Supply

Supply and
and Demand-
An
An Introduction
Introduction
 LEARNING OBJECTIVES

you will learn

1. How the demand curve summarizes the
behavior of buyers in the marketplace.
2. How the supply curve summarizes the
behavior of sellers in the marketplace.
3. How the supply and demand curves
interact to determine the equilibrium
price and quantity.
Chapter 3 - Supply and Demand: An Introduction 10
 LEARNING OBJECTIVES

4. How shifts in supply and demand curves

cause prices and quantities to change.
5. The Equilibrium Principle (also called the
No-Cash-on-the-Table Principle), which
says that a market in equilibrium leaves
no unexploited opportunities for
individuals.

11
 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?

Slid
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 Buyers and Sellers In Markets

 The Demand Curve

› A schedule or graph that tells us the
quantity of a good that buyers wish to buy
at each price

 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 Slid
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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

Slid
Chapter 3 - Supply and Demand: An Introduction e 14
 Contoh :
 Misalkan bahwa fungsi permintaan individu untuk
komoditi X adalah Qd=8 – Px, ceteris paribus. Dengan
mensubstitusikan berbagai harga X ke dalam fungsi
permintaan ini, akan diperoleh,
Px ($) 8 7 6 5 4 3 2 1

QdX

 Skedul permintaan individu komoditi X memperlihatkan

jumlah alternatif dari komoditi X yang bersedia dibeli
individu pada berbagai harga alternatif untuk komoditi X,
sementara menganggap hal lainnya konstan
 Grafik :

8
7
6
5
4
3
2
1
0
0 1 2 3 4 5 6 7 8
 Buyers and Sellers In Markets
 The Demand Curve
› Mengapa para konsumen akan beli lebih banyak
jika harga turun dan sebaliknya?
 The Substitution Effect
› Perubahan kuantitas demand diakibatkan oleh
berubahnya pilihan konsumen pada barang
substitusi jika harga barang tersebut berubah
 The Income Effect
› Perubahan kuantitas demand karena perubahan
harganya, disebabkan oleh perubahan daya beli
konsumen pada harga baru.

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Chapter 3 - Supply and Demand: An Introduction e 17
 Buyers and Sellers In Markets
 The Cost-Benefit Principle
› The reservation price is the benefit the
buyer receives from the good
› The cost of the good is its market price
› If the reservation price (benefit) exceeds
the market price (cost) the consumer will
purchase the good
› At higher prices, benefit will exceed cost
for a smaller quantity than at lower prices

Slid
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 Buyers and Sellers In Markets
The buyers reservation price: The largest dollar amount
the buyer would be willing to pay for a good

Slid
Chapter 3 - Supply and Demand: An Introduction e 19
 Buyers and Sellers In Markets

Horizontal Interpretation
Price
($ per slice)

4 Price determines
quantity demanded
3

2
Demand

8 12 16

Slid
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Buyers and Sellers In Markets
Vertical Interpretation
Price
($ per slice)

4
Demand
3

2
Quantity
measures the
8 12 16
marginal buyer’s
reservation price
Slid
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 Buyers and Sellers In Markets

 The Supply Curve

› A curve or schedule showing the
quantity of a good that sellers wish to
sell at each price

Slid
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 Buyers and Sellers In Markets

 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

Slid
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 The Daily Supply
Curve for Pizza in Chicago

Price
($ per slice)
Supply

Quantity
(1000s of slices per day)
8 12 16

Slid
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 The Daily Supply
Curve for Pizza in Chicago

Horizontal Interpretation
Price
($ per slice)
Supply

3 Shows the
quantity produced
for each price
2

Quantity
(1000s of slices per day)
8 12 16

Slid
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 The Daily Supply
Curve for Pizza in Chicago

Vertical Interpretation
Price
($ per slice) Shows the
Supply
marginal
4 cost
(reservation
3 price) for
producing
2 each
additional
unit
Quantity
(1000s of slices per day)
8 12 16

Slid
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 The Daily Supply
Curve for Pizza in Chicago

 Seller’s Reservation Price

› The smallest dollar amount for which a seller
would be willing to sell an additional unit,
generally equal to marginal cost

Slid
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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
Slid
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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
(1000s of slices per day)
8 12 16

Slid
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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
 What Do You Think?
› Would buyers prefer a lower price than
the equilibrium price?
› Would sellers prefer a higher price than
the equilibrium price? Slid
e 30
 Excess Supply

Slid
Chapter 3 - Supply and Demand: An Introduction e 31
 Excess Demand

Demand

Slid
Chapter 3 - Supply and Demand: An Introduction e 32
Points Along the Demand and
Supply Curves of a Pizza
Market

Slid
Chapter 3 - Supply and Demand: An Introduction e 33
Graphing Supply and Demand and
Finding the Equilibrium Price and
Quantity

The Equilibrium Price = $2.50

The Equilibrium Quantity = 5

Slid
Chapter 3 - Supply and Demand: An Introduction e 34
 Market Equilibrium

 What Do You Think?

› Is the market equilibrium always an
ideal outcome for all market
participants?

Slid
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 An Unregulated Housing Market

What Do You Think?

Is $1600 more than some
people can afford?

Slid
Chapter 3 - Supply and Demand: An Introduction e 36
 Rent Controls

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Chapter 3 - Supply and Demand: An Introduction e 37
 Market Equilibrium

 Rent Controls Reconsidered

› Other consequences of rent controls
 Maintenance will decline and housing
quality will fall
 Illegal payments
 Creation of co-ops and conversion to
condominiums
 Reduction in household mobility
 Discrimination
Slid
Chapter 3 - Supply and Demand: An Introduction e 38
 Market Equilibrium

 What do you think?

› How can we make housing affordable for poor
people without using rent ceilings?

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 Rent Controls

Monthly Rent
($/apartment) Supply
1,200

What is the impact of a

800 rent control set at
$1,200/month?

Demand

Quantity
(Millions of apartments/day)
0 1 2 3

Slid
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 Price Controls
In The Pizza Market

Price
($ per slice) Supply

4
Excess demand = 8,000 slices per day

Price ceiling = 2

Demand

Quantity
(1000s of slices per day)
8 12 16

Slid
e 41
 Market Equilibrium

 Pizza Price Controls?

› Market responses to a pizza price ceiling
 Long lines
 Preferential treatment to selected
customers
 Alternative pricing strategies
 Poorer quality ingredients
 Black-market pizzas

Slid
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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

Slid
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 Penyebab Pergerakan dan Pergeseran
Kurva
 Harga, penyebab terjadinya pergerakan
sepanjang kurva (MADC – The Movement
Allong Demand Curve)
 Income, Harga Komoditi lain, Taste,
Distribusi Pendapatan dan People
Growth, penyebab terjadinya Pergeseran
Antar Kurva (SODC—The Shift of Demand
Curve)
An Increase In Quantity
Demanded vs. An Increase In Demand
Price
($/can)

6 Increase in
quantity
5 demanded

1
D
Quantity
(1000s of cans/day)
0 2 4 6 8 10 12

Slid
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An Increase In Quantity 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

Slid
e 46
 Predicting and Explaining Changes In Prices and Quantities

 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

Slid
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 An Increase In Quantity
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

Slid
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 An Increase In Quantity
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

Slid
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The Effect on the Market for Tennis
Balls of a Decline in Court-Rental Fees

Price
($/ball)
S

1.40

1.00

D’
D
Quantity
(letters/month)
40 58

Slid
e 50
 Predicting and Explaining Changes In Prices and Quantities

 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
Slid
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The Effect on the Market for Overnight Letter
Delivery of a Decline in the Price of Internet
Access
Price
($/letter)
S

P’

D
D’ Quantity
(letters/month)
Q’ Q

Slid
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 Predicting and Explaining Changes In Prices and Quantities

 Shifts in Demand
› 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

Slid
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 Predicting and Explaining Changes In Prices and Quantities

 What do you think?

› How will a decline in airfares
affect
 inter-city bus fares and
 the price of hotel rooms in resort
communities?
Slid
e 54
 Predicting and Explaining Changes In Prices and Quantities

 Economic Naturalist
› When the Federal Government
implements a large pay increase for its
employees,
› why do rents for apartments near
Washington Metro stations go up
relative to rents for apartments located
far away from Metro stations?
Slid
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 The Effect of a Federal Pay Raise on the Rent for Conveniently
Located Apartments in Washington D.C.

Rent
(dollars per
month) S

P’

D’
D Conveniently
located apartments
Q Q’ (units per month)

Slid
e 56
 Predicting and Explaining Changes In Prices and Quantities

 Shifts in Demand=Changes In
Demand
 An increase (decrease) in the
demand for a good will shift
the demand curve to the right
(left)
Slid
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 Predicting and Explaining Changes In Prices and Quantities

 A Change In Income
› Normal Good
 One whose demand increases
(decreases) when the incomes of
buyers increase (decrease)

Slid
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 Predicting and Explaining Changes In Prices and Quantities

 A Change In Income
› Inferior Good
 One whose demand decreases
(increases) when the incomes of
buyers increase (decrease)

Slid
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The Effect of the Release of Jurassic
Park on the Market for Toy Dinosaurs

D’ = demand after release of

Price
movie S

P’

D’
D Toy Dinosaurs
(units per month)
Q Q’

Slid
e 60
 The Effect of a Credible Rumor on
the Market for Apple Macintosh Computers

D’ = demand after rumor of

Price cheaper model soon to be
released S

P’

D
D’ Apple Computers
(units per month)
Q’ Q

Slid
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 The Effect of the Increase in
the Population of Potential Buyers

D’ = demand after increase in

Price population
S

P’

D’
D Housing NY City
(units per month)
Q Q’

Slid
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Faktor-Faktor Yang Mempengaruhi
Permintaan
 Q = f(H, I, P , T, I , G)
D 2 2
› dimana :

 QD= Quantity of Demand

 H=Harga
 I=Income
 P2=Harga komoditi lain
 T=Taste =Selera
 I2=Distribusi Pendapatan

Predicting and Explaining Changes In Prices and Quantities

 Factors that Shift Demand

› Price of complements
› Price of substitutes
› Income
› Preferences
› Population of potential buyers
› Expectations
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Chapter 3 - Supply and Demand: An Introduction e 64
Variables That Shift Market
Demand Curves

Slid
Chapter 3 - Supply and Demand: An Introduction e 65
Variables That Shift Market
Demand Curves

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Chapter 3 - Supply and Demand: An Introduction e 66
Variables That Shift Market
Demand Curves

Slid
Chapter 3 - Supply and Demand: An Introduction e 67
Variables That Shift Market
Demand Curves

(+) Bertambah, meningkat atau lebih merata

(-) Menyatakan yang sebaliknya

Slid
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 The Effect on the Skateboard Market
of an Increase in the Price of Fiberglass

Price
($/skateboard)
S’
S

80

60

D
Quantity
(skateboards/month)
800 1000

Slid
e 69
 Predicting and Explaining Changes In Prices and Quantities

 What Do You Think?

› Does the increase in the cost of
fiberglass have any effect on the
demand curve for skateboards?

Slid
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 The Effect on the Market for New Houses
of a Decline in Carpenters’ Wage Rates

Price
($1000/house)
S
S’

120

90

D
Quantity
(houses/month)
40 50

Slid
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 The Effect of Technical Change on the Market for the Term Paper
Revisions

Price
($/revision) S

55
S’

7.50
D Quantity
12 36 (millions of revisions per year)

Slid
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 Predicting and Explaining Changes In Prices and Quantities

 Factors that Shift Supply

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

Slid
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Variables That Shift Market
Supply Curves

Slid
Chapter 3 - Supply and Demand: An Introduction e 74
Variables That Shift Market Supply
Curves

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Chapter 3 - Supply and Demand: An Introduction e 75
Four Rules Governing the Effects
of Supply And Demand Shifts

An increase in demand will lead to an increase

in both the equilibrium price and quantity
Price
S

P’

D’
D
Quantity
Q Q’

Slid
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 Four Rules Governing the Effects
of Supply And Demand Shifts

A decrease in demand will lead to a decrease

in bothPrice
the equilibrium price and quantity
S

P’

D
D’
Quantity
Q’ Q

Slid
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 Four Rules Governing the Effects
of Supply And Demand Shifts

Price
S
S’

P’

D
Quantity
Q Q’
An increase in supply will lead to a decrease in the
equilibrium price and an increase in the equilibrium
Slid
quantity
Chapter 3 - Supply and Demand: An Introduction e 78
 Four Rules Governing the Effects
of Supply And Demand Shifts

An decrease in
supply will lead
Price
S’ to an increase
S in the
equilibrium
P’ price and a
decrease in the
P equilibrium
quantity

D
Quantity
Q’ Q

Slid
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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
3. An increase in income (for a normal
good)
Slid
Chapter 3 - Supply and Demand: An Introduction e 80
Factors That Cause an Increase
(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
Slid
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Factors That Cause an Increase (rightward or upward shift) 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
Slid
Chapter 3 - Supply and Demand: An Introduction e 82
Factors That Cause an Increase (rightward
or upward shift) 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
Slid
Chapter 3 - Supply and Demand: An Introduction e 83
The Effects Of Simultaneous Shifts In
Supply And Demand
The Market for Corn Tortilla Chips
Price
($/bag)

S S’
S’ after reduction in price of
corn harvesting equipment
P

P’

D
D’
Millions of bags
per month
Q’ Q
D’ after discovery that oils are
harmful to people’s health
Slid
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 The Effects Of Simultaneous Shifts In Supply And Demand

The Market for Corn Tortilla Chips

Price
($/bag)

P S’ S’ after reduction in price of

corn harvesting equipment

P’
D D’ after discovery that oils are
D’
harmful to people’s health
Millions of bags
per month
Q Q’

Slid
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 Predicting and Explaining Changes In Prices and Demand

 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?
Slid
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 Predicting and Explaining Changes In Prices and Demand

 Economic Naturalist
› Why do the prices of some
goods, like airline tickets to
Europe, go up during the
months of heaviest
consumption, while others, like
sweet corn, go down?
Slid
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Seasonal Variation in Air Travel
High Consumption and Prices Due to High Demand

Price
($/ticket)

PS

PW
DS
DW

1000s of
QW QS tickets

Slid
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 Seasonal Variation in Corn Markets

High Consumption and Low Prices due to High Supply

Price
($/bushel) SW
SS

PS
PW

Millions of
QW QS bushels

Slid
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 Price Controls In The Pizza Market

Assume:
Price • Buyer’s reservation P = $4
($ per slice) • Sellers reservation P = $2
S • Pizza sells for $3

• Buyer’s surplus: $4 - $3 = $1
3 • Seller’s surplus: $3 - $2 = $1
• Total surplus: $4 - $2 = $2

Quantity
(1000s of slices per day)
8 12 16

Slid
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 Price Controls In The Pizza Market

Excess demand =
Assume price controls = $2
Price $8,000 slices/day •Quantity supplied falls to
($ per slice) 8,000
•Buyer’s reservation price
4 ($4) is greater than seller’s
($2)
• Both would benefit from
3
additional production
•There is CASH ON THE
2 TABLE

S D

Quantity
(1000s of slices per day)
8 12 16

Slid
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End of
Chapter