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Chapter 4
Demand, Supply,
and Markets
© 2009 South-Western/Cengage Learning
Demand
•
•
•
•
•
Quantity Demanded
Law of Demand
Demand Schedule
Demand Curve
Movement along the curve: Caused by a
change in current price
2
Exhibit 1
The demand schedule and demand curve for pizza
(b) Demand curve
(a) Demand schedule
a
b
c
d
e
$15
12
9
6
3
Quantity
Demanded
Per week
(millions)
8
14
20
26
32
Price per pizza
Price
per
pizza
a
$15
12
b
c
9
d
6
e
3
D
0
8
The market demand D shows the quantity of pizza
demanded, at various prices, by all consumers.
Price and quantity demanded are inversely related.
14
20 26
32
Millions of pizzas per week
3
Shifts of the Demand Curve
CHANGES IN DEMAND
1. Money income of consumers
2. Prices of other goods
3. Consumer expectations
4. The number or composition of
consumers in the market
5. Consumer tastes
4
Exhibit 2
An increase in the market demand for pizza
Price per pizza
$15
b
12
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.
f
9
6
D’
3
D
0
8
14
20 26
32
Millions of pizzas per week
5
Supply
•
•
•
•
•
Quantity Supplied
Law of Supply
Supply Schedule
Supply Curve
Movement along the curve: Caused by a
change in current price
6
Exhibit 3
The supply schedule and supply curve for pizza
(b) Supply curve
(a) Supply schedule
S
Quantity
Supplied
Per week
(millions)
$15
12
9
6
3
28
24
20
16
12
$15
Price per pizza
Price
per
pizza
12
9
6
3
0
12
The market supply S shows the quantity of pizza
supplied, at various prices, by all pizza makers.
Price and quantity supplied are directly related.
16
20 24
28
Millions of pizzas per week
7
Shifts of the Supply Curve
CHANGES IN SUPPLY
1. State of technology
2. Prices of relevant resources
3. Prices of alternative goods
4. Producer expectations
5. Number of producers in the market
8
Exhibit 4
An increase in the supply of pizza
S
S’
Price per pizza
$15
g
12
h
9
6
An increase in the supply
of pizza is reflected by a
rightward shift of the supply
curve, from S to S’.
Quantity supplied increases
at each price level.
3
0
12
16
20 24
28
Millions of pizzas per week
9
Exhibit 5 (b) MARKET EQUILIBRIUM
Equilibrium in the pizza market
(b) Market curves
Price per pizza
$15
Surplus
12
c
9
6
Shortage
3
0
14 16
Market equilibrium occurs at:
Price where QD=QS;
S
Point c
Above the equilibrium price:
QS>QD;
Surplus;
Downward pressure on P
Below the equilibrium price:
QD>QS;
D
Shortage;
Upward pressure on P
20 24 26
Millions of pizzas per week
10
Exhibit 6
Price per pizza
Effects of an increase in demand
S
g
$12
c
9
D’
D
0
Increase in demand:
Rightward shift to D’
At P=$9: QD>QS;
shortage
Upward pressure on P
QD decreases
QS increases
New equilibrium g
Higher P
Higher Q
20 24
30
Millions of pizzas per week
11
Exhibit 7
Effects of an increase in supply
Price per pizza
S
S’
c
$9
6
d
D
0
Increase in supply:
Rightward shift to S’
At P=$9: QS>QD; surplus
Downward pressure on P
QD increases
QS decreases
New equilibrium d
Higher Q
Lower P
20
26
30
Millions of pizzas per week
12
Exhibit 8
Indeterminate effect of an increase in both D and S
(b) Shift of S dominates
(a) Shift of D dominates
S’
S
Price
Price
S
S’’
p’
a
b
a
p
D’
p
p’’
c
D’’
D
D
0
Q
Q’
Units per period
0
Q
Q’’
Units per period
13
Exhibit 11 PRICE RESTRICTIONS
Price floors and price ceilings
(b) Price ceiling for rent
S
S
Surplus
Monthly rental price
Price per gallon
(a) Price floor for milk
$2.50
1.90
D
14 19 24
0
Millions of gallons per month
No effect if price floor is
set at or below equilibrium P
$1,000
600
Shortage
D
40 50 60
0
Thousands of rental units per month
No effect if price ceiling is
set at or above equilibrium P
14