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Demand and Supply
Chapter 3
Demand

demand is a schedule that shows the
various amounts of a product
consumers are WILLING and ABLE to
BUY at each specific price at a
specific time.

Demand Schedule: listing that shows
the # demanded at different prices
Demand Schedule for Donuts
Price
Quantity
$2
0
$1.50
1
$1.00
3
$.75
6
$.50
15
$.25
25

Demand Curve: the schedule on a
graph

See graph on document camera
Law of Demand
 There
is an inverse relationship
between price & quantity demanded
– If price , demand 
– If price , demand 
 Marginal
Utility: Extra satisfaction
from getting one more unit of a
product
 Diminishing
marginal utility: the
extra satisfaction we get from one
more unit begins to diminish
– i.e., the third donut, yields less extra
satisfaction than the first.
Demand Curve
 Always
Downward sloping—indicating
lower quantity demanded at higher
prices, higher quantities at lower
prices
 Change in PRICE reflects movement
along the curve = change in
quantity demanded
 If
a change in demand is NOT caused
by a change in PRICE, the entire
curve will shift = change in
demand
Determinants that affect demand
(other than price)
 Consumer
tastes
 # of buyers
 Income
 Prices of related goods
– Substitute goods
– Complementary goods
 Expectations
Demand Schedule for Donuts
Price
Quantity1
Quantity2
$2
0
1
$1.50
1
3
$1.00
3
6
$.75
6
15
$.50
15
25
$.25
25
35
Demand has increased so the curve has
shifted to the right.
 Income
Effect: Lower prices increase
the purchasing power of money
income enabling the consumer to buy
more at lower prices
 Substitution
Effect: a lower price
gives an incentive to substitute the
lower-priced good for the higher
priced good
Supply
 Supply
is a schedule that shows the
amount of a product a producer is
WILLING and ABLE to produce and
SELL at each specific price at a
specific time.
Law of supply
 Producers
will produce and sell more
of their product at a high P than at a
low P.
 There is a direct relationship in P and
Q supplied
– If price , supply will 
– If price , supply will 
Explanation of the Law of Supply
 Given
product costs, a higher P
means greater profits and thus an
incentive to increase the Q supplied.
Supply Curve
Supply Schedule for cakes
 Upward
sloping—
indicating higher
Qs supplied at
higher P, lower
Qs at lower P
P (Price)
Q
(Quantity)
$20
15
$15
10
$10
8
$5
3
Supply Curve for cakes

See board or document camera
 Change
in PRICE reflects movement
along the curve = change in quantity
supplied
 If
a change in supply is NOT caused
by a change in PRICE, the entire
curve will shift = change in supply
Determinants that affect supply
(other than price)
 Resource
prices
 Technology
 Taxes and subsidies
 Price of related goods
 Expectations
 Number of sellers
Supply Schedule for cakes
$
Q1
Q2
20
15
10
15
10
8
10
8
5
5
3
1
Market Equilibrium
 Quantity
supplied = quantity
demanded
– Where the two curves intersect
 Prices
above equilibrium = surplus of
supply
 Prices below equilibrium = shortage
of supply
 Market Clearing or Market Price is
another name for equilibrium
 Price
Floors: a legally determined
price at or above the equilibrium
price (can’t go below)
 Price Ceiling: a legally
established maximum price for a
good or service (can’t go above)