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MACROECONOMICS:
EXPLORE & APPLY
by Ayers and Collinge
CHAPTER 3
“Demand and Supply”
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
1
Learning Objectives
1. Distinguish between the general notions of
demand and supply used in ordinary
conversation and the precise notions
employed in the study of economics.
2. Explain what it means to shift demand and
supply and why shifts might occur.
3. Describe how the marketplace settles on the
equilibrium price and quantity.
4. Specify how demand and supply shifts cause
market equilibriums to change over time.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
2
Learning Objectives
5. Identify the changes to equilibrium that
result from simultaneous changes in demand
and supply.
6. (E&A) Discuss how vouchers use competition
to improve the quality of schooling.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
3
3.1
DEMAND
Demand relates the quantity of a good that
consumers would purchase at each of various
possible prices, over some period of time.
 The ceteris paribus condition means that
we look at only one relationship at a time.
 Ceteris paribus is the Latin for “holding
all else equal”.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
4
Demand Schedule
Data Point
A
B
C
E
F
G
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Price ($)
5
4
3
2
1
0
Quantity Demanded
0
1
2
3
4
5
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Demand Curve
5
The demand curve slopes downward
because price and quantity demanded
are inversely related.
A
B
4
C
3
E
2
F
1
0
Demand
G
1
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2
3
4
5
Quantity
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Shifting Demand versus Movements
along a Demand Curve
A change in the price of a good causes a
change in the quantity demanded,
but does not shift demand
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Ayers/Collinge, 1/e
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Price ($’s)
Changes in Demand vs. Changes in
Quantity Demanded
A price change
would change the
quantity demanded
which involves
movement along
the demand curve.
Demand
Quantity
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Ayers/Collinge, 1/e
8
Changes in Demand vs. Changes in
Quantity Demanded
Movement along
the demand
curve.
Decrease
Increase
Demand
Quantity
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Ayers/Collinge, 1/e
9
Demand Shift Factors
 Tastes and Preferences
 Substitutes and Complements
 Income
- Normal vs. Inferior Goods
 Population
 Price Expectations
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Demand Shifts LEFT
When:
 Prices of substitutes decrease
 Prices of complements
increase
 Normal good-income
decreases
 Inferior good-income
increases
 Population decreases
 Tastes & preferences turn
against the product
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Price
Changes in Demand - Decrease
D1
D2
Quantity
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Price
Changes in Demand - Increase
D2
D1
Quantity
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Demand Shifts RIGHT
When:
 Prices of substitutes increase
 Prices of complements
decrease
 Normal good-income
increases
 Inferior good-income
decreases
 Population increases
 Tastes & preferences turn in
favor of the product
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3.2
SUPPLY
Supply relates the quantity of a
good that will be offered for sale
at each of various possible prices,
over some period of time, ceteris
paribus.
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Ayers/Collinge, 1/e
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Supply Schedule
Data Point
H
I
J
K
L
M
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Price ($)
5
4
3
2
1
0
Quantity Supplied
4
3
2
1
0
0
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Price ($’s)
Supply Curve
5
I
4
The supply curve slopes
upward because price
and quantity supplied
are directly related.
J
3
K
2
1
Supply
H
L
0
M
1
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2
3
4
5
Quantity
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Supply Shift Factors
 Prices of Inputs
 Technological Change
 Government or Union Restrictions
 Prices of Substitutes in Production
 Prices of Jointly Produced Goods
 Expected Future Prices
 Number of Sellers
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Price ($’s)
Changes in Supply vs. Changes in
Quantity Supplied
Supply
5
4
A price change
causes movement
from one point to
another along the
same supply
curve.
3
2
1
0
1
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2
3
4
5
Quantity
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Price ($’s)
Changes in Supply vs. Changes in
Quantity Supplied
Supply
5
Decrease
4
Movement along
Supply
Increase
3
2
1
0
1
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2
3
4
5
Quantity
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Changes in Supply - Decrease
Supply Shifts LEFT When:
 Sellers expect price to rise in
future.
 Price of labor or any input
rises.
 Government or union
restrictions increase cost.
 Price of substitute in
production rises.
 Price of product produced
jointly falls.
 Number of sellers declines
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$
S2
S1
Quantity
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Changes in Supply - Increase
$
S1
S2
Quantity
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Supply Shifts RIGHT When:
 Sellers expect price to
decline in future.
 Price of labor or any input
falls.
 Technological change lowers
cost.
 Price of substitute in
production falls.
 Price of product produced
jointly rises.
 Number of sellers increases
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Individual Demand to Market Demand
Price ($)
5
4
3
2
1
0
Jack's Quantity Demanded Jill's Quantity Demanded Market Q Demanded
1
0
1
2
1
3
3
2
5
4
3
7
5
4
9
6
5
11
Demand can be one individual’s
or the market as a whole
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Ayers/Collinge, 1/e
21
Market Demand Curve
Price ($)
5
4
3
2
1
0
6
5
4
Jill’s Quantity Jack’s Quantity
Demanded
Demanded
0
1
1
2
2
3
3
4
4
5
5
6
Market Q
Demanded
1
3
5
7
9
11
3
2
Jill’s
Demand
1
Market Demand
Jack’s
Demand
0
1
2
3
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4
5
6
7
8
9
10 11
Quantity
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Individual Supply to Market Supply
Price ($)
5
4
3
2
1
0
Wally's Quantity Supplied Wanda's Quantity Supplied Market Q Supplied
4
5
9
3
4
7
2
3
5
1
2
3
0
1
1
0
0
0
Supply can be from one firm
or all firms in the market.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
23
Market Supply Curve
Wally’s
Supply
Wanda’s
Supply
5
4
Market Supply
3
2
1
0
1
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2
3
4
5
6
7
8 9
Quantity
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Market Equilibrium
Price ($)
5
4
3
2
1
0
Quantity Demanded
1
3
5
7
9
11
Quantity Supplied
9
7
5
3
1
0
Surplus or Shortage
8
4
0
-4
-8
-11
There is only one price that clears
the market, meaning that the quantity
supplied equals the quantity demanded.
©2004 Prentice Hall Publishing
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25
Market Equilibrium
Market equilibrium occurs where
demand and supply intersect.
5
Supply
Surplus of 4 Pails
Too High 4
P* 3
Too Low 2
Shortage of 4 Pails
Demand
1
0
1
2
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3
4
5
Q*
6
7
8
9
Pails of Water
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3.3
EQUILIBRIUM
The market clearing price and the resulting
quantity traded comprise what is referred
to as the market equilibrium, meaning that
there is no tendency for either price or
quantity to change, ceteris paribus.
©2004 Prentice Hall Publishing
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27
Changes in Market Equilibrium
S
Snew
Price ($’s)
Price ($’s)
Snew
S
P*
P*
D
D
Quantity
Q*
Q*
Quantity
An increase or decrease in supply.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
28
Price ($’s)
Price ($’s)
Changes in Market Equilibrium
S
S
P*
P*
D
D
Dnew
Dnew
Q*
Q*
Quantity
Quantity
An increase or decrease in demand.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
29
Changes in
Market Equilibrium
Case
1
2
3
4
Demand
No change
No change
Right
Left
Supply
Right
Left
No change
No change
Equilibrium P
Fall
Rise
Rise
Fall
Equilibrium Q
Rise
Fall
Rise
Fall
Note: In Cases 1-4 only one of the two
curves is shifting.
©2004 Prentice Hall Publishing
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30
Changes in
Market Equilibrium
Case
5
6
7
8
Demand
Right
Left
Right
Left
Supply
Right
Left
Left
Right
Equilibrium P
Unknown
Unknown
Rise
Fall
Equilibrium Q
Rise
Fall
Unknown
Unknown
Note: In Cases 5-8 both of the curves
are shifting.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
31
3.4 EXPLORE & APPLY
Policies for Competition and Choice in
Schooling
Charter Schools: Public schools in which
a non-profit group receives a contract (i.e.
charter) to operate a school for a limited
period of time.
Vouchers: Monetary amounts provided by
government, free of charge to parents,
which would be spendable only on the
education of their children, at a school
chosen by the parents.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
32
Test Yourself
1. The Law of demand states that
consumers
a.
b.
c.
d.
must not buy more than they need.
must not waste what they buy.
must pay for what they buy.
will buy more as price falls.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
33
Test Yourself
2. An increase in the price of football
tickets would cause the ___________
basketball tickets to __________.
a.
b.
c.
d.
demand for; increase.
supply of; increase.
demand for; decrease.
supply of; decrease.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
34
Test Yourself
3. An upward sloping supply curve means that
a. consumers will wish to purchase more at
higher prices .
b. consumers will wish to purchase more at
lower prices.
c. business firms will wish to sell more at
higher prices.
d. business firms that lower their prices wish
to sell more.
©2004 Prentice Hall Publishing
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35
Test Yourself
4. A decrease in supply is illustrated as
a. a downward shift in the supply curve.
b. a shift to the left in the supply curve .
c. an upward movement along the
supply curve.
d. a downward movement along the
supply curve.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
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Test Yourself
5. If research reveals that carrot juice cures
cancer, it is likely that
a. the supply of carrot juice will increase,
which will increase the quantity demanded.
b. demand for carrot juice will increase, which
will increase the quantity supplied .
c. neither the demand or supply of carrot
juice will increase.
d. both the demand and supply of carrot juice
will increase.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
37
Test Yourself
6. When there is an initial shortage,
market prices eventually reach
equilibrium because
a. supply increases.
b. price decreases .
c. price increases.
d. equilibrium output falls.
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
38
Terms along the Way









demand
quantity demanded
ceteris paribus
shift factors
normal goods
inferior goods
substitutes
complements
supply
©2004 Prentice Hall Publishing









quantity supplied
market equilibrium
surplus
shortage
consumer surplus
marginal benefit
marginal cost
charter schools
vouchers
Ayers/Collinge, 1/e
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The End!
Next Chapter 4
“The Power of
Prices"
©2004 Prentice Hall Publishing
Ayers/Collinge, 1/e
40