CHAPTE

DYNAMIC POWERPOINT SLIDES BY SOLINA LINDAHL

Supply and Demand

COPYRIGHT 2012 WORTH PUBLISHERS

CHAPTER
OUTLINE

To Try it!
questions
2

Food for
Thought.
Some good blogs and other sites to get the juices flowing:

Demand

What made him buy it?

4

BACK TO

Demand
Demand represents the
behavior of buyers.
A Demand Curve shows the
quantity demanded at different
prices.
The Quantity Demanded: the
quantity that buyers are willing
(and able) to purchase at a
particular price.
5

BACK TO

Law of Demand
Price and Quantity Demanded
are negatively related

BACK TO

The Demand Curve

The Demand Curve for
Oil
Price of
Oil per
Barrel

Quantity
Price Demanded

$55

$20
$5

$20

25

$5

50

Demand
5

$55

25

50

Quantity of Oil
(MBD)
BACK TO

Reading Demand Curves

Demand curves can be read in
two ways:
Horizontally: How much buyers
are willing and able to purchase
at a certain price.
Vertically: The highest price
buyers are willing to pay for a
certain quantity.

BACK TO

Intuition of the Demand Curve

When the price is
high, oil will only be
used in the high
value products. If
the price falls, oil
will also be used in
lower value
products.

Price of
Oil per
Barrel
Higher
Valued
Uses of Oil

$120

Lower
Valued
Uses of Oil

$20

Demand

20

120

Quantity of Oil
(MBD)
BACK TO

Consumer Surplus
Consumer Surplus is the
consumers gain from exchange,
the difference between the highest
price a consumer will pay at a
given quantity and the actual
market price.

Total consumer surplus is the

sum of consumer surplus of all
buyers.
10

BACK TO

Try it!
Your roommate just bought an iPad for
$600. She would have been willing to
pay $1,000 for a machine that could
make her life so much more worthwhile.
How much consumer surplus does your
roommate enjoy from the iPad?
a)$600
b)$400
c)$1600
d)$1400
To next
Try it!

Consumer Surplus
Consumer Surplus is the Area beneath the Demand Curve and above the
Price
Price of
Area of Triangle

Oil per
Barrel
80

20

The
Presidents
Consumer
Surplus
Total Consumer
Surplus at a Price
of $20

(8020)x90 =
$2,700

(Base x Height)
Base

Joes Consumer
Surplus

Demand
90

12

Height

Quantity of Oil
(MBD)

BACK TO

Try it!
If the price is $2010, what is the
consumer surplus?
a)$3,588,000
b)$1,794,000
c)$6,000,000
d)$3,000,000

To next
Try it!

What Shifts the Demand

Curve?
An increase in demand
means that consumers buy
more at every price level, (or
consumers are willing to pay
more for each quantity.)
On the graph: the demand curve
shifts outwards, up, and to the
right.

14

BACK TO

What Shifts the Demand

Curve?
A decrease in demand means
that consumers buy less at
every price level, (or they
reduce the price theyre willing
to pay for a given quantity.)
On the graph: the demand curve
shifts inwards, down, and to the
left.

15

BACK TO

A Decrease in Demand
Price
per
Unit
$50

Lower Willingness to
Pay for the Same
Quantity
Less Quantity Demanded
at the Same Price

$25
Old Demand
Curve
New
Demand
Curve

70
16

80

Quantity
BACK TO

An Increase in Demand
Price per
Unit
$50

Greater Willingness
to Pay for the Same
Quantity
Greater Quantity
Demanded at the Same
Price

$25

New
Demand
Curve
Old Demand
Curve

70
17

80

Quantity
BACK TO

Demand Shifters

Important Demand Shifters:

1.Income
2.Population
3.Price of Substitutes
4.Price of Complements
5.Expectations
6.Tastes
18

BACK TO

Important Demand Shifters:

Income
1.The effect of changes in
income on demand depends on
the nature of the good in
question.
A Normal Good: demand increases
when income increases (and vice
versa).
An Inferior Good: demand
decreases when income increases
(and vice versa)
19

BACK TO

Try it!
When the price of petroleum goes
up, the demand for natural gas
______, the demand for coal ______, and
the demand for solar power ______.
a)increases; increases; increases
b)increases; increases; decreases
c)decreases; decreases; increases
d)decreases; decreases; decreases
To next
Try it!

Important Demand Shifters:

Population
2.As the population of an
economy changes, the # of
buyers of a particular good
also changes, (thereby
changing its demand.)
What happens to the demand for
diapers in Russia as birth rates
drop?

21

BACK TO

Important Demand Shifters:

Price of Substitutes
3.Two goods are Substitutes if a
decrease in the price of one
leads to a decrease in
demand for the other (or vice
versa).
- What happens to the demand for

travel in Hawaii if the

(perceived) safety cost of
traveling to Mexico increases?
22

BACK TO

Important Demand Shifters:

Price of Complements
4.Two goods are Complements
if a decrease in the price of
one good leads to an increase
in the demand for the other
(or vice versa).
What happens to the demand for
Sport Utility Vehicles when
gasoline gets more expensive?

23

BACK TO

Price of Complements

Consumers often have to buy goods

together.
An increase in price of gasoline will
decrease the demand for SUVs
24

BACK TO

Important Demand Shifters:

Expectations
5. The expectation of a higher (lower)
price for a good in the future
increases (decreases) current
demand for the good.
Consumers will adjust their current
spending in anticipation of the
direction of future prices in order to
obtain the lowest possible price.
If prices for Xbox 360 consoles are
expected to drop right before
Christmas, what will happen to sales
during November?
25

BACK TO

Important Demand Shifters:

Tastes
6.Tastes and preferences are
subjective and will vary
among consumers.
Seasonal changes or fads have
predictable effects on demand.
What happens to demand for
boots in October? To
carbohydrates during the
Atkins diet fad? Or to Acai
berries after newly perceived
health benefits?
26

BACK TO

What Shifts the Demand

Curve?
A change in quantity demanded is NOT
the same as a change in demand.
Quantity demanded changes only
when the price of a good changes.
It is a movement along a fixed
demand curve.

Demand changes only when a nonprice factor (demand shifter) changes.

It is a shift in the entire demand
A
A change
change in
in
A
A change
change
curve.
Quantity
Quantity
Demanded
Demanded

27

in
in Demand
Demand

BACK TO

Try it!
When the price of a good increases the
quantity demanded ______. When the
price of a good decreases the quantity
demanded ______.
a)rises; rises
b)rises; falls
c)falls; rises
d)falls; falls
To next
Try it!

Supply

What made this oil field happen?

29

BACK TO

Supply
Supply represents the behavior
of sellers.
A Supply Curve shows the
quantity supplied at different
prices.
The Quantity Supplied is the
quantity that producers are
willing and able to sell at a
particular price.
30

BACK TO

Law of Supply
What do you think happens to the
quantity of human organs donated
in Israel when the government
issues a point system that rewards
donors?
The Law of Supply: there is a direct
relationship between price and
quantity supplied.
When price rises, all else equal,
quantity supplied rises and vice versa
31

BACK TO

The Supply Curve

Price of
Oil per
Barrel

The Supply Curve for

Oil
Supply Curve for Oil

$55

$20

$5
10
32

30

50

Quantity of Oil
(MBD)
BACK TO

Reading Supply Curves

Supply curves can be read in
two ways:
Horizontally: How much suppliers
are willing and able to sell at a
certain price.
Vertically: The minimum price for
which suppliers are willing to sell
a certain quantity.

33

BACK TO

Supply Curves
Why is the supply curve upward
sloping?
The cost of producing a good is
not equal across all suppliers.
At a low price, a good is
produced and sold only by
the lowest cost suppliers.
At a high price, a good is
also produced and sold by
higher cost suppliers.
34

BACK TO

The Supply Curve for Oil

Price of
Oil per
Barrel

The Supply Curve for

Oil

Supply

$60

Oil Shale
Profitable
Here

$40
Higher Cost Oil
Low Cost Oil
$20

20
35

40

60

80

Quantity of Oil
100 (MBD)
BACK TO

Furthermore

Does sex have a price? See this blog post for a discussion about changes
in supply and demand for sex.
36

BACK TO

Producer Surplus
Producer Surplus is the producers
gain from exchange
the difference between the market price
and the minimum price at which
producers would be willing to sell a
certain quantity.

Total producer surplus is the sum of

the producer surplus of each seller.
Graphically, total producer surplus is
measured by the area above the
supply curve and below the price.
37

BACK TO

Producer Surplus
Producer Surplus is the Area Above the Supply Curve and Below the Price
Price of
Oil per
Barrel

$60

Supply Curve

$40

$20

38

2
0

Total Producer
Surplus at a Price of
$40
Quantity of Oil
(MBD)
4
6
8
0
0
0

BACK TO

Try it!
Using the following diagram,
calculate total producer surplus if
the price of oil is $50 per barrel.
a)0
b)$45
c)$1,350
d)$2,700

To next
Try it!

Change in Supply
Price of
Oil per
Barrel
$50

Greater
Quantity
Supplied at
the Same
Price

Old
Supply

New
Supply

$10

Lower Costs Increase

Supply

Willing to
Sell Same
Quantity
at Lower
Prices
20
40

8
0

Quantity of Oil
(MBD)
BACK TO

Change in Supply
New
Supply

Price of
Oil per
Barrel

$10

Smaller
Quantity
Supplied at
the Same
Price

Higher
Price
Needed
to Sell
Same
Quantity

Higher Costs Decrease

Supply

20
41

Old
Supply

8
0

Quantity of Oil
(MBD)
BACK TO

Supply Shifters
Important Supply Shifters
1.Technological Innovations
2.Input Prices
3.Taxes and Subsidies
4.Expectations
5.Entry or Exit of Producers
6.Changes in Opportunity
Costs
42

BACK TO

Important Supply Shifters:

Technological Innovations
1. A technological innovation makes
sellers willing to offer more at a
given price, or sell a their
quantity at a lower price.
A technological innovation lowers
costs and increases supply.

43

BACK TO

Production Technology

44

BACK TO

Important Supply Shifters:

Input Prices
2. A decrease in the price of an
input (all else equal) increases
profits and encourages more
supply (and vice versa)
What will happen to the amount of
new businesses if the government
reduces the fees and red tape
associated with new business
licenses? What happens if the fees
rise?
45

BACK TO

Important Supply Shifters:

Taxes and Subsidies

3. A tax on output reduces profit
and makes sellers less willing to
supply at a given price, unless
they can effectively raise the
price without losing any sales.
(for now, assume they cannot)
A tax on output raises costs and
decreases supply.
Graph the effect on supply of a new
cigarette tax in your notes.
46

BACK TO

Important Supply Shifters:

Taxes and Subsidies

A subsidy on production makes
sellers willing to supply a greater
quantity at a given price, or the
subsidy allows producers to sell a
given quantity at a lower price.
A subsidy on production lowers costs
and increases supply.
Graph the effect on supply of a new
subsidy to fast food producers aimed
at helping them market and sell
overseas.
47

BACK TO

Taxes and Subsidies

Taxes and subsidies affect profits and

therefore supply.
A 10% yacht tax reduced the supply of
yachts
53% in the early 1990s.
48

BACK TO

Cotton Supply

When the U.S. decreases its cotton

subsidies, U.S. cotton supply decreases
49

BACK TO

Important Supply Shifters:

Taxes and Subsidies

$10

$1
0

$5
0

$10

With a $10 Tax Suppliers Require a $10 Higher Price to Sell the Same
Quantity
Price of
Supply With $10 Tax
Oil per
Barrel

Supply Without Tax

$4
0

50

Quantity of Oil (MBD)

BACK TO

Important Supply Shifters:

Expectations
4. The expectation of a higher price
for a good in the future
decreases current supply of the
good if they can store the good(and vice versa).
Sellers will adjust their current
offerings in anticipation of the
direction of future prices in order to
obtain the highest possible price.

51

BACK TO

Future Expectations
A change in producers
expectations about profitability
will affect supply curves
Windmill production increases as
producers expect sales and
profitability to increase.

52

BACK TO

Important Supply Shifters:

Expectations

Expectations Can Shift the Supply Curve

Price
per
Unit

Supply Today
with Expectation
of Future Price
Increase

Supply Today

Into Storage

Quantity
53

BACK TO

Important Supply Shifters:

Entry or Exit of Producers

5. As producers enter and exit the
market, the overall supply
changes.
Entry implies more sellers in the
market increasing supply.
Exit implies fewer sellers in the
market decreasing supply.
What will happen to the supply for
Marijuana in California if the drug is
legalized for general use?
54

BACK TO

Number of Producers
As more producers enter a market,
supply increases (and vice versa)
As more firms
enter the solar
installation market,
the number of
solar installations
available for sale
increases
55

BACK TO

Important Supply Shifters:

Entry or Exit of Producers

Entry Increases Supply
Pric
e

Domestic
Supply

Greater Quantity
Supplied at the
Same Price
Domestic Supply
Plus Canadian
Imports

Lower Price for the

Same Quantity
Supplied
56

Quantity
BACK TO

Important Supply Shifters:

Changes in Opportunity Costs

6. Inputs used in production have
opportunity costs. Sellers will choose
to use those inputs where the profit is
the highest
Sellers will supply less of a good if the
price of an alternate good using the
same inputs rises (and vice versa).
Sellers always chase the highest profit
goods.
57

BACK TO

Changes in Opportunity Costs

Producers have the ability to produce

other goods
An increase in the profitability of small
cars will decrease the supply of SUVs

58

BACK TO

3- 58

Important Supply Shifters:

Changes in Opportunity Costs

Higher (Opportunity) Costs Reduce Supply- Rising Wheat
Prices Reduce Soybean Supply
Price per
Unit
Higher Price
Required to Sell the
Same Quantity
$7

Supply with High

Opportunity Costs
Supply with Low
Opportunity Costs

$5

2,000
59

Smaller Quantity
Supplied at the Same
Price
Quantity of
Soybeans
2,80
(Millions of
0
Bushels)

BACK TO

What Shifts the Supply Curve?

A change in quantity supplied is
NOT the same as a change in
supply.
Quantity supplied changes only
when the price of a good changes.
It is a movement along a fixed
supply curve.

Supply changes only when a nonprice factor changes.

A
in
A change
change
in
It
is a shift
in
Quantity
Quantity
Supplied
curve. Supplied

60

the entire supply

A
A change
change
in
in Supply
Supply
BACK TO

Try it!

Market Price
of
Marijuana

Explain using the concepts of supply, demand, and

transport costs (including in this case smuggling costs)
the pattern of prices you see here

Try it!
The market price
of the product is
$20 per unit.
Calculate the
dollar amount of
consumer surplus
being earned in
this market.
a) $120,000
b) $60,000
c) $100,000
d) $80,000
BACK TO