Chapter 4

Demand, Supply, and Equilibrium

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4.3 How Do Sellers Behave?

How much would you have to be paid to sell you

smartphone right now in class?
4.3 How Do Sellers Behave?

Quantity Supplied
The amount of a good that sellers are willing and able
to sell at a given price.

Supply Schedule
A table that reports the quantity supplied at different
prices, holding all else equal.

Supply Curve
Plots the quantity supplied at different prices, holding
all else equal.
4.3 How Do Sellers Behave?
Starbucks’ Supply Schedule & Curve
P Price Quantity
$6.00 of of lattes
$5.00
lattes supplied
$0.00 0
$4.00 1.00 3
$3.00 2.00 6
$2.00
3.00 9
4.00 12
$1.00
5.00 15
$0.00 Q 6.00 18
0 5 10 15
 Law of Supply

• Law of Supply: Suggests that other thing equal (or ceteris

paribus) the Quantity Supplied rises if the price rises→
Positive relationship between Price & Quantity Supplied:
If P↑→↑
If P↓→

• What explains the law

of supply??
•  Increasing marginal
cost of production

Drilling platform in the Artic Circle (Kara Sea)

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4.3 How Do Sellers Behave?

• Willingness to Accept is the lowest price that a seller is

willing to get paid to sell an extra unit of a good.

• Willingness to Accept is the same as the marginal cost

of production

© 2015 Pearson Education, Inc.

4.3 How Do Sellers Behave?
From Individual Supply Curve to the Market Supply Curve

Market Supply Curve: Plots the relationship between

the total quantity supplied and the market price, holding
all else equal.

© 2015 Pearson Education, Inc.

4.3 How Do Sellers Behave?
From the Individual Supply to the Market Supply Curve
The Market Supply of Lattes
7
Price

Total
5 Starbucks Jitters Market
Price Supply Supply Supply
4
0 0 0 0
3
1 3 2 5
2
2 6 4 10
1 3 9 6 15
0 4 12 8 20
0 5 10 15 20 25 30 35
Quantity 5 15 10 25

Starbucks Jitters Market Supply 6 18 12 30

4.3 How Do Sellers Behave?
Shifting the Supply Curve

Shifts of the Supply Curve

Occur when one of the following changes:

1. input prices
2. technology
3. number and scale of sellers
4. sellers’ expectations about the future

© 2015 Pearson Education, Inc.

4.3 How Do Sellers Behave?
Shifting the Supply Curve: A Change in Input Prices
Market for Latte
P
Suppose the price
$6.00
of milk falls.
$5.00 At each price, the
$4.00 quantity of
lattes supplied
$3.00
will increase
$2.00 (by 5 in this
example).
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
4.3 How Do Sellers Behave?
Shifting the Supply Curve: A Change in Input Prices

• If the price on an input increases, then the

production cost is also increasing, so the supply will
shift to the left.
• If Input Price↑→Supply shifts to the left

• If the price of an input decreases, the supply cost

also decreases, so supply shifts to the right
• If Input Price ↓→Supply shifts to the right
4.3 How Do Sellers Behave?
Shifting the Supply Curve: A Change in Technology

• If the technology in production improves, then we

produce goods faster and of a better quality.
Production cost is usually decreasing at the same
time, so the supply will shift to the right
• If Technology↑→Supply shifts to the right
• If Technology↓→Supply shifts to the left
4.3 How Do Sellers Behave?
Shifting the Supply Curve: A Change in the Number of Sellers

• If the number of sellers increases then we have

more supply in the market. The supply curve will
shift to the right

• If the number of sellers decreases then we have

less supply in the market. The supply curve will
shift to the left
4.3 How Do Sellers Behave?
Shifting the Supply Curve: A Change in Sellers’ Expectations

Expectations may affect sellers' behavior:

• If sellers expect future prices to decrease, they

will increase their supply of goods and services 
supply shifts to the right

• If sellers expect future prices to increase, they will

decrease their supply of goods and services 
supply shifts to the left
4.2 Movements along the demand curve vs shifts in the
demand curve

Move along the same Shift the Supply Curve

supply curve if: if the Price is constant
• The Price changes and we have a change
and all other things in:
stay the same • Input Prices
• Technology
We call this a change • Number of Sellers
in the Quantity • Future Expectations
Supplied We call this a change in
Supply
© 2015 Pearson Education, Inc.
 Supply Curve Exercise
Draw a supply curve for tax
return preparation software.
What happens to it in each
of the following scenarios?
A. Retailers cut the price of
the software.
B. A technological advance
allows the software to be
produced at lower cost.
C. Professional preparers raise their price

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
4.4 Supply and Demand in Equilibrium

P
$6.00 D S Equilibrium:
P has reached
$5.00
the level where
$4.00 quantity supplied
$3.00 equals
quantity demanded
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
 Equilibrium price/ Market – Clearing Price:
the price that equates quantity supplied
with quantity demanded
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
2 18 10
$3.00
3 15 15
$2.00
4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
 Equilibrium quantity:
the quantity supplied and quantity demanded at
the equilibrium price
P
$6.00 D S P QD QS
$5.00 $0 24 0
$4.00 1 21 5
2 18 10
$3.00
3 15 15
$2.00
4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
 Surplus (= excess supply):
when quantity supplied is greater than
quantity demanded
P Example:
$6.00 D Surplus S
If P = $5,
$5.00
then
$4.00 QD = 9 lattes
$3.00 and
QS = 25 lattes
$2.00
resulting in a
$1.00 surplus of 16 lattes
$0.00 Q
0 5 10 15 20 25 30 35
 Surplus (=excess supply):
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase sales
$5.00 by cutting price.
$4.00 This causes
$3.00 QD to rise and QS to fall…
$2.00 …which reduces the
surplus.
$1.00
Prices continue to fall
$0.00 Q until market reaches
0 5 10 15 20 25 30 35 equilibrium
 Shortage (= excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P = $1,
$5.00
then
$4.00 QD = 21 lattes
$3.00 and
QS = 5 lattes
$2.00
resulting in a
$1.00 shortage of 16 lattes
$0.00 Shortage Q
0 5 10 15 20 25 30 35
LO5
 Shortage (=excess demand):
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise,
$3.00 …which reduces the
$2.00
shortage.

$1.00 Prices continue to

Shortage rise until market
$0.00 Q reaches equilibrium.
0 5 10 15 20 25 30 35
LO5
 Analyzing the changes in equilibrium
The four step method
Step 1 Decide if the event concerns the Demand, or
the Supply, or both
Step 2 Does this change make us move along the
curve, or do we need to shift the curve?
Step 3 If we have to shift the curve, are we going to
shift it to the left or to the right?
Step 4 Compare initial and final equilibrium points,
i.e. compare prices and quantities

LO5
 Changes in Demand and Equilibrium

D increase: D decrease:
P, Q P, Q

P
P
S S

D2 D3

D1 D4

0 0

Increase in demand Decrease in demand

LO5
 Changes in Supply and Equilibrium

S increase: S decrease:
P, Q P, Q

P P
S1 S2 S4 S3

D
D

0 0

Increase in supply Decrease in supply

LO5
 Effects of Shifts of Demand and Supply
Shift in Demand
Incr. Decr.
Shift in Supply

Demand Demand
Incr. Supply Equil. P ? Equil. P

Equil. Q Equil. Q ?
Decr. Equil. P Equil. P ?
Supply
Equil. Q ? Equil. Q
4.4 Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium

It’s time to revisit the

question:
Why do brown eggs cost
more than white eggs?

© 2015 Pearson Education, Inc.

EXAMPLE: The Market for Hybrid Cars

P
price of
S1
hybrid cars

P1

D1
Q
Q1
quantity of
hybrid cars
 Example 1: The Market for Hybrid Cars

EVENT TO BE
ANALYZED: P
Increase in price of gas. S1
STEP 1: P2
D curve
STEP 2: P1
because price of gas
D shifts
affects demandshifts
Step 3: Demand for to
hybrids.
the right D1 D2
SSTEP
curve
4: does not shift, Q
because price of gasin Q1 Q2
We have an increase
does
price not affect cost of.
and quantity of hybrid cars.
 Example 2: The Market for Hybrid Cars
EVENT: New technology
reduces cost of producing P
hybrid cars. S1 S2
STEP 1:
S curve
because event affects P1
STEP 2:
cost of production.
S shifts P2
D curve does not shift,
STEP 3: Sproduction
because shifts to the
right D1
technology is not one of
STEP 4:
the factors that affect Q
Q1 Q2
demand.
The shift causes price
to fall
and quantity to rise.
EXAMPLE 3: The Market for Hybrid Cars
EVENTS:
Price of gas rises AND P
new technology reduces S1 S2
production costs
STEP 1: P2
Both curves
P1
STEP 2:
Both shift.
STEP 3: Both to the right D1 D2
STEP 4: Q
Q rises, but effect Q1 Q2
on P is ambiguous:
If demand increases more than
supply, P rises.
EXAMPLE 3: The Market for Hybrid Cars Cont’d
EVENTS:
price of gas rises AND P
new technology reduces S1 S2
production costs

STEP 4, cont.
P1
But if supply
increases more P2
than demand,
D1 D2
P falls.
Q
Q1 Q2
 ACTIVE LEARNING
Shifts in supply and demand

Use the four-step method to analyze the effects of each

event on the equilibrium price and quantity of music
downloads.
Event A: A fall in the price of CDs
Event B: Sellers of music downloads negotiate a
reduction in the royalties they must pay for
each song they sell.
Event C: Events A and B both occur.

© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Demand and Supply Summary

© 2015 Pearson Education, Inc.

 Government Set Prices

• Price ceiling=maximum price that can be charged

on a good or service.
• Set below equilibrium price
• Rationing problem
• Black markets
• Example is rent control; US oil crisis 1970’s
• Price ceilings in Venezuela
 Government Set Prices

P S

$3.50 P0 Ceiling

3.00 PC

D
Shortage

Q
Qs Q0 Qd

LO6
 Government Set Prices

• Price floor=minimum price that can be charged on

a good or service
• Prices are set above the market price
• Chronic surpluses
• Example: the minimum wage law
• Agricultural Price Floors in the US
https://open.lib.umn.edu/principleseconomics/chapt
er/4-2-government-intervention-in-market-prices-pri
ce-floors-and-price-ceilings/

LO6
 Government Set Prices
P
S
Surplus
Floor

$3.00 Pf

2.00 P0

Q
Qd Q0 Qs
LO6