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Kaplan University
Supply and Demand
Topics Covered
Supply, Demand, Equilibrium (Quantity, Curves, Schedules)
Law of Demand & Law of Supply
• Movements Along Curves
• Shifts of Curves
Normal Goods & Inferior Goods
• Substitutes & Complements
• Price Floors & Price Ceilings (Shortages & Surpluses)
Demand
• Relates to the quantity of a good that consumers
would purchase at each various possible prices, over
some period of time…. Ceteris paribus (holding all
constant)
• Quantity demand is the quantity that consumers
would purchase at a given price.
• Examples: groceries, clothes, office equipment
• Can you think of more every day demand examples?
Law of Demand
• As prices fall, the quantity demanded increases
• Price and quantity demanded have an inverse
relationship
• Examples: airline tickets, sale items, clearance items,
etc.
Demand Schedules &
Demand Curves
• A table that shows the relationship between the price
of a good and quantity demanded
• A demand schedule can be plotted into a curve
LO1
Exhibit 1
The Demand Schedule and
Demand Curve for Pizza
(a) Demand schedule
a
b
c
d
e
$15
12
9
6
3
Quantity
Demanded
Per week
(millions)
8
14
20
26
32
The market demand D shows the quantity of pizza
demanded, at various prices, by all consumers.
Price and quantity demanded are inversely related.
Chapter 4
a
$15
Price per pizza
Price
per
pizza
b
12
c
9
d
6
e
3
D
0
8
14
20 26
32
Millions of pizzas per week
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Normal Goods & Inferior
Goods
• It is important to consider normal goods & inferior
goods when considering demand...
• Demand for normal goods vary directly with income
• Example: certain restaurants, cars, clothes, etc.
• Demand for inferior goods vary inversely with income
• Example: fast food, thrift stores, etc.
Substitutes &
Complements
• It is important to consider substitutes & complements
when considering demand...
• A substitute is something that takes the place of
something else (ie/ brand name, closely related
product)
• A complement is a good or service that goes well
with each other (hotdogs & buns, coffee and cream,
etc.)
• Can you think of other examples?
Demand Shifts
• Demand shifts when there is a change in any shift
factor
• An increase in demand moves the demand
curve to the right
• A decrease in demand moves the demand
curve to the left
An Increase in the Market
Demand for Pizza
An increase in the demand for
pizza is shown by a rightward
shift of the demand curve, so
the quantity demanded
increases at each price.
$15
Price per pizza
Exhibit 2
LO1
b
12
f
9
6
D’
3
D
0
Chapter 4
8
14
20 26
32
Millions of pizzas per week
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Demand Shifts
• Demand Shifts Left (decrease demand) when the
following occurs:
• Price of a substitute decreases
• Price of a compliment increases
• Good is a normal and income decreases
• Good is inferior and income increases
• Population decreases
• Consumers expect price to fall in the future
• Tastes and preferences turn against the product
Demand Shifts
• Demand Shifts Right (increase demand) when the
following occurs:
• Price of a substitute increases
• Price of complement decreases
• Good is normal and income increases
• Good is inferior and income decreases
• Population increases
• Consumers expect the price to rise in the future
• Tastes and preferences turn in favor of the product
Movements in Demand
• A change in price does not shift demand!
• A price change causes a movement along the
demand curve to a new quantity demand
LO1
Exhibit 1
The Demand Schedule and
Demand Curve for Pizza
(a) Demand schedule
a
b
c
d
e
$15
12
9
6
3
Quantity
Demanded
Per week
(millions)
8
14
20
26
32
The market demand D shows the quantity of pizza
demanded, at various prices, by all consumers.
Price and quantity demanded are inversely related.
Chapter 4
a
$15
Price per pizza
Price
per
pizza
b
12
c
9
d
6
e
3
D
0
8
14
20 26
32
Millions of pizzas per week
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Supply
• Relates to the quantity of a good that will be offered
for sale at each of various possible prices, over some
period of time…. Ceteris paribus (holding all
constant)
• Examples: produce, agriculture, labor
• Can you think of more every day supply examples?
Law of Supply
• As price rises, the quantity supplied increases
• Price and quantity supply have an direct relationship
• Examples: hotels, automobiles, seasonal food items
•
Supply Schedules &
Supply Curves
• Supply shifts when there is a change in any of its
shift factors
• An increase in supply moves the supply curve to
the right
• A decrease in supply moves the supply curve to
the left
Exhibit 3
LO2
The Supply Schedule and Supply Curve for Pizza
(a) Supply schedule
Quantity
Supplied
Per week
(millions)
$15
12
9
6
3
28
24
20
16
12
S
$15
Price per pizza
Price
per
pizza
(b) Supply curve
12
9
6
3
The market supply S shows the quantity
of pizza supplied, at various prices, by all
pizza makers.
Price and quantity supplied are directly
related.
Chapter 4
0
12 16
20 24
28
Millions of pizzas per week
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Supply Schedules &
Supply Curves
• A table that shows the relationship between the price
of a good and quantity supplied
• A supply schedule can be plotted into a curve
Supply Shifts
• Supply shifts left (decreases) when following occurs:
• The number of sellers decreases
• The price of labor or other input rises
• Producers expect the price to rise in the future
• Government, labor or other restrictions on production practices
increase costs
• Price of a jointly produced product falls
• The price of a substitute in production rises
Supply Shifts
• Supply shifts right (increases) when following occurs:
• The number of sellers increases
• The price of labor or other input falls
• Producers expect the price to fall in the future
• Technological change lowers costs
• Price of a jointly produced product rises
• The price of a substitute in production falls
Exhibit 4
LO2
An Increase in the Supply of Pizza
S
S’
Price per pizza
$15
12
g
h
9
6
Quantity supplied increases
at each price level.
3
0
Chapter 4
An increase in the supply of
pizza is reflected by a
rightward shift of the supply
curve, from S to S’.
12 16
20 24
28
Millions of pizzas per week
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Movements in Supply
• A change in price does not shift supply!
• A price change causes a movement along the supply
curve to a new quantity supplied.
Exhibit 3
LO2
The Supply Schedule and Supply Curve for Pizza
(a) Supply schedule
Quantity
Supplied
Per week
(millions)
$15
12
9
6
3
28
24
20
16
12
S
$15
Price per pizza
Price
per
pizza
(b) Supply curve
12
9
6
3
The market supply S shows the quantity
of pizza supplied, at various prices, by all
pizza makers.
Price and quantity supplied are directly
related.
Chapter 4
0
12 16
20 24
28
Millions of pizzas per week
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
Market Equilibrium
• Demand & Supply come together to determine the
equilibrium
• Market equilibrium is a situation in which there is no
tendency for either price or quantity to change
Surplus and Shortage
• Any price above the equilibrium = surplus (excess of
quantity supplied over quantity demanded)
• Any price below the equilibrium = shortage (excess of
quantity demanded over quantity supplied)
Exhibit 5(b)
LO3
Equilibrium in the Pizza Market
(b) Market curves
S
Price per pizza
$15
Surplus
12
Above the equilibrium price:
QS>QD;
Surplus;
Downward pressure on P
c
9
Market equilibrium occurs at:
Price where QD=QS; Point c
6
Shortage
3
0
Chapter 4
D
Below the equilibrium price:
QD>QS;
Shortage;
Upward pressure on P
14 16 20 24 26
Millions of pizzas per week
Copyright ©2010 by South-Western, a division of Cengage Learning. All rights reserved
4 Cases of Shifting
Demand And Supply
Case
Demand
Supply
Equilibrium
Price
Equilibrium
Quantity
1
No change
Shifts right
Falls
Rises
2
No change
Shifts left
Rises
Falls
3
Shifts right
No change
Rises
Rises
4
Shifts left
No change
Falls
Falls
Thinking as an
Economist….
• Why are cherries so expensive in the winter?
• Why do less people shop at high end stores versus
dollar stores?
• Why do more rich people drive BMWs and Mercedes
compared to individuals earning minimum wage?
Terms to Consider
supply
complements
demand
Law of demand
quantity demand
Law of supply
quantity supply
surplus
Normal goods
shortage
Inferior goods
Market equilibrium
substitutes
The End