incomes rise,
and day-old bakery goods are
inferior goods will:
• The demand for day-old bakery goods
will fall as consumer incomes rise.
• Inferior goods are goods that people
consume less of as their incomes rise.
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Changes in Demand
When students are gone during
the summer, the demand for
pizza slices on campus:
• The demand will fall because there will be
fewer consumers.
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Changes in Demand
If the Surgeon General announces
that cheeseburgers reduce heart
attack risk and prevent premature
baldness, this will affect market
demand for cheeseburgers:
• The demand will rise.
• The news will increase consumer tastes
and preferences for cheeseburgers.
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Changes in Demand
Which of the following are most
likely to be consumer substitutes:
i. Peanut butter and jelly
ii. Coke and Pepsi
iii. Cars and gasoline
iv. Telephones and telephone books
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Changes in Demand
Which of the following are most
likely to be consumer substitutes:
i. Peanut butter and jelly
ii. Coke and Pepsi
iii. Cars and gasoline
iv. Telephones and telephone books
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EXHIBIT 7
DISTINGUISHING CHANGES IN DEMAND
FROM CHANGES IN QUANTITY DEMANDED
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Exhibit 7: Distinguishing Changes in Demand
from Changes in Quantity Demanded
Movement along the demand
curve D from a price of $10 to a
price of $7 illustrates a change in
• Quantity demanded.
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Exhibit 7: Distinguishing Changes in Demand
from Changes in Quantity Demanded
In which of the following do we know
for certain that a change in demand
occurred:
i. Price declined and quantity demanded
increased.
ii. Price remained the same and quantity
demanded increased.
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Exhibit 7: Distinguishing Changes in Demand
from Changes in Quantity Demanded
In which of the following do we know
for certain that a change in demand
occurred:
i. Price declined and quantity demanded
increased.
ii. Price remained the same and quantity
demanded increased.
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EXHIBIT 8
CHANGE IN SUPPLY
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Exhibit 8: Change in Supply
When the supply changes from
curve S to curve S′, this is an
increase in supply.
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Exhibit 8: Change in Supply
What would cause the equilibrium
to shift from point a. to point b. in
Exhibit 8?
• A decrease in supply from S′ to S″.
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Changes in Supply
A change in supply:
• A change in quantity supplied of a good
or service that is caused by factors other
than a change in the price of that good.
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Changes in Supply
If a labor union successfully
negotiates a large pay increase, this
will affect the supply curve for the
product they make by:
• Higher wages, like any other increase in
resource prices, will cause the supply
curve to shift inwards to the left
(a decrease in supply).
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Changes in Supply
If more sellers enter the market,
this will affect the market supply
curve:
• An increase in the number of sellers will
cause the supply curve to shift outwards to
the right (an increase in supply).
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Changes in Supply
Suppose that farmers who grow
soybeans can also grow corn. If the
price of soybeans triples, how this will
affect the market supply of corn by:
• This will reduce the market supply of corn,
because many corn farmers will switch
to growing soybeans.
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EXHIBIT 9A INCREASES IN DEMAND AND SUPPLY
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EXHIBIT 9B INCREASES IN DEMAND AND SUPPLY
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Exhibit 9: Increases in Demand
and Supply (panel a)
When both demand and supply
increase:
• Equilibrium quantity increases.
• The effect of an increase in both supply an
demand on price depends on the relative size
of the increases. If the increase in demand is
larger than the increase in supply, then
price rises. Gottheil - Principles of Economics, 4e
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© 2005 Thomson
EXHIBIT 10A INCREASES IN DEMAND, DECREASES
IN SUPPLY
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EXHIBIT 10B INCREASES IN DEMAND, DECREASES
IN SUPPLY
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Exhibit 10: Increases in Demand,
Decreases in Supply
When demand increases a little
and supply decreases a lot:
• The equilibrium price increases, but
equilibrium quantity decreases. This
effect is illustrated in Exhibit 10, panel a.
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Exhibit 10: Increases in Demand,
Decreases in Supply
When demand increases a lot
and supply decreases a little:
• The equilibrium price and quantity both
increase. This effect is illustrated in
Exhibit 10, panel b.
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Demand and Supply
The equilibrium price of peaches will
be affected if the demand for peaches
decreases, while at the same time the
supply of peaches increases:
• The equilibrium price of peaches will fall.
• The relative magnitude of the changes in
supply and demand is needed before we
can determine how the equilibrium
quantity of peaches will change.
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Price as a Rationing Mechanism
Price rations scarce goods and
services in a market:
• It rations out goods in a market in such
a way that only those who have a high
willingness-to-pay get them.
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EXHIBIT 11A RATIONING FUNCTION OF PRICE
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EXHIBIT 11B RATIONING FUNCTION OF PRICE
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