Chapter 3:
Demand and Supply
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.
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Markets
• Markets– Arrangements that individuals have for
exchanging with one another– Represent the interaction of buyers and
sellers
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Markets
• Markets– Markets for gasoline– Markets for labor– Stock market– Market for Super Bowl tickets– Compact disk market
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Markets
• Markets– Markets set the prices we pay and receive in
a free, competitive environment
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The Law of Demand
• Demand– Quantities of specific goods or services that
individuals, taken singly or as a group, will purchase at various possible prices, other things being constant
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The Law of Demand
• Law of Demand
– Quantity demanded is inversely related to price, holding other factors constant.
• Price Qd
• Price Qd
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The Law of Demand
• What are we holding constant?– Income – Price of other goods– Many other factors
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The Law of Demand
• Relative prices versus money prices– Relative Price
• The price of a commodity in terms of another commodity
– Money Price• Price we observe today in today’s dollars
(absolute, nominal price)
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The Demand Schedule
• The demand schedule is a table relating prices to quantity demanded.
• We must consider:– The time dimension– Constant-quality units
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The Individual Demand Schedule
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The Individual Demand Curve
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The Horizontal Summationof Two Demand Schedules
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The Horizontal Summationof Two Demand Schedules
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The Market DemandSchedule for Secure Digital Cards
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The Market DemandCurve for Secure Digital Cards
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A Shift in the Demand Curve
• Ceteris-Paribus Conditions
– Determinants of the relationship between price and quantity that are unchanged along a curve
– Changes in these factors cause a curve to shift
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A Shift in the Demand Curve
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Shifts in Demand
• Determinants of demand– Income
• Normal goods• Inferior goods
– Tastes and preferences– The price of related goods
• Complements• Substitutes
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Shifts in Demand
• Determinants of demand– Expectations
• Income• Future prices
– Market size (number of buyers)
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Shifts in Demand
The Determinants of DemandIncome: Normal Good
D1
Q/Units
D2D3
Price
Decrease in incomedecreases demand
Increase in incomeincreases demand
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Shifts in Demand
The Determinants of DemandIncome: Inferior Good
D1
Q/Units
Decrease in incomeincreases demand
Increase in incomedecreases demand
Price
D2D3
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Shifts in Demand
The Determinants of DemandIncome: Tastes and Preferences
D1
Q/Units
Price
D2D3
Hybrid vehicles• Increase in demand
SUVs• Decrease in demand
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Shifts in Demand
The Determinants of DemandPrice of Related Goods: Substitutes
D1
Q/Butter
Butter and Margarine• Price of both = $2/lb.• Price of margarine increases
to $3/lb.• Demand for butter increases
D2
Price
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Shifts in Demand
The Determinants of DemandPrice of Related Goods: Complements
D1
Q/Speakers
Speakers and Amplifiers• Decrease the relative
price of amplifiers• Demand for speakers
increases
D2D3
Speakers and Amplifiers• Increase the relative
price of amplifiers• Demand for speakers
decreases
Price
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Shifts in Demand
The Determinants of DemandExpectations
D1
Q/Units
A higher income or expectations of a higher future price will increase demand
D2D3
A lower income or expectations of a lower future price will decrease demand
Price
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Shifts in Demand
The Determinants of DemandPopulation
D1
Q/Units
Increase in the population increases demand
D2D3
Decrease in population decreases demand
Price
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Shifts in Demand
• Changes in demand versus changes in quantity demanded– A change in one or more of the non-price
determinants (income, tastes, etc.) will lead to a change in demand.
– This is a shift of the whole curve.
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Shifts in Demand
• Changes in demand versus changes in quantity demanded
– A change in a good’s own price leads to a change in quantity demanded.
• This is a movement along the same curve.
– ∆D is not the same as ∆Qd.
Movement Along a Given Demand Curve
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The Law of Supply
• Supply– The amount of a product or service that firms
are willing to sell at alternative prices
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The Law of Supply
• Law of Supply
– The price of a product or service and the quantity supplied are directly related.
• P Qs
• P Qs
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The Supply Schedule
• The supply schedule is a table relating prices to quantity supplied at each price.
• Supply Curve
– A graphical representation of the supply schedule
– Positively sloped line showing direct relationship between price and quantity supplied, all else equal
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The Individual Producer’s Supply Schedule
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The Individual Producer’s Supply Curve
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Horizontal Summationof Supply Curves
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Horizontal Summationof Supply Curves
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The Market Supply Schedule for Secure Digital Cards
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The Market Supply Curve for Secure Digital Cards
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Shifts in Supply
• In general, non-price changes that lead to higher profits lead to an increase in supply.
• In general, non-price changes that lead to lower profits lead to a decrease in supply.
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Shifts in Supply
• Determinants of supply– Cost of inputs– Technology and productivity– Taxes and subsidies– Price expectations– Number of firms in industry
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Shifts in Supply
The Determinants of SupplyCost of Inputs
S1
Q/Units
Decrease in cost increases supply
S2Increase in costdecreases supply
S3
Price
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Shifts in Supply
The Determinants of SupplyTechnology and Productivity
S1
Q/Units
Improvements in technology or increases in productivity increase supply
S2
Decreases in productivity decrease supply
S3
Price
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Shifts in Supply
The Determinants of SupplyTaxes and Subsidies
S1
Q/Units
Decreases in taxes or increases in subsidies increase supply
S2
Increases in taxes or decreases in subsidies decrease supply
S3
Price
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Shifts in Supply
The Determinants of SupplyPrice Expectations
S1
Q/Units
Expectations of lower future prices increase supply
S2Expectations of higher future prices decrease supply
S3
Price
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Shifts in Supply
The Determinants of SupplyNumber of Firms in Industry
S1
Q/Units
Increase in the number of firms increases supply
S2Decrease in the number of firms decreases supply
S3
Price
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Shifts in Supply
• Changes in supply versus changes in quantity supplied– A change in one or more of the non-price
determinants will lead to a change in supply.
– This is a shift of the whole curve.
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Shifts in Supply
• Changes in supply versus changes in quantity supplied– A change in a good’s own price leads to a
change in quantity supplied.– This is a movement along the same curve.
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Putting Demandand Supply Together
Putting Demandand Supply Together
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Putting Demandand Supply Together
• Equilibrium
– The situation when quantity supplied equals quantity demanded at a particular price
– There tends to be no movement of the price of the quantity away from this point unless demand or supply changes.
– Equilibrium is a stable point – any point that is not equilibrium is unstable and will not persist.
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Putting Demandand Supply Together
• Shortages
– The situation when quantity demanded is greater than quantity supplied
• Qd > Qs
– Exist at any price below the market clearing price
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Putting Demandand Supply Together
• Surpluses
– The situation when quantity supplied is greater than quantity demanded• Qd < Qs
– Exist at any price above the market clearing price
Chapter 3:
Demand and Supply
ECON 152 – PRINCIPLES OF MICROECONOMICS
Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.