DEM&SUP

Demand and Supply
· Markets as allocative mechanism require:

· nonattenuated property rights
[exclusive, enforceable, transferable]
· “voluntary” transactions
· Markets include all “potential buyers and
sellers”
· behavior of buyers is represented by “demand”
[benefits side of model]
· behavior of sellers is represented by “supply”
[cost side of model]
Fall ‘ 97 Principles of Microeconomics slide 1

Markets, Supply and Demand
· markets include all potential buyers
and sellers
· geographic boundaries of market
· markets defined by nature of product
and characteristics of buyers
· conditions of entry into market
· markets, competition and substitutes

Demand
· Definition: “A schedule of the quantities
of a good that buyers are willing and able
to purchase at each possible price during a
period of time, ceteris paribus. [all other
things held constant]”
· Demand can also be perceived as a schedule
of the maximum prices buyers are willing
and able to pay for each unit of a good.

Demand Function
· Is the functional relationship between the
price of the good and the quantity of that
good purchased in a given time period [UT],
income, other prices and preferences being
held constant.
· A change in income, prices of other goods
or preferences will alter [‘shift’] the
demand function.

Demand: the demand curve
· Quantity demanded - the amount of
a good that consumers are willing to
buy at a given price, holding
constant the other factors that
influence purchases.
· Demand curve - the quantity
demanded at each possible price,
holding constant the other factors
that influence purchases
© 2009 Pearson Addison-
2-5
Wesley. All rights reserved.
Demand: determinants of
demand.
· The following factors determine the
demand for a good:
· Price of the good
· Tastes
· Information
· Prices of related goods
· Complements and substitutes
· Income
· Government rules and regulations
· Other © 2009 Pearson Addison-
2-6
Quantity demanded
· A change in the price of the good under
consideration will change the “quantity demanded.”
· Q = f (P, holding M, Pr , preferences constant);

where: M = income Pr =
prices of related goods
· DP causes a change in X [DQ], this is a “change in
quantity demanded”

Change in demand
· If M, Pr, or preferences change, the demand
function [relationship between P and Q] will
change.
· These are sometimes called “demand shifters”
· Be sure to understand difference between a
“change in demand” and a “change in quantity
demanded”
· change in demand --- shift of the function
· change in quantity demanded --- move on the function

“Law of Demand”
· Theory and empirical evidence
suggest that the relationship
between Price and Quantity is an
inverse or negative relationship
· At higher prices, quantity purchased
is smaller, or at lower prices the
quantity purchased is greater.

Cups of Hot Chocolate [H] purchased
eachday between8-9am
price cups The demand relationship
per cup purchased can be demonstrated as a
table:
A 0 20 .
B $ . 50 15 . Demand is a schedule of
quantities that will be
C $ . 75 12 . 5 purchased at a schedule
DP > 0 DQ < 0
D $ 1. 00 [+.75] 10 . [-7.5] of prices during a given
time period, cet. par.
E $ 1. 25 7.5
As the price is increased,
F $ 1. 50 5.
the quantity purchased
G $ 1. 75 2.5 decreases.
H $ 2 . 00 0
This demand relationship can be expressed as an equation:

P = 2 - .1Q or Q = 20 - 10P: [Q = f (P, . . .) but we graph P on
the Y axis and Q on the X axis.]
The demand relationship can be expressed as a table
(previous slide) or an equation [either P = 2 - .1Q or Q = 20 - 10P]
The data from the table or equation can be graphed:
$
PRICE
2.25
P = $2, Then Q = 0 P = $1.75, then Q = 2.5
2.00
1.75 .. P = $1.50, then Q = 5
1.50
1.25 .. P = $1.25, Q = 7.5
P = $1, then Q = 10
..
1.00
.75 P = 0, then Q = 20
.50
.25 Demand
2 4 6 8 10 12 14 16 18 20QUANTITY 22 24
The demand function can be represented as a table, {CUPS/UT}
an equation or a graph.
The demand equation P = 2 - .1Q was graphed
A change in “quantity demanded” is a movement on the demand
function caused by a change in the independent variable [ price].
PRICE
DP from $1.50 to $1 causes DQ from 5 to 10 units

2.25
.
2.00
A change in quantity demanded is a move
1.75 A from point A to B “on the demand function”
.
1.50
caused by a change in the price!
1.25
B
1.00
.75
.50 Demand [P = 2 - .1Q]
.25
QUANTITY
2 4 56 8 10 12 14 16 18 20 22 24
{CUPS/ UT}

The demand equation P = 2 - .1Q was graphed
A change in any of the parameters (income, price of related goods,
preferences, population of buyers, etc.) will cause a “shift of the
demand function.” In this example, the intercepts have changed,
the slope has remained constant
PRICE
2.50
2.25
2.00
1.75
1.50
an increase in demand
1.25
D’ [ P’ = 2.5 - .1Q]
ad
1.00 ec
re
ase
.75 in
.50
d em Demand [P = 2 - .1Q]
an
.25 d
2 4 6 8 10 12 14 16 18 20 22 24
QUANTITY
{CUPS/UT}
D`` [P`` = 1.5 -
Fall ‘ 97
.1Q]
Principles of Microeconomics slide 13
PRICE
2.50
2.25
2.00
1.75
buyers are more responsive to DP
1.50
1.25 P` = 2- .048076923Q
1.00
buyers
.75 a decrease in the
are less
slope
.50 responsive an increase in Demand [P = 2 - .1Q]
to DP the slope
.25
P = 2 - .25Q
2 4 6 8 10 12 14 16 18 20 22 24
QUANTITY
{CUPS/UT}
A change in the parameters [income, Pr, preferences, population,

etc.] might alter the relationship by changing the slope
A change in demand refers to a movement or shift of the entire
demand function

PRICE
2.50
An increase in demand
2.25
2.00 results in a larger quantity being
1.75 purchased at each price
increase
1.50
1.25
1.00 D2 [an increase in demand]
.75
.50
Demand [P = 2 - .1Q]
.25 Q = 7.5
2 4 6 8 10 12 14 16 18 20 22 24
QUANTITY
In this case, an increase in demand results {CUPS/UT}
in an increase in the amount that will be purchased at a price of

$1.25. At this price the Quantity purchased increases from 7.5
to 18. An increase in demand!

PRICE Effect of a change in the price of a
2.50
substitute
2.25 D em
2.00 the and fo
pric r
1.75 e of steak
chic incre
1.50 ken as
incr es wh
1.25 e as e
a es n
1.00 in dec
.75 fo th re
r e as
.50
s t de e
ea m Demand [P = 2 - .1Q]
k an
.25 d D2
2 4 6 8 10 12 14 16 18 20 22 24
QUANTITY
If the price of a substitute, like chicken, increases [steak /UT]
buyers will buy more steak at each price of steak
If the price of chicken decreases, the buyers will want less steak at
each possible price of steak; the demand for steak decreases!

Complementary goods
Two goods may be complimentary, i.e. the two goods are
“used together. [tennis rackets and tennis balls or CD’s
and CD Players]
An increase in the price of CD’s will tend to reduce the
demand [shift the demand function to the left] for CD Players
As people buy fewer
PCD’s Pplayers CD’s, the demand for
As the price of CD’s increases CD players decreases.
from P1 to P2, the quantity of At the same price,
CD’s decreases from Y1 Ppl , the demand
P2 to Y. Ppl is reduced
from Dto D’.
D’player
P1 Dcd Dplayer
Y Y1 CD’s/UT X X1 CD Players
Fall ‘ 97 Principles of Microeconomics per UT17
slide
Compliments and
Substitutes
· Substitutes:
· if the price of a substitute increases, the
demand for the good increases.
· if the price of a substitute decreases, the
demand for the good decreases.
· Compliments:
· if the price of a compliment increases, the
demand for the good decreases.
· if the price of a compliment decreases, the
demand for the good increases.

Shifts in Demand
· Determinants of demand
· Income
· Tastes and preferences
· The prices of related goods
· Substitutes
· Complements
Chapter 3 - Demand and Supply 19

Shifts in Demand
· Substitutes
· Two goods are substitutes when a
change in the price of one causes a
shift in demand for the other in the
same direction as the price change.

Shifts in Demand
· Complements
· Two goods are complements when a
change in the price of one causes an
opposite shift in the demand curve for
the other.

Shifts in Demand
· Determinants of demand
· Expectations
· Future prices
· Income
· Product availability
· Market size (number of buyers)

Shifts in Demand
The Determinants of Demand
Income: Normal Good
Price
Increase in
income
increases
demand
Decrease in
income
decreases D3 D1 D2
demand
Q/Units
Shifts in Demand
Income: Inferior Good
Price
Decrease in
income
increases demand
Increase in income
decreases demand
D3 D1 D2
Q/Units
Shifts in Demand
Tastes and Preferences
Price
Hybrid vehicles
• Increase in
demand
SUVs
• Decrease in
demand D3 D1 D2
Q/Units
Shifts in Demand
Price of Related Goods: Substitutes
Price
Butter and Margarine
• Price of both = $2/lb
• Price of margarine
increases to $3/lb
• Demand for butter
increases
D1 D2
Q/Butter
Shifts in Demand
Price of Related Goods: Complements
Price
Speakers and
Amplifiers
• Decrease the relative
price of amplifiers
• Demand for speakers
increases
Speakers and
Amplifiers
• Increase the relative
price of amplifiers
• Demand for speakers D3 D1 D2
decreases
Q/Speakers
Shifts in Demand
Expectations: Income, Future Prices
Price
A higher income or
expectations of a higher
future price will increase
demand
A lower income or
expectations of a lower
future price will decrease
demand D3 D1 D2
Q/Units
Shifts in Demand
Market Size (Number of Buyers)
Price
Increase in the
number of buyers
increases demand
Decrease in the
number of buyers
decreases
demand D3 D1 D2
Q/Units
The Demand Schedule
· Individual versus market demand
curves
· Market Demand
· The demand of all consumers in the
marketplace for a particular good or
service
· Summation at each price of the
quantity demanded by each individual

The Horizontal Summation of
Two Demand Curves

The Horizontal Summation of
Two Demand Curves

Demand Summary
· “Law of Demand” holds that usually as the
price of a good increases, individuals will
buy less of it.
· The nature of this relationship is
influenced by a variety of other variables;
· income, preferences, prices of related
goods, and other circumstances
· as these circumstances change, the
demand relationship changes or “shifts.”
Demand Summary [cont. . . ]
· A “change in demand” means the relationship

between price and quantity was altered by a
change in some other variable [a demand “shifter”]
The demand “shifts.”
· A “change in quantity demanded” is a change in the
quantity bought that was caused by a change in
the price of the good. There is a movement on the
demand function.

Supply
· Supply is defined as a schedule of
quantities of a good that will be produced
and offered for sale at a schedule of
prices during a given time [UT], ceteris
paribus.
· Generally, producers are willing to offer
greater quantities of a good for sale at
higher prices; a positive relationship
between price and quantity supplied.
Supply Schedule
Observation Price Quantity
Supplied
The information can be represented
A $1 6
on a graph by plotting each
B $2 10 price quantity combination.
C $3 14
D $4 18
E
F $5 22
P
Both the graph and the table $5
.
represent a supply
relationship: Q = 2 + 4P
$4
$3
. . sup p ly
A supply schedule can be
displayed as a table.
$2
$1 .
Fall ‘ 97
2 4
Principles of Microeconomics
6 8 10 12 14
slide 36
Q
Change in Quantity Supplied
· A change in the price of the good
causes a change in the “quantity
supplied.”
· The change in the price of the good
causes a “movement on the supply
function,” not a change or “shift of
the supply function.”

Supply Schedule
Supplied
A change in the price “causes” a
A $1
$1 6 change in the “quantity supplied.”
B $2 DP “CAUSES”
10 DQThis can be represented by a
C $3
$3 14 “movement” on the supply
D $4 18 function in the graph
E
F $5 22
This is a change in “quantity P

supplied.” Not to be $5 DP “causes” the quantity supplied
confused with a “change in to increase from 6 to 14.
$4
supply!”
$3
p ly
DP from $1 to $2 sup
$3
$1
2 4 6 8 10 12 14 16 Q
/ut
“Change in Supply”
· A change in supply [like a change in demand]
refers to a change in the relationship
between the price and quantity supplied.
· A change in supply is “caused” by a change
in any variable, other than price, that
influences supply
· A change in supply can be represented by a
shift of the supply function on a graph

“Change in Supply” [cont. . . ]
· There are many factors that infuence the

willingness of producers to supply a good.
· technology
· prices of inputs
· returns in alternative choices
· taxes, expectations, weather, number of
sellers, . . .
· Qs = fs (P, Pinputs, technology, . . .)

“Change in Supply” [cont. . . ]
· Qs = fs (P, Pinputs, technology, number of

sellers, taxes, . . .)
· A change in the price [P] causes a “change
in quantity supplied;”
· a change in any other variable causes a
“change in supply”

Supply Schedule
Given the supply schedule,
An increase in the prices Supplied
of inputs would make it A $1 46
more expensive to produce
B $2 810
each unit of output,
C $3 1214
therefore, the supply
decreases D $4 1618
E
F $5 20
22
P a shift to the left
$5 is a decrease in supply
ti on
c
$4 f un The decreased quantity
pl y at each price “shifts” the
sup ilny supply curve to the left!
app
$3 e
w s
$2
ne i ns
crue
The development of a “new”
an ply
$1 sup technology that reduces the
cost of production will “shift”
2 4 6 8 10 12 14 16 Q the supply function to the right
Equilibrium
· Equilibrium: 1. a state of rest or balance due to
the equal action of opposing forces. 2. equal
balance between any powers, influences, [Webster’s
Encyclopedic Unabridged Dictionary of the English Language]
· In a market an equilibrium is said to exist when
the forces of supply [sellers] and demand [buyers] are
in balance: the actions of sellers and buyers are
coordinated. The quantity supplied equals the
quantity demanded!

[Price]
100 p ly
S up Given a demand
90
80 function [which
Px
$70
70 represents the
behavior or choices
60 of buyers,
50
40 and a supply function
30 that represents the
20 De behavior of
msellers,
an
10 d
10 20 30 40 50 60 70 80 90 100 110 120 130
60 Qx/ UT
Where the quantity that people want to buy is equal to the quantity
that the producers want to sell, there is an equilibrium quantity.
The price that coordinates the preferences of the buyers and sellers
is the equilibrium price.
At the equilibrium price of $70, the quantity supplied is equal to
the quantity demanded.
When the price is greater than the equilibrium price, the
amount that sellers want to sell at that price [quantity supplied]
exceeds the amount that buyers are willing to purchase [quantity
demanded] at that price. The price is “too high.”
At a Price of $90 the quantity supplied is 80, the quantity demanded is 35

[Price]
surplus = 45
p ly
100
u p
$90
90 S
80 At $90 there is a surplus
equilibrium price
Px
$70
70 of 45 units [80-35=45]
equilibrium quantity
60
50
40
30
20 De
ma
10 nd
10 20 303540 50 60
60 70 80
80 90 100 110 120 130
Fall ‘ 97 Principles of Microeconomics

Qx/ UT
slide 45
surplus = 45 ly
[Price]
100 pp
.
Su
$90
90
lower At a price of $90 a surplus
80
price of 45 units exists
Px
$70
70
Suppliers have more to sell than
60 buyers will purchase at a price of $90.
50 To get rid of these unsold
40 Quantity units [inventory], the
Quantity
30
demanded
supplied sellers lower
increases
decreases D the price.
20 em
an
10 d
10 20 303540 50 60
60 70 80
80 90 100 110 120 130
Qx/ UT
As the price of the good is reduced, the quantity supplied decreases.
The quantity demanded increases as the price falls.
As the price moves toward equilibrium, quantity supplied and
quantity demanded are brought into equilibrium.

.
[Price]
As a result of market forces
100 the market moves to ply
.
p
90 equilibrium Su
At a price below equilibrium the
80
Px
the quantity demanded exceeds

$70
70
the quantity supplied.
60 price
At a price of $30 the quantity
50 rises
demanded is 110. The quantity
40 supplied is 15.
$30
30 quantity quantity
20 supplied De
demanded ma
increases decreases nd
10
shortage = 95
10 1520 30 40 50 60 70 80 90 100 110
110 120 130
60 Qx/ UT
At a price of $30 the quantity demanded exceeds the quantity
supplied by 95 units [110 - 15 = 95]. This is a shortage.
Since the buyers cannot obtain all they want at a price of $30, some buyers will
offer to pay more. Some buyers will not pay the higher price, they buy less so the
quantity demanded decreases.
At the higher price the quantity supplied increases
.. Fall ‘ 97 Principles of Microeconomics slide 47

Shocking the Equilibrium
The equilibrium changes only if a

shock occurs that shifts the demand
curve or the supply curve. These
curves shift if one of the variables
we were holding constant changes.
© 2009 Pearson Addison-

2-48
[Price]
100 demand p ly
increases S up
90
$89 The market for good X is
price
80 in equilibrium at Px = $70
Px
rises
$70
70
60
50
40
30 equilibrium D2
20
quantity
De
increases
ma
10 nd
10 20 30 40 50 60
60 70 80
80 90 100 110 120 130
Qx/ UT
An increase in the price of a
substitute [good Y] causes the The increase in the demand for
demand for good X to increase. good X results in an increase in
both the equilibrium price and
As a result of the increased demand, quantity.
market forces push Px up. Identify other factors that could
increase demand!

[Price]
100 p ly
up
S Given a demand function,
90
80 an equilibrium is defined.
Px
$7700
A decrease in demand,
60
establishes a new equilibrium
$50.89
50
at a lower price and
40
quantity.
30
20 D1 De
ma
10 nd
40 50 660
10 20 30 39.2 0 70 80 90 100 110 120 130 Qx/ UT
Demand might be reduced by: A change in the
a decrease in the price of a substitute, price of the good
an increase in the price of a compliment, does not change
a change in income, demand! It changes
a change in the number of buyers the quantity
or their preferences, or, . . . demanded.
.
[Price]
100 p ly
S up
90 S2
80 supply
Px
$70
70 increases
price
60 falls
$50
50
40
30
20 De
ma
10 nd
60 70 808690 100 110 120 130
10 20 30 40 50 60
Qx/ UT
Given an equilibrium
condition in a market, Quantity Identify factors that increase supply:
1. fall in price of inputs
an increase in supply will increases
2. improved technology
increase the equilibrium 3. increase in number of sellers
quantity and decrease 4. fall in return in alternative
equilibrium P. uses of inputs
5. or, . . .

A decrease in supply causes the equilibrium price to increase
and equilibrium quantity to decrease. What forces might cause the
supply to decrease?
1. an increase in the prices
Px S1 of inputs
2. increase in returns from
pl y alternative actions
100 p
$90
90
decrease in supply
Su 3. problems in technology
[regulations, . . . ]
80 price rises
4. decrease in number of
$7700 sellers or producers
60
50 quantity
40 decreases
30
20 De
ma
10 n d
40 50 6
10 20 3035 600 70 80 90 100 110 120 130
Qx/ UT
P100
x ly
demand
pp
increases Su S2 If both supply and
90 and decrease
80 demand decrease,
price might price
+DP and the DP will be
$7 0
70 go up or down increase indeterminate and
60 or stay the same -DP price the equilibrium Q
increase
will decrease.
50 results in
increase
a market
40
supply force to
results in
D2
30
increases aincrease
market Q De
20
force to ma
10 increase Q n d
10 20 30 40 50 660
0 70 80 90 100
100 110 120 130 Qx/ UT
When demand and supply both shift, the resultant effect on either
equilibrium price or quantity will be indeterminate.
Both the increase in demand and supply increase quantity; equilibrium Q increases.
The increase in demand pushes price up. The increase in supply pushes price down.
The change in price may be positive or negative, it depends on the magnitude
of the shifts in and slopes of demand and supply.
A decrease in supply tends to increase P and reduce Q.
An increase in demand tends to increase both P and Q.

Result is that Price will rise, Quantity may increase, decrease or stay the same
depending on the magnitudes of the shifts and slopes of supply and demand.
In this example,
the price Price
increases to
$105 S1 ply
$105.
100
u p
decrease in supply
90
to push S
price up
When supply 80 pushes
increases and $70
70 price up
demand
decreases, 60
an increase in
the price will 50 demand tends D2
fall but the 40 reducesand
change in Q quantityincrease
30 Q
will be De
20
indeterminate! ma
10 nd
10 20 303540 49
50 60
60 70 80 90 100 110 120
Qx/ UT
the quantity decreases to 49
Supply and Demand Analysis
· Supply and demand is a simplistic model that
provides insights into the effects of events that
are related to a specific market.
· Whether an event will tend to cause the price of a
good to increase or decrease is of importance to
decision makers.
· To estimate the magnitude of price and quantity
changes more sophisticated models are needed.

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Demand and Supply

· Markets as allocative mechanism require:

Fall ‘ 97 Principles of Microeconomics slide 1

Fall ‘ 97 Principles of Microeconomics slide 2

Fall ‘ 97 Principles of Microeconomics slide 3

Fall ‘ 97 Principles of Microeconomics slide 4

· Q = f (P, holding M, Pr , preferences constant);

Fall ‘ 97 Principles of Microeconomics slide 7

Fall ‘ 97 Principles of Microeconomics slide 8

Fall ‘ 97 Principles of Microeconomics slide 9

This demand relationship can be expressed as an equation:

DP from $1.50 to $1 causes DQ from 5 to 10 units

Fall ‘ 97 Principles of Microeconomics slide 12

A change in the parameters [income, Pr, preferences, population,

Fall ‘ 97 Principles of Microeconomics slide 14

in an increase in the amount that will be purchased at a price of

Fall ‘ 97 Principles of Microeconomics slide 15

Fall ‘ 97 Principles of Microeconomics slide 16

Fall ‘ 97 Principles of Microeconomics slide 18

Chapter 3 - Demand and Supply 19

Chapter 3 - Demand and Supply 20

Chapter 3 - Demand and Supply 21

· Market size (number of buyers)

Chapter 3 - Demand and Supply 22

Chapter 3 - Demand and Supply 30

Chapter 3 - Demand and Supply 31

Chapter 3 - Demand and Supply 32

· A “change in demand” means the relationship

Fall ‘ 97 Principles of Microeconomics slide 34

Fall ‘ 97 Principles of Microeconomics slide 37

This is a change in “quantity P

Fall ‘ 97 Principles of Microeconomics slide 39

· There are many factors that infuence the

Fall ‘ 97 Principles of Microeconomics slide 40

· Qs = fs (P, Pinputs, technology, number of

Fall ‘ 97 Principles of Microeconomics slide 41

Fall ‘ 97 Principles of Microeconomics slide 43

At a Price of $90 the quantity supplied is 80, the quantity demanded is 35

Fall ‘ 97 Principles of Microeconomics

Fall ‘ 97 Principles of Microeconomics slide 46

the quantity demanded exceeds

.. Fall ‘ 97 Principles of Microeconomics slide 47

The equilibrium changes only if a

© 2009 Pearson Addison-

Fall ‘ 97 Principles of Microeconomics slide 49

Fall ‘ 97 Principles of Microeconomics slide 51

An increase in demand tends to increase both P and Q.

Fall ‘ 97 Principles of Microeconomics slide 56

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