Theory of Demand and Supply

Dr.Usha Nori
 Overview
• Basis for Demand
• Market Demand Function
• Demand Curve
• Basis For Supply
• Market Supply Function
• Supply Curve
• Market Equilibrium
 Basis for Demand
• Direct Demand
– Demand is the quantity customers are willing to
buy under current market conditions.
– Direct demand is demand for consumption.
• Derived Demand
– Derived demand is input demand.
– Firms demand inputs that can be profitably
employed.
 Demand Theory
• The relationship between price and quantity
demanded is the starting point for building a
model of consumer behaviour.
• Measuring the relationship between price and
quantity demanded provides information
which is used to create a demand schedule,
from which a demand curve can be derived.
Determinants of Demand
 Demand Schedule
• Industry Demand Versus Firm Demand
– Industry demand is subject to general economic
conditions.
– Firm demand is determined by economic conditions and
competition.
• A demand schedule shows the relationship between
price and demand over a hypothetical range of prices.
For example, purchase of cans of cola.
• Ability and willingness to buy- law of demand
• Negative relationship between price and quantity
demanded.
 Demand curve

QUANTITY
PRICE (Rs.)
DEMANDED

110 0
100 100
90 200
80 300
70 400
60 500
50 600
40 700
30 800
 Demand
• In formulating our demand theory, the agents
are all assumed to be adult individuals who
earn income, and they spend this income
purchasing various goods and services.
• The consumer ‘is assumed to ‘maximize utility’
within the limits set by his or her available
resources.
 The nature of demand
• The amount of a product that consumers wish
to purchase is called the quantity demanded.
• Note there are two important things about
this concept.
• First, quantity demanded is a desired quantity.
• Secondly, quantity demanded is a flow.
 DEMAND
Alice’s Demand Schedule Alice’s Demand Curve

Reference Letter Price [£ per dozen] Quantity demanded

Price of eggs [£ per dozen]

[dozen per month]
3.00 f
a 0.50 7.0 e
b 1.00 5.0 2.50
c 1.50 3.5 d
d 2.00 2.5 2.00
e 2.50 1.5 c
f 3.00 1.0 1.50
b
1.00
a
0.50

1 2 3 4 5 6 7
Quantity of Eggs [dozen per month]
 Alice’s demand schedule for eggs

· The table shows the quantity of eggs that Alice will

demand at each selected price, other things being equal.
· For example, at a price of £1.00, Alice demands 5 dozen
eggs per month.
· The data is plotted in the figure ‘Alice’s demand curve’.
 Alice’s demand curve

· Each point on the figure relates to a row on Table Demand

Schedule.
· For example, when price is £3.00, 1 dozen are brought per
month (point f ).
· When the price is £0.50, 7 dozen are brought (point a).
· The resulting curve relates the price of a commodity to the
amount that Alice wishes to purchase.
 The Relation Between Individual and Market Demand Curves
Price of eggs [£ per dozen]

3.00

2.00

1.00
3.00

Price of eggs [£ per dozen]

2 4 6 8
Quantity of Eggs 2.00
[i]. William [dozen per month]

1.00
Price of eggs [£ per dozen]

3.00

2.00 2 4 6 8 10 12 14
Quantity of Eggs
[dozen per month]
1.00
[iii]. Total Demand William & Sarah
2 4 6 8
[ii]. Sarah Quantity of Eggs
[dozen per month]
 The relation between individual and market
demand curves

· The figure illustrates aggregation over two individuals,

William and Sarah.
· For example, at a price of £2.00 per dozen William
purchases 2.4 dozen and Sarah purchases 3.6 dozen.
· Together they purchase 6 dozen.
· In general the market demand curve is the horizontal
sum of the demand curves of all consumers in the
market.
 A Market Demand Schedule for Eggs

Quantity demanded
Reference Letter Price [£ per dozen] [000 dozen per month]

U 0.50 110.0

V 1.00 90.0

W 1.50 77.5

X 2.00 67.5

Y 2.50 62.5

Z 3.00 60.0
 A Market Demand Schedule for Eggs

· The table shows the quantity of eggs that would be

demanded by all consumers at selected prices, ceteris
paribus.
· For example, row W indicates that if the price of eggs were
£1.50 per dozen, consumers would want to purchase
77,500 dozen per month.
· The data in this table are plotted in the following figure.
 A Market Demand Curve for Eggs

3.50 D

Z
3.00
Price of eggs [£ per dozen]

Y
2.50

X
2.00

W
1.50

V
1.00

U
0.50

20 40 60 80 100 120 140

Quantity of Eggs (000/month)
 A Market Demand Curve for Eggs

• The negative slope of the curve indicates that

quantity demanded increases as price falls.
• The six points correspond to the six price–quantity
combinations shown in the table.
• The curve drawn through all of the points and
labelled D is the demand curve.
 Two Demand Curves for Eggs

3.50
D0

3.00 Z

2.50 Y
Price of eggs [£ per dozen]

2.00 X

1.50 W

1.00 V

U
0.50

20 40 60 80 100 120 140

Quantity of Eggs (000/month)
 Why demand curve slopes downwards

• Demand curves generally have negative slope.

• Three accepted explanations of why demand
curves slope downwards:
• 1.The law of diminishing marginal utility
• 2.The income effect
• 3.The substitution effect
 Diminishing Marginal Utility
• The law of diminishing marginal utility:
- The law is related with utility. Utility is the
power of commodity that satisfy a human
need.
- The more of one good consumed in a given
period, the less satisfaction (utility) generated
by consuming each additional (marginal) unit
of the same good.
• Diminishing marginal
utility helps to explain why
demand slopes down.
• Marginal utility falls with
each additional unit
consumed, so people are
not willing to pay as much.
• So consumers purchase
goods only when MU=
Price. If price falls,
consumer demand more
units.
 Total and Marginal utility
Units of coke Total utility (Utils) Marginal utility (utils)
0 0 -
1 9 9
2 16 7
3 21 5
4 24 3
5 25 1
6 24 -1
7 21 -3
 Assumptions to DMU
• Unit of consumption must be a standard one
• Consumption must be continuous
• Multiple units of commodity should be
consumed
• Tastes and preferences of consumer should
remain unchanged during the course of
consumption
• Goods should be normal and not addictive in
nature.
 Exceptions to the law of demand
• Giffen goods
• Speculation
• Luxury goods
• Outdated goods
• Goods in short supply
• Income effect of a price change : That portion
of the change in quantity demanded that
results from the change in real income.
• Substitution effect of a price change: That
portion of the change in quantity demanded
that results from the change in the relative
price of the good.
• Substitution effect:
• Consumers often classify various commodities as substitutes.
For example, many Indian consumers may substitute coffee and
tea with each other for various reasons. When the price of coffee
rises, consumers may switch to buying tea more as it will
become relatively cheaper.
• Hence, if the price of tea reduces, its demand will increase and
the demand curve will be downward sloping.
• Income effect
• According to this principle, the real income of people increases
when the prices of commodities reduce. This happens because
they spend less in case of falling prices and end up with more
money. With more money, they will, in turn, purchase more and
more. Therefore, the demand increases as prices fall.
 A Market Demand Schedule for Eggs
when income rises

Quantity demanded
Quantity demanded [000 dozen per
Reference Letter Price [£ per dozen] [000 dozen per month] month] when income
rises
U 0.50 110.0 140.0 U’

V 1.00 90.0 116.0 V’

W 1.50 77.5 100.0 W’

X 2.00 67.5 90.0 X’

Y 2.50 62.5 81.3 Y’

Z 3.00 60.0 78.0 Z’

 Two Demand Curves for Eggs

3.50 D1
D0
3.00 Z Z’

2.50 Y Y’
Price of eggs [£ per dozen]

2.00 X X’

1.50 W W’

V V’
1.00

U U’
0.50

20 40 60 80 100 120 140

Quantity of Eggs (000/month)
 Two demand curves for eggs

· When the curve shifts from D0 to D1, more is demanded at

each price and a higher price is paid for each quantity.
· At price £1.50, quantity demanded rises from 77.5
thousand dozen (point W) to 100 (point W’).
· The quantity of 90 thousand dozen, which was formerly
bought at a price of £1.00 (point V), will be brought at a
price of £2.00 after the shift (point X’).
 SUPPLY AND DEMAND

The Demand Curve

The demand curve, labeled D,

shows how the quantity of a good
demanded by consumers
depends on its price. The
demand curve is downward
sloping; holding other things
equal, consumers will want to
purchase more of a good as its
price goes down.
The quantity demanded may also
depend on other variables, such
as income, the weather, and the
prices of other goods. For most
products, the quantity demanded
increases when income rises.
A higher income level shifts the
demand curve to the right (from
D to D’).
 Demand Shifters

Shifting the Demand Curve

If the market price were held constant at P1, we
would expect to see an increase in the quantity
demanded—say from Q1 to Q2, as a result of
consumers’ higher incomes. Because this
increase would occur no matter what the market
price, the result would be a shift to the right of
the entire demand curve.

Shifting the Demand Curve

● substitutes Two goods for which an increase in the
price of one leads to an increase in the quantity
demanded of the other.
● complements Two goods for which an increase in
the price of one leads to a decrease in the quantity
demanded of the other.
 THE MARKET MECHANISM

The market clears at

price P0 and quantity Q0.

At the higher price P1, a

surplus develops, so
price falls.

At the lower price P2,

there is a shortage, so
price is bid up.
 THE MARKET MECHANISM

Equilibrium

● equilibrium (or market clearing) price

Price that equates the quantity supplied

to the quantity demanded.

● market mechanism Tendency in a free

market for price to change until the market
clears.

● surplus Situation in which the quantity

supplied exceeds the quantity demanded.

● shortage Situation in which the quantity

demanded exceeds the quantity supplied.
 Shifts in the Demand Curve

D0
Price

0 Quantit
y
 Shifts in the Demand Curve
An increase in demand

D0 D1
Price

Quantity
0
 Shifts in the Demand Curve
A decrease in demand

D0
D2
Price

Quantity
0
 Shifts in the Demand Curve

D2 D0 D1
Price

Quantity
0
 Note
• A rise in the price of a product’s substitute
shifts the demand curve for the product to the
right. More will be purchased at each price.

• A fall in the price of one product that is

complementary to a second product will shift
the second product’s demand curve to the
right. More will be purchased at each price.
 Movements along demand curves versus shifts

• Demand refers to one whole demand curve.

• Change in demand refers to a shift in the

whole curve, that is, a change in the amount
that will be bought at every price.
 Note
An increase in demand means that the whole
demand curve has shifted to the right; a
decrease in demand means that the whole
demand curve has shifted to the left.

• Any one point on a demand curve represents a

specific amount being bought at a specified
price. It represents, therefore, a particular
quantity demanded.
 Note
A movement down a demand curve is called an
increase (or a rise) in the quantity demanded;
a movement up the demand curve is called a
decrease (or a fall) in the quantity demanded.

• A movement along a demand curve is referred

to as a change in the quantity demanded.
 Shifts in the demand curve

· When the demand curve shifts from D0 to D1, more is

demanded at each price.
· Such an increase in demand can be caused by:
· A rise in the price of a substitute
· A fall in the price of a complement
· A rise in income
· A redistribution of income towards those who favour
the commodity
· A change in tastes that favours the commodity.
 Shifts in the demand curve

· When the demand curve shifts from D0 to D2, less is

demanded at each price.
· Such a decrease in demand can be caused by:
· a fall in the price of a substitute
· a rise in the price of a complement, a fall in income
· a redistribution of income away from groups that
favour the commodity
· a change in tastes that dis-favours the commodity.
 Demand and price
• We are interested in developing a theory of
how products get priced.
• To do this, we hold all other influences
constant and ask the following question:

‘How will the quantity of a product

demanded vary as its own price varies?’
 Note

A basic economic hypothesis is that the lower

the price of a product, the larger the quantity
that will be demanded, other things being
equal.
 Supply
• We now look at the supply side of markets.
The suppliers are firms, which are in business
to make the goods and services that
consumers want to buy.
 Firms’ motives
• Economic theory gives firms several attributes.
• Firstly, each firm is assumed to make consistent
decisions, as though it was run by a single individual
decision-maker.
• Secondly, firms hire workers and invest capital and
entrepreneurial talent in order to produce goods and
services that consumers wish to buy.
• Thirdly, firms are assumed to make their decisions with
a single goal in mind: to make as much profit as
possible.
 The nature of supply
• The amount of a product that firms are able
and willing to offer for sale is called the
quantity supplied.
• Supply is a desired flow: how much firms are
willing to sell per period of time, not how
much they actually sell.
 The determinants of quantity supply

• Three major determinants of the quantity

supplied in a particular market are:
– the price of the product;
– the prices of inputs to production;
– the state of technology.
•When price changes, quantity supplied will change. That is a
movement along the same supply curve. When factors other than
price changes, supply curve will shift. Here are some
determinants of the supply curve.

•1. Production cost:

•Higher production cost will lower profit, thus hinder supply. Factors affecting production cost are: input
prices, wage rate, government regulation and taxes, etc.
• 
•2. Technology:
•Technological improvements help reduce production cost and increase profit, thus stimulate higher
supply.
• 
•3. Number of sellers:
•More sellers in the market increase the market supply.
• 
•4. Expectation for future prices:
•If producers expect future price to be higher, they will try to hold on to their inventories and offer the
products to the buyers in the future, thus they can capture the higher price.
 Supply and price
• For a simple theory of price, we need to know
how quantity supplied varies with a product’s
own price, all other things being held
constant.
‘The quantity of any product that firms will
produce and offer for sale is positively related
to the product’s own price, rising when the
price rises and falling when the price falls.’
 A Market Supply schedule for Eggs

Reference Letter Price [£ per dozen] Quantity demanded

[000 dozen per month]

0.50 5.0
u

1.00 46.0
v

1.50 77.5
w

x 2.00 100.0

y 2.50 115.0

z 3.00 122.5
A market supply schedule for eggs

·The table shows the quantities that producers

wish to sell at various prices, ceteris paribus.
·For example, row y indicates that if the price were
£2.50, producers would wish to sell 115,000 dozen
eggs per month.
·The data in this table are plotted in the following
figure.
 A Supply Curve For Eggs
3.50
S
Z
3.00

Y
2.50
Price of eggs [£ per dozen]

X
2.00

W
1.50

V
1.00

U
0.50

20 40 60 80 100 120 140

Quantity of Eggs[thousand dozen per month]
 A supply curve for eggs

· The six points correspond to the price-quantity

combinations shown in Table ‘A Market Supply Schedule
for Eggs’.
· The curve drawn through these points, labeled S, is the
supply curve showing the quantity of eggs that will be
supplied at each price of eggs.
· The supply curve’s positive slope indicates that quantity
supplied increases as price increases.
 Two Alternative Market Supply Schedule for Eggs

Price of Eggs Original quantity New quantity

[£ per dozen] supplied [‘000 supplied [‘000
dozen per month] dozen per month]
[1] [2] [3] [4] [5]

u 0.50 5.0 28.0 U’

v 1.00 46.0 76.0 V’

w 1.50 77.5 102.0 W’

x 2.00 100.0 120.0 X’

y 2.50 115.0 132.0 Y’

z 3.00 122.5 140.0 Z’

 Two Supply Curves for Eggs

3.50
S0

Z
3.00

2.50 Y
Price of eggs [£ per dozen]

2.00 X

W
1.50

V
1.00
U

0.50

20 40 60 80 100 120 140

Quantity of Eggs [thousand dozen per month]

 Two Supply Curves for Eggs

3.50
S0
S1
Z
3.00

2.50 Y
Price of eggs [£ per dozen]

2.00 X

W
1.50

V
1.00
U

0.50

20 40 60 80 100 120 140

Quantity of Eggs [thousand dozen per month]

 Two supply curves for eggs

· The rightward shift in the supply curve from S0 to S1

indicates an increase in the quantity supplied at
each price.
·For example, at the price of £1.00 the quantity
supplied rises from 46 to 76 thousand dozen per
month.
 SUPPLY AND DEMAND

The Supply Curve

The supply curve is thus a relationship between the quantity
supplied and the price. We can write this relationship as an equation:

QS = QS(P)

Other Variables That Affect Supply

The quantity that producers are willing to sell depends not only on the price
they receive but also on their production costs, including wages, interest
charges, and the costs of raw materials.
When production costs decrease, output increases no matter what the market
price happens to be. The entire supply curve thus shifts to the right.
Economists often use the phrase change in supply to refer to shifts in the
supply curve, while reserving the phrase change in the quantity supplied to
apply to movements along the supply curve.
 Shifts in the Supply Curve

S0
Price

Quantity
 Shifts in the Supply Curve – increase in supply

S0 S1
Price

Quantity
 Shifts in the Supply Curve – decrease in supply

S2
S0
Price

Quantity
 Shifts in the Supply Curve

S2 S0
S1
Price

Quantity
 Shifts in the supply curve
· A shift in the supply curve from S0 to S1 indicates more is
supplied at each price.
· Such an increase in supply can be caused by:
· Improvements in the technology of producing the commodity
· A fall in the price of inputs that are important in producing the
commodity
· A shift in the supply curve from S0 to S2 indicates less is supplied
at each price.
· Such a decrease in supply can be caused by:
· A rise in the price of inputs that are important in producing the
commodity.
· Changes in technology that increase the costs of producing the
commodity (rare).
 The determination of price
• So far we have considered demand and supply
separately.
• We now outline how demand and supply
interact to determine price.
 The concept of a market
• A market may be defined as an area over
which buyers and sellers negotiate the
exchange of some product or related group of
products.
• It must be possible, therefore, for buyers and
sellers to communicate with each other and to
make meaningful transactions over the whole
market.
Demand and Supply Schedules for Eggs and Equilibrium Price

Price Quantity Quantity supplied Excess Demand [quantity

[£ per dozen] demanded [‘000 dozen demanded minus
[‘000 dozen per month] quantity supplied]
per month] [‘000 dozen per month]

0.50 110.0 5.0 105.0

1.00 90.0 46.0 44.0

1.50 77.5 77.5 0.0

2.00 67.5 100.0 -32.5

2.50 62.5 115.0 -52.5

3.00 60.0 122.5 -62.5

 Demand and supply schedules for eggs and
equilibrium price

· Equilibrium occurs where the quantity demanded and

the quantity supplied are equal.
· In the table the equilibrium price is £1.50.
· The equilibrium quantity bought and sold is 77.5
thousand dozen per month.
· For prices below the equilibrium, such as £0.50, quantity
demanded (110) exceeds quantity supplied (5).
· For prices above the equilibrium, such as £3.00, quantity
demanded (60) is less than quantity supplied (122.5).
· The data in this table are plotted in the following figure.
 Determination of the Equilibrium Price of Eggs

3.50
D S

Z Z
3.00

Y Y
Price of eggs [£ per dozen]

2.50

X X
2.00

1.50 W W

V V
1.00
U U

0.50

20 40 60 80 100 120
140
Quantity of Eggs [thousand dozen per month]
 Determination of the equilibrium price of eggs

·Equilibrium price is where the demand and supply

curves intersect, point E in the figure.
·At all prices above equilibrium there is excess
supply and downward pressure on price.
·At all prices below equilibrium there is excess
demand and upward pressure on price.
 The ‘Laws’ of Demand and Supply

S0
D1
S D S1

Price
D0
Price

E1
E0
p1
E0 p0 E1
p0
p1

q1 Quantity q0 q1 Quantity
q0
[i]. The effects of shifts in the demand curve [ii]. The effects of shifts in the supply curve
The laws of demand and supply (i) shifts
in demand
· The original curves are D0 and S, which intersect to produce
equilibrium at E0.
· Price is p0, and quantity q0.
· An increase in demand shifts the demand curve to D1.
· Price rises to p1 and quantity rises to q1 taking the new equilibrium
to E1.
· A decrease in demand now shifts the demand curve to D0.
· Price falls to p0 and quantity falls to q0 taking the new equilibrium to
E0.
· Thus, an increase in demand raises both price and quantity while a
decrease in demand lowers both price and quantity.
The laws of demand and supply (ii) shifts
in supply

· The original demand and supply curves are D and S0, which
intersect to produce an equilibrium at E0, price p0 and
quantity q0.
· An increase in supply shifts the supply curve to S1. Price falls
to p1 and quantity rises to q1, taking the new equilibrium to E1.
· A decrease in supply shifts the supply curve back to S0. Price
rises to p0 and quantity falls to q0 taking the new equilibrium
to E0.
· Thus an increase in supply raises quantity but lowers prices
while a decrease in supply lowers quantity but raises price.
 THE MARKET MECHANISM

When Can We Use the Supply-Demand Model?

We are assuming that at any given price, a given quantity will be produced
and sold.
This assumption makes sense only if a market is at least roughly competitive.
By this we mean that both sellers and buyers should have little market power
—i.e., little ability individually to affect the market price.
Suppose instead that supply were controlled by a single producer—a
monopolist.
If the demand curve shifts in a particular way, it may be in the monopolist’s
interest to keep the quantity fixed but change the price, or to keep the price
fixed and change the quantity.
 EXAMPLE: GOOD WEATHER FOR SALMON FISHING

• In the summer of 2000, weather conditions were excellent

for commercial salmon fishing off the California coast.
• Heavy rains meant higher than normal levels of water in the
rivers, which helps the salmon to breed.
• slightly cooler ocean temperatures stimulated the growth of
plankton, the microscopic organisms at the bottom of the
ocean food chain, providing everything in the ocean with a
hearty food supply.
• The ocean stayed calm during fishing season, so commercial
fishing operations did not lose many days to bad weather.
• How did these climate conditions affect the quantity and
price of salmon?
Price per Pound Quantity Supplied Quantity Supplied Quantity
in 1999 in 2000 Demanded
$2.00 80 400 840

$2.25 120 480 680

$2.50 160 550 550

$2.75 200 600 450

$3.00 230 640 350

$3.25 250 670 250

$3.50 270 700 200

• The demand curve D0 and the supply curve S0 show that the original
equilibrium price is $3.25 per pound and the original equilibrium quantity
is 250,000 fish.
• Did the economic event affect supply or demand? Good weather is an
example of a natural condition that affects supply.
• Was the effect on supply an increase or a decrease? Good weather is a
change in natural conditions that increases the quantity supplied at any
given price.
• Compare the new equilibrium price and quantity to the original
equilibrium.
• At the new equilibrium E1, the equilibrium price falls from $3.25 to $2.50,
but the equilibrium quantity increases from 250,000 to 550,000 salmon.
Notice that the equilibrium quantity demanded increased, even though
the demand curve did not move.
• In short, good weather conditions increased supply of the California
commercial salmon. The result was a higher equilibrium quantity of
salmon bought and sold in the market at a lower price.
 CHANGES IN MARKET EQUILIBRIUM

New Equilibrium
Following
Shift in Supply

When the supply

curve shifts to
the right, the
market clears at
a lower price P3
and a larger
quantity Q3.
 CHANGES IN MARKET EQUILIBRIUM

New Equilibrium
Following Shift in
Demand

When the
demand curve
shifts to the right,
the market clears
at a higher price
P3 and a larger
quantity Q3.
 CHANGES IN MARKET EQUILIBRIUM

New Equilibrium Following

Shifts in Supply and Demand
Supply and demand curves
shift over time as market
conditions change.
In this example, rightward
shifts of the supply and
demand curves lead to a
slightly higher price and a
much larger quantity.
In general, changes in price
and quantity depend on the
amount by which each
curve shifts and the shape
of each curve.
 CHANGES IN MARKET EQUILIBRIUM

From 1970 to 2007, the real (constant-dollar) price of eggs fell by 49

percent, while the real price of a college education rose by 105 percent.
The mechanization of poultry farms sharply reduced the cost of producing
eggs, shifting the supply curve downward. The demand curve for eggs
shifted to the left as a more health-conscious population tended to avoid
eggs.
As for college, increases in the costs of equipping and maintaining modern
classrooms, laboratories, and libraries, along with increases in faculty
salaries, pushed the supply curve up. The demand curve shifted to the right
as a larger percentage of a growing number of high school graduates
decided that a college education was essential.
 CHANGES IN MARKET EQUILIBRIUM

(a) Market for Eggs

The supply curve for eggs

shifted downward as
production costs fell; the
demand curve shifted to
the left as consumer
preferences changed.
As a result, the real price of
eggs fell sharply and egg
consumption rose.
 CHANGES IN MARKET EQUILIBRIUM

(b) Market for College

Education

The supply curve for a

college education shifted
up as the costs of
equipment, maintenance,
and staffing rose.
The demand curve shifted
to the right as a growing
number of high school
graduates desired a
college education.
As a result, both price and
enrollments rose sharply.
 Example: Wage Inequality in United States

Over the past two decades, the wages of skilled high-income workers
have grown substantially, while the wages of unskilled low-income
workers have fallen slightly.
From 1978 to 2005, people in the top 20 percent of the income
distribution experienced an increase in their average real (inflation-
adjusted) pretax household income of 50 percent, while those in the
bottom 20 percent saw their average real pretax income increase by
only 6 percent.
While the supply of unskilled workers—people with limited educations
—has grown substantially, the demand for them has risen only slightly.
On the other hand, while the supply of skilled workers—e.g.,
engineers, scientists, managers, and economists—has grown slowly,
the demand has risen dramatically, pushing wages up.
 The Long-Run Behavior of Natural Resource Prices

Consumption and the

Price of Copper

Although annual
consumption of
copper has
increased about
a hundredfold,
the real (inflation-
adjusted) price
has not changed
much.
 The Long-Run Behavior of Natural Resource Prices (continued)

Long-Run Movements of
Supply and Demand for
Mineral Resources

Although demand for

most resources has
increased
dramatically over the
past century, prices
have fallen or risen
only slightly in real
(inflation-adjusted)
terms because cost
reductions have
shifted the supply
curve to the right just
as dramatically.