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Chapter 3
Market Supply and Demand
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2002 South-Western College Publishing
1
What is the
law of demand?
The principle that there is an
inverse relationship
between the price of a good
and the quantity buyers are
willing to purchase in a
defined time period, ceteris
paribus
2
What does “ceteris
paribus” mean?
All else remains the same
3
What is a
demand curve?
Depicts the relationship
between price and
quantity demanded
4
Individual’s Demand Curve for Compact Discs
P
$20
$15
Individuals Buyer’s Demand Schedule for Compact Discs
A
B
C
$10
Point
Price
per compact disk
A
B
C
D
$20
$15
$10
$5
Quantity demanded
(per year)
4
6
10
16
7
D
$5
Demand Curve
4
8
12 16
Q
5
Why do demand curves
have a negative slope?
At a higher price consumers
will buy fewer units, and at
a lower price they will buy
more units
6
What is a
demand schedule?
Shows the specific
quantity of a good or
service that people are
willing and able to buy at
different prices
7
What is
market demand?
The summation of
the individual
demand schedules
8
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
DEMANDED AND A
CHANGE IN DEMAND
9
When price changes,
what happens?
The curve does not shift
- there is a change in
the quantity demanded
10
Increase in
Quantity
Demanded
Decrease in
Price
11
P
$20
$15
Fred’s Demand Curve
$10
$5
D1
1 2 3 4 5 6 7 8 9 Q
12
P
$20
$15
Mary’s Demand Curve
$10
$5
D2
1 2 3 4 5 6 7 8 9 Q
13
P
Market Demand Curve
$20
$15
$10
$5
D3
Q
3 4 5 6 7 8 9 101112
14
P
$20
$15
Fred’s Demand Curve
$10
P
$20
$15
Mary’s Demand Curve
$10
$5
1 2 3 4 5 6 7 8 9 Q
12
P
D2
$5
D1
1 2 3 4 5 6 7 8 9 Q
13
Market Demand Curve
$20
$15
$10
$5
D3
Q
3 4 5 6 7 8 9 10 11 12
14
15
Market Demand Schedule for Compact Discs
Price
$25
$20
$15
$10
$5
Fred
Mary
Total Demanded
1 + 0 =
2
1
3
3
4
5
5
7
1
3
6
9
12
16
P
$20
$15
$10
$5
A change in price causes a
change in the quantity demanded
A
B
D
Q
10 20 30 40 50
17
When something
changes other than
price, what happens?
The whole curve
shifts,there is a
change in demand
18
P
$20
$15
When the ceteris paribus assumption
is relaxed, the whole curve can shift
A
$10
B
D
D2
$5
10 20
1
Q
30 40 50
19
Increase
in demand
Change in
nonprice
determinant
20
What can cause a shift
in a demand curve?
• Tastes and preferences
• Number of buyers in the market
• Income
• Expectations of consumers
• Prices of related goods
21
Decrease in
quantity
demanded
Upward
movement
along the
demand curve
Price
increases
22
Increase in
quantity
demanded
Downward
movement
along the
demand curve
Price
decreases
23
Decrease or
increase in
demand
Leftward or
rightward shift in
the demand curve
Nonprice
determinant
24
What is a
normal good?
Any good for which
there is a direct
relationship between
changes in income
and its demand curve
25
What is an
inferior good?
Any good for which
there is an inverse
relationship between
changes in income
and its demand curve
26
What are
substitute goods?
Goods that compete
with one another for
consumer purchases
27
What happens when
the price increases for
a good that has a
substitute?
The demand curve for
the substitute good
increases
28
What happens when
the price decreases for
a good that has a
substitute?
The demand curve for
the substitute good
decreases
29
What does a direct
relationship
between price and
quantity mean?
The two move in the
same direction
30
What are
complementary goods?
Goods that are
jointly consumed
with another good
31
What happens when
the price increases for
a good that has a
complement?
The demand curve for
the complement good
decreases
32
What happens when
the price decreases for
a good that has a
complement?
The demand curve for
the complement good
increases
33
What does an inverse
relationship between
price & quantity mean?
It means that the two
move in opposite
directions
34
What is the
law of supply?
The principle that there is
a direct relationship
between the price of a
good and the quantity
sellers are willing to offer
for sale in a defined time
period, ceteris paribus
35
Why do supply curves
have a positive slope?
Only at a higher price will it
be profitable for sellers to
incur the higher opportunity
cost associated with
supplying a larger quantity
36
P
$20
A company’s
Supply Curve for
Compact Discs
$15
Supply Curve
A
B
$10
C
$5
10
20
30
40
Q
37
An Individual Seller’s Supply for Compact Discs
Point
A
B
C
Price
$20
10
6
Quantity
40
30
20
38
P
Super Sound Supply Curve
S1
$25
$20
$15
$10
10 15 20 25
Q
39
P
High Vibes Supply Curve
S2
$25
$20
$15
$10
20 25 30 35
Q
40
What is a market?
Any arrangement in
which buyers and
sellers interact to
determine the price and
quantity of goods and
services exchanged
41
What is market supply?
The horizontal summation of
all the quantities supplied at
various prices that might
prevail in the market
42
P
$25
$20
$15
$10
Market Supply Curve
S total
40 45 55 60
Q
43
Market Supply Schedule for Compact Discs
Price
$25
$20
$15
$10
$5
Super Sound
High Vibes
Total
25 + 35 =
20
30
15
25
10
20
5
15
60
50
40
30
20
44
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
SUPPLIED AND A
CHANGE IN SUPPLY
45
When price changes,
what happens?
The curve does not shift
- there is a change in
the quantity supplied
46
P
$20
A change in price
causes a change
in the quantity
supplied
$15
Supply Curve
A
B
$10
C
$5
10
20
30
40
Q
47
Increase in
Quantity
Supplied
Increase in
Price
48
When something
changes other than
price, what happens?
The whole curve shifts there is a change in supply
49
P
$20
When the ceteris paribus
assumption is relaxed, the
whole curve can shift
S1
$15
S2
$10
$5
10
20
30
40
Q
50
Increase
in supply
Change in
nonprice
determinant
51
What can cause a shift
in a supply curve?
1. Number of sellers in the market
2. Technology
3. Resource prices
4. Taxes and subsidies
5. Expectations of producers
6. Prices of other goods the firm
could produce
52
The Supply & Demand
for Tennis Shoes
P
$120
$90
S
Surplus
$60
$30
Shortage
D
1,000 2,000 3,000 4,000
Q
53
What is an
equilibrium?
A market condition that
occurs at any price for
which the quantity
demanded and the
quantity supplied are equal
54
What is the
price system?
A mechanism that uses
the forces of supply
and demand to create
an equilibrium through
rising and falling prices
55
Key Concepts
56
Key Concepts
• What is the law of demand?
• What is a demand curve?
• Why do demand curves have a negative
slope?
• When price changes, what happens?
• When something changes other than price,
what happens?
• What can cause a shift in a demand curve?
57
Key Concepts cont.
• What is the law of supply?
• Why do supply curves have a positive
slope?
• When price changes, what happens?
• When something changes other than price,
what happens?
• What can cause a shift in a supply curve?
• What is a market?
• What is an equilibrium?
58
Summary
59
The law of demand states there is
an inverse relationship between
the price and the quantity
demanded, ceteris paribus. A
market demand curve is the
horizontal summation of individual
demand curves.
60
Individual’s Demand Curve for Compact Discs
P
$20
$15
Individuals Buyer’s Demand Schedule for Compact Discs
A
B
C
$10
Point
Price
per compact disk
A
B
C
D
$20
$15
$10
$5
Quantity demanded
(per year)
4
6
10
16
7
D
$5
Demand Curve
4
8
12 16
Q
61
A change in quantity demanded is a
movement along a stationary
demand curve caused by a change
in price. When any of the nonprice
determinants of demand changes,
the demand curve responds by
shifting. An increase in demand
(rightward shift) or a decrease in
demand (leftward shift) is caused
by a change in one of the nonprice
determinants.
62
P
$20
$15
When the ceteris paribus assumption
is relaxed, the whole curve can shift
A
$10
$5
10 20
B
D2
D1
Q
30 40 50
63
Nonprice determinants of demand:
a. the number of buyers,
b. tastes and preferences.
c. income (normal and inferior).
d. expectations of future p;rice and
income changes, and
e. prices of related goods
(substitutes and complements)
64
The law of supply states there is a
direst relationship between the
price and the quantity supplied,
ceteris paribus. The market supply
curve is the horizontal summation
of individual supply curves.
65
A change in quantity supplied is a
movement along a stationary
supply curve caused by a change in
price. When any of the nonprice
determinants of supply changes,
the supply curve responds by
shifting. An increase in supply
(rightward shift) or a decrease in
supply (leftward shift) is caused by
a change in one of the nonprice
determinants.
66
P
$20
A company’s
Supply Curve for
Compact Discs
$15
Supply Curve
A
B
$10
C
$5
10
20
30
40
Q
67
P
$20
When the ceteris
paribus assumption
is relaxed, the whole
curve can shift
S1
S2
$15
$10
$5
10
20
30
40
Q
68
Nonprice determinants of supply:
a. the number of sellers.
b. technology
c. resource prices.
d. taxes and subsidies.
e. expectations of future price
changes,
f. prices of other goods.
69
A surplus or shortage exists at any
price where the quantity
demanded and the quantity
supplied are not equal. When the
price of a good is greater than the
equilibrium price, there is an
excess quantity supplied called a
surplus. When the price is less
than the equilibrium price, there is
an excess quantity demanded
called a shortage.
70
Equilibrium is the unique price and
quantity established at the
intersection of the supply and the
demand curves. Only at
equilibrium does quantity
demanded equal quantity
supplied.
71
The Supply & Demand
for Tennis Shoes
P
$120
$90
S
Surplus
$60
$30
Shortage
D
1,000 2,000 3,000 4,000
Q
72
The price system is the supply and
demand mechanism that
establishes equilibrium through the
ability of prices to rise or fall.
73
END
74