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Econ 2301
Dr. Jacobson
Mr. Stuckey
Week 3 Class 3
Chapter 3
Supply and Demand
Supply and Demand Are
the Forces That Make
Economies Work.
They Determine the
Quantity of Each Good
Produced and the Price At
Which it is Sold.
The Terms Supply and
Demand Refer to
Behavior of People As
They Interact With One
Another in Competitive
Markets.
What is a Market?
A Market is a Group of Buyers and
Sellers of a Particular Good or
Service.
The Buyers As a Group
Determine the Demand For the
Product, and the Sellers as a
Group Determine the Supply of
the Product.
Markets Can Range
From Very Competitive
to Having Very Little
Competition.
Markets Can Range
From Very Competitive
to Having Very Little
Competition.
Economists Define a
Competitive Market As a
Market in Which There
Are So Many Sellers
That Each Has A
Negligible Impact on
the Market Price.
Perfectly Competitive Markets
To Be Perfectly Competitive A
Market Must Have:
1. The Goods Offered For Sale
Are all Exactly the Same.
2. The Buyers and Sellers Are So
Numerous that No Single Buyer
or Seller Has Any Influence Over
the Market Price.
Demand
Demand
•The Quantity Demanded of
Any Good is the Amount of
the Good That Buyers Are
Willing and Able to
Purchase.
Demand
• The schedule of quantities of
a good or service that people
are willing and able to buy at
different prices
–Sometimes a schedule is also
called a table
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
3-4
The Quantity Demanded
in a Market is the Sum
of the Quantities
Demanded By All the
Buyers At Each Price.
Law of Demand
The Claim That, Other
Things Being Equal, the
Quantity Demanded of a
Good Falls When the
Price Rises.
The Quantity Demanded
Falls As Price Rises and
Rises As the Price Falls,
Therefore, the Quantity
Demanded is Negatively
Related to the Price.
Demand Curve
Price
P
Quantity
Q
The Quantity Demanded
in a Market is the Sum
of the Quantities
Demanded By All the
Buyers At Each Price.
Shifts in the Demand Curve
The Demand Curve Can
Either Shift to the Right
Indicating an Increase in
Demand or to the Left
Indicating a Decrease in
Demand.
Causes of Shifts in
the Demand Curve
1. A Change in Income.
2. A Change in Prices of Related
3.
4.
5.
6.
(Complementary) Goods.
A Change in Tastes.
A Change in Consumer Expectations.
A Change in The Number of Buyers.
A Change in Price of Substitute Goods.
Supply
Demand Curve
Price
P
D1
D2
D3
Decrease in
Demand
Increase in
Demand
Quantity
Q
Substitutes
Two Goods for Which an
Increase in The Price of
One Leads to An
Increase in Demand For
the Other.
Complements
Two Goods For Which
an Increase in The Price
of One Leads to a
Decrease in the Demand
For the Other.
Supply
Supply
• Is the “schedule” of quantities of
a good or service that people are
willing to sell at different prices
Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
3-18
The Supply Curve
Is the Relationship
Between Price and the
Quantity Supplied.
Quantity Supplied
The Amount of a Good
That Sellers Are Willing
and Able to Sell.
Law of Supply
The Claim That, The
Quantity Supplied of A
Good Rises When The
Price of the Good Rises.
Supply Schedule
A Table That Shows the
Relationship Between
the Price of a Good and
the Quantity Supplied.
Supply Curve
A Graph of the
Relationship Between
The Price of a Good and
The Quantity Supplied.
The Quantity Supplied
Rises As the Price Rises
and Falls as the Price Falls,
Therefore, The Quantity
Supplied is Positively
Related to the Price of the
Good.
Market Supply Vs.
Individual Supply
Market Supply is the
Sum of The Supplies of
All the Individual
Sellers.
Supply Curve
Price
P
Quantity
Q
Supply Curve
Supply
Curve S3
Price
P
Supply
Curve S1
Supply
Curve S2
Decrease
in Supply
Quantity
Increase in
Supply
Q
Causes For a Shift in
Supply
•Input Price
•Technology
•Expectations
•Number of Sellers
Putting Supply and
Demand Together
Equilibrium
Is a Situation In Which
the Market Price Has
Reached The Level At
Which Quantity
Supplied Equals The
Quantity Demanded
Equilibrium Price
The Price That Balances
Quantity Supplied and
the Quantity Demanded.
At the Equilibrium Price,
The Quantity of the Good
The Buyers Are Willing and
Able to Buy Exactly
Balances The Quantity That
Sellers Are Willing and
Able to Sell.
Equilibrium Quantity
The Quantity Supplied
and The Quantity
Demanded At the
Equilibrium Price.
Equilibrium
$3.00
Supply
S1
P
Equilibrium
2.50
Price
Equilibrium
-----------------------------
Price
2.00 --------------------------------------1.50
1.00
.50
0
1
2
3
4
5
6
Equilibrium
Demand
Quantity
D1
7
Quantity
8
9
10
Q
Shortage
Is a Situation In which
the Quantity Demanded
is Greater Than the
Quantity Supplied at a
Given Price.
Equilibrium
$3.00
P
Supply
S1
2.50
Equilibrium
-----------------------------
1.50
1.00
Shortage
Quantity
.50
Supplied
0
1
2
3
4
5
6
7
Quantity
8
----------------------
-----------------------------------------------
----------------------
Price
2.00 ---------------------------------------
Demand
Quantity D1
Demanded
9
10
Q
Surplus
Is a Situation In Which
Quantity Supplied is
Greater Than Quantity
Demanded at a given
Price.
Equilibrium
$3.00
Supply
S1
P
Surplus
1.50
1.00
-----------------------------
Price
2.00 ---------------------------------------
Quantity
.50
Supplied
0
1
2
3
4
5
6
7
Quantity
-------------------------------------
-------------------------------------
2.50 -----------------------------------------------
8
Equilibrium
Demand
Quantity D1
Demanded
9
10
Q
The Activities of the
Many Buyers and Sellers
of a Product Push the
Market Price Toward the
Equilibrium Price.
Equilibrium
$3.00
S2
P
Supply
S1
Decrease
S3
2.50
Increase
-----------------------------
Price
2.00 --------------------------------------1.50
1.00
.50
0
1
2
3
4
5
6
7
Quantity
Demand
D1
8
9
10
Q
Equilibrium
$3.00
Supply
S1
P
Decrease
2.50
-----------------------------
Price
2.00 --------------------------------------1.50
1.00
.50
0
1
2
3
4
5
6
7
Quantity
Increase
D3
Demand
D2
8
9
10
D1
Q
Definitions
Supply- Refers to the
Position of the Supply
Curve.
Quantity SuppliedRefers to the Amount
Suppliers Are Willing to
Sell.
Therefore
A Shift in the Supply Curve
is Called a “Change in
Supply.”
A Movement Along a Fixed
Supply Curve is Called a
“Change in The Quantity
Supplied.”
Change In Supply
S3
P
S1
S2
$3.00
Price
2.50
2.00
1.50
1.00
.50
0
1
2
3
4
5
6
7
Quantity
8
9
10
Q
Change In Quantity
Supplied
S1
P
D2
$3.00
D1
Price
2.50
2.00
Change in
Quantity
Supplied
1.50
1.00
.50
0
1
2
3
4
5
6
7
Quantity
8
9
10
Q
Questions
?