Demand & Supply 02

8/9/2019 Demand & Supply 02

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2004 Prentice Hall Publishing Ayers/Collinge, 1/e 11

DemandDemandrelates the quantity of a good thatrelates the quantity of a good that

consumers would purchase at each of variousconsumers would purchase at each of various

possible prices, over some period of time.possible prices, over some period of time.TheThe ceteris paribusceteris p

aribuscondition means thatcondition means that

we look at only one relationship at a time.we look at only one relationship at a time.

Ceteris paribusCeteris paribus is the Latin for holding allis the Latin for holding all

else equal.else equal.

DemandDemandrelates the quantity of a good thatrelates the quantity of a good that

consumers would purchase at each of variousconsumers would purchase at each of various

possible prices, over some period of time.possible prices, over some period of time.TheThe ceteris paribusceteris p

aribuscondition means thatcondition means that

we look at only one relationship at a time.we look at only one relationship at a time.

Ceteris paribusCeteris paribus is the Latin for holding allis the Latin for holding all

else equal.else equal.


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QuantityQuantity

P

rice

( $s )

P

rice

( $s )

55

44

33

22

11

00

AA

BB

CC

EE

FFGG

11 22 33 44 55

DemandDemand

The demand curve slopes downwardThe demand curve slopes downward

because price and quantity demandedbecause price and quantity demanded

are inversely related.are inversely related.

The demand curve slopes downwardThe demand curve slopes downward

because price and quantity demandedbecause price and quantity demanded

are inversely related.are inversely related.


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A change in the price of aA change in the price of a

good causes a change in thegood causes a change in thequantity demanded,quantity demanded,

but does not shiftbut does not shift

demanddemand

A change in the price of aA change in the price of a

good causes a change in thegood causes a change in thequantity demanded,quantity demanded,

but does not shiftbut does not shift

demanddemand


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QuantityQuantity

Price

($s)

Price

($s)

DemandDemand

A price changeA price change

would change thewould change the

quantity demandedquantity demanded

which involveswhich involves

movement along themovement along the

demand curve.demand curve.


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QuantityQuantity

Pr

ic

e

($s

)

Pr

ic

e

($

s)

DemandDemand

Movement alongMovement along

the demand curve.the demand curve.

Increase

DecreaseDecrease


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Tastes and PreferencesTastes and Preferences

Substitutes and ComplementsSubstitutes and Complements

IncomeIncome- Normal vs. Inferior Goods- Normal vs. Inferior Goods

PopulationPopulation

Price ExpectationsPrice Expectations

77



Demand ShiftsDemand Shifts

LEFTLEFT

When:When: Prices of substitutesPrices of substitutes

decreasedecrease

Prices of complementsPrices of complementsincreaseincrease

Normal good-incomeNormal good-incomedecreasesdecreases

Inferior good-incomeInferior good-incomeincreasesincreases

Population decreasesPopulation decreases

Tastes & preferencesTastes & preferencesturn against the productturn against the product

Demand ShiftsDemand Shifts LEFTLEFTWhen:When: Prices of substitutesPrices of substitutes

decreasedecrease

Prices of complementsPrices of complementsincreaseincrease

Normal good-incomeNormal good-incomedecreasesdecreases

Inferior good-incomeInferior good-incomeincreasesincreases

Population decreasesPopulation decreases

Tastes & preferencesTastes & preferencesturn against the productturn against the product

88

D1D1

Price

Price

QuantityQuantity

D2D2


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Demand ShiftsDemand Shifts RIGHTRIGHT When:When: Prices of substitutes increasePrices of substitutes increase

Prices of complementsPrices of complements

decreasedecrease

Normal good-incomeNormal good-incomeincreasesincreases

Inferior good-incomeInferior good-income

decreasesdecreases

Population increasesPopulation increases

Tastes & preferences turn inTastes & preferences turn in

favor of the productfavor of the product

Demand ShiftsDemand Shifts RIGHTRIGHT When:When: Prices of substitutes increasePrices of substitutes increase

Prices of complementsPrices of complements

decreasedecrease

Normal good-incomeNormal good-income

increasesincreases

Inferior good-incomeInferior good-income

decreasesdecreases

Population increasesPopulation increases

Tastes & preferences turn inTastes & preferences turn in

favor of the productfavor of the product

Price

Price

QuantityQuantity

D1D1

D2D2



SupplySupplyrelates therelates the

quantity of a good thatquantity of a good thatwill be offered for sale atwill be offered for sale ateach of various possibleeach of various possible

prices, over some periodprices, over some periodof time,of time, ceteris paribusceteris paribus..

1010



Data Point Price ($) Quantity Supplied

H 5 4

I 4 3

J 3 2

K 2 1

L 1 0

M 0 0



QuantityQuantity

Price

($s)

Price

($s)

55

44

33

22

11

0011 22 33 44 55

SupplySupplyHH

II

JJ

LL

KK

MM

The supply curve slopesThe supply curve slopesupward because priceupward because price

and quantity suppliedand quantity supplied

are directly related.are directly related.

The supply curve slopesThe supply curve slopes

upward because priceupward because price

and quantity suppliedand quantity supplied

are directly related.are directly related.



Prices of InputsPrices of Inputs

Technological ChangeTechnological Change

Government or Union RestrictionsGovernment or Union Restrictions

Prices of Substitutes in ProductionPrices of Substitutes in Production Prices of Jointly Produced GoodsPrices of Jointly Produced Goods

Expected Future PricesExpected Future Prices

Number of SellersNumber of Sellers

Prices of InputsPrices of Inputs

Technological ChangeTechnological Change

Government or Union RestrictionsGovernment or Union Restrictions

Prices of Substitutes in ProductionPrices of Substitutes in Production Prices of Jointly Produced GoodsPrices of Jointly Produced Goods

Expected Future PricesExpected Future Prices

Number of SellersNumber of Sellers

1313



QuantityQuantity

Price

($s)

Price

($s)

55

44

33

22

11

0011 22 33 44 55

SupplySupply

A price changeA price changecauses movementcauses movement

from one point tofrom one point to

another along theanother along the

same supply curve.same supply curve.



QuantityQuantity

Price

($s)

Price

($s)

55

44

33

22

11

0011 22 33 44 55

SupplySupply

Movement alongMovement alongSupplySupplyIncrease

Increase

DecreaseDecrease



Supply ShiftsSupply Shifts LEFTLEFTWhen:When:

Sellers expect price toSellers expect price torise in future.rise in future.

Price of labor or anyPrice of labor or any

input rises.input rises. Government or unionGovernment or union

restrictions increaserestrictions increasecost.cost.

Price of substitute inPrice of substitute inproduction rises.production rises.

Price of productPrice of productproduced jointly falls.produced jointly falls.

Number of sellersNumber of sellersdeclinesdeclines

1616

QuantityQuantity

$$ S2S2

S1S1



Supply ShiftsSupply Shifts RIGHTRIGHT When:When:

Sellers expect price to declineSellers expect price to declinein future.in future.

Price of labor or any inputPrice of labor or any input

falls.falls. Technological change lowersTechnological change lowers

cost.cost.

Price of substitute inPrice of substitute in

production falls.production falls. Price of product producedPrice of product produced

jointly rises.jointly rises.

Number of sellers increasesNumber of sellers increases

Supply ShiftsSupply Shifts RIGHTRIGHT When:When:

Sellers expect price to declineSellers expect price to declinein future.in future.

Price of labor or any inputPrice of labor or any input

falls.falls. Technological change lowersTechnological change lowers

cost.cost.

Price of substitute inPrice of substitute in

production falls.production falls. Price of product producedPrice of product produced

jointly rises.jointly rises.

Number of sellers increasesNumber of sellers increases

QuantityQuantity

$$

S2S2

S1S1



P r i c e ($ ) J a c k 's Q u a n ti ty D e m a n d e dJ i l l 's Q u a n t i ty D e m a n d e dM a r k e t Q D e m a

5 1 0 1

4 2 1 33 3 2 5

2 4 3 7

1 5 4 9

0 6 5 1 1

Demand can be one individualsDemand can be one individuals

or the market as a wholeor the market as a wholeDemand can be one individualsDemand can be one individuals

or the market as a wholeor the market as a whole



Quantity

Price

( $s )

Market Demand CurveMarket Demand CurveMarket Demand CurveMarket Demand Curve

Price ($)

5

4

3

2

10

JillsDemand

Jills Quantity

Demanded

0

1

2

3

45

JacksDemand

Jacks Quantity

Demanded

1

2

3

4

56

Market Demand

Market Q

Demanded

1

3

5

7

911

6

5

4

3

2

1

01 2 3 4 5 6 7 8 9 10 11


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P r ic e ($ ) W a l l y 's Q u a n t i ty S u p p li e dW a n d a 's Q u a n ti ty S u p p l ie dM a r k e t Q S u p p

5 4 5 9

4 3 4 73 2 3 5

2 1 2 3

1 0 1 1

0 0 0 0

Supply can be from one firmSupply can be from one firm

or all firms in the market.or all firms in the market.Supply can be from one firmSupply can be from one firm

or all firms in the market.or all firms in the market.


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Market Supply CurveMarket Supply CurveMarket Supply CurveMarket Supply Curve

QuantityQuantity

Price

( $s )

Price

( $

s )

55

4433

22

11

0011 22 33 44 55 7766 88 99

Market SupplyMarket Supply

WallysWallysSupplySupply

WandasWandasSupplySupply


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Price ($) Quantity Demanded Quantity Supplied Surplus or Shortage

5 1 9 8

4 3 7 4

3 5 5 0

2 7 3 -4

1 9 1 -8

0 11 0 -11

There is only one price that clearsThere is only one price that clearsthe market, meaning that the quantitythe market, meaning that the quantity

supplied equals the quantity demanded.supplied equals the quantity demanded.

There is only one price that clearsThere is only one price that clears

the market, meaning that the quantitythe market, meaning that the quantity

supplied equals the quantity demanded.supplied equals the quantity demanded.


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Pails of Water

Pric e

( $ s )

1 2 3 4 5 76 8 9

5

4

3

2

1

0QQ*

PP**

Surplus of 4 PailsSurplus of 4 Pails

Shortage of 4 PailsShortage of 4 Pails

Too HighToo High

Too LowToo Low

Market equilibrium occurs where

demand and supply intersect.SupplySupply

DemandDemand


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TheThe market clearing pricemarket clearing price and theand theresulting quantity traded compriseresulting quantity traded comprise

what is referred to as thewhat is referred to as the marketmarket

equilibriumequilibrium,, meaning that there is nomeaning that there is notendency for either price or quantitytendency for either price or quantity

to change,to change, ceteris paribusceteris paribus..

TheThe market clearing pricemarket clearing price and theand theresulting quantity traded compriseresulting quantity traded comprisewhat is referred to as thewhat is referred to as the marketmarket

equilibriumequilibrium,, meaning that there is nomeaning that there is notendency for either price or quantitytendency for either price or quantity

to change,to change, ceteris paribusceteris paribus..


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SS

Quantity

Price

($

s)

SSnewnewSS

DD DD

SSnewnew

Q*Q*Q*

P*P*

P*P*

An increase or decrease in supply.

Price

($s)

Quantity


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S

Quantity

Price

($s

)

SS

D

DD

DDnewnew

Q*Q*Q*Q*

P*P*

P*

An increase or decrease in demand.

DDnewnew

Quantity

Price

($

s

)


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Case Demand Supply Equilibrium P Equilibrium Q

1 No change Right Fall Rise

2 No change Left Rise Fall

3 Right No change Rise Rise

4 Left No change Fall Fall

NoteNote: In Cases 1-4 only one of the two curves: In Cases 1-4 only one of the two curvesis shifting.is shifting.

NoteNote: In Cases 1-4 only one of the two curves: In Cases 1-4 only one of the two curvesis shifting.is shifting.


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Case Demand Supply Equilibrium P Equilibrium Q

5 Right Right Unknown Rise

6 Left Left Unknown Fall7 Right Left Rise Unknown

8 Left Right Fall Unknown

NoteNote: In Cases 5-8 both of the curves: In Cases 5-8 both of the curves

are shifting.are shifting.


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2004 Prentice Hall Publishing Ayers/Collinge, 1/e

Charter Schools:Charter Schools: Public schools inPublic schools inwhich a non-profit group receiveswhich a non-profit group receivesa contract (i.e. charter) toa contract (i.e. charter) to

operate a school for a limitedoperate a school for a limitedperiod of time.period of time. Vouchers:Vouchers: Monetary amountsMonetary amounts

provided by government, free ofprovided by government, free of

charge to parents, which would becharge to parents, which would bespendable only on the education ofspendable only on the education oftheir children, at a school chosentheir children, at a school chosenby the parents.by the parents.

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1.1. The Law of demand states thatThe Law of demand states thatconsumersconsumers

a.a. must not buy more than they need.must not buy more than they need.

b.b. must not waste what they buy.must not waste what they buy.c.c. must pay for what they buy.must pay for what they buy.

d.d. will buy more as price falls.will buy more as price falls.

1.1. The Law of demand states thatThe Law of demand states thatconsumersconsumers

a.a. must not buy more than they need.must not buy more than they need.

b.b. must not waste what they buy.must not waste what they buy.c.c. must pay for what they buy.must pay for what they buy.

d.d. will buy more as price falls.will buy more as price falls.

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2.2. An increase in the price of footballAn increase in the price of footballtickets would cause the ___________tickets would cause the ___________basketball tickets to __________.basketball tickets to __________.

a.a. demand for; increase.demand for; increase.b.b. supply of; increase.supply of; increase.

c.c. demand for; decrease.demand for; decrease.

d.d. supply of; decrease.supply of; decrease.

2.2. An increase in the price of footballAn increase in the price of footballtickets would cause the ___________tickets would cause the ___________basketball tickets to __________.basketball tickets to __________.

a.a. demand for; increase.demand for; increase.b.b. supply of; increase.supply of; increase.

c.c. demand for; decrease.demand for; decrease.

d.d. supply of; decrease.supply of; decrease.

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3.3. An upward sloping supply curveAn upward sloping supply curvemeans thatmeans that

a.a. consumers will wish to purchase more atconsumers will wish to purchase more athigher prices .higher prices .

b.b. consumers will wish to purchase more atconsumers will wish to purchase more atlower prices.lower prices.

c.c. business firms will wish to sell more atbusiness firms will wish to sell more athigher prices.higher prices.

d.d. business firms that lower their pricesbusiness firms that lower their priceswish to sell more.wish to sell more.

3.3. An upward sloping supply curveAn upward sloping supply curvemeans thatmeans that

a.a. consumers will wish to purchase more atconsumers will wish to purchase more athigher prices .higher prices .

b.b. consumers will wish to purchase more atconsumers will wish to purchase more atlower prices.lower prices.

c.c. business firms will wish to sell more atbusiness firms will wish to sell more athigher prices.higher prices.

d.d. business firms that lower their pricesbusiness firms that lower their priceswish to sell more.wish to sell more.

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4.4. A decrease in supply is illustrated asA decrease in supply is illustrated as

a.a. a downward shift in the supplya downward shift in the supplycurve.curve.

b.b. a shift to the left in the supplya shift to the left in the supplycurve .curve .

c.c. an upward movement along thean upward movement along the

supply curve.supply curve.d.d. a downward movement along thea downward movement along the

supply curve.supply curve.

4.4. A decrease in supply is illustrated asA decrease in supply is illustrated as

a.a. a downward shift in the supplya downward shift in the supplycurve.curve.

b.b. a shift to the left in the supplya shift to the left in the supplycurve .curve .

c.c. an upward movement along thean upward movement along thesupply curve.supply curve.

d.d. a downward movement along thea downward movement along thesupply curve.supply curve.

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5.5. If research reveals that carrot juiceIf research reveals that carrot juicecures cancer, it is likely thatcures cancer, it is likely that

a.a. the supply of carrot juice will increase,the supply of carrot juice will increase,

which will increase the quantity demanded.which will increase the quantity demanded.b.b. demand for carrot juice will increase,demand for carrot juice will increase,

which will increase the quantity supplied .which will increase the quantity supplied .

c.c. neither the demand or supply of carrotneither the demand or supply of carrotjuice will increase.juice will increase.

d.d. both the demand and supply of carrot juiceboth the demand and supply of carrot juicewill increase.will increase.

5.5. If research reveals that carrot juiceIf research reveals that carrot juicecures cancer, it is likely thatcures cancer, it is likely that

a.a. the supply of carrot juice will increase,the supply of carrot juice will increase,

which will increase the quantity demanded.which will increase the quantity demanded.b.b. demand for carrot juice will increase,demand for carrot juice will increase,

which will increase the quantity supplied .which will increase the quantity supplied .

c.c. neither the demand or supply of carrotneither the demand or supply of carrotjuice will increase.juice will increase.

d.d. both the demand and supply of carrot juiceboth the demand and supply of carrot juicewill increase.will increase.

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6.6. When there is an initial shortage,When there is an initial shortage,market prices eventually reachmarket prices eventually reach

equilibrium becauseequilibrium becausea.a. supply increases.supply increases.

b.b. price decreases .price decreases .

c.c. price increases.price increases.d.d. equilibrium output falls.equilibrium output falls.

6.6. When there is an initial shortage,When there is an initial shortage,market prices eventually reachmarket prices eventually reach

equilibrium becauseequilibrium because

a.a. supply increases.supply increases.

b.b. price decreases .price decreases .

c.c. price increases.price increases.d.d. equilibrium output falls.equilibrium output falls.

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demanddemand

quantity demandedquantity demanded

ceteris paribusceteris paribus

shift factorsshift factors

normal goodsnormal goods

inferior goodsinferior goods

substitutessubstitutes

complementscomplements

supplysupply

quantity suppliedquantity supplied

market equilibriummarket equilibrium

surplussurplus

shortageshortage

consumer surplusconsumer surplus

marginal benefitmarginal benefit

marginal costmarginal cost

charter schoolscharter schools

vouchersvouchers

Documents

Demand & Supply 02