Transcript Supply and Demand

CHAPTER 3
Supply and Demand
PowerPoint® Slides
by Can Erbil and Gustavo Indart
© 2005 Worth Publishers, all rights reserved
Supply and Demand



A competitive market is a market in which there are
 many buyers and sellers…
 …of the same good or service
The supply and demand model is a model of how a
competitive market works
There are 5 key elements in this model:
 The demand curve
 The supply curve
 The set of factors that cause the demand curve to
shift, and the set of factors that cause the supply
curve to shift
 The equilibrium price
 The way the equilibrium price changes when the
supply and demand curves shift
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Slide 3-2
Demand Schedule
A demand schedule shows how much of a good or service
consumers will want to buy at different prices
Demand Schedule for Tickets
Price
($ per
ticket)
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Quantity
demanded
(tickets)
350
5,000
300
6,000
250
8,000
200
11,000
150
15,000
100
20,000
Slide 3-3
A demand curve is the graphical representation of the
demand schedule; it shows how much of a good or service
consumers want to buy at any given price.
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Slide 3-5
The quantity demanded is the actual amount consumers
want to buy at some specific price.
 If the scalpers are
charging $250 per ticket,
8,000 tickets will be
purchased
8,000
 That is, 8,000 is the quantity demanded at a price
of $250
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Slide 3-6
The law of demand says that a higher price for a good,
other things equal, leads people to demand a smaller quantity
of the good
 If the price drops to $100,
20,000 fans want to buy
tickets
 At $250, only 8,000
tickets are demanded
This

The reflects
law of the
demand
general
Note
that
the
demand
points to
proposition
thethat
inverse
a higher
curve
slopes
downward
price reduces
relationship
between
the
number
price
andpeople
of
the quantity
willing to buy a
demanded.
good
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Slide 3-7
Shifts of the Demand Curve
A change in the quantity demanded at any given price,
represented by the replacement of the original demand curve
with a new demand curve.
Gretzky is
retiring!!!
 Thisincrease
Announcement
The
event is in
represented
of
demand
Gretzky’s
shifts
byretirement
the
thetwo
demand
demand
generates
curve
schedules:
to
anthe
increase
right.
 Demand
in demand,
beforean
theincrease
announcement
in the quantity demanded
at any
 Demand
given price.
after the announcement
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Slide 3-9
“Movement Along” vs. “Shift” of the Demand Curve
A movement along the demand curve is a change in the
quantity demanded of a good that is the result of a change in
that good’s price.

Frompoint
pointAAto
to
From
It isB:the
result in
of
point
increase
point
C:
increase
in
It
is
the
result
of
a
an
increase
in
the
quantity
demanded
quantity
demanded
fall
in the
price of the
quantity
demanded
reflects
a
movement
reflects
a shift of
good
along
at
any
the
given
demand
price
the demand
curve
curve
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Slide 3-10
Shifts of the Demand Curve (continued)

A
Andecrease
“increaseinin
demand
demand”,means
meansa a
leftward
rightwardshift
shiftofofthe
the
demand
demand curve
curve
At
At any
any given
given price,
price,
consumers
consumers demand
demand a
a
smaller
quantitythan
than
larger quantity
before
( D 1 D
3)
before (D1
D2)
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Slide 3-12
What Causes a Demand Curve to Shift?

Changes in the Prices of Related Goods
 Substitutes: Two goods are substitutes if a fall in the price
of one of the goods makes consumers less willing to buy the
other good. Ex.: muffins and donuts
 Complements: Two goods are complements if a fall in the
price of one good makes people more willing to buy the other
good. Ex: squash balls and squash racquets

Changes in Income
 Normal Goods: When a rise in income increases the demand
for a good—the normal case—we say that the good is a
normal good.
 Inferior Goods: When a rise in income decreases the
demand for a good, it is an inferior good. Ex: instant noodles



Changes in Tastes
Changes in Population
Changes in Expectations
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Slide 3-13
Supply Schedule
A supply schedule shows how much of a good or service
would be supplied at different prices
Supply Schedule for Tickets
© 2005 Worth Publishers
Price
($ per ticket)
Quantity
supplied
(tickets)
350
8,800
300
8,500
250
8,000
200
7,000
150
5,000
100
2,000
Slide 3-15
A supply curve shows graphically how much of a good or
service people are willing to sell at any given price.
The
higher
the
Just
as demand
…or
for
that
price
being
curves
normally
matter,
the
more
of
offered,
the
more
slope
downwards,
any
good
they
will
people
will
be
supply
curves
be
willing
to sell
willing
to
part
normally slopewith
their
hockey
upwards
tickets…
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Slide 3-16
Shifts of the Supply Curve
A shift of the supply curve is a change in the quantity
supplied of a good at any given price.
Gretzky is
retiring!!!
Announcement
Gretzky’s
a decrease
in
The decrease inofsupply
shiftsretirement
the supplygenerates
curve to the
left
supply, a decrease in the quantity supplied at any given price
© 2005 Worth Publishers
Slide 3-17
“Movement Along” vs. “Shift” of the Supply Curve
A movement along the supply curve is a change in the
quantity supplied of a good that is the result of a change in
that good’s price
From point A to
From
point B:point
the A to
point
It

Itisis
C:the
the
the
result
of
ofa
decrease
inresult
quantity
decrease
fall
a
decrease
in thein
price
quantity
in the
ofa
supplied
reflects
supplied
the
quantity
goodreflects
supplied
a at
movement
along
shift
any
of the
price
supply
the given
supply
curve
curve
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Slide 3-18
Shifts of the Supply Curve (continued)
The principal factors
At
given
price,
that
shift
the supply
Anyany
“decrease
in
there
is
an
increase
curve: means a in
supply”
the
quantity
leftward
shiftsupplied.
ofthe
the

changes
in
(S1
S2)
supply
price curve
of an input

“increase
in
At
Any
changes
any
given
inprice,
supply”
a in
there
technology
is ameans
decrease
rightward
shift
of the
the
quantity
supplied

changes
in
supply
curve
(S1
S3)
expectations
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Slide 3-19
What Causes a Supply Curve to Shift?

Changes in Input Prices
 An input is a good that is used to produce another
good.

Changes in Technology

Changes in Income

Changes in the Number of Suppliers

Changes in Expectations
© 2005 Worth Publishers
Slide 3-20
Supply, Demand, and Equilibrium


Equilibrium in a competitive market: when the
quantity demanded of a good equals the quantity
supplied of that good
The price at which this takes place is the
equilibrium price (a.k.a market-clearing price):
Every buyer finds a seller and vice versa

The quantity of the good bought and sold at that
price is the equilibrium quantity
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Slide 3-21
Finding the Equilibrium Price and Quantity
In this market the
Market
equilibrium
Let’s
putequilibrium
theprice
supply
In
equilibrium
the is
occurs
atdemanded
point
E, is
$250
quantity
curve and
the demand
where
the
supply
curve
equal
to
the
quantity
curve
for
that
market
And
the
equilibrium
and
the
demand
curve
supplied
on
the same
diagram
quantity
is 8,000
intersect
tickets
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Slide 3-22
Why Does the Market Price Fall if It Is
Above the Equilibrium Price?
Let’s say the market
price of $350 is above
the equilibrium price of
$250
This creates a surplus
This surplus will push
the price down until it
reaches the equilibrium
price of $250
There is a surplus of a good when the quantity supplied
exceeds the quantity demanded. Surpluses occur when the
price is above its equilibrium level.
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Slide 3-24
Why Does the Market Price Rise if It Is
Below the Equilibrium Price?
Let’s say the market
price of $150 is below the
equilibrium price of $250
This creates a shortage
This shortage will push
the price up until it
reaches the equilibrium
price of $250
There is a shortage of a good when the quantity demanded exceeds the
quantity supplied. Shortages occur when the price is below its equilibrium
level.
© 2005 Worth Publishers
Slide 3-25
Changes in Supply and Demand
What happens when the demand curve shifts?
Coffee and tea are substitutes: If the price of tea rises (falls), the
demand for coffee will increase (decrease). But how does the price
of tea affect the market for coffee?
The
A
rise
original
in
theexists
price
A shortage
When
new
demand
equilibrium
for
equilibrium
of
at
tea, original
the
aincreases,
is good
a
reached
atinEthe
2,
market
substitute,
price
,for
socoffee
shifts
price
withequilibrium
the
aP1higher
is
the
rises
atdemand
Eand
the
curve
1, atthe
equilibrium
price
and
the
price
intersection
rightward
quantity
toof
itsthe
P2 and a supplied
equilibrium
higher
supply
new
increases,
position
curve
S
at D2
equilibrium
quantity
ofathe
and
movement
the
original
along
quantity
good
both
Q2rise
demand
the
supply
curve
curve
D1
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Slide 3-26
Changes in Supply and Demand (continued)
What happens when the supply curve shifts?
Technological innovation: In the early 1970s, engineers learned how to
put microscopic electronic components onto a silicon chip; progress in the
technique has allowed ever more components to be put on each chip.
The
shift:exists
Afterat
a
A
surplus
The
original
A
new
equilibrium
When
supply of a
technological
the
original
price
equilibrium
is
reached
atin
Ethe
good
increases,
2,
change
increases
P
falls
market
for silicon
1, so
with
a price
lower
the
equilibrium
the
supply
and
the
quantity
chips
is at
Eof
, at
1good
equilibrium
price
price
of
the
silicon
chips, theof
demanded
the
intersection
P
and
a the
higher
falls
and
2
supply
curve
shifts
increases,
a curve
the
demand
equilibrium
right
its original
new
movement
along
D
andtothe
quantity
Q
rises
2
position
at S2curve
supply
curve
S1
the
demand
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Slide 3-27
Simultaneous Shifts in Supply and Demand
What happens when both the supply and demand curves
shift simultaneously?
The increase in
There
is a
demand
is relatively
simultaneous
larger than the
rightward
of the
decrease inshift
supply,
so
demand
curve and
the equilibrium
price
leftward
rises andshift
the of the
supply
curvequantity
equilibrium
increases
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Slide 3-28
Simultaneous Shifts in Supply and Demand
What happens when both the supply and demand curves shift
simultaneously? (another scenario)
The decrease in
There
supply is
is a
simultaneous
relatively larger
rightward
shift of
than
the increase
thedemand,
demandso
in
curve
and
the
equilibrium
price
risesshift
andof
leftward
the equilibrium
supply curve.
quantity
decreases
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Slide 3-29
Simultaneous Shifts in Supply and Demand
We can make the following predictions about the outcome
when the supply and demand curves shift simultaneously:
Supply
Increases
Supply
Decreases
Demand
Increases
Price: ?
Price: up
Quantity: up Quantity: ?
Demand
Decreases
Price: down
Quantity: ?
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Price: ?
Quantity: down
Slide 3-30
For Inquiring Minds
Supply, Demand, and Controlled Substances
However, we can see
by comparing the
The
equilibrium
original
equilibrium
E
the new
price
1 withhas
The
“war onrisen
drugs”
equilibrium
E
2 that
from the
P1 to
P
shifts
supply
2,
the actual reduction
curve
to the
left
and
this
induces
in the quantity of
suppliers
to is
drugs supplied
provide
drugs
much smaller
than
the
shift of
therisks
despite
the
supply curve
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Slide 3-31
The End of Chapter 3
Coming Attraction:
Chapter 4:
The Market Strikes Back
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Slide 3-32