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CHAPTER 3
Supply and Demand
PowerPoint® Slides
by Can Erbil
© 2004 Worth Publishers, all rights reserved
Supply and Demand
A competitive market is a market in which there are
many buyers and sellers
of the same good or service.
The supply and demand model is a model of how a
competitive market works.
Five key elements in this model:
The demand curve
The supply curve
The set of factors that cause the demand curve to shift, and
the set of factors that cause the supply curve to shift
The equilibrium price
The way the equilibrium price changes when the supply and
demand curves shift
Demand Schedule
A demand schedule shows how much of a
good or service consumers will want to buy
at different prices.
Demand Schedule for Tickets
Price
($ per ticket)
Quantity
demanded
(tickets)
350
5,000
300
6,000
250
8,000
200
11,000
150
15,000
100
20,000
A demand curve is the graphical representation of
the demand schedule; it shows how much of a good
or service consumers want to buy at any given price.
The quantity demanded is the actual amount
consumers want to buy at some specific price.
If the scalpers are
charging $250 per ticket,
8,000 tickets will be
purchased.

8,000

That is, 8,000 is the quantity demanded at a price of $250.
The law of demand says that a higher price for a
good, other things equal, leads people to want to
purchase a smaller quantity of the good.

If the price drops to $100,
20,000 fans want to buy
tickets.
At $250, only 8,000 tickets
are purchased.

This
Note
The reflects
law
that of
thethe
demand
demand
general
proposition
points
curve
to
slopes
thethat
inverse
a higher
price reducesbetween
relationship
downward.
the number
price
andpeople
of
the quantity
willing and able
demanded.
to
buy a good.
Shifts of the Demand Curve
A change in the quantity demanded at any given price,
represented by the replacement of the original demand
curve with a new demand curve. (a change in demand)
Gretzky is
retiring!!!
The
Announcement
Thisincrease
event is in
represented
of
demand
Gretzky’s
shifts
byretirement
the
thetwo
demand
demand
generates
curve
schedules:
to
anthe
increase
right. in
demand,
 Demand
an increase
before the
in the
announcement
quantity demanded at any given
price.
 Demand after the announcement
“Movement Along” vs. “Shift” of the Demand Curve
A movement along the demand curve is a change in the
quantity demanded of a good that is the result of a change in that
good’s price.


from
from
it
point
point
AA to
toofofa
Itisisthe
theresult
result
point
fall
B:
C:
theincrease
price
ofin
an in
increase
in the
the
quantity
good.demanded
quantity
reflects
a shift
of
demanded
at any
movement
the
demand
given
price. along
curve
the
demand
curve
Shifts of the Demand Curve (continued)
A decrease
an
“increaseinin
demand”,means
demand
meansa a
rightwardshift
leftward
shiftofofthe
the demand
demand
curve.
curve:

At
at
any given price,
consumers demand
a smaller
larger quantity
quantity
than before. (D1
(D2)
D1D3)
What causes a demand curve to shift?

Changes in the Prices of Related Goods





one of the goods makes consumers less willing to buy the other
good. Ex.: muffins and donuts.
Complements: Two goods are complements if a fall in the
price of one good makes people more willing to buy the other
good. Ex: squash balls and squash racquets.
Changes in Income


Substitutes: Two goods are substitutes if a fall in the price of
Normal Goods: When a rise in income increases the demand
for a good—the normal case—we say that the good is a normal
good.
Inferior Goods: When a rise in income decreases the demand
for a good, it is an inferior good. Ex: instant noodles.
Changes in Tastes
Changes in Expectations
Supply Schedule
A supply schedule shows how much of a good
or service would be supplied at different prices.
Supply Schedule for Tickets
Price
($ per ticket)
Quantity
supplied
(tickets)
350
8,800
300
8,500
250
8,000
200
7,000
150
5,000
100
2,000
A supply curve shows graphically how much of a good
or service people are willing to sell at any given price.
… orhigher
Just
The
as
fordemand
that
the
curvesbeing
price
matter,
normally
the more
slope
offered,
of
any good
the more
they
downwards,
people
will
be willing
will be and
supply
willing
able
to to
curves
sell.
part
normally
with
theirslope
hockey
tickets,… :
upwards
Shifts of the Supply Curve
A shift of the supply curve is a change in the quantity
supplied of a good at any given price.
Gretzky is
retiring!!!
of Gretzky’s
retirement
a decrease
in supply,
The decrease
in supply
shiftsgenerates
the supply
curve
to thea left.

Announcement
decrease in the quantity supplied at any given price.
“Movement Along” vs. “Shift” of the Supply Curve
A movement along the supply curve is a change in the
quantity supplied of a good that is the result of a change in that
good’s price.

from
frompoint
pointAAtotopoint
point
C:
B:the
thedecrease
decreaseinin
 It
it is
is the
the
result
result of
of aa
quantity
quantity
supplied
supplied
fall
decrease
in the
in
price
theof
of the
the
reflects
reflects
aashift
movement
good.
quantity
supplied
supply
along the
curve
supplyat
any
given price.
curve
Shifts of the Supply Curve (continued)
The
Any principal
“decrease
increase in
in
factors that
shift the
supply”
means
a
supply
curve:
rightward
leftward
shift
shiftofofthe
the
supply
supply
curve:
curve:
changes
in the

price of an input
 at any given price,
changes
in
there
is a
andecrease
increase
intechnology
the quantity
supplied.
(S1
S2)
changes
in S3)
expectations.
Supply, Demand, and Equilibrium
Equilibrium in a competitive market: when the
quantity demanded of a good equals the quantity
supplied of that good.


The price at which this takes place is the equilibrium
price (a.k.a market-clearing price):
 Every

buyer finds a seller and vice versa.
The quantity of the good bought and sold at that price
is the equilibrium quantity.
Finding the Equilibrium Price and Quantity

In
this
market
In
Market
equilibrium
Let’s
put
the the
equilibrium
price
is
equilibrium
the
quantity
occurs
supply
curve
and
$250
at point E, where
demanded
is equal
the demand curve
the
to
the
supply
quantity
curve

And
the
for
that
market
on
equilibrium
and
supplied.
the
demand
the
sameisdiagram.
quantity
8,000
curve intersect.
tickets.
Why does the market price fall if it is above
the equilibrium price?
Let’s say the market
price of $350 is above
the equilibrium price of
$250
This
Qs > Qd
creates a surplus
This
surplus will push
the price down until it
reaches the equilibrium
price of $250.
There is a surplus of a good when the quantity supplied exceeds
the quantity demanded. Surpluses occur when the price is above
its equilibrium level.
Why does the market price rise if it is
below the equilibrium price?
Let’s say the market
price of $150 is below
the equilibrium price of
$250.
Qd > Qs
This
creates a
shortage.
This
shortage will push
the price up until it
reaches the equilibrium
price of $250.
There is a shortage of a good when the quantity demanded
exceeds the quantity supplied. Shortages occur when the price is
below its equilibrium level.
Changes in Supply and Demand

What happens when the demand curve shifts?
Coffee and tea are substitutes: if the price of tea rises (falls), the
demand for coffee will increase (decrease). But how does the
price of tea affect the market for coffee?
When
E
A
shortage
:A
rise
equilibrium
demand
inexists
the
The
original
2
1new
price
at
is
for
reached
the
a of
good
original
tea,atinaEthe
price
equilibrium
2,
substitute,
P
with
increases,
a price
higher
shifts
rises
the is
market
for coffee
1, so
the
and
equilibrium
equilibrium
curve
price
P2
at Edemand
, at quantity
theprice
1the
rightward
supplied
and
and
athe
higher
increases,
to of
itsthe
intersection
new
a
equilibrium
equilibrium
movement
position
atand
D2.
supply
curve along
S
the original
quantity
quantity
supply
Qof
. the
2curve.
good
both
rise.
demand
curve
D1.
Changes in Supply and Demand (continued)

What happens when the supply curve shifts?
Technological innovation: In the early 1970s, engineers learned how to
put microscopic electronic components onto a silicon chip; progress in
the technique has allowed ever more components to be put on each
chip.
The
original
When
The
A
E
:A
shift:
new
supply
exists
After of
aat
1surplus
2
in
the
technological
the
equilibrium
a
good
original is
price
market
for
change
P
reached
increases,
increases
at silicon
Efalls
the
1, so price
2, with
chips
is at
Eof1, price
at
the
and
a
equilibrium
lower
supply
the
equilibrium
quantity
thethe
intersection
of
silicon
demanded
price
of
P2chips,
good
and athe
falls
the demand
supply
increases,
higher
and
the
equilibrium
curve
a curve
shifts
D andtothe
right
movement
quantity
equilibrium
its
Q2original
new
.along
supply
curve
position
the
quantity
demand
atrises.
S2curve.
.S1.
Simultaneous Shifts in Supply and Demand

What happens when the both supply and demand
curves shift simultaneously?
The increase
There
is a in
demand
is relatively
simultaneous
larger
than shift
the of
rightward
decrease
in supply,
the demand
curve
so the equilibrium
and leftward shift
price rises and the
of
the supply
equilibrium quantity
curve.
increases.
Simultaneous Shifts in Supply and Demand

What happens when the both supply and demand
curves shift simultaneously? (another scenario)
The decrease
There
is a in
supply
is relatively
simultaneous
larger
than shift
the of
rightward
increase
in demand,
the demand
curve
so the equilibrium
and leftward shift
price rises and the
of
the supply
equilibrium quantity
curve.
decreases.
Simultaneous Shifts in Supply and Demand
We can make the following predictions about the outcome when
the supply and demand curves shift simultaneously:
Supply
Increases
Supply
Decreases
Demand
Increases
Price: ?
Price: up
Quantity: up Quantity: ?
Demand
Decreases
Price: down
Quantity: ?
Price: ?
Quantity: down
The End of Chapter 3