Session 4

Supply and Demand

Disclaimer: The views expressed are those of the presenters and do not necessarily reflect those
of the Federal Reserve Bank of Dallas or the Federal Reserve System.
TEKS
(2) Economics. The student understands the
interaction of supply, demand, and price. The
student is expected to:
(A) understand the effect of changes in price on the
quantity demanded and quantity supplied;
(B) identify the non-price determinants that create
changes in supply and demand, which result in a new
equilibrium price; and
(C) interpret a supply-and-demand graph using supply-
and-demand schedules.
Teaching the Terms
• Market
• Demand
• Supply
• Determinants
• Surplus
• Shortage
Markets
• A market facilitates the interaction of a buyer
and a seller as they complete a transaction

• Buyers, as a group, determine the

demand
• Sellers, as a group, determine the
supply
Characteristics of Competitive Markets

• Identical goods or services

• Enough buyers and sellers so that no
participant can influence the market price –
everyone is a price taker
Demand
• Law of demand
• Quantity demanded
• Demand schedule
• Demand curve
• Determinants of demand
The Law of Demand

As the price
rises,

the quantity
demand falls.
Demand
Price Quantity Demand for ____
6
$5 10 5
4
$4 20

Price
3

$3 30 2
1
$2 40 0
10 20 30 40 50
$1 50 Quantity
Determinants of Demand
• Income
• Price of related goods
– Complements
– Substitutes
• Tastes or preferences
• Expectations
• Number of buyers
Shifting Demand
8
7
6
5
Price

4
3
2
1
0
10 20 30 40 50
Quantity
Supply
• Law of supply
• Quantity supplied
• Supply schedule
• Supply curve
• Determinants of supply
The Law of Supply

As the price rises,

the quantity supplied rises.

Supply
Price Quantity Supply of ____
6
$5 50 5

$4 40 4

Price
3
$3 30 2
1
$2 20 0
10 20 30 40 50
$1 10 Quantity
Determinants of Supply
• Input prices
• Technology
• Expectations
• Number of sellers
Shifting Supply
8
7
6
5
Price

4
3
2
1
0
10 20 30 40 50
Quantity
Market Equilibrium

Price Quantity Quantity

Demanded Supplied
$5 10 50
$4 20 40
$3 30 30
$2 40 20
$1 50 10
Market Equilibrium
6
Supply
5

4
Price

1
Demand
0
10 20 30 40 50
Quantity
Market Equilibrium

Quantity demanded is less than

Surplus
●

quantity supplied Qd < Qs

Quantity demanded is equal to

●

Equilibrium quantity supplied Qd = Qs

Quantity demanded is greater than

●

Shortage quantity supplied Qd > Qs

Practice
• Draw the graph.
• Which curve is shifting because of the
changing market conditions? Supply?
Demand? Both?
• Which direction is the shift?
• Draw the shift.
• What is the impact on price and quantity?
Price Controls
• Price Ceiling
– If price is fixed BELOW the market clearing price
– Creates a shortage because Qd > Qs
• Rent controls
• Price Floor
– If price is fixed ABOVE the market clearing price
– Creates a surplus because Qd < Qs
• Minimum wage
Price Elasticity of Demand
• Measures the responsiveness of quantity
demanded to a change in price
• Determinants
– Availability of close substitutes
– Necessities versus luxuries
– Definition of the market (food vs. ice cream vs.
chocolate ice cream)
– Time horizon
Price Elasticity and Total Revenue
• If demand for a good is elastic, price increases
lead to lower total revenue
• If demand for a good is inelastic, price
increases lead to higher total revenue
Price Elasticity of Supply
• Measures the responsiveness of quantity
supplied to a change in price
• Determinants
– Availability of inputs
– Time
Questions?