Chapter 4

Extensions of Demand
and Supply Analysis

Copyright © 2020 National Economics University. All rights reserved.

 Introduction

lower in inflation-adjusted terms than they were in 1980. What fa

Slide 4-
 Did You Know

◼ According to the U.S. Customs Service,

the second most serious smuggling
problem along the Mexican border
involves the refrigerant freon?
◼ When an older U.S. air conditioner
needs fixing, it is often cheaper to pay a
relatively high price for illegally
smuggled freon than to modify the unit?

Slide 4-
 The Price

◼ Price System (market system)

– An economic system that allocates
resources based on relative prices
determined by supply and demand
– Prices signal what is relatively scarce
and relatively abundant

Slide 4-
 Exchange and

◼ Markets
– Emphasize voluntary exchange
– Determine the terms of exchange
– Facilitate exchange

Slide 4-
 Exchange and

◼ Voluntary Exchange
– Acts of trading between individuals that
make both parties to the trade subjectively
better off

◼ Terms of Exchange
– The prices we pay for the desired items

Slide 4-
 Exchange and

◼ Transaction Cost
– The costs associated with exchange
– Examples
• Price shopping
• Determining quality
• Determining reliability
• Service availability
• Cost of contracting

Slide 4-
 Exchange and

◼ The role of middlemen

– Middlemen (intermediaries) or brokers
reduce transaction cost by providing
information to buyers and sellers.
– Examples
• Real estate brokers
• Stock brokers
• Consignment shops
• Car dealerships

Slide 4-
 Exchange and

◼ Observation
– Consumers on the Internet rely on intelligent
shopping agents to act as middlemen

◼ Question
– How has the increase in the number of web
pages affected the potential market for
shopbot services?

Slide 4-
Changes in Demand and

◼ Changes in supply and demand create

a disequilibrium

◼ The market price and quantity adjusts to

a new equilibrium

Slide 4-10
Shifts in Demand and
Supply:
Increase Demand with Supply Constant

E1
P1

D1

Q1
Slide 4-11
Shifts in Demand and
Supply:
Increase Demand with Supply Constant

E1 At price P1 quantity
demanded exceeds
P1 quantity supplied—
a shortage exists

D2
D1

Q1 Q3
Slide 4-12
Shifts in Demand and
Supply:
Increase Demand with Supply Constant

E2
P2 Equilibrium price and quantity
increase to P2 and Q2
E1
P1

D1 D2

Slide 4-13
Shifts in Demand and
Supply:
Q1 Q2

Slide 4-14
Shifts in Demand and
Supply:
Decrease Demand with Supply Constant

S
E1 At price P1 quantity
supplied exceeds
P1 quantity demanded—
a surplus exists.

D1

D2

Q2 Q1
Slide 4-15
Shifts in Demand and
Supply:
Decrease Demand with Supply Constant

S
E1
Equilibrium price
P1 and quantity decrease
to P3 and Q3
E3
P3

D1

D2

Q3 Q1
Slide 4-16
Shifts in Demand and
Supply:
Increase Supply with Demand Constant

S1

E1
P1

Q1
Slide 4-17
Shifts in Demand and
Supply:
Increase Supply with Demand Constant

At price P1 quantity
S1 supplied exceeds
quantity demanded—
a surplus exists
S2
E1
P1

Q1 Q3
Slide 4-18
Shifts in Demand and
Supply:
Increase Supply with Demand Constant

S1 Equilibrium price
decreases and quantity
increases to P2 and Q2
S2
E1
P1
E2
P2

Slide 4-19
Shifts in Demand and
Supply:
Q1 Q2

Slide 4-20
Shifts in Demand and
Supply:
Decrease Supply with Demand Constant

S3
At price P1 quantity
S1 demanded exceeds
quantity supplied—
a shortage exists
E1
P1

Q2 Q1
Slide 4-21
Shifts in Demand and
Supply:
Decrease Supply with Demand Constant

S3
Equilibrium price
E3 S1 decreases and quantity
P3 increases to P3 and Q3

E1
P1

Q3 Q1
Slide 4-22
Changes in Demand and

◼ Summary

– Increases in demand increase equilibrium

price and quantity.

– Decreases in demand decrease equilibrium

price and quantity.

Slide 4-21
Changes in Demand and

◼ Summary

– Increases in supply decrease equilibrium

price and increase equilibrium quantity.

– Decreases in supply increase equilibrium

price and decrease equilibrium quantity.

Slide 4-22
Changes in Demand and

◼ When both demand and supply shift

– Simultaneous changes in demand and
supply put conflicting pressure on price or
quantity
– The resulting effect depends upon how
much each shift
– Either equilibrium price or quantity will be
indeterminate

Slide 4-23
 Shifts in Demand and
Supply:
Increase Demand > Increase Supply

S1 S2

E1
P1

D1 D2

Q1
Slide 4-24
 Shifts in Demand and
Supply:
Increase Demand > Increase Supply

S1 S2

At price P1 quantity demanded ex

E1
P1

D D2

Q1 Qs Qd
Slide 4-25
Shifts in Demand and
Supply:
Increase Demand > Increase Supply

S1 S2

Equilibrium price increases and

P2 E1 E2
P1

D1 D2

Q1 Q2
Slide 4-26
Shifts in Demand and
Supply:
Decrease Demand < Decrease Supply

S2 S1
At price P1 quantity demanded ex

E1
P1

D2 D1

Qs Qd Q1
Slide 4-27
Shifts in Demand and
Supply:
Decrease Demand < Decrease Supply

S2 S1

Equilibrium price
increases and quantity
P2 E2 decreases to P2 and Q2
E1 P1

D2 D1

Q2 Q1
Slide 4-28
Shifts in Demand and
Supply:
Increase Demand > Decrease Supply

S2 S1

E1
P1

D1 D2

Q1
Slide 4-29
Shifts in Demand and
Supply:
Increase in Demand > Decrease in Supply

S2 S1

At price P1 quantity demanded

E1
P1

D1 D2

Qs Q1 Qd
Slide 4-30
Shifts in Demand and
Supply:
Increase Demand > Decrease in Supply

S2 S1
E2
P2
Equilibrium price increases and

E1
P1

D1 D2

Q1 Q2
Slide 4-31
Shifts in Demand and
Supply:
Increase Demand < Decrease in Supply

S2 S1

E1
P1

D1 D2

Q1
Slide 4-32
Shifts in Demand and
Supply:
Increase Demand < Decrease in Supply

S2 S1

At price P1 quantity demanded

E1
P1

D1 D2

Qs Q1 Qd
Slide 4-33
Shifts in Demand and
Supply:
Increase Demand < Decrease in Supply

S2 S1
E2
P2
Equilibrium price increases and

E1
P1

D1 D2

Q2 Q1
Slide 4-34
Shifts in Demand and
Supply:
Increase Supply > Increase in Demand

S1 S2

E1
P1

D1 D2

Q1
Slide 4-35
Shifts in Demand and
Supply:
Increase Supply > Increase in Demand

S1 S2

E1
P1 At price P1 quantity supplie

D1 D2

Q1 Qd Qs
Slide 4-36
Shifts in Demand and
Supply:
Increase Supply > Increase in Demand

S1 S2

E1
P1 E2 Equilibrium price decreases an
P2

D1 D2

Q1 Q2
Slide 4-37
Shifts in Demand and
Supply:
Decrease Demand > Decrease in Supply

S2 S1

E1
P1

D1
D2

Q1
Slide 4-38
Shifts in Demand and
Supply:
Decrease Demand > Decrease in Supply

S2 S1

At price P1 quantity supplied excee

E1
P1

D1
D2

Qd Qs Q1
Slide 4-39
Shifts in Demand and
Supply:
Decrease Demand > Decrease in Supply

S2 S1

Equilibrium price decreases and qua

E1
P1 E2
P2

D1
D2

Qd Q1
Slide 4-40
Shifts in Demand and
Supply:
Increase Supply > Decrease in Demand

S1
S2

E1
P1

D1
D2

Q1
Slide 4-41
Shifts in Demand and
Supply:
Increase Supply > Decrease in Demand

S1
S2

E1
P1
At price P1 quantity supplie

D1
D2

Qd Q1 Qs
Slide 4-42
Shifts in Demand and
Supply:
Increase Supply > Decrease in Demand

S1
S2

E1
P1

Equilibrium price decreases and

E2
P2
D1
D2

Q1 Q2
Slide 4-43
Shifts in Demand and
Supply:
Increase Supply < Decrease in Demand

S1 S2

E1
P1

D2
D1

Q1
Slide 4-44
Shifts in Demand and
Supply:
Increase Supply < Decrease in Demand

S1 S2

E1
At price P quantity
1
P1 supplied exceeds
quantity demanded— a surplus exists

D2
D1

Qd Q1 Qs
Slide 4-45
Shifts in Demand and
Supply:
Increase Supply < Decrease in Demand

S1 S2

E1
P1 Equilibrium price decreases and

E2
P2
D2
D1

Q2 Q1
Slide 4-46
Changes in Demand and

◼ When both demand and supply increase

– Change in price is indeterminate
– Quantity will increase

◼ When both demand and supply decrease

– Change in price is indeterminate
– Quantity will decrease

Slide 4-47
Changes in Demand and

◼ When supply decreases and demand increases

– Price will increase
– Change in quantity is indeterminate

◼ When supply increases and demand decreases

– Price will decrease
– Change in quantity is indeterminate

Slide 4-48
 Price Flexibility
and Adjustment

◼ Flexibility and indirect adjustment

– Quality
– Service
– Rebates

Slide 4-49
 Price Flexibility
and Adjustment

◼ Adjustment speed

– Market characteristics influence adjustment

speed

– Markets may overshoot in the adjustment

process

Slide 4-50
The Rationing Function of

◼ When surpluses and shortages exist

price adjusts to clear the market.

◼ This adjustment is the rationing

function of price.

Slide 4-51
The Rationing Function of

◼ When prices cannot adjust non-price

rationing occurs
– Rationing by queues
– Rationing by lotteries
– Rationing by coupons

Slide 4-52
The Rationing Function of

◼ The essential role of rationing

– With scarcity rationing must occur
– We must choose the rationing mechanism:
price or non-price
– Price rationing is the most efficient
• Further trades could not occur without making
somebody worse-off

Slide 4-53
The Rationing Function of

◼ Question
– If price rationing is the most efficient is it
the best way to ration?

Slide 4-54
The Policy of Government-Imposed
Price Controls

◼ Price Controls
– Government-mandated minimum or maximum
prices

◼ Price Ceiling
– A legal maximum price

◼ Price Floor
– A legal minimum price

Slide 4-55