Download Supply And Demand

Supply and Demand
Chapter 4
© 2003 McGraw-Hill Ryerson Limited
4-2
Demand

Demand means a willingness and
capacity to pay.
© 2003 McGraw-Hill Ryerson Limited
4-3
Demand

Prices are the tool by which the market
coordinates individual desires.
© 2003 McGraw-Hill Ryerson Limited
4-4
The Law of Demand
Quantity demanded rises as price falls,
other things constant.
 Quantity demanded falls as price rises,
other things constant.

 Thus,
there is an inverse relationship
between price and quantity demanded.
© 2003 McGraw-Hill Ryerson Limited
4-5
The Law of Demand
What accounts for the law of demand?
 People tend to substitute other goods
for goods whose price has increased.

© 2003 McGraw-Hill Ryerson Limited
4-6
The Demand Curve
The demand curve is the graphic
representation of the relationship
between price and quantity demanded.
 The demand curve slopes downward
and to the right.

 As
the price goes up, the quantity
demanded goes down.
© 2003 McGraw-Hill Ryerson Limited
4-7
The Demand Curve

The negative slope tells us that quantity
demanded varies indirectly—in the
opposite direction—with price.
© 2003 McGraw-Hill Ryerson Limited
4-8
Other Things Constant
“Other things constant” in our definition
of demand means that all other factors
that affect the analysis are assumed to
remain constant, whether they actually
remain constant or not.
 These factors may include changing
tastes, prices of other goods, even the
weather.

© 2003 McGraw-Hill Ryerson Limited
4-9
A Sample Demand Curve,
Price (per unit)
Fig. 4-1, p 84
PA
A
D
0
QA
Quantity demanded (per unit of time)
© 2003 McGraw-Hill Ryerson Limited
4 - 10
Shifts in Demand Versus
Movements Along a Demand
Curve
Demand refers to a schedule of
quantities of a good that will be bought
per unit of time at various prices, other
things constant.
 Graphically, it refers to the entire
demand curve.

© 2003 McGraw-Hill Ryerson Limited
4 - 11
Shifts in Demand Versus
Movements Along a Demand
Curve

Quantity demanded refers to a specific
amount that will be demanded per unit of time
at a specific price, other things constant.

Graphically, it refers to a specific point on the
demand curve.
© 2003 McGraw-Hill Ryerson Limited
4 - 12
Shifts in Demand Versus
Movements Along a Demand
Curve

A movement along a demand curve is
the graphical representation of the
effect of a change in price on the
quantity demanded.
© 2003 McGraw-Hill Ryerson Limited
4 - 13
Shifts in Demand Versus
Movements Along a Demand
Curve
A shift in demand is the graphical
representation of the effect of anything
other than price on demand.
 The original curve will move to the right
or to the left.

© 2003 McGraw-Hill Ryerson Limited
4 - 14
Change in Quantity Demanded
Price (per unit)
Fig. 4-2a, p 86
$2
B
Change in quantity demanded
(a movement along the curve)
$1
A
D1
0
100
200
Quantity demanded (per unit of time)
© 2003 McGraw-Hill Ryerson Limited
4 - 15
Price (per unit)
Shift in Demand, Fig. 4-2b, p 86
Change in demand
(a shift of the curve)
$2
$1
B
A
D0
D1
250
100
200
Quantity demanded (per unit of time)
© 2003 McGraw-Hill Ryerson Limited
4 - 16
Shift Factors of Demand

Shift factors of demand are factors that
cause shifts in the demand curve to the
right or left.
© 2003 McGraw-Hill Ryerson Limited
4 - 17
Shift Factors of Demand

Shift factors of demand include—but are
not limited to—the following:
 Society's
income
 The prices of other goods
 Tastes
 Expectations
 Population
© 2003 McGraw-Hill Ryerson Limited
4 - 18
Shift Factors of Demand
A rise in income may increase demand
for goods.
 When the prices of substitute goods fall,
you will consume less of the good
whose price has not changed.
 A change in taste will change demand
without a change in price.

© 2003 McGraw-Hill Ryerson Limited
4 - 19
Shift Factors of Demand
If you expect your income to rise, you
may consume more now.
 If you expect prices to fall in the future,
you may put off purchases today.

© 2003 McGraw-Hill Ryerson Limited
4 - 20
Shift Factors of Demand
If there is an increase in population,
demand will increase at every price
 With a population decrease, demand
will decrease as well

© 2003 McGraw-Hill Ryerson Limited
4 - 21
The Demand Table

The demand table assumes all the
following:
 As
price rises, quantity demanded declines.
 Quantity demanded has a specific time
dimension to it.
© 2003 McGraw-Hill Ryerson Limited
4 - 22
The Demand Table

The demand table assumes all the
following:
 All
the products involved are identical in
shape, size, quality, etc.
 The schedule assumes that everything else
is held constant.
© 2003 McGraw-Hill Ryerson Limited
4 - 23
From a Demand Table to a
Demand Curve

You plot each point in the demand table
on a graph and connect the points to
derive the demand curve.
© 2003 McGraw-Hill Ryerson Limited
4 - 24
From a Demand Table to a
Demand Curve

The demand curve graphically conveys
the same information that is on the
demand table.
© 2003 McGraw-Hill Ryerson Limited
4 - 25
From a Demand Table to a
Demand Curve

The curve represents the maximum
price that you will pay for various
quantities of a good—you will happily
pay less.
© 2003 McGraw-Hill Ryerson Limited
4 - 26
From a Demand Table to a
Demand Curve, Fig. 4-3 (a and b), p 87
A Demand Table
A
B
C
D
E
$0.50
1.00
2.00
3.00
4.00
9
8
6
4
2
Price per cassette (in dollars)
Price per Cassette rentals
cassette demanded per
week
A Demand Curve
$6.00
5.00
4.00
3.50
3.00
E
D
G
2.00
C
1.00
.50
0
F
Demand for
cassettes
B
A
1 2 3 4 5 6 7 8 9 10 11 12 13
Quantity of cassettes demanded (per week)
© 2003 McGraw-Hill Ryerson Limited
4 - 27
Individual and Market
Demand Goods

A market demand curve is the horizontal
sum of all individual demand curves.
 This
is determined by adding the
individual demand curves of all the
consumers (“demanders”).
© 2003 McGraw-Hill Ryerson Limited
4 - 28
Individual and Market
Demand Goods
In reality, the sellers do not add up
individual demand curves.
 They estimate total market demand for
their product which becomes smooth
and downward sloping curve.

© 2003 McGraw-Hill Ryerson Limited
4 - 29
Individual and Market
Demand Goods

The demand curve is downward sloping
for the following reasons:
 At
lower prices, existing consumers buy
more.
 At lower prices, new consumers enter the
market.
© 2003 McGraw-Hill Ryerson Limited
4 - 30
From Individual Demands
to a Market, Fig. 4-4 (a and b), p 88
A $.0.50
B 1.00
C 1.50
D 2.00
E 2.50
F 3.00
G 3.50
H 4.00
9
8
7
6
5
4
3
2
6
5
4
3
2
1
0
0
1
1
0
0
0
0
0
0
16
14
11
9
7
5
3
2
$4.00
Price per cassette (in dollars)
(1)
(2)
(3)
(2)
(3)
Price per Marie’s Pierre’s Cathy’s Market
cassette demand demand demand demand
3.50
G
F
3.00
E
2.50
D
2.00
C
1.50
B
1.00
0.50
Cathy
0
2 4
A
Pierre Marie Market demand
6 8 10 12 14 16
Quantity of cassettes demanded per week
© 2003 McGraw-Hill Ryerson Limited
4 - 31
Supply

Individuals control the factors of
production.
 Factors
of production are the resources or
inputs, necessary to produce goods or
services.
© 2003 McGraw-Hill Ryerson Limited
4 - 32
Supply

Individuals supply factors of production
to intermediaries or firms.
© 2003 McGraw-Hill Ryerson Limited
4 - 33
Supply

The analysis of the supply of produced
goods has two parts:
 An
analysis of the supply of the factors of
production to households and firms.
 An analysis of why firms transform those
factors of production into usable goods and
services.
© 2003 McGraw-Hill Ryerson Limited
4 - 34
The Law of Supply
Quantity supplied rises as price rises,
other things constant.
 Quantity supplied falls as price falls,
other things constant.
 Thus, there is a direct relationship
between price and quantity supplied.

© 2003 McGraw-Hill Ryerson Limited
4 - 35
The Law of Supply

The law of supply is accounted for by
two factors:
 In
the face of rising prices, firms arrange
their activities to supply more of the good to
the market, substituting production of that
good for the production of other goods.
 Assuming firms' costs are constant, a higher
price means higher profits.
© 2003 McGraw-Hill Ryerson Limited
4 - 36
The Supply Curve
The supply curve is the graphic
representation of the law of supply.
 The supply curve slopes upward to the
right.
 The slope tells us that the quantity
supplied varies positively—in the same
direction—with the price.

© 2003 McGraw-Hill Ryerson Limited
4 - 37
A Sample Supply Curve
Price (per unit)
Fig. 4-5, p 90
S
PA
0
A
QA
Quantity supplied (per unit of time)
© 2003 McGraw-Hill Ryerson Limited
4 - 38
Shifts in Supply Versus
Movements Along a Supply
Curve

Supply refers to a schedule of
quantities a seller is willing to sell per
unit of time at various prices, other
things constant.
© 2003 McGraw-Hill Ryerson Limited
4 - 39
Shifts in Supply Versus
Movements Along a Supply
Curve

If the amount supplied is affected by anything
other than a change in price, there will be a
shift in supply.
 Shift
in supply -- the graphic
representation of the effect of a change in a
factor other than price on supply.
© 2003 McGraw-Hill Ryerson Limited
4 - 40
Shifts in Supply Versus
Movements Along a Supply
Curve

Quantity supplied refers to a specific
amount that will be supplied at a
specific price.
© 2003 McGraw-Hill Ryerson Limited
4 - 41
Shifts in Supply Versus
Movements Along a Supply
Curve

Changes in price cause changes in
quantity supplied represented by a
movement along a supply curve.
© 2003 McGraw-Hill Ryerson Limited
4 - 42
Change in Quantity Supplied
Fig. 4-6a, p 92
Price (per unit)
S0
B
$15
A
Change in quantity
supplied (a movement
along the curve)
1,250
1,500
Quantity supplied (per unit of time)
© 2003 McGraw-Hill Ryerson Limited
4 - 43
Shift in Supply Fig. 4-6b, p 92
S0
Price (per unit)
S1
$15
A
B
Shift in Supply
(a shift of the curve)
1,250
1,500
Quantity supplied (per unit of time)
© 2003 McGraw-Hill Ryerson Limited
4 - 44
Shift Factors of Supply

Shift factors of supply are those factors
that cause shifts in the entire supply
curve to the left or right.
© 2003 McGraw-Hill Ryerson Limited
4 - 45
Shift Factors of Supply

The following are shift factors of supply:
 Changes
in the prices of inputs used in the
production of a good
 Changes in technology
 Changes in suppliers' expectations
 Changes in taxes and subsidies
© 2003 McGraw-Hill Ryerson Limited
4 - 46
Shift Factors of Supply

Changes in the prices of inputs used in
the production of a good.
 If
costs rise, then profits go down, and
there is less incentive to supply.
 If costs go up substantially, the firm may
even shut down.
© 2003 McGraw-Hill Ryerson Limited
4 - 47
Shift Factors of Supply

Technology makes costs decrease,
profits go up, thus the incentive to
supply also increases.
 This
is especially true when new
technology replaces labor.
© 2003 McGraw-Hill Ryerson Limited
4 - 48
Shift Factors of Supply
If they expect prices to rise in the future,
suppliers may store today's production
for an expected windfall later.
 If they expect prices to fall in the future,
suppliers may sell off more of their
inventories today.

© 2003 McGraw-Hill Ryerson Limited
4 - 49
Shift Factors of Supply
If taxes go up, costs also increase, and
profits go down, leading suppliers to
reduce output.
 Government subsidies increase supply,
as they reduce costs of production.

© 2003 McGraw-Hill Ryerson Limited
4 - 50
From a Supply Table to a
Supply Curve

To derive a supply curve from a supply
table, you plot each point in the supply
table on a graph and connect the points.
© 2003 McGraw-Hill Ryerson Limited
4 - 51
From a Supply Table to a
Supply Curve

The supply curve represents the set of
minimum prices an individual seller will
accept for various quantities of a good.
© 2003 McGraw-Hill Ryerson Limited
4 - 52
From a Supply Table to a
Supply Curve

Competing suppliers’ entry into the
market places a limit on the price any
supplier can charge.
© 2003 McGraw-Hill Ryerson Limited
4 - 53
Individual and Market
Supply Curves

The market supply curve is derived by
horizontally adding the individual supply
curves of each supplier.
© 2003 McGraw-Hill Ryerson Limited
4 - 54
From Individual Supplies to
a Market Supply, Fig 4-7a, p 93
(1)
(2)
(3)
(4)
(5)
Quantities
Price
Ann’s Barry's Charlie's Market
Supplied (in dollars) Supply Supply Supply Supply
A
B
C
D
E
F
G
H
I
$0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
0
1
2
3
4
5
6
7
8
0
0
1
2
3
4
5
5
5
0
0
0
0
0
0
0
2
2
0
1
3
5
7
9
11
14
15
© 2003 McGraw-Hill Ryerson Limited
4 - 55
Price per cassette (in dollars)
From Individual Supplies to
a Market Supply, Fig 4-7b, p 93
$4.00
Charlie
Barry
Ann
Market Supply
3.50
H
3.00
G
2.50
F
2.00
E
1.50
D
1.00
0.50
I
C
B
CA
0 A
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Quantity of cassettes supplied (per week)
© 2003 McGraw-Hill Ryerson Limited
4 - 56
The Marriage of Supply and
Demand

Supply and demand come together to
determine equilibrium quantity and
equilibrium price.
© 2003 McGraw-Hill Ryerson Limited
4 - 57
Excess Supply and Excess
Demand
Excess supply –if quantity supplied is
greater than quantity demanded, prices
tend to fall.
 Excess demand – prices tend to rise if
quantity demanded is greater than
quantity supplied.

© 2003 McGraw-Hill Ryerson Limited
4 - 58
Price Adjusts

The larger the difference between
quantity demanded and quantity
supplied, the greater the pressure for
prices to rise (if there is excess
demand) or fall (if there is excess
supply.
© 2003 McGraw-Hill Ryerson Limited
4 - 59
Price Adjusts

When quantity demanded equals
quantity supplied, prices have no
tendency to change.
© 2003 McGraw-Hill Ryerson Limited
4 - 60
Price per cassette (in dollars)
The Marriage of Supply and
Demand, Fig 4-8, p 96
$5.00
S
Excess supply
4.00
3.50
A
3.00
E
2.50
2.00
B
1.50
Excess demand
1.00
1
D
2 3 4 5 6 7 8 9 10 11 12
Quantity of cassettes supplied and demanded
(per week)
© 2003 McGraw-Hill Ryerson Limited
4 - 61
Equilibrium

Equilibrium is a concept in which
opposing dynamic forces cancel each
other out.
© 2003 McGraw-Hill Ryerson Limited
4 - 62
Equilibrium

In supply and demand analysis,
equilibrium means that the upward
pressure on price is exactly offset by the
downward pressure on price.
© 2003 McGraw-Hill Ryerson Limited
4 - 63
Equilibrium
Equilibrium price is the price toward
which the invisible hand drives the
market.
 Equilibrium quantity is the amount
bought and sold at the equilibrium price.

© 2003 McGraw-Hill Ryerson Limited
4 - 64
What Equilibrium Isn't
Equilibrium isn’t a state of the world—
it's a characteristic of the model used to
look at the world.
 Equilibrium isn’t inherently good or
bad—but simply a state in which
dynamic pressures offset each other.

© 2003 McGraw-Hill Ryerson Limited
4 - 65
Desirable Characteristics of
Supply/Demand Equilibrium

Consumer surplus – the distance
between the demand curve and the
price the consumer pays is net benefit
to consumers.
© 2003 McGraw-Hill Ryerson Limited
4 - 66
Desirable Characteristics of
Supply/Demand Equilibrium

Producer surplus - if a producer
receives more than the price she would
be willing to sell the good for, she
receives a net benefit.
© 2003 McGraw-Hill Ryerson Limited
4 - 67
Desirable Characteristics of
Supply/Demand Equilibrium

What's good about equilibrium is that it
makes the combination of consumer
and producer surplus as large as it can
be.
© 2003 McGraw-Hill Ryerson Limited
4 - 68
Desirable Characteristics of
Supply/Demand Equilibrium

Markets allow trade, thereby leading to
an increase in the combination of
consumer and producer surplus.
© 2003 McGraw-Hill Ryerson Limited
4 - 69
Consumer and Producer
Surplus, Fig 4-9, p 98
$10
9
Consumer Surplus
8
Lost
7
Surplus
6
5
4 Producer
3 Surplus
2
1
0
1 2 3 4 5 6 7 8
Quantity
Supply
Demand
9 10
© 2003 McGraw-Hill Ryerson Limited
Supply and Demand
End of Chapter 4
© 2003 McGraw-Hill Ryerson Limited