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SAYRE | MORRIS
Seventh Edition
CHAPTER 2
Demand and Supply:
an Introduction
© 2012 McGraw-Hill Ryerson Limited
2-1
LO1
Demand
• the quantities that consumers are willing and able
to buy over a period of time at various prices
• must be willing to purchase it
AND
• must have ability to pay for it
© 2012 McGraw-Hill Ryerson Limited
2-2
LO1
Demand
• the quantities that consumers are willing and able
to buy over a period of time at various prices
• shows relationship between quantity & price
• price is the most important determinant
• “ceteris paribus” – all else remains the same
© 2012 McGraw-Hill Ryerson Limited
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LO1
Demand
Demand Schedule
• A table showing the various quantities demanded
at different prices
Demand Curve
• A graphic representation of a demand schedule
© 2012 McGraw-Hill Ryerson Limited
2-4
LO1
Demand Schedule
Price Per Case
of Beer
$17
18
19
20
21
22
Quantity Demanded
(cases per month)
© 2012 McGraw-Hill Ryerson Limited
7
6
5
4
3
2
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LO1
Demand Curve
Price
Price
$17
Quantity
7
18
19
20
6
5
4
21
22
3
2
$19
$18
$17
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
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LO1
Demand Curve
Price
$19
$18
$17
Demand curve
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
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LO1
Demand Curve
Price
$19
$18
$17
- as price increases,
quantity demanded
decreases
- movement is along
an existing demand
line
B
A
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
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LO1
Why the Demand Curve
Slopes Downward
1. Income effect
•
The effect of a price change on real income, and
therefore on quantity demanded
•
Real income is measured in terms of the goods
and services it will buy
•
Real income will increase if prices fall, or
decrease if prices rise.
© 2012 McGraw-Hill Ryerson Limited
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Real Income Example
20 Years Ago
Today
$2.50
$5.75
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LO1
Why the Demand Curve
Slopes Downward
2. Substitution effect
•
The substitution of one product for another as a
result of a change in their relative prices
© 2012 McGraw-Hill Ryerson Limited
2-11
LO1
Market Demand
• The total demand for a product or service
from all consumers
• It is the summation of all individual demand
curves
• Consumers do not set prices; they react to
different prices by altering their quantity
demanded
© 2012 McGraw-Hill Ryerson Limited
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LO1
Market Demand Schedule
Quantity demanded (cases/month)
$/case Tomiko
Abdi
Jan
Market
demand
$18
6
+ 4
+ 9
= 19
$19
5
4
7
16
$20
4
4
6
14
$21
3
3
3
9
$22
2
3
1
6
© 2012 McGraw-Hill Ryerson Limited
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Market Demand Schedule
P
LO1
Market demand is the horizontal
summation of all individual
demands.
22
21
20
19
18
DJAN
DTOMIKO
DABDI
DMARKET
0 2 4 6 8 10 12 14 16 18 20
© 2012 McGraw-Hill Ryerson Limited
Q
2-14
LO2
Supply
• the quantities that producers are willing and able
to supply over a period of time at various prices
© 2012 McGraw-Hill Ryerson Limited
2-15
LO2
Supply
Supply Schedule
• A table showing the various quantities supplied
per period of time at different prices
Supply Curve
• A graphic representation of the supply schedule
© 2012 McGraw-Hill Ryerson Limited
2-16
LO2
Supply Schedule
Price Per Case of
Beer
$18
19
20
21
22
Quantity Supplied
(cases per month)
© 2012 McGraw-Hill Ryerson Limited
2
3
4
5
6
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LO2
Supply Curve
Price
Price
$18
Quantity
2
19
20
21
3
4
5
22
6
$20
$19
$18
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
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LO2
Supply Curve
Price
$20
$19
$18
- as price increases,
quantity supplied (Qs)
increases
- movement is along an
existing supply line
B
A
1
2
3
4
5
6
7
Quantity
© 2012 McGraw-Hill Ryerson Limited
2-19
LO2
Why the Supply Curve
Slopes Upward
•
•
•
Suppliers are motivated by profit
Higher price means more profit. Greater profit
means more suppliers are willing to produce the
product
Costs rise as more is produced, so higher prices
are required to supply more
© 2012 McGraw-Hill Ryerson Limited
2-20
LO2
Market Supply Curve
• Total supply from all producers of a product
• Horizontal summation of each individual
producer’s supply curve
Assumptions:
• producers are all making a similar product
• consumers have no preference as to which supplier
or product they use
© 2012 McGraw-Hill Ryerson Limited
2-21
LO2
Market Supply Schedule
Quantity supplied (cases/month)
$/case
Bobbie
2
Other
Brewers
+ 6
Market
Supply
= 8
$18
$19
3
9
12
$20
4
12
16
$21
5
15
20
$22
6
18
24
© 2012 McGraw-Hill Ryerson Limited
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Market Supply Curve
P
22
SBOBBI
+
SOTHER
=
LO2
SMARKET
21
20
19
18
Market supply is the total quantity
of all producers at each price.
0 2 4 6 8 10 12 14 16 18 20
© 2012 McGraw-Hill Ryerson Limited
Q
2-23
Market Equilibrium
LO3. LO4
Market
• A mechanism that allows buyers and sellers to
exchange products or services
Equilibrium
• The point where quantity demanded equals
quantity supplied
• There is neither a shortage nor a surplus
QD = QS
© 2012 McGraw-Hill Ryerson Limited
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LO4
Market Equilibrium
Surplus
• the amount by which quantity supplied is greater
than quantity demanded
• occurs at prices above equilibrium
Shortage
• the amount by which quantity supplied is less than
quantity demanded
• occurs at prices below equilibrium
© 2012 McGraw-Hill Ryerson Limited
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LO4
Market Equilibrium
Quantity supplied (cases/month)
$/case
$18
Market
Supply
8
Market
Demand
_ 22
$19
12
18
-6
$20
16
16
0
$21
20
9
+11
$22
24
6
+18
© 2012 McGraw-Hill Ryerson Limited
Shortage/
Surplus
= -14
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LO4
Market Equilibrium
P
Supply
Demand
The market is in
equilibrium when
QS = QD
$20
16
© 2012 McGraw-Hill Ryerson Limited
Q
2-27
LO4
Shortage
P
Supply
Demand
At a price lower
than equilibrium,
QS < QD
there is a shortage
$20
$18
shortage
16
8
(QS )
22
(QD )
© 2012 McGraw-Hill Ryerson Limited
Q
2-28
LO4
Surplus
P
Supply
Demand
$22
At a price higher
than equilibrium,
QS > QD
there is a surplus
$20
surplus
6
(QD )
16
24
(QS )
© 2012 McGraw-Hill Ryerson Limited
Q
2-29
LO4
Market Adjustments
When there is a Surplus:
• producers drop the price to sell excess stock
• as price drops:
- quantity demanded increases
- quantity supplied falls
• market moves back to equilibrium price, quantity
© 2012 McGraw-Hill Ryerson Limited
2-30
LO4
Market Adjustment - Surplus
P
Supply
Demand
$22
$20
surplus
6
(QD )
16
24
(QS )
© 2012 McGraw-Hill Ryerson Limited
Q
2-31
LO4
Market Adjustment - Surplus
P
Supply
Demand
- Sellers drop price to
sell excess
- Buyers buy more at
lower price
- Sellers supply less
at lower price
- Back to equilibrium
$22
$20
surplus
6
(QD )
16
24
(QS )
© 2012 McGraw-Hill Ryerson Limited
Q
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LO4
Market Adjustments
When there is a Shortage:
• buyers bid up the price
• as price rises:
- quantity demanded decreases
- quantity supplied increases
• market moves back to equilibrium price, quantity
© 2012 McGraw-Hill Ryerson Limited
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