Download Chapter 5 SUPPLY AND DEMAND: AN INITIAL LOOK

3
Supply and Demand:
An Initial Look
The free enterprise system is absolutely too important
to be left to the voluntary action of the marketplace.
FLORIDA CONGRESSMAN RICHARD KELLY, 1979
Contents
● The Invisible Hand
● Demand and Quantity Demanded
● Supply and Quantity Supplied
● Supply and Demand Equilibrium
● Effects of Demand Shifts on SupplyDemand Equilibrium
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Contents (continued)
● Supply Shifts and Supply-Demand
Equilibrium
● Fighting the Invisible Hand: The Market
Fights Back
● A Simple but Powerful Lesson
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
The Invisible Hand
● Supply and demand  automatic solution
to economic problems
● Interference in markets 
counterproductive consequences
● Invisible hand = in the pursuit of selfinterest, individuals promote social wellbeing
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Demand and Quantity
Demanded
● Buyers  demand
● Quantity of demand = the amount that
buyers wish to purchase at each price
● Law of demand = price and the quantity of
demand are negatively related, all else
equal
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Demand and Quantity
Demanded
● The Demand Schedule
♦ Table showing the quantity of demand at each
price for some good
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-1
Demand Schedule for Milk
TABLE
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Demand and Quantity
Demanded
● The Demand Curve
♦ Graph of a demand schedule
♦ Negative slope
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-1
Demand Curve for Milk
FIGURE
Price per Quart
D
$1.50
A
B
1.40
C
1.30
E
1.20
F
1.10
G
1.00
H
.90
D
0
45
50
55
60
65
70
75
Quantity Demanded
in Billions of Quarts per Year
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Demand and Quantity
Demanded
● Shifts of the Demand Curve
♦ Movement along a demand curve due to
■ Price
♦ Shift between demand curves due to
■ Incomes
■ Population
■ Preferences
■ Prices and availability of related goods
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-2 Movements along
versus Shifts of a Demand Curve
FIGURE
D1
Price per Quart
D0
$1.30
1.10
C
F
D1
D0
Quantity Demanded in Billions of Quarts per year
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Supply and Quantity
Supplied
● Sellers (producers)  supply
● Quantity of supply = amount that
producers wish to sell at each price
● Law of supply = price and the quantity of
demand are positively related, all else equal
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-2
Supply Schedule for Milk
TABLE
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Supply and Quantity
Supplied
● The Supply Schedule and the Supply Curve
♦ Supply Schedule = a table showing the
quantity of demand at each price for some good
♦ Supply Curve = graph of a supply schedule
■Positive slope
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-4
Supply Curve for Milk
FIGURE
a
$1.50
S
b
Price per Quart
1.40
c
1.30
e
1.20
f
1.10
g
1.00
h
.90
0
S
30
40
50
60
70
80
90
Quantity Supplied
in Billions of Quarts per Year
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Supply and Quantity
Supplied
● Shifts of the Supply Curve
♦ Movement along a supply curve due to
■ Price
♦ Shift between supply curves due to
■ Size of the industry
■ Technological progress
■ Prices of inputs
■ Prices of related outputs
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-5 Movements along
versus Shifts of a Supply Curve
FIGURE
S0
Price per Quart
S1
c
$1.30
f
1.10
S0
S1
Quantity Supplied
in Billions of Quarts per Year
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-6
Shifts of the Supply Curve
FIGURE
S2
D
S0
S0
S0
V
Price
Price
S1
U
E
S2
S1
D
S0
Quantity
(a)
Quantity
(b)
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Supply and Demand
Equilibrium
● There is normally one price where quantity
of supply = quantity of demand
● This price  equilibrium
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Supply and Demand
Equilibrium
● Below equilibrium price  shortage
● Above equilibrium price  surplus
● Surpluses and shortages   price
●  price  restoration of equilibrium
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-3 Equilibrium Price &
Quantity of Milk
TABLE
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Supply and Demand
Equilibrium
● Interaction of supply and demand 
equilibrium
● A market not in equilibrium  equilibrium
● Equilibrium = a state of rest
● “Outside events”   equilibrium
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-7
Supply-Demand Equilibrium
FIGURE
D
a
A
$1.50
S
Price per Quart
1.40
1.30
E
1.20
1.10
g
G
1.00
.90
0
D
S
30
40
50
60
70
80
90
Quantity
in Billions of Quarts per Year
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Demand Shifts on SupplyDemand Equilibrium
● Shifts in Demand
♦  any of the non-price determinants of demand
and/or supply   equilibrium
♦ Shifts of the demand curve   equilibrium
price and quantity in the same direction
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-8 The Effects of Shifts
of the Demand Curve
FIGURE
D1
S
T
$1.30
E
1.20
D0
Price per Quart
Price per Quart
D0
R
S
D2
E
$1.20
L
M
1.10
D1
D0
S
60 70 75
Quantity
(a)
D0
S
D2
45 50 60
Quantity
(b)
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Supply Shifts and SupplyDemand Equilibrium
● Shifts in Supply
♦ Shifts of the supply curve   equilibrium
price and quantity in opposite directions
♦ Old equilibrium position  new equilibrium
position
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-9 Effects of Shifts of
the Supply Curve
FIGURE
S2
D
S0
E
I
$1.20
J
1.10
S1
V
Price per Quart
Price per Quart
D
$1.40
S0
E
U
1.20
S2
S0
S0
S1
D
60
Quantity
(a)
65
D
78
37.5
50
60
Quantity
(b)
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-10 Who Pays for a New
Tax on Products?
FIGURE
Price per Gallon
D
S1
M
$1.64
E1
1.60
S0
1.54
S1
E0
D
S0
Q2
Q1
30
50
Millions of Gallons per Year
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Fighting the Invisible Hand:
The Market Fights Back
● Restraining the Market Mechanism: Price
Ceilings
♦ Shortages
♦ Black markets with higher prices
♦ Illicit suppliers
♦ Underinvestment
♦ Vested interests that resist change
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-11 Supply-Demand
Diagram for Rental Housing
FIGURE
S
Rent per Month
D
$2,000
1,200
Market
rent
Rent
ceiling
E
C
B
S
0
D
2.5
3
3.5
Millions of Dwellings
Rented per Month
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Fighting the Invisible Hand:
The Market Fights Back
● Restraining the Market Mechanism: Price
Ceilings
♦ Surpluses
♦ Disposal problems
♦ Unwanted and inefficient discounts
♦ Overinvestment
♦ Vested interests that resist change
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
3-12
Supporting the Price of Sugar
FIGURE
S1
D
S0
Price
$2
$1
S1
D
S0
Quantity
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
Fighting the Invisible Hand:
The Market Fights Back
● A Can of Worms
♦ Favoritism and corruption
♦ Unenforceability
♦ Auxiliary restrictions
♦ Limitation of the volume of transactions
♦ Misallocation of resources
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.
A Simple But Powerful
Lesson
● Self-interested actions of buyers and sellers
 laws of supply and demand
● Difficult to resist
● Interference  counterproductive effects
Copyright© 2003 South-Western/Thomson Learning. All rights reserved.