Chapter 3

Demand, Supply and Price

I- Demand

Quantity demanded:

A. It is desired
B. It is a flow of purshases
• total amount that consumers desire to purchase during a given period
• actual purchases: quantity bought/exchanged
• is a flow not a stock

In uenced by:
◦ Consumers’ income
◦ Prices of other products
◦ Consumers’ preferences (or “tastes”)
◦ Population
◦ Signi cant changes in weather
◦ Product’s own price

Assumptions:
- all variables constant except the product’s own price
- product’s price vary
—> study how its change affects quantity demanded

“other things being equal,” = ceteris paribus.

1. Quantity demanded and price

The price and demand are negatively related

—> bc several products that can satisfy a demand.
= « the law of demand ». Alfred Marshall

Quantity demanded refers to the quantity of widgets demanded per period of

time

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 .
Part 4

Si le prix d’un produit augmente, logiquement, on va aller voir d’autres

produits

2. Demand schedules and demand curves

Demand schedule: relationship between quantity demanded and the price of a

product
1) table showing the quantity demanded at various prices.
2) curve drawn through points is called a demand curve
= shows the quantity that consumers would like to buy at each price
= negative slope of the curve: quantity demanded increases as the price falls

Single point on a demand schedule or curve:

—> quantity demanded at that point

3. Shifts in the demand curve

Curve shifts right if demand ↗

Curve shifts left if demand ↘

A change in demand is a change in quantity demanded at every price = entire

curve shifts
A change in quantity demanded refers to a movement from one point on a
demand curve to another = movement along the demand curve

increase in annual household income = increases in the quantity demanded

at each price (for all normal goods)
A change in any of the variables (other than the product’s own price) that
affect the quantity demanded will shift the demand curve to a new
position.
shifts rightward = increase in demand
shifts leftward = decrease in demand

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 ve important causes of shifts in the demand curve:

1. Consumers’ Income
If average income rises, consumers as a group can be expected to desire more
of most products
—> an increase in demand
Goods for which the quantity demanded increases when income rises
= normal goods

2. Prices of Other Goods

3. Consumers’ preferences
4. Population
increase in population with purchasing power
= the demands for all the products purchased by the new people will rise

5. Signi cant Changes in Weather

Movements Along the Curve Versus Shifts of the Whole Curve

change in demand = change in the quantity demanded at every price

—> a shift of the entire demand curve
change in quantity demanded = movement from one point on a demand
curve to another point, either on the same demand curve or on a new one.

A change in quantity demanded can result from:

1) a shift in the demand curve with the price constant
2) a movement along a given demand curve due to a change in the price
3) a combination of the two

An increase in demand = demand curve shifts to the right

= quantity demanded is higher at each price.

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 II Supply

1) Quantity Supplied

Quantity supplied:
—> amount of some good or service that producers want to sell in some time
period
- is a ow
- is so much per unit of time
- amount that producers are willing to offer for sale
- not necessarily the amount they succeed in selling (expressed by quantity
sold or quantity exchanged)

in uenced by:
◦ Product’s own price
◦ Prices of inputs
◦ Technology
◦ Government taxes or subsidies
◦ Prices of other products
◦ Signi cant changes in weather
◦ Number of suppliers

2) Quantity Supplied and Price

price of the product + the quantity supplied

—> related positively
= the higher the product’s own price, the more its producers will supply

3) Supply Schedules and Supply Curves

Supply schedule: shows relationship between quantity supplied of a product

and the price of the product

Supply curve: graphical representation of the supply schedule

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 —> Each point on the supply curve represents a speci c price–quantity
combination
—> positive slope = quantity supplied increases when price increases

A single point on the supply curve: quantity supplied at that price.

4) Shifts in the Supply Curve

shift in the supply curve = at each price there is a change in the quantity
supplied.

A cost-saving innovation increases the quantity supplied at each price

—> is shown by the rightward shift in the supply curve

A change in any of the variables (other than the product’s own price) that affect
the quantity supplied will shift the supply curve to a new position.

Causes of shifts in supply curves:

1. Prices of Inputs

What the rm uses to make its products

—> materials, labour, and machines

Ex: rise in price of inputs = reduces pro tability = shifts the supply curve for
the product to the left

2. Technology
3. Government Taxes or Subsidies

Les taxes make the production and sale of these goods less pro table
—> supply curve shifts to the left.

4. Prices of Other Products

Changes in the price of one product may lead to changes in the supply of some
other product

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 —> bc the two products are either substitutes or complements in the production
process.

5. Signi cant Changes in Weather

6. Number of Suppliers

5) Movements Along the Curve Versus Shifts of the Whole Curve

important to distinguish:
1) movements along supply curves
2) shifts of the whole curve

Change in supply: shift of the whole supply curve

= change in the quantity that will be supplied at every price

Change in the quantity supplied: movement from one point on a supply curve
to another point, either on the same supply curve or on a new one.

A change in quantity supplied can result from:

1) a change in supply with the price constant
2) a movement along a given supply curve because of a change in the
price
3) a combination of the two.

III. The Determination of Price

—> How do the two forces of demand and supply interact to determine the
actual price and quantity?

1) The Concept of a Market

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Originally:
—> Market: physical place where products were bought and sold

Today:
—> can also buy and sell most consumer products in markets that exist online
—> existing in any situation (such as a physical place or an electronic medium)
in which buyers and sellers negotiate the exchange of goods or services

2) Market Equilibrium

Hypothèse d’école:

$60 per bushel: quantity of apples demanded = the quantity supplied

When: prices <$60 per bushel

—> shortage of apples because the quantity demanded exceeds the quantity
supplied.
= excess demand
=excess demand causes upward pressure on price.

When: prices > $60 per bushel

—> surplus of apples because the quantity supplied exceeds the quantity
demanded
= excess supply
= excess supply causes downward pressure on price.

the excess supply / excess demand = the horizontal distance between the curves
at each price

equilibrium price: price where the actual market price will tend
Disequilibrium price: quantity demanded =/= quantity supplied
Disequilibrium: excess demand or excess supply in a market,

3) Changes in Market Equilibrium

Changement that in uences quantity demanded or supplied

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—> = shift in the demand curve, the supply curve, or both

There are four possible shifts:

method known as a comparative static:

- derive predictions about how the endogenous variables will change
- following a change in a single exogenous variable

The effects of the four possible curve shifts are as follows:

1. An increase in demand
—> increase in equilibrium price
—> increase equilibrium quantity exchanged

2. A decrease in demand
—> a decrease in the equilibrium price
—> a decrease in the equilibrium quantity exchanged

3. An increase in supply
—> a decrease in the equilibrium price
—> an increase in the equilibrium quantity exchanged

4. A decrease in supply
—> an increase in the equilibrium price
—> a decrease in the equilibrium quantity exchanged

4) A Numerical Example

Changes in market equilibrium

—> can be examined by using a simple algebraic model.

5) Relative Prices

We have assumed the constancy of all prices except the one we are studying

BUT: 2 types of prices

—> absolute prices + relative prices.

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Absolute price: e amount of money that must be spent to acquire one unit of
that product

Relative price: the ratio of two absolute prices; it expresses the price of one
good in terms of (relative to) another good.

BUT: The demand and supply of speci c products depends on their

relative, not absolute, prices.

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