Chapter 3:
Demand and Supply
Checklist:
When you have completed your study of
this chapter, you will be able to
1. Distinguish between quantity demanded and
demand, and explain what determines demand.
2. Distinguish between quantity supplied and supply,
and explain what determines supply.
3. Explain how demand and supply determine price
and quantity in a market, and explain the effects
of changes in demand and supply.
COMPETITIVE MARKETS
A market is any arrangement that bring buyers and
sellers together.
A market might be a physical place or a group of buyers
and sellers spread around the world who never meet.
COMPETITIVE MARKETS
In this chapter, we study a competitive market
that has so many buyers and so many sellers that
no individual buyer or seller can influence the
price.
DEMAND
Quantity demanded (QD) is the amount of a
good, service, or resource that people are willing
and able to buy during a specified period at a
specified price.
The quantity demanded is an amount per unit of
time. For example, the amount per day or per
month.
DEMAND
Law of Demand
Other things remaining the same,
If the price (P) of a good rises, the
quantity demanded (QD) of that good
decreases.
If the P of a good falls, the QD of that
good increases.
A negative relationship between P and
QD.
DEMAND
Demand Schedule and Demand Curve
Demand (D) is the relationship between
the quantity demanded and the price of a
good when all other influences on buying
plans remain the same.
Demand is a list of quantities at different
prices and is illustrated by the demand
curve.
DEMAND
Demand schedule is a list of the quantities
demanded at each different price when all
the other influences on buying plans remain
the same.
Demand curve is a graph of the relationship
between the quantity demanded of a good
and its price when all other influences on
buying plans remain the same.
DEMAND
DEMAND
Individual Demand and Market Demand
Market demand is the sum of the
demands of all the buyers in a market.
The market demand curve is the
horizontal sum of the demand curves of
all buyers in the market.
DEMAND
DEMAND
Changes in Demand
Change in demand is a change in the
quantity that people plan to buy when
any influence other than the price of the
good changes.
A change in demand means that there is
a new demand schedule and a new
demand curve.
DEMAND
The diagram shows
changes in demand.
[Link] demand
decreases, the
demand curve shifts
leftward from D0 to
D1.
[Link] demand
increases, the
demand curve shifts
rightward from D0 to
D2.
DEMAND
The main influences on buying plans that
change demand are
1. Prices of related goods
2. Expected future prices
3. Income
4. Number of buyers
5. Preferences
DEMAND
1. Prices of Related Goods
A substitute is a good that can be consumed
in place of another good.
For example, apples and oranges are
substitutes.
The demand for a good increases, if the price of
one of its substitutes rises.
The demand for a good decreases, if the price of
one of its substitutes falls.
DEMAND
A complement is a good that is consumed
with another good.
For example, ice cream and fudge sauce are
complements.
The demand for a good increases, if the price
of one of its complements falls.
The demand for a good decreases, if the price
of one of its complements rises.
DEMAND
2. Expected Future Prices
A rise in the expected future price of a good
increases the current demand for that good.
A fall in the expected future price of a good
decreases current demand for that good.
For example, if the price of a computer is
expected to fall next month, the demand for
computers today decreases.
DEMAND
3. Income
A normal good is a good for which the
demand increases if income increases and
demand decreases if income decreases.
An inferior good is a good for which the
demand decreases if income increases and
demand increases if income decreases.
DEMAND
4. Number of Buyers
The greater the number of buyers in a market,
the larger is the demand for any good.
5. Preferences
When preferences change, the demand for one
item increases and the demand for another item
(or items) decreases.
Preferences change when:
People become better informed.
New goods become available.
DEMAND
Change in Quantity Demanded Versus Change in
Demand
A change in the quantity demanded is a
change in the quantity of a good that people
plan to buy that results from a change in the
price of the good.
A change in demand is a change in the
quantity that people plan to buy when any
influence other than the price of the good
changes.
DEMAND
summarizes the distinction:
COST & SUPPLY
Comparative Advantage (C.A.)
Comparative advantage is the ability
of a person to perform an activity or
produce a good or service at a lower
opportunity cost than someone else.
Handout about C.A.
SUPPLY
Quantity supplied (QS) is the amount of a good, service,
or resource that people are willing and able to sell during a
specified period at a specified price.
The Law of Supply
Other things remaining the same,
If the P of a good rises, the QS of that good
increases.
If the P of a good falls, the QS of that good
decreases.
A positive relationship between P & QS
SUPPLY
Supply Schedule and Supply Curve
Supply (S) is the relationship between the
quantity supplied of a good and the price of
the good when all other influences on selling
plans remain the same.
Supply is a list of quantities at different
prices and is illustrated by the supply curve.
SUPPLY
A supply schedule is a list of the quantities
supplied at each different price when all
other influences on selling plans remain the
same.
A supply curve is a graph of the relationship
between the quantity supplied and the price
of the good when all other influences on
selling plans remain the same.
SUPPLY
SUPPLY
Individual Supply and Market Supply
Market supply is the sum of the supplies
of all sellers in a market.
The market supply curve is the horizontal
sum of the supply curves of all the sellers in
the market.
SUPPLY
SUPPLY
Changes in Supply
A change in supply is a change in the
quantity that suppliers plan to sell when any
influence on selling plans other than the price
of the good changes.
A change in supply means that there is a new
supply schedule and a new supply curve.
SUPPLY
This diagram shows
changes in supply.
[Link] supply
decreases, the
supply curve shifts
leftward from S0 to
S1.
[Link] supply
increases, the supply
curve shifts rightward
from S0 to S2.
SUPPLY
The main influences on selling plans that
change supply are
1. Prices of resources and other Inputs
2. Expected future prices
3. Number of sellers
4. Productivity / Technological change
SUPPLY
1. Prices of Resources and Other Inputs
Resource and input prices influence the
cost of production. And the more it costs to
produce a good, the smaller is the quantity
supplied of that good.
2. Expected Future Prices
A rise in the expected future price of a good
decreases the current supply for that good.
A fall in the expected future price of a good
increases current supply for that good
SUPPLY
3. Number of Sellers
The greater the number of sellers in a market, the
larger is supply.
4. Productivity
Productivity is output per unit of input.
An increase in productivity lowers costs and
increases supply. For example, an advance in
technology increases supply.
A decrease in productivity raises costs and
decreases supply. For example, a severe hurricane
decreases supply.
SUPPLY
Change in Quantity Supplied Versus Change
in Supply
A change in quantity supplied is a
change in the quantity of a good that
suppliers plan to sell that results from a
change in the price of the good.
A change in supply is a change in the
quantity that suppliers plan to sell when
any influence on selling plans other than
the price of the good changes.
SUPPLY
summarizes the distinction
MARKET EQUILIBRIUM
Market equilibrium occurs when the quantity
demanded equals the quantity supplied (QD = QS).
At market equilibrium, buyers’ and sellers’ plans are
consistent.
Equilibrium price is the price at which the quantity
demanded equals the quantity supplied.
Equilibrium quantity is the quantity bought and sold at
the equilibrium price.
MARKET EQUILIBRIUM
This diagram shows the
equilibrium price and
equilibrium quantity.
1. Market equilibrium at
the intersection of the
demand curve and the
supply curve.
2. The equilibrium price
is $1 a bottle.
3. The equilibrium
quantity is 10 million
bottles a day.
MARKET EQUILIBRIUM
Price: A Market’s Automatic Regulator
Law of market forces
When there is a shortage, the price rises.
When there is a surplus, the price falls.
Shortage or Excess Demand is the quantity
demanded exceeds the quantity supplied.
Surplus or Excess Supply is the quantity
supplied exceeds the quantity demanded.
MARKET EQUILIBRIUM
At $1.50 a bottle:
1. Quantity is supplied
11 million bottles.
2. Quantity demanded
is 9 million bottles.
3. There is a surplus of
2 million bottles.
4. Price falls until the
surplus is eliminated
and the market is in
equilibrium.
MARKET EQUILIBRIUM
At 75 cents a bottle:
1. Quantity demanded
is 11 million bottles.
2. Quantity supplied is
9 million bottles.
3. There is a
shortage of 2
million bottles.
4. Price rises until the
shortage is eliminated
and the market is in
MARKET EQUILIBRIUM
Predicting Price Changes: Three Questions
We can work out the effects of an event
by answering:
1. Does the event change demand or
supply?
2. Does the event increase or decrease
demand or supply—shift the demand
curve or the supply curve rightward or
leftward?
3. What are the new equilibrium price and
equilibrium quantity and how have they
MARKET EQUILIBRIUM
Effects of Changes in Demand
Event: A new study says that tap water is
unsafe.
In the market for bottled water:
1. With tap water unsafe, demand for bottled
water changes.
2. The demand for bottled water increases, the
demand curve shifts rightward.
3. What are the new equilibrium price and
MARKET EQUILIBRIUM
1. An increase in demand
shifts the demand
curve rightward.
2. At $1.00 a bottle,
there is a shortage, so
the price rises.
3. The quantity supplied
increases along the
supply curve.
4. Equilibrium
quantity increases.
MARKET EQUILIBRIUM
Event: A new zero-calorie sports drink is
invented.
In the market for bottled water:
1. The new drink is a substitute for bottled
water, so the demand for bottled water
changes
2. The demand for bottled water decreases,
the demand curve shifts leftward.
3. What are the new equilibrium price and
MARKET EQUILIBRIUM
1. A decrease in demand
shifts the demand curve
leftward.
2. At $1.00 a bottle, there
is a surplus, so the price
falls.
3. Quantity supplied
decreases along the
supply curve.
4. Equilibrium quantity
decreases.
MARKET EQUILIBRIUM
When demand changes:
The supply curve does not shift.
But there is a change in the quantity
supplied.
Equilibrium price and equilibrium quantity
change in the same direction as the
change in demand.
MARKET EQUILIBRIUM
Effects of Changes in Supply
Event: Europeans water bottlers buy springs
and open plants in the United States.
In the market for bottled water:
1. With more suppliers of bottled water, supply
changes.
2. The supply of bottled water increases, the
supply curve shifts rightward.
3. What are the new equilibrium price and
equilibrium quantity and how have they
MARKET EQUILIBRIUM
1. An increase in
supply shifts the
supply curve
rightward.
2. At $1.00 a bottle,
there is a surplus,
so the price falls.
3. Quantity demanded
increases along the
demand curve.
4. Equilibrium quantity
increases.
MARKET EQUILIBRIUM
Event: Drought dries up some springs in the
United States.
In the market for bottled water:
1. Drought changes the supply of bottled water.
2. The supply of bottled water decreases, the
supply curve shifts leftward.
3. What are the new equilibrium price and
equilibrium quantity and how have they
changed?
MARKET EQUILIBRIUM
1. A decrease in supply
shifts the supply
curve leftward.
2. At $1.00 a bottle, there
is a shortage, so the
price rises.
3. Quantity demanded
decreases along the
demand curve.
4. Equilibrium quantity
decreases.
MARKET EQUILIBRIUM
When supply changes:
The demand curve does not shift.
But there is a change in the quantity
demanded.
Equilibrium price changes in the opposite
direction as the change in supply.
Equilibrium quantity changes in the same
direction to the change in supply.
MARKET EQUILIBRIUM
Changes in Both Demand and Supply
When two events occur at the same time,
work out how
each event influences the market:
1. Does each event change demand or
supply?
2. Does either event increase or decrease
demand or increase or decrease supply?
3. What are the new equilibrium price and
equilibrium quantity and how have they
changed?
MARKET EQUILIBRIUM
The figure shows the
effects of an increase in
both demand and supply.
An increase in demand
shifts the demand curve
rightward; an increase in
supply shifts the supply
curve rightward.
1. Equilibrium quantity
increases.
2. Equilibrium price might
rise or fall.
MARKET EQUILIBRIUM
Increase in Both Demand and Supply
Increases the equilibrium quantity.
The change in the equilibrium price is
ambiguous because the:
Increase in demand raises the price.
Increase in supply lowers the price.
MARKET EQUILIBRIUM
This figure shows the
effects of a decrease in
both demand and supply.
A decrease in demand
shifts the demand curve
leftward; a decrease in
supply shifts the supply
curve leftward.
1. Equilibrium quantity
decreases.
2. Equilibrium price might
rise or fall.
MARKET EQUILIBRIUM
Decrease in Both Demand and Supply
Decreases the equilibrium quantity.
The change in the equilibrium price is
ambiguous because the:
Decrease in demand lowers the price
Decrease in supply raises the price.
MARKET EQUILIBRIUM
The figure shows the effects
of an increase in demand
and a decrease in supply.
An increase in demand shifts
the demand curve rightward;
a decrease in supply shifts
the supply curve leftward.
1. Equilibrium price
rises.
2. Equilibrium quantity
might increase,
decrease, or not change.
MARKET EQUILIBRIUM
Increase in Demand and Decrease in Supply
Raises the equilibrium price.
The change in the equilibrium quantity is
ambiguous because the:
Increase in demand increases the quantity.
Decrease in supply decreases the quantity.
MARKET EQUILIBRIUM
This figure shows the effects
of a decrease in demand
and an increase in supply.
A decrease in demand shifts
the demand curve leftward;
an increase in supply shifts
the supply curve rightward.
1. Equilibrium price falls.
2. Equilibrium quantity
might increase,
decrease, or not change.
MARKET EQUILIBRIUM
Decrease in Demand and Increase in Supply
Lowers the equilibrium price.
The change in the equilibrium quantity is
ambiguous because the:
Decrease in demand decreases the
quantity.
Increase in supply increases the quantity.
MARKET EQUILIBRIUM
∆D ∆S ∆P ∆Q
Increases No change + +
Decreases No change - -
No change Increases - +
No change Decreases + -
Increases Increases uncertain +
Increases Decreases + uncertain
Decreases Increases - uncertain
Decreases Decreases uncertain -
EYE on HOME PRICES
Why Did Home Prices Boom and Bust?
In 1999, the price of an average home was
$200,000, but home prices were rising by
almost 10 percent a year.
The pace of increase picked up and by
2004, home prices were rising by 15
percent a year.
What caused this boom in home prices?
EYE on HOME PRICES
Why Did Home Prices Boom and Bust?
1. Cheap and easy
loans increased the
demand for homes.
2. With house prices
expected to rise
further the supply of
homes for sale
decreased.
3. Home prices soared.
In 2006, home prices
started to fall. What
caused home prices to
EYE on HOME PRICES
Why Did Home Prices Boom and Bust?
1. Cheap and
easy loans dried up
the demand for
homes.
2. With house
prices expected
to fall the supply of
homes for sale
increased.
3. Home prices fell.
By 2009, the average
home price had fallen
to 54 percent of the
2006 peak value.
