Chapter 3:

Demand, Supply,
and Price

© 2014 Pearson Education Canada Inc.

 Chapter Outline/Learning Objectives

Section Learning Objectives

After studying this chapter, you will be able to

3.1 Demand 1. list the factors that determine the quantity

demanded of a good.
2. distinguish between a shift of the demand curve
and a movement along the demand curve.

3.2 Supply 3. list the factors that determine the quantity supplied
of a good.
4. distinguish between a shift of the supply curve and
a movement along the supply curve.

3.3 The Determination 5. explain the forces that drive market price to
of Price equilibrium, and how equilibrium price is affected
by changes in demand and supply.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 2

 3.1 Demand

Quantity Demanded
The total amount that consumers desire to purchase in some time
period is called the quantity demanded of a product.

Quantity bought (or exchanged) refers to actual purchases.

Quantity demanded is a flow, as opposed to a stock.

EXTENSIONS IN THEORY 3-1

The Distinction Between Stocks and Flows

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 3

 Quantity Demanded and Price

A basic hypothesis is that—ceteris paribus—the price of a product

and the quantity demanded are negatively related.

Why? There are usually several products that can satisfy any given
want or desire.

A reduction in the price of a product means that the specific desire

can now be satisfied more cheaply by buying more of that product.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 4

 Demand Schedules and Demand Curves
Fig.3-1 The Demand for Apples

Demand Schedule Demand Curve

Reference Price Quantity

Point ($ per bushel) Demanded
U $ 20 110
V 40 85
W 60 65
X 80 50
Y 100 40

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 5

 Determinants of Demand LO5

1. Consumer preferences
• If tastes change, demand changes

2. Consumer incomes
• Normal Products: buy more when income rises, less
when income falls
• Inferior Products: buy more when income falls, less
when income rises

© 2014 Pearson Education Canada Inc. 6

 Determinants of Demand LO5

3. Prices of Related Products:

• Products are related if a change in the price of one
product causes a change in demand for the other
product
• Two types of related products:
• Substitutes
• Complements

© 2014 Pearson Education Canada Inc. 7

 Determinants of Demand LO5

3. Prices of Related Products

• Substitute Product
• similar products that can be substituted for each other
• increase in price of one product causes increased demand
for the related product

© 2014 Pearson Education Canada Inc. 8

 Determinants of Demand LO5

3. Prices of Related Products

• Complementary Product
• tend to be bought together
• Increase in price of one product causes a decrease in
demand for related product

© 2014 Pearson Education Canada Inc. 9

 Determinants of Demand LO5

4. Expectations of future prices, income, availability

• If prices or incomes expected to rise, consumers
buy more
• If goods expected to be scarcer, buy more now

5. Population size, income, and age distribution

• Increases in population or incomes cause increase
in demand
• Changes in age distribution affect demand

© 2014 Pearson Education Canada Inc. 10

 A change in variables other than price will shift the demand curve to
a new position.
Fig. 3-2 An Increase in the Demand for Apples
• average
household
income
• prices of
other products
• distribution
of income
or population
• expectations
about the future

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 11

 Fig. 3-3 Shifts in the Demand Curve

A rightward shift indicates an increase in demand.

A leftward shift indicates a decrease in demand.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide12

 Fig. 3-4 Shifts of and Movements Along the Demand Curve

A change in demand is a
change in quantity demanded
at every price—a shift of
the entire curve.

A change in quantity demanded

refers to a movement from one
point
on a demand curve to
another point, either on
the same demand curve or
on a new one.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 13

 Self Test LO5

Price Demand (D1) Demand (D2)

$2.00 10 000 11 000
3.00 9 600 10 600
4.00 9 200 10 200

Market for pretzels:

• What might have happened to the price of a complementary
product, like beer, to cause the demand for pretzels to change?
• What might have happened to the price of a substitute product, like
nuts?

© 2014 Pearson Education Canada Inc. 2- 14

 Demand Concepts Review

Which of the following would cause a movement along the demand

curve for ski-lift tickets, other things being equal?
A) a change in tastes in favour of skiing

B) an increase in population

C) an increase in price as the supply curve for lift tickets shifts to the
left

D) a rise in the price of ski boots and skis

E) a rise in average household income

© 2014 Pearson Education Canada Inc. 15

 If the price of tea falls and as a consequence the demand for sugar rises,
then tea and sugar are

A) substitute goods.

B) complementary goods.

C) independent goods.

D) neutral goods.

E) luxury goods.

© 2014 Pearson Education Canada Inc. 16

 3.2 Supply

Quantity Supply
The amount of a product that firms desire to sell in some time
period is called the quantity supplied of that product.

Quantity supplied is the amount that firms are willing to offer for
sale and not necessarily the quantity actually sold.

Quantity supplied is a flow as opposed to a stock.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 17

 Quantity Supplied and Price

A basic hypothesis is that—ceteris paribus—the price of the product

and the quantity supplied are positively related.

Why? Producers are interested in making profits. If the price of a

particular product rises, then the production and sale of this product
is more profitable.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 18

 Fig. 3-5 The Supply of Apples

Supply Schedule Supply Curve

Reference Price Quantity

Point ($ per bushel) Supplied
u $ 20 20
v 40 45
w 60 65
x 80 80
y 100 95

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 19

 A change in supply is a
Fig. 3-6 An Increase in the Supply
change in the quantity
of Apples
that will be supplied at
every price—a shift of
the entire curve.

A change in quantity
supplied refers to a
movement from one
point on a supply curve
to another point, either
on the same supply curve
or on a new one.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 20

 Determinants of Supply LO6

1. Prices of Productive Resources

• If the price of a productive resource increases,
firms will supply less
2. Business Taxes
• If business taxes rise, firms will supply less
3. Technology
• An improvement in technology leads to a fall in
the cost of production and an increase in supply

© 2014 Pearson Education Canada Inc. 21

 Determinants of Supply LO6

4. Prices of Substitutes in Production

• An increase in the price of one product will cause
a drop in the supply of products that are
substitutes in production
5. Future Expectation of Suppliers
• Lower expected future prices will lead to an
increase in supply
6. Number of Suppliers
• A decrease in the number of suppliers will reduce
market supply

© 2014 Pearson Education Canada Inc. 22

 Concept Check: Supply

Refer to Figure 3-2. A shift of the supply curve from S

to S1 could be caused by

A) an increase in the price of energy-efficient light

bulbs.

B) a decrease in the price of energy-efficient light

bulbs.

C) a decrease in the price of glass, a major input in

the production of energy-efficient light bulbs.

D) a change in consumers' preferences away from

ordinary light bulbs toward energy-efficient light
bulbs.

E) an expectation that new government regulations

will ban the use of energy-efficient light bulbs.

© 2014 Pearson Education Canada Inc. 23

 In which statement is the term "supply" used correctly?

(1)An increase in the price of leather will cause a decrease in the supply
of leather.
(2)An increase in the price of leather will cause a decrease in the supply
of leather boots.

A) not enough information to tell

B) the second statement only

C) the first statement only

D) both statements

E) neither statement

© 2014 Pearson Education Canada Inc. 24

 3.3 The Determination of Price

The Concept of a Market

A market may be defined as any situation in which buyers and sellers

negotiate the transaction of some goods or services.

Markets may differ in the degree of competition among various

buyers and sellers.

In a perfectly competitive market buyers and sellers are price

takers.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 25

 Graphical Analysis of a Market
At the equilibrium price, every buyer finds a seller and every seller
finds a buyer—the market “clears.”
Fig. 3-7 Determination of Equilibrium Price

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 26

 Changes in Market Prices
The four “laws” of supply
and demand: Fig. 3-8(i) Shifts in the Demand
Curve
1. An increase in demand
causes an increase in
both the equilibrium
price and equilibrium
quantity.

2. A decrease in demand
causes a decrease in
both equilibrium
price and equilibrium
quantity.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 27

 Changes in Market Prices

Fig. 3-8(ii) Shifts in the Supply

3. An increase in supply Curve
causes a decrease in
the equilibrium price
and an increase in the
equilibrium quantity.

4. A decrease in supply
causes an increase in
the equilibrium price
and a decrease in the
equilibrium quantity.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 28

 Price Demand Supply Surplus/Shortage
$2.00 60 30
2.25 58 33
2.50 56 36
2.75 54 39
3.00 52 42
3.25 50 45
3.50 48 48
3.75 46 51
4.00 44 54

© 2014 Pearson Education Canada Inc. 29

 Price Demand Supply 1 Supply 2

$4.00 140 60
4.25 130 70
4.50 120 80
4.75 110 90
5.00 100 100
5.25 90 110
5.50 80 120
Equilibrium P&Q ?
Supply increases by 50% - new equilibrium?

© 2014 Pearson Education Canada Inc. 30

 What effect will the following changes have
upon (i) the demand for, (ii) the price, and (iii)
the quantity traded of commercially brewed
beer?
- A new medical report praising the healthy
effects of drinking beer
- A big decrease in the price of home-brewing
kits
- A rapid increase in population growth
- Talk of a possible future strike of brewery
workers

© 2014 Pearson Education Canada Inc. 31

 a. Day-care services
More mothers with small children are returning to the
labour force; gov’t introduces subsidies for day-care
operators
b. Marijuana
The gov’t severely increases penalties for buying and for
selling
c.Compact discs
New processing method reduces cost of producing CDs;
consumers are switching to high digital downloads
d. Organic vegetables
Vegetarianism increases due to medical report; tighter
regulations on definition of organically grown
products introduced

© 2014 Pearson Education Canada Inc. 32

 LO6

Self-Test
What impact will the following events have on the price of
wine?
a) A poor harvest in the grape industry results in a big
decrease in the supply of grapes
b) The number of wineries increases
c) The sales tax on wine increases
d) The introduction of a new fermentation method
reduces the time needed for the wine to ferment
e) The gov’t introduces a subsidy for each bottle of wine
produced domestically

© 2014 Pearson Education Canada Inc. 33

 APPLYING ECONOMIC CONCEPTS 3-1
Why Apples But Not iPhones?

Three conditions must be satisfied in order for price determination

in a market to be well described by the demand-and-supply model:

1. Large number of consumers; each one small relative to the size

of the market.

2. Large number of producers; each one small relative to the size

of the market.

3. Producers must be selling 'homogeneous' versions of the

product.
© 2014 Pearson Education Canada Inc. Chapter 3, Slide 34
 EXTENSIONS IN THEORY 3-2
The Algebra of Market Equilibrium

Relative Prices and Inflation

The absolute price of a product is the amount of money that must
be spent to acquire one unit of that product.

A relative price is the price of one good in terms of another.

Demand and supply curves are drawn in terms of relative prices

rather than absolute prices.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 35

 The table below displays hypothetical demand and supply schedules for the market
for overnight parcel deliveries in Canada .

Quantity Quantity
Demanded Supplied
(millions) (millions)
Price ($) Year 1 Year 2 Year 1 Year 2

30 80 95 140 125
26 90 105 135 120
22 100 115 130 115
18 110 125 125 110
14 120 135 120 105
10 130 145 115 100

© 2014 Pearson Education Canada Inc. 36

 1. The equilibrium price and quantity for overnight parcel delivery in Year 1 is
________ and ________ million parcels.

2. If the price of overnight parcel delivery in Year 2 is $10, how many parcels
will actually be delivered?

3. Which of the following statements describes a likely event in the market for
overnight parcel delivery? From Year 1 to Year 2,

A) there was a decrease in consumers' income.

B) there was an improvement in technology for tracking overnight parcels.

C) the price of regular parcel delivery decreased.

D) there was a rise in the price of jet fuel.

E) the number of suppliers of overnight parcel delivery service increased.

© 2014 Pearson Education Canada Inc. 37