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Chapter 1
Supply, Demand, and Equilibrium
Steven Landsburg,
University of Rochester
Copyright ©2005 by Thomson South-Western, a part of the Thomson Corporation. All rights reserved.
Introduction
• Economic consequences of bad weather
• Interplay of supply and demand
• Supply and demand analysis
– Consumers
– Producers
– Responsiveness of prices and quantities to
variety of changes in economic environment
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Law of Demand
• Observation that when price of a good
goes up, people will buy less of that good
• Leads to a downward sloping demand
curve
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Demand versus Quantity
Demanded
• Quantity Demanded
– the amount of a good that a given individual or group
of individuals will choose to consume at a given price
– Change in price means a change in quantity
demanded
• Movement along the demand curve
• Demand
– A family of numbers that lists the quantity demanded
corresponding to each possible price
– Refers to the curve itself
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Demand Curves
• Graph illustrating demand, with prices on
the vertical axis and quantities demanded
on the horizontal
• Representation of the demand schedule
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Changes in Demand
• A change in price does not lead to a
change in demand
• If rule for how you make purchases
changes, then demand changes
• Entire curve shifts
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Changes in Demand
• Fall in Demand
– Decision made by demanders to a buy a
smaller quantity at each given price
– Leftward shift of demand curve
• Rise in Demand
– Decision made by demanders to a buy a
larger quantity at each given price
– Rightward shift of demand curve
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EXHIBIT 1.2
Shifting The Demand Curve
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Sales Tax Example
• Impose a tax to be paid by consumers
directly to the government
• Less desirable to buy the taxed good or
service at every given price
• Demand shifts left and downward
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EXHIBIT 1.3
The Effect of a Sales Tax on
Demand
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Market Demand
• Quantity associated with a given price is
the total number of that good or service
that the group members would demand
• Slopes downward as the individual
demand curve does
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Shape of the Demand Curve
• Steeply-sloped demand curve means a
small change in price will lead to a small
change in quantity demanded
• Flat demand curve means a small change
in price will lead to a large change in the
quantity demanded
• Important to producers of goods
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Econometrics
• Statistical techniques used by economist
to resolve questions about slopes of
various demand curves
• Based on direct observations in
marketplace
– Ex. Demand for murder
– Ex. Demand for reckless driving
• Wide scope of economics
– Allows for other investigations as well
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Law of Supply
• Observation that when the price of a good
goes up, the quantity supplied goes up
• Leads to a upward sloping supply curve
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Supply versus Quantity Supplied
• Quantity Supplied
– The amount of a good that suppliers will provide at a
given price
– Changes if the price changes
• Movement along the curve
• Supply
– Family of numbers giving the quantities supplied at
each price
– Changes in anything other than price changes supply
• Shifts entire curve
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Changes in Supply
• Rise in Supply
– Increase in quantities that supplier will provide
at each price
– Rightward shift of supply
• Fall in Supply
– Decrease in quantities that supplier will
provide at each price
– Leftward shift of supply
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EXHIBIT 1.5
The Supply of Coffee
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Excise Tax Example
• Impose a tax to be paid by producers
directly to the government
• Less desirable to produce the taxed good
or service at every given price
• Supply shifts left and upward
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EXHIBIT 1.6
Effect of an Excise Tax
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Equilibrium
• Actual prices determined by interaction
between demanders and suppliers
• Demanders cannot purchase more than
suppliers willing to sell them
• Suppliers cannot sell more than
demanders willing to buy
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Equilibrium Point
• Point where supply and demand curves
intersect
• Price where quantity demanded equals
quantity supplied
• Demanders and suppliers satisfied
– Able to behave as one wants to, taking
market prices as given
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EXHIBIT 1.7
Equilibrium in the Market
for Cement
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Changes in the Equilibrium Point
• Never look at price and quantity
• Look at effect change has on demand
curve and supply curve
• Common mistakes arise as look at
equilibrium
– Supply, demand, and equilibrium misused at
times
– Check validity of information
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EXHIBIT 1.8
The Effects
of Supply
and Demand
Shifts
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Effect of Sales Tax
• Sales tax of x¢ per item causes
equilibrium price to fall by some amount
less than x¢ per item
• Price to suppliers not same as price to
demanders (price plus sales tax)
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Effect of Excise Tax
• Excise tax of x¢ per item causes the
equilibrium price to rise by some amount
less than x¢ per item
• Price to suppliers (price minus excise tax)
not same as price to demanders
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Comparing Two Taxes
• Economic Incidence – the division of a tax
burden according to who actually pays the
tax
• Legal Incidence – the division of a tax
burden according to who is required under
the law to pay the tax
• The economic incidence of a tax
independent of its legal incidence
• Ex. Social Security tax
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EXHIBIT 1.10 A Sales Tax versus an Excise Tax
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