Understanding Economics

4th edition
by Mark Lovewell, Khoa Nguyen and Brennan Thompson

Chapter 2
Demand and Supply

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

Learning Objectives
 In this chapter, you will:
1. consider the nature of demand, changes in
quantity demanded, changes in demand, and the
factors that affect demand
2. examine the nature of supply, changes in
quantity supplied, changes in supply, and the
factors that affect supply
3. see how markets reach equilibrium – the point at
which demand and supply meet

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

What Is Demand?

o Demand is a relationship between a

product’s price and quantity demanded.
• Demand is shown using a schedule or curve.
• The law of demand states that price and
quantity demanded are inversely related.
• Market demand is the sum of quantities
demanded by all consumers in a market.
• http://www.reffonomics.com/TRB/chapter4/de
mand1.swf

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 The Demand Curve
Figure 2.1, page 30

Your Demand Curve for Strawberries

Your Demand Schedule 2.50 a
for Strawberries
b
2.00
Quantity Point

Price ($ per kg)

Price
($ per kg) Demanded on c
(kg per month) graph 1.50
D
$2.50 7 a 1.00
2.00 9 b
0.50
1.50 11 c

0 1 3 5 7 9 11 13
Quantity Demanded
(kg per month)

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Deriving Market Demand
Figure 2.2, page 32

Your Demand Curve for Strawberries Friend’s Demand Curve for Strawberries

2.50 2.50

Price ($ per kg)

Price ($ per kg)

2.00 2.00
1.50 1.50
1.00 1.00
D0 D1
0.50 0.50

0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7
Quantity Demanded (kg per month) Quantity Demanded (kg per month)

Market Demand Curve for Strawberries

Individual and Market Demand
Schedules for Strawberries 2.50

Price ($ per kg)

Price You Friend Market 2.00
1.50
($ per (D0) (D1) (Dm)
kg) 1.00
(kg per month) Dm
0.50
$2.50 1 2 3
2.00 2 3 5
1.50 3 4 7 0 1 2 3 4 5 6 7

Quantity Demanded (kg per month)

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

Changes in Demand (a)

 Changes in demand:
 are shown by shifts in the demand curve
 are caused by changes in demand factors

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Changes in Demand
Figure 2.3, page 33

Market Demand Curve for Strawberries

Market Demand Schedule 2.50
for Strawberries
2.00
Price Quantity Demanded

Price ($ per kg)

($ per (millions of kg)
kg) (D2) (D0) (D1) 1.50
D2 D0 D1
$2.50 5 7 9 1.00
2.00 7 9 11
0.50
1.50 9 11 13

0 1 3 5 7 9 11 13
Quantity Demanded
(millions of kg per year)

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

Demand Factors

 Demand factors include the following:

 The number of buyers (an increase causes a
rightward demand shift)
 Income
 For normal products, an increase causes a
rightward demand shift.
 For inferior products, an increase causes a
leftward demand shift.

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 Demand Factors

 Prices of other products

 For substitute products, a rise in the other
product’s price causes a rightward demand shift.
 For complementary products, a rise in the other
product’s price causes a leftward demand shift.
 Consumer preferences
 Consumer expectations
 http://www.reffonomics.com/TRB/chapter4/demandinteractivec
hart.swf

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

Changes in Quantity Demanded (a)

 Changes in quantity demanded:

 are shown by movements along demand curve
 are caused by price changes
 http://www.reffonomics.com/TRB/chapter4/qu
antitydemanded.swf

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

 Changes in Quantity Demanded (b)
Figure 2.4, page 34

Change in Quantity Demanded Change in Demand

Price ($ per pair of skis)

Price ($ per pair of skis)

a
2.00 2.00
b
1.50 1.50

1.00 1.00
D0 D0 D1
0.50 0.50

0 5000 6000 0 5000

Quantity Demanded (pairs of skis) Quantity Demanded (pairs of skis)

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

What Is Supply?

 Supply:
 is a relationship between a product’s price and
quantity supplied
 is shown using a schedule or curve
 The law of supply states there is a direct
relationship between price and quantity
supplied.
 http://www.reffonomics.com/TRB/chapter
4/supply1.swf

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

 The Supply Curve
Figure 2.5, page 36

Market Supply Curve for Strawberries

Market Supply Schedule f
for Strawberries S
2.50
e
Price Quantity Supplied Points
($ per kg) (millions of kg) on graph 2.00 d

Price ($ per kg)

1.50
$1.50 5 d
2.00 9 e 1.00
2.50 13 f
0.50

0 1 3 5 7 9 11 13
Quantity Supplied
(millions of kg per year)

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

Changes in Supply (a)

 Changes in supply:
 are shown by shifts in the supply curve
 are caused by changes in supply factors
 http://www.reffonomics.com/TRB/chapter4/su
pplyinteractivechart.swf

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

Changes in Supply (b)
Figure 2.6, page 37

Market Supply Curve for Strawberries

S2 S0 S1
Market Supply Schedule
2.50
for Strawberries
Price Quantity Supplied 2.00

Price ($ per kg)

($ per (millions of kg)
kg) 1.50
(S2) (S0) (S1)
$2.50 11 13 15 1.00

2.00 7 9 11 0.50
1.50 3 5 7

0 1 3 5 7 9 11 13 15
Quantity Supplied
(millions of kg per year)

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

Supply Factors (a)

 Supply factors include the following

factors:
 Number of producers (an increase causes a
rightward supply shift)
 Resource prices (an increase causes a leftward
supply shift)
 State of technology (an improvement causes a
rightward supply shift)
 Prices of related products (an increase causes
a leftward supply shift)

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Supply Factors (b)
 Changes in nature (an improvement causes a
rightward shift for some products)
 Producer expectations (an expectation of lower
prices in the future causes an immediate
rightward supply shift)

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Changes in Quantity Supplied (a)

 Changes in quantity supplied:

 are shown by movements along the supply
curve
 are caused by price changes

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 Changes in Quantity Supplied (b)
Figure 2.7, page 39

Change in Quantity Supplied Change in Supply

S0 S0 S1
120 b 120

100 a 100
Price ($ per kg)

Price ($ per kg)

80 80

60 60

40 40

20 20

0 1 2 0 1 2

Quantity Supplied Quantity Supplied

(millions of kg per year) (millions of kg per year)

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Market Equilibrium (a)

 When a product is in surplus:

 there is excess supply
 price is pushed down
 When a product is in shortage:
 there is excess demand
 price is pushed up

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 Market Equilibrium (b)
Figure 2.8, page 41

Market Demand and Supply Market Demand and Supply Curves

Schedules for Strawberries for Strawberries
S
3.00 Surplus
Surplus (+)
Quantities or Shortage
Price (millions of kg) (-)
2.50 a a

Price ($ per kg)

($ per D S (millions of
kg) kg) 2.00 e

$3.00 5 13 +8 1.50 b b
2.50 7 11 +4 1.00 Shortage
2.00 9 9 0 D
1.50 11 7 -4
1.00 13 5 -8
0 1 3 5 7 9 11 13 15
Quantity
(millions of kg per year)

Copyright © 2008 by McGraw-Hill Ryerson Limited. All rights reserved.

Changes in Equilibrium

 A rightward demand shift pushes up both

equilibrium price and quantity.
 A leftward demand shift pushes down both
equilibrium price and quantity.
 A rightward supply shift pushes equilibrium
price down and equilibrium quantity up.
 A leftward supply shift pushes equilibrium
price up and equilibrium quantity down.

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 Demand Changes and Equilibrium
Figure 2.9, page 42

Market Demand and Supply Curves

for Strawberries
Market Demand and Supply S
Schedules for Strawberries 3.00

2.50 b
Price Quantities

Price ($ per kg)

(D0) (D1) (S)
($ per kg.) (millions of kg) 2.00 a

$3.00 5 9 13 1.50
2.50 7 11 11 shortage
1.00
D0 D1
2.00 9 13 9
1.50 11 15 7
1.00 13 17 5
0 1 3 5 7 9 11 13 15 17

Quantity
(millions of kg per year)

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 Supply Changes and Equilibrium
Figure 2.10, page 43

Market Demand and Supply Curves

for Strawberries
Market Demand and Supply S0 S1
Schedules for Strawberries 3.00

Price Quantities 2.50 Surplus

Price ($ per kg)

(D0) (S0) (S1) a
($ per kg) (millions of kg) 2.00
b
$3.00 5 13 17 1.50
2.50 7 11 15 1.00
D0
2.00 9 9 13
1.50 11 7 11
1.00 13 5 9
0 1 3 5 7 9 11 13 15 17

Quantity
(millions of kg per year)

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The Utility-Maximizing Rule

 Jevons devised the utility-maximizing rule

 this rule states a consumer should reach the
same marginal utility per dollar for all products
consumed
 in mathematical terms:

MU1 MU2
=
P1 P2

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Spoilt for Choice (c)
Figure B, page 51

Cups of Cappuccino Danish Pastries

(price = $1) (price = $2)
Quantity Marginal Marginal Quantity Marginal Marginal
Utility Utility Utility Utility
(MU1) per $ (MU2) per $
(MU1/P1=MU1/$1) (MU2/P2=MU2/$2)
(utils) (utils per $) (utils) (utils per $)
0 0
12 12 16 8
1 1
8 8 12 6
2 2
4 4 8 4
3 3
2 2 4 2
4 4

Cappuccinos Danish Pastries

12 12
Marginal Utility

Marginal Utility
Per $ (utils)

Per $ (utils)
8 8

4 4

0 1 2 3 4 0 1 2 3 4
Cups of Cappuccino Pastries

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