Supply and Demand: An Introduction

Supply
Supply and
and Demand:
Demand:
An
An Introduction
Introduction
MB MC
MB MC
Supply and Demand:
An Introduction
 How do consumers get the goods and

services they want in the right quantities
and qualities?
 Some goods and services are allocated by
the market forces of supply and demand
Copyright c 2007 by The McGraw-Hill

Companies, Inc. All rights reserved.
MB MC
Supply and Demand:
An Introduction
 Why do some goods and services have

shortages or surpluses and others do
not?
 Some good and supplies services are
regulated by government

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What, How, and For Whom?
Central Planning Versus the Market
 Three Problems All Economic Systems

Must Address
 What should be produced?
 How should it be produced?
 For whom will it be produced?

MB MC
 Centralized Economic Organizations

 Agrarian society
 Former Soviet Union
 Cuba
 North Korea
 China
 Bureaucracy
Copyright c 2007 by
Chapter 3 -The McGraw-Hill
Supply and Demand: An Introduction Slide 5
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 Free-Market or Capitalist Economic

System
 Individual choices determine:
 Which careers to pursue
 Which products to produce or buy
 When to start and shut-down a business
 Who gets what is decided by individual

preferences and purchasing power
Copyright c 2007 by The McGraw-Hill Chapter 3 - Supply and Demand: An Introduction

MB MC
 A small number of individuals address:

 What
 Establish production targets for factories and
farms
 How
 Plan how to achieve the goals
 For Whom
 Distribute the goods and services
produced

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Buyers and Sellers In Markets
 Market
 Consists of all buyers and sellers of a good
or service
 What do you think?
 What determines the price of pizza,
gasoline, a car wash, or other goods and
services?
Copyright c 2007 by The McGraw-Hill Chapter 3 - Supply and Demand: An Introduction Slide 8
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 The Demand Curve

 A schedule or graph that tells us the
quantity of a good that buyers wish to buy
at each price
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 A Property of Demand
 As price of a good or service goes down
the quantity consumers wish to buy will
increase
 Therefore, the demand curve is downward-
sloping
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The Daily Demand
Curve for Pizza in Chicago
Price
($ per slice)
2
Demand
Quantity
(1000s of slices per day)
8 12 16
Copyright c 2007 by The McGraw-Hill Chapter 3 - Supply and Demand: An Introduction

MB MC
 The Demand Curve

 Why do buyers purchase a greater quantity
at lower prices and vice-versa?
 The substitution effect
 The income effect
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 The Substitution Effect

 The change in the quantity demanded of a
good that results because buyers switch to
substitutes when the price of the good
changes
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 The Income Effect

 The change in the quantity demanded of a
good that results because a change in the
price of a good changes the buyer’s
purchasing power
Copyright c 2007 by The McGraw-Hill Slide 14

Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An Introduction
MB MC
 The Supply Curve

 A curve or schedule showing the quantity
of a good that sellers wish to sell at each
price
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 The Supply Curve

 Sellers must receive a higher price to
produce additional units of product to cover
the higher opportunity costs of each
additional unit
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The Daily Supply
Curve for Pizza in Chicago
Price
($ per slice)
Supply
Quantity
8 12 16
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Market Equilibrium
 Equilibrium
 A system is in equilibrium when there is no
tendency for it to change
 Market Equilibrium
 Occurs in a market when all buyers and
sellers are satisfied with their respective
quantities at the market price

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The Equilibrium Price and
Quantity of Pizza In Chicago
Price
($ per slice)
Supply
4 Equilibrium at $3
Quantity Demanded =
3 Quantity Supplied
Demand
Quantity
8 12 16

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Market Equilibrium
 Equilibrium Price and Equilibrium

Quantity
 The values of price and quantity for which
quantity supplied and quantity demanded
are equal

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Market Equilibrium
 What Do You Think?

 Would buyers prefer a lower price than the
equilibrium price?
 Would sellers prefer a higher price than the
equilibrium price?

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Excess Supply
Excess supply = 8,000 slices per day
Price
($ per slice)
Supply
Demand
Quantity
8 12 16

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Excess Demand
Price
($ per slice)
Supply
4
Excess demand = 8,000
3 slices per day
Demand
Quantity
8 16

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Points Along the Demand and
Supply Curves of a Pizza Market
Demand for pizza Supply of pizza
Price Quantity demanded Price Quantity supplied

($/slice) (1000s of slices/day) ($/slice) (1000s of slices/day)
1 8 1 2
2 6 2 4
3 4 3 6
4 2 4 8

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Graphing Supply and Demand and
Finding the Equilibrium Price and Quantity
Price
($per slice) Supply
5
4
The Equilibrium Price = $2.50
3 The Equilibrium Quantity = 5
2.50
2
1
Demand
Quantity
0 (1000s of slices per day)
2 4 6 8 10
5

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Predicting and Explaining
Changes In Prices and Quantities
 Distinguishing Between:
 A change in the quantity demanded
A movement along the demand curve that
occurs in response to a change in price
 A change in demand
A shift of the entire demand curve

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An Increase In Quantity
Demanded vs. An Increase In Demand
Price
($/can)
6 Increase in
quantity
5 demanded
1
D
Quantity
0 (1000s of cans/day)
2 4 6 8 10 12

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Demanded vs. An Increase In Demand
Price
($/can) D’
6 D
4
Increase in demand
3
2
D’
1
D
Quantity
(1000s of cans/day)
0 12

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 Change in the quantity supplied

 A movement along the supply curve that
occurs in response to a change in price
 Change in supply
 A shift of the entire supply curve

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Supplied vs. An Increase In Supplied
Price
($/can)
6
S
5
Increase in
4 quantity supplied
2
S
1
Quantity
(1000s of cans/day)
0 2 4 6 8 10

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Supplied vs. An Increase In Supplied
Price
($/can)
6 S S’
5
3
Increase in supply
2
1
S S’
Quantity
(1000s of cans/day)
0 2 4 6 8 10

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 Shifts in Demand
 Complements
 Two goods are complements in consumption if
an increase (decrease) in the price of one
cause a decrease (increase) in the demand for
the other

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 Substitutes
 Two goods are substitutes in consumption if an
increase (decrease) in the price of one causes
an increase (decrease) in the demand for the
other

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 Changes In Demand
 An increase (decrease) in the demand for a
good will shift the demand curve to the right
(left)

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 Factors that Shift Demand

 Price of complements
 Price of substitutes
 Income
 Preferences
 Population of potential buyers
 Expectations

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 Factors that Shift Supply

 Costs of production
 Technology
 Weather
 Number of suppliers
 Expectations

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Changes In Prices and Demand
 Factors That Cause an Increase

(rightward or upward shift) in Demand
1. A decrease in the price of complements
to the good or service
2. An increase in the price of substitutes for
the good or service

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(rightward or upward shift) in Demand
4. An increased preference by demanders
for the good or service
5. An increase in the population of potential
buyers
6. An expectation of higher prices in the
future

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(rightward) in Supply
1. A decrease in the cost of materials, labor,
or other inputs used in the production of
the good or service
2. An improvement in technology that
reduces the cost of producing the good or
service

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(rightward) in Supply
3. An improvement in the weather,
especially for agricultural products
4. An increase in the number of suppliers
5. An expectation of lower prices in the
future

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 Assume
 A vitamin found in corn chips helps protect
against cancer and heart diseases
 Swarm of locusts destroys part of the corn
crop
 What Do You Think?
 What will happen to the equilibrium price
and quantity of corn chips?

End of
Chapter
MB MC

Supply and Demand: An Introduction

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Supply

 How do consumers get the goods and

Copyright c 2007 by The McGraw-Hill

 Why do some goods and services have

Copyright c 2007 by The McGraw-Hill

 Three Problems All Economic Systems

Copyright c 2007 by The McGraw-Hill

 Centralized Economic Organizations

 Free-Market or Capitalist Economic

 When to start and shut-down a business

 Who gets what is decided by individual

Copyright c 2007 by The McGraw-Hill Chapter 3 - Supply and Demand: An Introduction

 A small number of individuals address:

Copyright c 2007 by The McGraw-Hill

Buyers and Sellers In Markets

Buyers and Sellers In Markets

 The Demand Curve

Buyers and Sellers In Markets

Copyright c 2007 by The McGraw-Hill Chapter 3 - Supply and Demand: An Introduction

Buyers and Sellers In Markets

 The Demand Curve

Buyers and Sellers In Markets

 The Substitution Effect

Buyers and Sellers In Markets

 The Income Effect

Copyright c 2007 by The McGraw-Hill Slide 14

Buyers and Sellers In Markets

 The Supply Curve

Buyers and Sellers In Markets

 The Supply Curve

Copyright c 2007 by The McGraw-Hill

Copyright c 2007 by The McGraw-Hill

 Equilibrium Price and Equilibrium

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 What Do You Think?

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Demand for pizza Supply of pizza

Price Quantity demanded Price Quantity supplied

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 Change in the quantity supplied

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 Factors that Shift Demand

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 Factors that Shift Supply

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 Factors That Cause an Increase

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 Factors That Cause an Increase

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 Factors That Cause an Increase

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 Factors That Cause an Increase