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LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
__________________
LSSS 231: MICROECONOMICS
Learning Outcome 2: SUPPLY AND DEMAND
Supply and demand are the two words that economists use most often.
Supply and demand are the forces that make market economies work.
Modern Microeconomics is about supply, demand, and market equilibrium.
A____________ is a group of buyers and sellers of a particular good or service.
The terms supply and demand refer to the behavior of people . . . as they interact with one another in
markets.
__________ determine demand.
__________ determine supply
What is Demand?
If I desire a Porsche but don’t have the money to purchase it, is it “demand”?
Demand is when a person is _________ and _________ to buy a good or service.
We define the demand schedule as a table that shows the relationship between the _______ of the good
and the ________ _____________ in a given time period when all factors other than the product's
_______ remain unchanged.
Individual demand is the demand of just one consumer. The following demand schedule shows
Catherine’s Demand for Ice Cream cones in a week.
CATHERINE’S DEMAND SCHEDULE
Price of ice cream cone ($)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Page 1 of 29
Quantity Demanded (per week)
12
10
8
6
4
2
0
6/24/2017
Demand Curve
The demand curve is a graph showing the relationship between the __________ of a good and the
quantity ____________________.
Quantity demanded is the amount of a good that buyers are ____________ and _________ to purchase.
EXERCISE: Draw Catherine’s Demand Curve
Market Demand versus Individual Demand
Market demand refers to the sum of all individual demands for a particular good or service.
Graphically, individual demand curves are summed horizontally to obtain the market demand
curve.
EXERCISE: Determining individual and market demand
Imagine that the Ice Cream Cafe in Sharjah is selling ice cream cones at different prices. How many ice
cream cones would you be prepared to buy in a week at each possible price? Write the number of ice
cream cones you would buy in the second column of the demand schedule (table) below?
Now ask two other students in the class how much they would demand at each price and fill in their
names and responses in columns 3 and 4 in the following table.
Add the quantity demanded horizontally at each price to get the market demand for the ice cream cones.
Fill in market demand for your group.
Possible
price of an
ice cream
cone (Dhs)
0.00
0.50
1.00
1.50
2.00
2.50
3.00
Page 2 of 29
Your
quantity
demanded
per week
Quantity
demanded
per week
Quantity
demanded
per week
MARKET
DEMAND
6/24/2017
LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
EXERCISE:
Use graph paper and the above information for market demand to plot a demand curve for the ice cream
cones.
The Law of Demand
Look at the market demand schedule and the market demand curve and fill in the blanks below for the
Law of Demand.
The law of demand, states that other things equal the quantity demanded of a good _____ (rises/falls)
when the price of the good _______ (rises/falls) and vice versa; therefore, there exists a(n) _______
(positive/ inverse) relationship between quantity demanded and price.
The Substitution and Income Effect
Why do people buy more quantity of a good when its price falls? Why do people buy less quantity of a
good when its price rises? We can explain the reason by using the income effect and substitution effect.
If the price of a good; i.e., Pepsi, falls, then consumers have ________ (more/less) purchasing power so
they can buy ________ (less/ more) Pepsi and more of other goods. This is the income effect.
If the price of a good; i.e., Pepsi, falls, then a consumer will ________________ the now _____________
product, Pepsi, for other goods, i.e., Coke. This is the substitution effect.
The substitution effect and income effect help explain why the demand curve is___________
(upward/downward) sloping.
Ceteris Paribus: Other things equal assumption
Economists use the “ceteris paribus”, all other factors held constant, assumption when making
generalizations. Only the _____________ that is under consideration is changed while all other variables
are held constant.
For example, the number of cars bought in a year is determined by the price of cars, consumer incomes,
gas prices, price of substitutes (i.e. public transport), etc.
In order to analyze the effect that a change in the price of gas has on car sales, all other factors that may
affect car sales are held constant and only the price of gas is changed.
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Change in quantity demanded
On your graph a movement along the curve due to a change in price shows a change in quantity
demanded.
A change in the price of ice-cream cones results in a movement along the demand curve.
If the Price rises from $1.00 to $2.00 the quantity demanded falls from 8 to 4 per week; therefore, a
change in price has caused a movement along the demand curve.
P
($)
2.00
1.00
Q
4
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8
6/24/2017
LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
Shifts in the Demand Curve caused by Non-price Determinants of Demand
A Change in Demand is a _______ in the demand curve, either to the left or right caused by any
change that changes quantity demanded at every price.
Non-price Determinants of Demand cause Shifts in the Demand Curve/A Change in Demand.
Now assume that the Ice Cream Cafe increases its advertising for ice cream cones. This advertising
causes you and others to desire more ice cream cones at each price. Let’s assume that in the following
table D1 shows the original market demand for ice cream cones. D2 shows the increase in demand for ice
cream cones because of the successful advertising.
Price of Ice
Cream Cones
($)
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity of
Cones Demanded
(D1)
12
10
8
6
4
2
0
Quantity of
Cones Demanded
(D2)
24
20
16
12
8
4
0
Quantity of
Cones Demanded
(D3)
6
5
4
3
2
1
0
Question: What has happened to the demand for ice cream cones at $1.50? ___ At $2.50? __
An increase in demand means that consumers now demand _________ (more/less) at each and every
price than they did before. D___ shows an increase in demand.
An decrease in demand means that consumers now demand _________ (more/less) at each and every
price than they did before. D___ shows a decrease in demand.
Draw a diagram freehanded below to show all three demand curves. Label the curves and identify the
decrease and increase in demand.
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When we draw the demand curve, we assume the following non-price determinants are held constant
(do not change). If the non-price determinants of demand change the entire demand curve will shift. The
following are non-price determinates of demand:
•
•
•
•
•
•
Consumer income
Prices of related goods
Changes in population/ number of buyers
Tastes and fashion
Advertising
Expectations about future prices
1. Changes in People’s Income (consumer income)
Clearly the more income people have, the more they can buy. A rise in people’s incomes will therefore
cause an increase in demand for many goods and services and the demand curve will shift outwards,
while a fall in incomes will cause demand to fall and demand curves will shift inwards. These are normal
goods.
Normal Goods are goods and services whose demand increases when income increases and vice versa.
Inferior goods, for example, public transport and second-hand clothes, are an exception to the above
relationship between income and the demand curve. Rising incomes will cause the demand for inferior
goods to fall and falling incomes will cause the demand for inferior goods to rise. Inferior Goods are
goods and services whose demand decreases when income increases and vice versa.
Draw a diagram and show the effect of an increase in income on the demand for a normal good.
Draw a diagram and show the effect of an increase in income on the demand for an inferior good.
Page 6 of 29
6/24/2017
LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
2. Change in the prices of related goods
When a fall in the price of one good reduces the demand for another good the two goods are called
substitutes. A good or service is a substitute when its purchase can replace another good or service. For
example, margarine is a substitute for butter. If the price of margarine rises, people will buy butter and
vice versa. So an increase in the price of margarine will lead to an increase in the demand for butter. The
two goods are substitutes.
When a fall in the price of one good increases the demand for another good, th two goods are called
complements. If the prices of cars rise many people may not buy new cars and the demand for petrol will
fall and vice versa. Therefore, if the price of a good rises the demand for its complement will fall and
vice versa.
Some of the goods and services we buy need other things to go with them. For example, cars need petrol
and compact discs need disc players. Goods and services consumers want together are called
complementary goods or complements.
A complement is a good that goes with another good.
A substitute is a good that can be used instead of another good.
Exercise: Think of some complements and substitutes for the following list of goods and services.
Goods and services
Possible substitutes
Electric cooker (stove)
Woolen sweater
Going to the cinema
Train travel
Lamb
Goods and services
Possible complements
DVDs
Shoes
Hamburgers
Toothbrushes
3. Changes in the Population (number of consumers in the market): An increase in the
number of people in a country means more food, clothes and many other goods and services are needed.
A rise in the population will therefore cause an increase in demand for many goods and services and the
demand curve will shift outwards, while a fall in incomes will cause demand to fall and demand curves
will shift inwards.
4. Tastes and Fashion: The demand for goods and services can change dramatically because of
changing tastes and fashions. Flared jeans and platform shoes were much in demand in the early 1970s,
but by the late 70s straight-leg jeans and flat shoes had replaced them.
5. Advertising:
Carefully planned advertising campaigns cause consumers to buy more of a product and shift the
demand curve for it outwards. Adverse (negative) advertising (i.e. anti-smoking campaigns) can cause consumers to buy less of
a product and shift the demand curve for it inwards
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6. Expectations about Future Prices: If we expect prices to go up in the future, we will buy
more of the good today and vice versa.
7. Weather: Changes in weather may affect the demand for some goods and services.
EXERCISE: (PORTAL EXERCISE) What causes a shift in demand/ a Decrease or increase
in demand? The table below lists the non-price determinates of demand. Read the change
and decide if the change would increase or decrease the demand for cars in the UAE.
Non-Price
Determinates of
Demand
Change in the
price of a
complement
Change in nonprice determinate
of demand
What will happen to the
demand for cars this
month?
The price of petrol
increases
Change in taste or Motorcycles
fashion
become very
popular due to
increased road
congestion
Change in
people’s income
People in the UAE
experience an
increase in their
income.
Change in
population
There is an
increase in the
number of expatriots living in
the UAE
Change in the
price of a
substitute.
The price of public
transportation
decreases.
Change in
advertising
Car dealers
increase their
advertising.
Expectations
about future
prices
During the Dubai
Shopping Festival
which will take
place next month
car dealers will run
specials on cars.
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LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
PORTAL EXERCISE ON SHIFTS IN DEMAND
EXERCISE: Decide if the change will cause a change in demand (shift in the demand curve) or a
change in quantity demanded (a movement along the demand curve) and fill in the table. The first
one has been done for you.
VARIABLE
A CHANGE IN THIS VARIABLE WILL CAUSE
Consumer income
Change in demand (shift in demand curve)
Price of a substitute
Advertising
Price
Change in population
Price of a complement
Tastes
Expectations
Change in Quantity Demanded versus Change in Demand
A change in the price of the product results in a change in quantity demanded and is represented
graphically by a movement along the demand curve.
When any of the non-price determinants of demand change, the result is a change in demand-an entirely
new demand schedule represented graphically by a shift of the demand curve (an increase or a
decrease in demand.)
Change in quantity demanded
Change in demand
P
P
D1
P1
D
D2
Q
Q
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Q1
6/24/2017
SUPPLY
What is Supply?
Quantity Supplied refers to the amount of a good or service firms are willing to make and sell at a
number of possible prices. Clearly, a firm that is interested in profit will only makes and sell a product
if it can do so at a price over and above what it cost the firm to make.
The supply schedule is a table that shows the relationship between the price of the good and the quantity
supplied.
Ben's Supply Schedule
Price of
Ice-Cream Cones ($)
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity of IceCream Cones
supplied
0
0
1
2
3
4
5
EXERCISE: Draw a supply curve freehanded for Ben.
The higher the price of the product, the _________ (more/less) the firm will supply because the _____
(more/less) profits it expects to make. Therefore as price rises, quantity supplied _____
(increases/decreases).
The lower the price of the product, the _________ (more/less) the firm will supply because the _____
(more/less) profits it expects to make. Therefore as price falls, quantity supplied _____
(increases/decreases).
There exists a (n) _____________ (inverse/positive) relationship between price and quantity supplied.
The supply curve is the graph of the relationship between the price of a good and the quantity
_______(demanded/supplied).
The Law of Supply
The law of supply, states that as price rises the quantity supplied rises, and vice versa; therefore, there
exists a positive relationship between quantity supplied and price.
Market Supply versus Individual Supply
Market supply refers to the _____ of all ______ supplies for all sellers of a particular good or service.
Graphically, individual supply curves are summed _______ to obtain the market supply curve.
Page 10 of 29
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LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
Non- Price Determinates of Supply cause a Change in Supply (shift in the supply
curve)
Changes in factors other than a change in the price of a good can cause the whole supply curve to shift –
either to increase or decrease. These factors are called non-price determinates of supply.
Example of a shift in supply
Assume it becomes less expensive for producers to produce disposable razors. Therefore, firms will
increase their supply of disposable razors at every price by 2,000 disposable razors. Fill in the third
column in the table below.
Possible price of razors (Dhs)
Original supply per
month (S1)
50
40
30
20
10
10,000
8,000
6,000
4,000
2,000
Increased supply per
month (S2)
Decreased supply per
month (S3)
8,000
6,000
4,000
2,000
0
Draw free handed below the original supply per month label it S1 and the increased supply per month
label it S2. Draw one curve for original supply (label it S1) and another curve for increased supply (label
it S2).
The above table and your graph show that at each and every price, razor producers are now willing to
make and sell more razors than they did before. The whole supply curve has shifted outwards from S1 to
S2. An increase in supply means that producers are now willing and able to supply more than they were
before.
Now draw the decreased supply per month (label it S3) on your diagram graph above. The above table
and graph show that at each and every price, razor producers are now willing to make and sell fewer
razors than they did before. The whole supply curve has shifted inwards from S1 to S3. A decrease in
supply means that producers are now willing and able to supply less than they were before.
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Non- price Determinates of Supply cause a shift inwards or outwards of the Supply
curve
EXERCISE: (PORTAL EXERCISE) Match the following non-price determinates of Supply with
the correct explanation:
• Input prices/Cost of production (land, labor, capital)
• Technology
• Expectations
• Taxes
• Number of sellers
• Environmental regulations/Pollution regulations
• Weather
• Change in profitability (of other goods that a business can produce)
• Subsidies (A subsidy is a sum of money, which the business never has to pay back to the
government.)
1. __________________________________________________________________
In a free market economy, resources are allocated to those goods and services that yield the most
profit.
2. __________________________________________________________________
A change in these costs; i.e., wages, rent, oil prices, will cause the production cost of a firm to
change and will affect supply.
3. ____________________________________________________________________________
If more businesses enter an industry, there will be an increase in supply. If businesses leave an
industry, there will be a decrease in supply.
4. _______________________________________________________________________
Business may experience improvements in the performances of machines, labor, production
methods, management control, quality etc. this allows more to be produced regardless of the
selling price.
5. ________________________ is an important factor determining the supply of crops. A good
summer may bring a bumper (good) crop so that whatever the price supply increases. A bad
summer will cause supply curves to shift inwards.
6. Governments can influence supply.
 If the government wants firms to produce more it may give firms a
________________, which will reduce their costs, increase their profits and
increase supply.
 Governments can levy these on goods and services produced by firms. A _______
on a good will cause an increase in a business’ costs and will lead to a fall in
supply.
 Many governments are concerned about the environment and
pass_____________________, that cause the firm’s costs to increase which will
cause the supply curve to fall.
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LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
FARMER AHMED’S CROPS
EXERCISE (PORTAL EXERCISE) : What causes a change in supply (shift in supply)? Read the
following passage and try to pick out all the factors that have caused a change in the supply of potatoes
and cabbage.
Farmer Ahmed plans to plant five fields of potatoes and three fields of cabbage each year. The price he
can usually get for a kilo of potatoes is 15 dhs while the price of cabbage is 25 dhs per kilo. Farmer
Ahmed has estimated that his time effort, machinery and fertilizer costs add up to an average of 12 dhs
per kilo of potatoes and 20 dhs per kilo of cabbage.
Which crop is the more profitable one to grow? _____________
What will happen to the supply of the more profitable crop? ____________
Draw a supply curve for cabbage and show this effect.
However in the following season the price of potatoes rises to 30 dhs per kilo.
What would you advice Farmer Ahmed and farmers like him to do? ____________
Given your advice what will happen to the supply of cabbage? ____________________________
Draw a supply curve and show this effect.
In the very next growing season, farmer Ahmed discovers a new “Speedo” cabbage harvester is available
and at a very reasonable price. He used to pay some boys from the nearby village to help pick his crops
each year but now he can pick them all by himself using the machine. He estimates that this saving has
reduced the average cost per cabbage grown to only 5 dhs.
What would you now advise Farmer Ahmed and farmers like him to do? _____
How will that affect the supply of potatoes and cabbage? ____________________
Draw a supply curve and show this effect.
In the very next season the landowner who rents her land to Farmer Ahmed decides to cut the rent of his
land from 5,000 Dhs per year to 4,000 Dhs per year and will rent him more land at a lower rent. Farmer
Ahmed wonders if he should rent an additional field now that it costs much less to produce potatoes and
cabbage.
If he decides to rent more land, what will be the likely effect on the supply of his potatoes and
cabbage?
_________________________________________________________________________
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A farmer’s year is not without its problems. Towards the end of the season an early but very hard frost
damages Farmer Ahmed’s entire cabbage crop.
What will happen to the supply of cabbage now? _______ What will happen to the supply of
potatoes? ________________ Draw two supply curves below, one for cabbage and one for potatoes, and
show this effect.
List all the factors that have caused a change in supply of potatoes and cabbages: (See the list of
non-price determinates of Supply)
1) ___________________________
2) _____________________________
3) ___________________________
4) ______________________________
Change in Supply versus Change in Quantity Supplied (Moynihan 167)
A change in the quantity supplied results from a change in the _________ of the product, with factors
other than price held constant. A change in quantity supplied is a ___________along the supply curve.
A change in supply is an increase (S1) or decrease (S2) in the amount of a product supplied at each and
every price. A change in supply is a _____________ in the supply curve. A change in supply is caused
by a change in one of the non-price determinants of supply and is represented graphically by a shift of the
entire supply curve.
Draw a diagram showing a Change in Quantity Supplied and a diagram showing a Change in Supply
Change in Quantity Supplied
Change in Supply
EXERCISE: Decide if the change in the variable will cause a shift or a movement. The first one
has been done for you.
VARIABLE
A CHANGE IN THIS VARIBALE
Input prices
Technology
Price
Expectations
Number of sellers
Taxes
Subsidies
Change in Supply (Shift)
Page 14 of 29
6/24/2017
LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
Market Equilibrium: Supply and Demand Together
We have now looked at the two market forces (demand and supply) that determine the price. For each
good and service there is a supply schedule and a demand schedule. If the two are combined we will find
that the quantity demanded and the quantity supplied will be equal at one price. This is the market price at
which the commodity (good) will be sold in the market. The market price can also be found using the
market demand and supply curve.
Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals
quantity demanded.
Exercise: Finding the market price
Consider the following market demand and supply schedules for ice-cream cones.
Demand Schedule
Price of Ice-Cream
Cones
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity of IceCream Cones
19
16
12
10
7
4
1
Supply Schedule
Price of IceCream
Cones
$0.00
$0.50
$1.00
$1.50
$2.00
$2.50
$3.00
Quantity of Ice-Cream
Cones
0
0
1
4
7
10
13
On graph paper, plot the demand and supply curves for the Ice Cream Cones on one graph.
Using the above table and your graph, state at which price quantity demanded equals quantity
supplied. ______
This is the market price (equilibrium price) for Ice-Cream Cones because at that price producers are
willing to make and sell just as many cones as consumers are willing to buy.
Surpluses and Shortages: Disequilibrium in the market
When the quantity demanded is greater than quantity supplied economists say there is excess ______
(supply/demand) and there is a ________________(shortage/ surplus).
When quantity supplied exceeds the quantity demanded economists say there is excess ______
(supply/demand) and there is a ________________(shortage/ surplus).
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1. Look at your graph and schedule (table) above. State if there is a surplus or shortage at the following
prices for chocolate bars and state how much the surplus or shortage is.
a. $1.00: ___________________
b. $3.00: _____________________
c. $2.00 ______________________
2. If there is a shortage what do you think will happen to price? ___________________
3. If there is a surplus what do you think will happen to price? ___________________
4. At which price will there be no excess demand or supply? ________ Why? ___________
EXERCISE: Draw a Supply and Demand diagram below freehanded and show the
following:
 Equilibrium
 Shortage
 Surplus
Page 16 of 29
6/24/2017
LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
Events that affect Market Equilibrium
To analyze how any event influences a market, we use the supply-and-demand
diagram to examine how the even affects the equilibrium price and quantity.
In market economies, prices are the signals that guide economic decisions and
thereby allocate resources.
• Decide whether the event shifts the supply or demand curve (or both).
• Decide whether the curve(s) shift(s) to the left or to the right.
• Use the supply-and-demand diagram to see how the shift affects equilibrium price
and quantity.
• Decide whether the event shifts the supply or demand curve (or both).
• Decide whether the curve(s) shift(s) to the left or to the right.
• Use the supply-and-demand diagram to see how the shift affects equilibrium price
and quantity.
EXERCISE: Draw a Supply and Demand curve and show what happens to the demand
and/supply of ice cream cones if
 There is hot weather.
 There is an increase in the price of sugar used to produce ice-cream cones
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Price Ceilings and Price Floors
Price Ceiling:
Study the following diagram that shows the demand and supply for apartments in New
York City (NYC) and then answer the questions:
1. What is the market price? __________
2. At the market price, what quantity is:
a. Quantity demanded ______
b. Quantity supplied ________
3. If the government passes a law requiring the price to be $2, what is
a. Quantity demanded ______
b. Quantity supplied ________
A price ceiling is a price that is artificially set _______ (below/above) the market price.
Government may set a price ceiling because it believes the market price is too high for
most consumers i.e. rent controls in New York City.
What are the problems that result from a price ceiling?
Price of Apartments
In NYC (000)
of Apartments
Page 18 of 29
6/24/2017
LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
Price Floor:
Study the following diagram that shows the demand and supply of tomatoes and then
answer the questions:
1. What is the market price? __________
4. At the market price, what quantity is:
a. Quantity demanded ______
b. Quantity supplied ________
5. If the government passes a law requiring the price to be $4, what is
a. Quantity demanded ______
b. Quantity supplied ______
A price floor is a price that is artificially set _______ (below/above) the market price.
Government may set a price floor because it believes the market price is too low for most
producers, i.e., minimum prices for farm products.
What are the problems that result from a price floor?
Price of tomatoes
of tomatoes
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Shifts in Demand and/or Supply and Market Equilibrium
A Shift in Demand
An increase in demand will cause an increase in the price and quantity of the good as shown in the
following diagram. A decrease in demand will cause a decrease in the price and quantity of the good as
shown in the following diagram.
Increase in Demand
Decrease in Demand
Exercise: Fill in the following table. The first one has been done as an example for you:
Change in
Factor
EXAMPLE:
Increase in
population
Demand
FOR
Private
Schools
Increase
Diagram FOR Private
Schools in the UAE
Price
Quantity
demanded
Quantity
supplied
Increase
Increase
Increase
The
government
allows nonUAE nationals
to attend
public schools
Increase in
income for expatriots
Page 20 of 29
6/24/2017
LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
A shift in Supply (Portal Exercise)
An increase in Supply will cause the price to decrease and quantity to increase. A decrease in Supply will
cause the price to increase and quantity to decrease.
Increase in Supply
Decrease in Supply
Fill in the information on the table. The first one has been done as an example for you:
Change in
Factor
EXAMPLE:
Increase in
wages for
construction
workers
Supply
for
Houses
Decrease
Diagram for New Houses
Price
Quantity
demanded
Quantity
supplied
Increase
Decrease
Decrease
The UAE
government
gives subsidies
to construction
companies
New
technology
introduced in
the
construction
industry
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The Impact of TWO EVENTS CHANGING simultaneously on the Price and
Quantity of a good or service (Both Supply and Demand change at the same time.)
In many real-world situations simultaneous changes often occur in demand and supply. For example,
there is an increase in advertising for ice cream cones and an increase in the cost of production of ice
cream cones, what is the final effect on the price and quantity of ice cream cones?
An increase in advertising
AND
An increase in the cost of production
Always analyze TWO events with TWO demand and supply diagrams. Then determine the effect on Price
and Quantity as follows:
An increase in advertising causes:
Demand

Price

Quantity

Supply

Price

Quantity

Price
Quantity
An increase in the cost of production:
Net (Final) Effect

Indeterminate
Look at the arrows showing the direction that price and quantity moved. If the arrows are going in the
same direction we can conclude that the final effect in price or quantity is an increase or decrease. If the
arrows are going in different directions then the price or quantity change is indeterminate (can not be
decided).
So in the above example, we can conclude that price increases but the quantity change is indeterminate.
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LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
Now practice the following exercises. Draw the diagrams for the first two events and the price and
quantity answers have been filled in for you:
Change in
Factor
EXAMPLE:
Decrease in
costs of
workers
producing cars
AND
Increase in
price of public
transport
Increase in
technology
Supply & Demand Diagrams FOR
CARS
Diagram for Supply change
Price
Quantity
demanded
Quantity
supplied






NET
EFFECT
ON PRICE
NET EFFECT
ON QUANTITY
DEMANDED
NET EFFECT
ON QUANTITY
SUPPLIED
INDETERM
INATE


NET
EFFECT
ON PRICE
NET EFFECT
ON Qd
NET EFFECT
ON Qs
Diagram for Demand change
Diagram for Supply change
Diagram for Demand change
AND
Decrease in the
price of petrol
Determine the net effect:
Government
gives subsidies
to car
producers
Diagram for Supply change
AND
Diagram for Demand change
Decrease in the
price of public
transportation
Determine the net effect:
NET
EFFECT
ON PRICE
NET EFFECT
ON Qd
(PORTAL EXERCISE)
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NET EFFECT
ON Qs
OVERVIEW OF CHANGE IN DEMAND/SUPPLY
VERSUS
CHANGE IN QUANTITY DEMANDED AND CHANGE IN QUANTITY SUPPLIED
CHANGE IN DEMAND
CHANGE IN SUPPLY
IS CAUSED BY A CHANGE IN ANY OF THE
FOLLOWING NON-PRICE DETERMINATES OF
DEMAND
IS CAUSED BY A CHANGE IN ANY OF THE
FOLLOWING NON-PRICE DETERMINATES OF
SUPPLY
Income
Normal goods – income increases – demand
increases & v.v.)
Inferior goods – income increases – demand
decreases & v.v. (e.g. second hand clothes and
public transportation)
Cost of production
Wages (cost of labor)
Rent
Oil prices
Change in the price of a complement (e.g. petrol
and cars)
Taxes
Change in the price of a substitute
Subsidies
Advertising
Profitability of other goods the business could
produce using the same resources
Change in Tastes and Fashions
Technology
Change in expectations about future prices
Change in Number of producers/suppliers
Sometimes Weather (for farm products)
CHANGE IN QUANTITY DEMANDED IS A MOVMENT ALONG THE DEMAND CURVE CAUSED BY A
CHANGE IN THE PRICE OF THE GOOD ITSELF.
CHANGE IN QUANTITY SUPPLIED IS A MOVMENT ALONG THE SUPLY CURVE CAUSED BY A CHANGE IN
THE PRICE OF THE GOOD ITSELF.
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LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
Supply and Demand Review Exercises
1) In the following table indicate if the change in a non-price determinate will affect the Demand OR Supply of going to the
cinema in the UAE.
Change in
Non-price
Determinates
Does it
affect S
or D for
going to
movies in
the UAE?
Draw the diagram
and show the shift
What
happens
to Price?
What
happens to
Quantity
Demanded?
What
happens to
Quantity
Supplied?
The income of
people in the
UAE falls.
New
technology has
been
introduced to
the cinema
industry.
The price of
DVD rentals
rises.
The price of
popcorn and
Pepsi at the
cinemas
increases.
The wages of
cinema
workers
increase.
There is an
increase in the
number of
residents in the
UAE.
People expect
the price of
cinema tickets
to fall next
month.
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2) Read the following situations. Draw a diagram and show if the Demand curve OR
the Supply curve for taxis in Dubai shifted and what was the effect on Price and
Quantity.
a. Female taxi drivers (there are more taxi drivers in Dubai) are now allowed to
work in Dubai.
i. Diagram
ii. Price ________
iii. Quantity _______
b. The price of taking buses has fallen in Dubai.
i. Diagram
ii. Price ________
iii. Quantity _______
c. Dubai Transport Company has increased advertisements for taxis.
i. Diagram
ii. Price ________
iii. Quantity _______
3) Read the following situation. Draw two diagrams and show what happens to the
Demand curve and what happens to the Supply curve for Pepsi. What was the
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LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
effect on Price and Quantity in each case? What was the net (final) effect on Price
and Quantity?
a. Coke increases its price.
i. Diagram showing what happens to D or S of Pepsi.
ii. Price _________
iii. Quantity __________
b. Workers in Pepsi receive higher wages.
i. Diagram showing what happens to D or S of Pepsi.
ii. Price _________
iii. Quantity __________
c.
What is the net (final) effect on the Price and Quantity of Pepsi?
i. Net (final) effect on Price __________
ii. Net (final) effect on Quantity ________
Exercise: Applying your Knowledge and Understanding
Read the following article and apply the concepts of Demand and Supply to the article to better
understand the concepts.
Demand for Oil Outstripping Supply
by Richard Gwyn Published on Wednesday, January 28, 2004 by the Toronto Star
http://www.commondreams.org/views04/0128-10.htm
In some year ahead — and by no means one necessarily that far ahead — we'll go through another bout of
winter weather like this one but with one critical distinction that will make all the difference, even though
it will have nothing to do with the weather.
Assume that we experience the same prolonged, extreme cold and high winds and succession of
snowstorms, all right across the country.
But assume, as well, that in that year the fuel by which we heat our houses, offices, factories and stores,
and by which we power our cars, trucks, airplanes, trains and buses, is having to be rationed.
Rationing doesn't here mean actual physical rationing, with householders and car drivers limited to so
many liters a month.
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It means, instead, rationing by price. As oil supplies dwindle, not in themselves (or not for a long time)
but in relation to demand, so will the price at first escalate, and then soar.
That's bound to happen. It will happen because the demand for oil is bound to outstrip the supply of oil,
and of natural gas and coal and of other hydrocarbons.
The U.S. Energy Department reckons that this ``tilting point" won't happen until 2037. Its calculation is
widely criticized, with its forecasts for increases in demand dismissed as far too conservative.
One well-known petroleum geologist, Colin Campbell, has put the tilting point at 2010, or little more
than a half-decade away. Another, Kenneth Deffeys, forecasts that it will occur this year.
The basis facts are these: The entire world now both produces and consumes some 75 million barrels of
oil a day. By 2015, or a decade away, demand is expected to increase by more than two-thirds, or by
another 60 million barrels a day.
This extra demand simply cannot be met. We would have to find and develop the equivalent of 10 new
North Sea oilfields in just a decade. Even if Iraq's oilfields are fully developed, with almost unlimited
new investment and new technology, it could only produce an extra 6 million barrels, or a mere one-tenth
of the amount needed.
Certainly, new supplies are being found in places such as Siberia, the Central Asian Republics and west
Africa. But these are not net additions to the total output. At the same time, production from all existing
super-giant and giant fields is contracting by 4 to 5 per cent a year.
Additional supplies could be generated from tar sands and oil shale in Western Canada and in
Venezuela's Orinoco belt. But more than half as much energy is used extracting this oil as the energy
value of the oil produced. Other potential supplies, such as polar oil and liquid natural gas, are
horrendously expensive.
The real problem isn't supply, though. It's demand. Last year, one element of the demand equation clicked
into place. In 2003, China overtook Japan to become the world's second-largest consumer of oil. The
International Energy Agency describes China as "the major driver of global demand growth."
The U.S. remains the world's gas guzzler. It consumes about one-seventh of global production. (Canada,
relatively, is as liberal and as wasteful in its consumption.)
A bit surprisingly, President George W. Bush, himself an oil man, has actually expressed some concern
about the issue. He's said, "It's becoming very clear that demand is outstripping supply."
In fact, a lot could be done. Tax loopholes could be closed, like the one that makes SUVs artificially
attractive. Regulations could mandate higher fuel-efficiency standards. Tax incentives could motivate
householders to improve their heating efficiency. Other remedies could range from minimizing urban
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LSSS 231
Prepared by Linda Habibi
LO 2: S & D
Teachers: Ms. Linda/Mr. Mahmoud
sprawl to developing alternatives to hydrocarbons, such as hydrogen cells. Energy economist Philip
Verleger reckons that the U.S.'s oil imports, of some 11 million barrels a day, could be cut by half.
Bush, though, has done nothing about the problem other than to mutter that it does exist, and no
Democratic presidential candidate has dared to mention the subject. The reason is obvious: the last
politician to talk seriously about conservation, Jimmy Carter in 1977, was trounced in the next
presidential election.
Nothing is going to happen until the crisis of oil demand outstripping oil supply is clear, unmistakable
and urgent.
And by then it may be too late. Too late, that is, to avoid what former British energy minister michael
Meacher forecasts will be, "the sharpest and perhaps the most violent dislocation (of society) in recent
history."
So enjoy today's weather.
Exercise: When reading the text
1. Look up any new vocabulary words.
2. Some of the concepts you should apply include all concepts relating Supply and Demand
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