IE Chapter 3a

CHAPTER 3
Demand and
Supply
Chapter 3
Demand, Supply and
Relative Prices
 Demand and supply determine
relative prices.
 The word “price” means relative
price. Price is an opportunity cost.
 If we predict a price will fall, we mean
its price will fall relative to the
average price of other goods and
services.
Calculation of Relative
Prices
 Relative price is usually calculated
by dividing the price of a good in
question by a price index.
 The most commonly used price
index is the CPI (Consumer Price
Index).
 The CPI represents the “average”
price of consumer goods in a
particular month or year.
Demand
 The quantity demanded of a good or
service is the amount that
consumers plan to (or are willing to)
buy in a given period of time at a
particular (relative) price.
 Quantity demanded is measured as
an amount per unit time: pizzas per
day, pizzas per week, or pizzas per
year.
The Law of Demand
 Other things remaining the same, the
higher the price of a good, the
smaller is the quantity demanded.
 The phrase “other things being
equal” is sometimes abbreviated
with the Latin phrase ceteris paribus
(cet. par.).
 Thus, when we say price changes,
we mean relative price changes.
Demand Schedule
and Demand Curve
 A demand schedule lists the
quantities demanded at each
different price when all the other
influences on consumers’ planned
purchases remain the same.
 A demand curve is a graph of the
demand schedule.
Demand Schedule
Price Quantity Demanded
(dollars per CD-R) (millions of CD-Rs per week)
a .50 9
b 1.00 6
c 1.50 4
d 2.00 3
e 2.50 2
Demand Curve
Price (dollar per CD-R)
3.00
2.50
2.00
1.50
1.00
.50
0 2 4 6 8 10
Quantity (millions of CD-Rs per week)
Demand Curve
3.00
2.50 e
2.00 d
1.50 c
1.00
b
a
.50
0 2 4 6 8 10
Demand Curve
3.00
2.50 e
2.00 d
1.50 c
b
1.00 Demand
a for CD-Rs
.50
0 2 4 6 8 10
Factors That
Influence Demand
 Price (of the good in question)
 Prices of related goods
 Income
 Expected future price
 Population
 Preferences (or Tastes)
Price
 If the price of the good rises, the
quantity demanded falls (a
movement up along the demand
curve).
 If the price of the good falls, the
quantity demanded rises (a
movement down along the demand
curve).
Prices of Related Goods
 A substitute is a good that can be used in
place of another good. If the price of a
CD-RW rises, the demand for CD-Rs rises
(demand curve shifts out to the right) .
 A complement is a good that is used in
conjunction with another good. If the
price of a CD burner rises, the demand for
CD-Rs falls (demand curve shifts in to the
left).
Example-Decrease in Price of a Complement
Original demand schedule New demand schedule

CD Burner $300 CD Burner $100
Price Quantity Price Quantity
(dollars (millions of CD-Rs (dollars (millions of CD-Rs
per CD-R) per week) per CD-R) per week))
a .50 9
b 1.00 6 Assume the original price of
c 1.50 4 A CD Burner is $300. The
demand schedule shows
d 2.00 3 the Price-Quantity
e 2.50 2 relationship for CD-Rs.
Example-Decrease in Price of a Complement
Original demand schedule New demand schedule

CD Burner $300 CD Burner $100
per CD-R) per week) per CD-R) per week))
a .50 9 a’ .50 13
b 1.00 6 b’ 1.00 10
c 1.50 4 c’ 1.50 8
d 2.00 3 d’ 2.00 7
e 2.50 2 e’ 2.50 6
Demand Before Price of
Price (dollar per CD-R) Complement Decreases
3.00
2.50 e
2.00 d
1.50 c
1.00 b
Demand for CD-Rs
.50 (CD Burner $300) a
0 2 4 6 8 10 12 14
Demand after Price of
Price (dollar per CD-R) Complement Decreases
3.00
2.50 e e' Demand for CD-Rs

(CD Burner $100)
2.00 d d'
1.50 c c'
1.00 b b'
Demand for CD-Rs
.50 (CD Burner $300) a a'
0 2 4 6 8 10 12 14
Income
 Normal goods are those for which
demand increases as income
increases (demand curve shifts out
to the right).
 Inferior goods are those for which
demand decreases as income
increases (demand curve shifts in to
the left).
 The terms normal and inferior do not
necessarily refer to the quality of the
product
Expected Future Price
 If the price of a good is expected to
rise in the future and if the good can
be stored, people will often
substitute over time by buying more
of the good today.
 Demand for the good increases
(demand curve shifts out to the
right). This is sometimes called
speculation.
Population
larger the population, the greater is
the demand for all goods and
services (demand curve shifts out to
the right).
 The smaller the population, the
smaller is the demand for all goods
and services (demand curve shifts in
to the left).
Preferences (or Tastes)
 Preferences are an individual’s
attitudes toward goods and services.
 Different people have different
preferences and will therefore have
different demands for a particular
good or service.
Summary of Changes in
Demand
 Changes In Demand
– The demand for CD-Rs
• Decreases if:
– The price of a substitute falls
– The price of a complement rises
– Income falls (since CD-R is a normal good)
– The price of a CD-R is expected to fall in the future
– The population decreases
– Preferences decrease
Summary of Changes in
Demand
 Changes In Demand
– The demand for CD-Rs
• Increases if:
– The price of a substitute rises
– The price of a complement falls
– Income rises (since CD-R is a normal good)
– The price of a CD-R is expected to rise in the future
– The population increases
– Preferences increase
Movement Along Versus a
Shift of the Demand Curve
 If the price of a good changes but
everything else remains the same,
there is a movement along the
demand curve.
 If the price of a good remains
constant but some other influence on
buyers’ plans changes, there is a
shift of the demand curve.
A Change in Quantity
Demanded Versus a Change
in Demand
 A movement along the demand curve
shows a change in the quantity
demanded.
 A shift of the demand curve shows a
change in demand.
A Change in the Quantity Demanded
Versus a Change in Demand
Price
D0
Quantity
Price
Decrease in
quantity
demanded
Increase in
quantity
demanded
D0
Quantity
Price
P0
D0
Q0 Quantity
Price
P1
P0
D0
Q1 Q0 Quantity
Price
P1
P0
P2
D0
Q1 Q0 Q2 Quantity
Price
D0
Quantity
Price
Increase in
demand
D1
D0
Quantity
Price
Decrease in Increase in
demand demand
D1
D0
D2
Quantity
Price
Decrease in
quantity
demanded
demand demand
Increase in
quantity
demanded
D1
D0
D2
Quantity
Supply
 If a firm supplies a good or service,
the firm
– Has the resources and technology to produce it,
– Can profit from producing it, and
– Has made a definite plan to produce it and sell
it.
Supply
 The amount of a good or service that
producers plan to (or are willing to)
sell during a given time period at a
particular price is called the quantity
supplied.
 Quantity supplied is not necessarily
the same as the quantity actually
sold (which depends on the
interaction of supply and demand).
The Law of Supply
higher the price of a good, the
greater is the quantity supplied.
 Increasing opportunity cost is the
reason behind the law of supply.
Supply Schedule
and Supply Curve
 A supply schedule lists the
quantities supplied at each different
price when all other influences on
the amount firms plan to sell remain
the same.
 A supply curve is a graph of a supply
schedule.
Supply Schedule
Price Quantity
(dollars per CD-R) (millions of CD-Rs per week)
a .50 0
b 1.00 3
c 1.50 4
d 2.00 5
e 2.50 6
Price (dollar per CD-R) Supply Curve
3.00
2.50
2.00
1.50
1.00
.50
0 2 4 6 8 10
3.00
2.50
e
2.00
d
1.50
c
1.00
b
.50
a
0 2 4 6 8 10
3.00
Supply of CD-Rs
2.50
e
2.00
d
1.50
c
1.00
b
.50
a
0 2 4 6 8 10
Other Influences on Supply
Besides Price
 Prices of factors of production
 Prices of other goods produced
 Expected future prices
 The number of suppliers
 Technology
Prices of Factors
of Production
 A change in the price of a factor of
production causes supply to change
by changing production costs.
 For example, suppose the product is
automobiles and the price of labor
increases. Automakers will cut back
on their supply (the supply curve will
shift to the left).
Produced - Substitutes
 Two goods are substitutes in
production if the same factors of
production can be used to produce
each good. Examples are sedans
and sports cars.
 If the price of sports cars rises, the
quantity supplied of sports cars rises
(move up the supply curve) and the
supply of sedans falls (the supply
curve of sedans shifts to the left).
Produced - Complements
 Two goods are complements in
production if they are produced together.
Examples are beef and cowhide.
 If the price of cowhide rises, the quantity
supplied of cowhide rises (move up along
the supply curve) and the supply of beef
rises (the supply curve of beef shifts to
the right).
Expected Future Prices
 If producers expect the price of a
good to be higher in the future (and
the good can be stored), they may
substitute over time.
 This means they will offer a smaller
quantity of the good for sale today so
the current supply decreases (the
supply curve shifts to the left) .
The Number of Suppliers
larger the number of producers
supplying a good, the larger is the
supply of the good (the supply curve
shifts to the right).
Technology
 New technologies that enable
producers to use less (or cheaper)
factors of production lower the cost
of production and increase supply
(the supply curve shifts to the right).
Supply Response to Change in Technology
Original supply schedule
Old technology
Price Quantity
(dollars (millions of CD-Rs
per CD-R) per week)
a .50 0
b 1.00 3
c 1.50 4
d 2.00 5
e 2.50 6
Original supply schedule New supply schedule
Old technology New technology

per CD-R) per week) per CD-R) per week)
a .50 0 a' .50

b 1.00 3 b' 1.00
c 1.50 4 c' 1.50
d 2.00 5 d' 2.00
e 2.50 6 e' 2.50
Original supply schedule New supply schedule
Old technology New technology

per CD-R) per week) per CD-R) per week)
a .50 0 a' .50 3

b 1.00 3 b' 1.00 6
c 1.50 4 c' 1.50 8
d 2.00 5 d' 2.00 10
e 2.50 6 e' 2.50 12
Supply of CD-Rs
3.00 (old technology)
2.50 e
2.00 d
1.50 c
1.00 b
.50
a
0 2 4 6 8 10 12 14
Supply of CD-Rs
Supply of CD-Rs
(new technology)
2.50 e e'
2.00 d d'
1.50 c c'
1.00 b b'
.50
a a'
0 2 4 6 8 10 12 14
Movement Along Versus a
Shift of the Supply Curve
 If the price of a good changes but
everything else influencing supply
remains constant, there is a
movement along the supply curve.
 If the price of a good remains the
same but another influence on
supply changes, there is a shift of
the supply curve.
A Change in Quantity
Supplied Versus a Change
in Supply
 A movement along the supply curve
shows a change in quantity supplied.
 A shift of the supply curve shows a
change in supply.
A Change in the Quantity Supplied
Versus a Change in Supply
Price
S0
Quantity
Increase in
Price
quantity S0
supplied
Decrease in
quantity
supplied
Quantity
Price
S0
P0
Q0 Quantity
Price
S0
P1
P0
Q0 Q1 Quantity
Price
S0
P1
P0
P2
Q2 Q0 Q1 Quantity
Price
S0 S1
Increase in
supply
Quantity
Price
S2 S0 S1
supply supply
Quantity
Increase in
Price
S2 quantity S0 S1
supplied
supply supply
Decrease in
quantity
supplied
Quantity
Price Determination
 The price of a good regulates the
quantities demanded and supplied.
 There is one price, and only one
price, at which the quantity
demanded equals the quantity
supplied.
 Price is the rationing (or regulating)
mechanism
Shortages
 If the price is too low, the quantity
demanded exceeds the quantity
supplied. People are willing to pay
more for the good.
 To eliminate this shortage, sellers
will raise the price, increasing the
quantity supplied and reducing the
quantity demanded.
Surpluses
 If the price is too high, the quantity
supplied exceeds the quantity
demand. Inventories pile up.
 To eliminate this surplus, sellers will
lower the price, reducing quantity
supplied and increasing quantity
demanded.
Market Equilibrium
 The market equilibrium price is the
price at which the quantity
demanded equals the quantity
supplied.
 The market equilibrium quantity is
the quantity bought and sold at the
equilibrium price.
 At market equilibrium, both buyers
and sellers are satisfied. This is not
true at any other price or quantity.
Market Equilibrium
Quantity Quantity Shortage(–)
Price demanded supplied or surplus(+)
(dollars
per CD-R) (millions of CD-Rs per week)
.50 9 0
1.00 6 3
1.50 4 4
2.00 3 5
2.50 2 6
Market Equilibrium
(dollars
.50 9 0 –9
1.00 6 3
1.50 4 4
2.00 3 5
2.50 2 6
Market Equilibrium
(dollars
.50 9 0 –9
1.00 6 3 –3
1.50 4 4
2.00 3 5
2.50 2 6
Market Equilibrium
(dollars
.50 9 0 –9
1.00 6 3 –3
1.50 4 4 0
2.00 3 5
2.50 2 6
Market Equilibrium
(dollars
.50 9 0 –9
1.00 6 3 –3
1.50 4 4 0
2.00 3 5 +2
2.50 2 6
Market Equilibrium
(dollars
.50 9 0 –9
1.00 6 3 –3
1.50 4 4 0
2.00 3 5 +2
2.50 2 6 +4
Market Equilibrium
(dollars
.50 9 0 –9
1.00 6 3 –3
1.50 4 4 0
2.00 3 5 +2
2.50 2 6 +4
Market Equilibrium
3.00
2.50
2.00
1.50
1.00
.50
0 2 4 6 8 10
Market Equilibrium
3.00
2.50
2.00
1.50
1.00
Demand
.50 for CD-Rs
0 2 4 6 8 10
Market Equilibrium
3.00
Supply of CD-Rs
2.50
2.00
1.50
1.00
Demand
.50 for CD-Rs
0 2 4 6 8 10
Market Equilibrium
3.00
Supply of CD-Rs
2.50
2.00
1.50
1.00
Demand
.50 for CD-Rs
0 2 4 6 8 10
A Shortage Forces
the Price Up
 If demand exceeds supply, sellers
will raise price, decreasing quantity
demanded.
A Surplus Forces
the Price Down
 If supply exceeds demand, sellers
will see their inventories of unsold
goods piling up and will cut price to
sell them.
Market Equilibrium
Surplus of
3.00 2 million CD-Rs
at $2 a CD-R Supply of CD-Rs
2.50
2.00
Equilibrium
1.50
1.00
Demand
.50 Shortage of for CD-Rs
3 million
CD-Rs at $1
a CD-R
0 2 4 6 8 10
The Best Deal Available
for Buyers and Sellers
 The equilibrium price is the best deal
available for buyers and sellers.
 This is the price at which trade takes
place.
Predicting Changes in
Price and Quantity
 The theory we have just studied
provides us with a powerful way of
analyzing influences on prices and
the quantities bought and sold.
 A change in price must be caused by
either a change in demand or a
change in supply.
A Change in Demand
 An increase in demand shifts the
demand curve up and to the right.
 The new equilibrium price and
quantity are higher.
Predicting Changes in
Price and Quantity
 A Change in Demand
– What would happen to the price and quantity of
CD-Rs if the price of a CD Burner falls from
$300 to $100.
The Effects of a Change in
Demand
Quantity demanded
Price (millions of CD-Rs per week)
(dollars Quantity supplied
per CD-R ) CD Burner $300 CD Burner $100 (millions of CD-Rs per week)
.50 9 0
1.00 6 3
1.50 4 4
2.00 3 5
2.50 2 6
Demand
Quantity demanded
.50 9 0
1.00 6 3
1.50 4 4
2.00 3 5
2.50 2 6
Demand
Quantity demanded
.50 9 13 0
1.00 6 10 3
1.50 4 8 4
2.00 3 7 5
2.50 2 6 6
Demand
Quantity demanded
.50 9 13 0
1.00 6 10 3
1.50 4 8 4
2.00 3 7 5
2.50 2 6 6
The Effects of a Change in Demand
Supply of CD-Rs
3.00
2.50
2.00
1.50
1.00
.50
Demand for CD-Rs
(CD Burner $300)
0 2 4 6 8 10 12 14
Supply of CD-Rs
3.00
2.50
2.00
1.50
1.00
Demand for CD-Rs
.50 (CD Burner $100)
Demand for CD-Rs
(CD Burner $300)
0 2 4 6 8 10 12 14
Supply of CD-Rs
3.00
2.50
2.00
1.50
1.00
Demand for CD-Rs
(CD Burner $100)
.50
Demand for CD-Rs
(CD Burner $300)
0 2 4 6 8 10 12 14
A Change in Supply
 An increase in supply shifts the
supply curve down and to the right.
 The new equilibrium price is lower,
but the equilibrium quantity is
higher.
The Effects of a Change in Supply
Quantity supplied
(dollars Quantity demanded old new
per CD-R ) (millions of CD-Rs per week) technology technology
.50 9 0
1.00 6 3
1.50 4 4
2.00 3 5
2.50 2 6
Quantity supplied
.50 9 0
1.00 6 3
1.50 4 4
2.00 3 5
2.50 2 6
Quantity supplied
.50 9 0 3
1.00 6 3 6
1.50 4 4 8
2.00 3 5 10
2.50 2 6 12
Quantity supplied
.50 9 0 3
1.00 6 3 6
1.50 4 4 8
2.00 3 5 10
2.50 2 6 12
Supply of CD-Rs
2.50
2.00
1.50
1.00
.50
Demand for CD-Rs
0 2 4 6 8 10 12 14
Supply of CD-Rs Supply of CD-Rs

3.00 (old technology) (new technology)
2.50
2.00
1.50
1.00
.50
Demand for CD-Rs
0 2 4 6 8 10 12 14
2.50
2.00
1.50
1.00
.50
Demand for CD-Rs
0 2 4 6 8 10 12 14
A Change in Both
Demand and Supply
 Both curves shift.
 The direction in which price and
quantity change will depend on how
each curve shifts.
Demand and Supply Change
in the Same Direction
 If demand and supply increase, both
the demand and supply curves shift
out.
 The new equilibrium quantity will be
higher.
 The new equilibrium price may be
higher, lower, or it may remain the
same.
The Effects of an Increase in
Both Demand and Supply
Original Quantities New Quantities
(millions of CD-Rs per week) (millions of CD-Rs per week)
Price Quantity Quantity Quantity Quantity
(dollars demanded supplied demanded supplied
per CD-R ) CD Burner old CD Burner new
$300 technology $100 technology
.50 9 0
1.00 6 3
1.50 4 4
2.00 3 5
2.50 2 6
.50 9 0
1.00 6 3
1.50 4 4
2.00 3 5
2.50 2 6
.50 9 0 13 3
1.00 6 3 10 6
1.50 4 4 8 8
2.00 3 5 7 10
2.50 2 6 6 12
.50 9 0 13 3
1.00 6 3 10 6
1.50 4 4 8 8
2.00 3 5 7 10
2.50 2 6 6 12
Supply of CD-Rs
2.50
2.00
1.50
1.00
.50
Demand for CD-Rs
(CD Burner $300)
0 2 4 6 8 10 12 14
Supply of CD-Rs
2.50
2.00
1.50
1.00 Demand for CD-Rs

(CD Burner $100)
.50
Demand for CD-Rs
(CD Burner $300)
0 2 4 6 8 10 12 14
2.50
2.00
1.50

(CD Burner $100)
.50
Demand for CD-Rs
(CD Burner $300)
0 2 4 6 8 10 12 14
A Decrease in Both
Demand and Supply
 When both demand and supply
decrease, the quantity decreases and
the price increases, decreases, or
remains constant
The Effects of a Decrease in
Price (dollar per CD-R) Both Demand and Supply
Supply of CD-Rs
3.00 (wage=$9)
2.50
2.00
1.50

(CD Burner $100)
.50
0 2 4 6 8 10 12 14
3.00 (wage=$10) (wage=$9)
2.50
2.00
1.50

(CD Burner $100)
.50
0 2 4 6 8 10 12 14
3.00 (wage=$10) (wage=$9)
2.50
2.00
1.50

(CD Burner $100)
.50
Demand for CD-Rs
(CD Burner $300)
0 2 4 6 8 10 12 14
Demand and Supply Change
in Opposite Directions
 Suppose supply increases but
demand decreases.
 Price falls.
 The direction in which quantity
changes will depend on the
magnitude of the shifts in the two
curves.
The Effects of an Decrease in Demand
and an Increase in Supply
per CD-R ) MP3 download old MP3 download new
free technology $20 technology
.50 13 0
1.00 10 3
1.50 8 4
2.00 7 5
2.50 6 6
.50 13 0
1.00 10 3
1.50 8 4
2.00 7 5
2.50 6 6
.50 13 0 9 3
1.00 10 3 6 6
1.50 8 4 4 8
2.00 7 5 3 10
2.50 6 6 2 12
.50 13 0 9 3
1.00 10 3 6 6
1.50 8 4 4 8
2.00 7 5 3 10
2.50 6 6 2 12
A Decrease in Demand and an
Increase in Supply
Supply of CD-Rs
2.50
2.00
1.50
Demand for CD-Rs
(MP3 Download free)
1.00
.50
0 2 4 6 8 10 12 14
Increase in Supply
Supply of CD-Rs
2.50
2.00
1.50
Demand for CD-Rs
(MP3 Download free)
1.00
.50
Demand for CD-Rs
(MP3 Download $20)
0 2 4 6 8 10 12 14
Increase in Supply
Supply of CD-Rs
2.50
Supply of CD-Rs
2.00 (new technology)
1.50
Demand for CD-Rs
(MP3 Download free)
1.00
.50
Demand for CD-Rs
(MP3 Download $20)
0 2 4 6 8 10 12 14
Demand and a Decrease in
Supply
 When demand increases and supply
decreases, the price rises and the
quantity increases, decreases, or
remains constant.
An Increase in Demand and a
Decrease in Supply
3.00
2.50
Supply of CD-Rs
2.00 (wage=$9)
1.50
1.00
.50
Demand for CD-Rs
(MP3 download $20)
0 2 4 6 8 10 12 14
Decrease in Supply
3.00
2.50
Supply of CD-Rs
2.00 (wage=$9)
1.50
Demand for CD-Rs
(MP3 download free)
1.00
.50
Demand for CD-Rs
(MP3 download $20)
0 2 4 6 8 10 12 14
Decrease in Supply
Supply of CD-Rs
3.00 (wage=$10)
2.50
Supply of CD-Rs
2.00 (wage=$9)
1.50
Demand for CD-Rs
(MP3 download free)
1.00
.50
Demand for CD-Rs
(MP3 download $20)
0 2 4 6 8 10 12 14

IE Chapter 3a

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

IE Chapter 3a

Uploaded by

Copyright:

Available Formats

CHAPTER 3

Original demand schedule New demand schedule

Original demand schedule New demand schedule

2.50 e e' Demand for CD-Rs

Price Quantity Price Quantity

a .50 0 a' .50

Price Quantity Price Quantity

a .50 0 a' .50 3

Supply of CD-Rs Supply of CD-Rs

1.00 Demand for CD-Rs

1.00 Demand for CD-Rs

1.00 Demand for CD-Rs

1.00 Demand for CD-Rs

1.00 Demand for CD-Rs

You might also like