In this chapter, look for the

answers to these questions:

ECONOMIC • What factors affect buyers’ demand for goods?
DEVELOPMENT • What factors affect sellers’ supply of goods?
AC 2203 • How do supply and demand determine the price of a good
and the quantity sold?
• How do changes in the factors that affect demand or
Unit 1 supply affect the market price and quantity of a good?
Overview of Economic Principles • How do markets allocate resources?
Part 2- Economics and Distribution
Demand and Supply

1 2

Markets and Competition Markets and Competition

• Market
• Competitive market
• A group of buyers and sellers of
a particular good or service • Many buyers and many sellers, each
has a negligible impact on market
price
• Buyers as a group
• Determine the demand for the
product • Perfectly competitive market
• All goods are exactly the same
• Sellers as a group • Buyers and sellers are so numerous
• Determine the supply of the that no one can affect the market
product price, “Price takers”

3 4
 Derick’s Demand
Demand Schedule Price
Quantity
of lattes
of lattes
•Demand schedule: demanded
• Quantity demanded
A table, shows the relationship $0.00 16
• Amount of a good that buyers are
willing and able to purchase between the price of a good and 1.00 14
the quantity demanded 2.00 12
• Law of demand 3.00 10
• Other things equal
Example: Derick’s demand for 4.00 8
• When the price of a good rises, the
latte 5.00 6
quantity demanded of the good Price Quantity Notice that Derick’s preferences
6.00 4
falls obey the law of demand.
• When the price falls, the quantity
demanded rises
Price Quantity
6

5 6

Derick’s Demand Schedule

and Demand Curve
Price of Price
Quantity
of lattes
Demand
Lattes of lattes
demanded
$6.00 $0.00 16 • Market demand
$5.00 1.00 14 • Sum of all individual demands for a good or service
2.00 12
$4.00
3.00 10 • Market demand curve: sum the individual demand
$3.00 4.00 8 curves horizontally
• To find the total quantity demanded at any price, we
$2.00 5.00 6
add the individual quantities
6.00 4
$1.00
$0.00 Quantity of
0 5 10 15 Lattes

7 8
 Market Demand versus Individual Demand The Market Demand Curve for
•Suppose Derick and Dean are the only two buyers in the Lattes
market for lattes. (Qd = quantity demanded) P P Qd (Market)
$6.00
$0.00 24
Price Derick’s Qd Dean’s Qd Market Qd $5.00
1.00 21
$0.00 16 + 8 = 24 $4.00 2.00 18
1.00 14 + 7 = 21
$3.00 3.00 15
2.00 12 + 6 = 18
4.00 12
3.00 10 + 5 = 15 $2.00
5.00 9
4.00 8 + 4 = 12 $1.00 6.00 6
5.00 6 + 3 = 9 $0.00
6.00 4 + 2 = 6
Q
0 5 10 15 20 25

9 10

Why Does Quantity Demanded

Go Down as Price Goes Up? Demand Curve Shifters
• people substitute lower priced goods for higher • The demand curve
priced goods. • Shows how price affects quantity P

demanded, other things being equal

• the law of diminishing marginal utility, which states • These “other things” are non-price D D1

that for a given time period, the marginal (or determinants of demand Q

• Things that determine buyers’

additional) utility or satisfaction gained by demand for a good, other than the P

consuming equal successive units of a good will good’s price

decline as the amount consumed increases.
• Changes in them shift the D curve… D1 D

12

11 12
 Demand Curve Shifters Demand Curve Shifters
Income of Consumers
Tastes & Preferences of Consumers
• As people’s tastes change in
Example: When Michael Jordan began • As income increases, Example: When Billy got laid off from his job,
endorsing the products, demand for Nike
favor of a good, or an & Gatorade increased.
consumer demand for goods his demand for gourmet steak dinners
decreased.
effective advertising and services increases (shifts
campaign has been waged,
demand increases (shifts to to the right).
the right). • As income decreases,
• As people’s tastes change consumer demand for goods
against a good, or a good
loses popularity, demand and services decreases
decreases (shifts to the left). (shifts to the left).

13 14

Demand Curve Shifters Demand Curve Shifters

Related Goods: Substitutes Related Goods: Complements
Substitute goods can be easily used in Complementary goods are used WITH each
place of one another. other.
• If two goods are SUBSTITUTES, Example: Demand for Starbucks changes • If two goods are COMPLEMENTS, Example: Demand for ketchup changes
when the price of Good A when CBTL alters its prices when the price of Good A when hamburger prices fluctuate
increases, demand for Good B increases, demand for Good B
increases (shifts to the right). decreases (shifts to the left).
• If two goods are SUBSTITUTES, • If two goods are COMPLEMENTS,
when the price of Good A when the price of Good A
decreases, demand for Good B decreases, demand for Good B
decreases (shifts to the left). increases (shifts to the right).

15 16
 Demand Curve Shifters
Expectations of Future Price Changes
• If consumers expect the
price of a good to rise in
the future, immediate
demand increases (shifts
to the right).
• If consumers expect the
price of a good to
decrease in the future,
immediate demand
decreases (shifts to the
left).
17
Summary:
Variables That Influence Buyers
19
Demand Curve Shifters
Size of Population/Market
• As the number of consumers
in a given market increases, Example: Demand for BTS concert
Example: Demand for gas changes
throughout the week demand increases (shifts to tickets items increases when more K
the right). pop fans would watch their concerts.
• As the number of consumers
in a given market decreases,
demand decreases (shifts to
the left).
18
Supply
• Quantity supplied
• Amount of a good
• Sellers are willing and able to sell
• Law of supply
• Other things equal
• When the price of a good rises, the
quantity supplied of the good rises Price Quantity
• When the price falls, the quantity
supplied falls
Price Quantity
19 24
24
 Starbucks’ Supply Schedule Starbucks’ Supply Schedule and Supply
Curve
Price Quantity
•Supply schedule: Price Quantity P of of lattes
A table, shows the relationship of of lattes $6.00 lattes supplied
between the price of a good and lattes supplied $0.00 0
the quantity supplied. $5.00
$0.00 0 1.00 3
1.00 3 $4.00 2.00 6
Example: Starbucks’ supply of 2.00 6 3.00 9
$3.00
lattes 3.00 9 4.00 12
Notice that Starbucks’ supply 4.00 12
$2.00
5.00 15
schedule obeys the law of supply $1.00
5.00 15 6.00 18
6.00 18 $0.00
Q
0 5 10 15
25 26

25 26

Market Supply vs. Individual Supply

Market Supply vs. Individual Supply
•Suppose Starbucks and Peet’s are the only two sellers in
this market. (Qs = quantity supplied)
• Market supply
• Sum of the supplies of all sellers of a good or Price Qs Starbucks Qs Peet’s Market Qs
service $0.00 0 + 0 = 0
1.00 3 + 2 = 5
• Market supply curve: sum of individual
2.00 6 + 4 = 10
supply curves horizontally
• To find the total quantity supplied at any price, 3.00 9 + 6 = 15
we add the individual quantities 4.00 12 + 8 = 20
5.00 15 + 10 = 25
6.00 18 + 12 = 30
27 28

27 28
 The Market Supply Curve
P Supply Curve Shifters
QS
$6.00 P
(Market)
• The supply curve
$5.00 $0.00 0
• Shows how price affects quantity supplied, other things
$4.00 1.00 5 being equal
2.00 10
$3.00
3.00 15 • These “other things”
$2.00 4.00 20 • Are non-price determinants of supply
$1.00 5.00 25
6.00 30 • Changes in them shift the S curve…
$0.00
0 5 10 15 20 25 30 35 Q

29 30

29 30

Supply Curve Shifters Supply Curve Shifters

Technological Advancements International Events/Disasters
P • When international events (such
• As technology advances, production P

as wars & revolutions) or natural

becomes more efficient and supply
S disasters occur, supply decreases
increases (shifts to the right).
S1 S1 S
Q
(shifts to the left). Q

31 32
 Supply Curve Shifters
Government Intervention
Example:
If the import tax on Toyota Corollas P

(Taxes, Fees, Regulations, Subsidies)) increases, the profit per unit decreases,
and American manufacturers will not be
• When a tax, fee, or regulation is P
able to afford to offer as many for sale.
S1 S
Q
imposed on the production of a
good or service, supply decreases S1 S
(shifts to the left). Q

• When a subsidy is granted for

P

producers of a good or service,

supply increases (shifts to the right). S S1
Q

33 34

Supply Curve Shifters

Example: P

When the government decided to

subsidize dairy farming, dairy farmers’
Expectations of Future Price Changes
S S1
profits increased, therefore increasing Q • If producers expect the price of a
supply of dairy cattle. good to rise in the future,
P

immediate supply decreases (shifts

to the left). S1 S
Q
• If producers expect the price of a
good to decrease in the future, P

immediate supply increases (shifts to

the right). S S1
Q

35 36
 Supply Curve Shifters
Example:
If Farmer Joe hears that the price of corn is going to
increase next month, he’s going to wait to sell his corn Resource Costs P

(therefore decreasing the immediate supply of corn). • As the factors of production (land,
labor, and capital) become more S1 S

expensive for the producer to Q

purchase, supply decreases (shifts

to the left). P

• As the factors of production (land,

labor, and capital) become less S S1

expensive for the producer to Q

purchase, supply increases (shifts to

the right).

37 38

Supply Curve Shifters

Example:
Donkie’s landlord increases his rent, which increases # of Sellers in the Market
Donkie’s costs of production. Since it’s more
expensive to make a donut, the profit per unit earned • When additional firms
P

decreases and supply of Donkie’s Donuts falls. (businesses) enter a market,

supply of the product increases S S1

(shifts to the right). Q

• When firms (businesses) exit a

market (go out of business or for
P

some other reason cease

production), supply of the product S1 S

decreases (shifts to the left). Q

39 40
 Summary:
Example: Variables That Influence Sellers
If the Never City Council passed a law banning pizza
from being sold within city limits, pizza producers
would have to close/move, decreasing the supply of
pizza in Never.

42

41 42

Supply and Demand Together

P
D
$6.00 S

Putting it all together: •Equilibrium: $5.00

Price has reached
EQUILIBRIUM the level where
$4.00

quantity supplied $3.00

equals quantity $2.00
How Demand & Supply Interact to
Determine Prices of Goods & Services
demanded $1.00
$0.00
Q
0 5 10 15 20 25 30 35

44

43 44
 Market Demand and Supply Equilibrium

Equilibrium Price (Market- Clearing Price)

The price at which quantity demanded of the good equals
quantity supplied
Equilibrium Quantity
The quantity that corresponds to equilibrium price. The
quantity at which the amount of the good that buyers are
willing and able to buy equals the amount that sellers are
willing and able to sell, and both equal the amount actually
bought and sold.

45 46

If Demand Increases…

What happens
when demand or
P2

supply shifts?
D2

Q2

47 48
 If Demand Decreases… If Supply Increases…

S2

P2 P2

D2
Q2 Q2

49 50

If Supply Decreases… Four Steps to Analyzing

Changes in Equilibrium
S2

P2
• Does the event shift the supply or demand curve?
• Will the curve shift rightward ( ) or leftward ( ) ?
• Draw & label the new curve on your graph
• Locate the new equilibrium (price and qty)

Q2

51 52
 Del Monte largest country’s spaghetti
producer cuts pasta prices
Spaghetti Sauce

P2

D2

Q2

53 54

Typhoon Yolanda destroy much of
Ormoc pineapple crop
Pineapple Juice
S2
Farmer invents new picking machine – Harvests
mangoes in half the time
Sweet Delicious Mangoes
S2

P2

P2

Q2 Q2

55 56
 Markets Not in Equilibrium: Surplus
Disequilibrium
•Surplus (excess supply):
P D S •quantity supplied is greater
Disequilibrium $6.00 Surplus
than quantity demanded
A state of either surplus or shortage in the $5.00
market $4.00
•Example: if P = $5,
• then QD = 9 lattes
Disequilibrium Price
$3.00 • and QS = 25 lattes
A price other than equilibrium price. A price at •
$2.00
which the quantity demanded does not equal the •resulting in a surplus of 16
quantity supplied. $1.00 lattes
$0.00
Q
0 5 10 15 20 25 30 35
58

57 58

Markets Not in Equilibrium: Surplus Markets Not in Equilibrium: Surplus

•Facing a surplus, •Facing a surplus,

P D S
sellers try to increase sales P D S sellers try to increase sales
$6.00 Surplus by cutting price. $6.00 Surplus by cutting price.
$5.00 $5.00
$4.00
•This causes QD to rise $4.00 •This causes QD to rise
$3.00 •and QS to fall… $3.00 •and QS to fall…
$2.00 $2.00 •Prices continue to fall
•…which reduces the until market reaches
$1.00 surplus. $1.00 equilibrium.
$0.00 $0.00
Q Q
0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35
59 60

59 60
 Markets Not in Equilibrium: Shortage Markets Not in Equilibrium: Shortage

•Shortage (excess demand): •Facing a shortage,

P D S •quantity demanded is P D S sellers raise the price,
$6.00 $6.00
greater than quantity
$5.00 supplied $5.00 • causing QD to fall
$4.00 •Example: if P = $1, $4.00 • and QS to rise,
$3.00 • then QD = 21 lattes $3.00
• and QS = 5 lattes •…which reduces the
$2.00 • $2.00
shortage.
$1.00 •resulting in a shortage of 16 $1.00
lattes Shortage
$0.00 Shortage $0.00
Q Q
0 5 10 15 20 25 30 35 0 5 10 15 20 25 30 35
61 62

61 62

Markets Not in Equilibrium: Shortage

How Prices Allocate
•Facing a shortage, Resources
sellers raise the price,
P D S
$6.00 • “Markets are usually a good way to organize
• causing QD to fall economic activity”
$5.00
$4.00 • and QS to rise,
• In market economies
$3.00 •…which reduces the • Prices adjust to balance supply and demand

$2.00 shortage.
•Prices continue to rise until • These equilibrium prices
$1.00 market reaches equilibrium. • Are the signals that guide economic decisions and thereby
Shortage
$0.00 • allocate scarce resources
Q
0 5 10 15 20 25 30 35
63 64

63 64
 Summary
• Economists use the model of supply and demand to
analyze competitive markets.
• Many buyers and sellers, all are price takers
• The demand curve shows how the quantity of a good
demanded depends on the price.
• Law of demand: as the price of a good falls, the
quantity demanded rises; the D curve slopes downward
• Other determinants of demand: income, prices of
substitutes and complements, tastes, expectations, and
number of buyers.
• If one of these factors changes, the D curve shifts
65
65
Summary
• The behavior of buyers and sellers naturally drives
markets toward their equilibrium.
• When the market price is above the equilibrium
price, there is a surplus of the good, which causes
the market price to fall.
• When the market price is below the equilibrium
price, there is a shortage, which causes the market
price to rise.
67
67
Summary
• The supply curve shows how the quantity of a good
supplied depends on the price.
• Law of supply: as the price of a good rises, the quantity
supplied rises; the S curve slopes upward.
• Other determinants of supply: input prices,
technology, expectations, and number of sellers.
• If one of these factors changes, supply curve shifts.
• The intersection of the supply and demand curves
determines the market equilibrium.
• At the equilibrium price, quantity demanded =
quantity supplied
66
66
Summary
• To analyze how any event influences a market, we use
the supply-and-demand diagram to examine how the
event affects the equilibrium price and quantity.
1. Decide whether the event shifts the supply curve or
the demand curve (or both).
2. Decide in which direction the curve shifts.
3. Compare the new equilibrium with the initial one.
• In market economies, prices are the signals that guide
economic decisions and thereby allocate scarce
resources.
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