Supply and Demand A competitive market: Many buyers and sellers Same good or service The supply and demand model is a model of howa competitive market works. Five key elements: Demand curve Supply curve Demand and supply curve shifts Market equilibrium Changes in the market equilibrium
Buyers and Sellers In Markets The Demand Curve A schedule or graph that tells us the quantity of a goodthat buyers wish to buy at each price A Property of Demand As price of a good or service goes down the quantityconsumers wish to buy will increase Therefore, the demand curve is downward-sloping
The Daily DemandCurve for Pizza in ChicagoPrice($ per slice)Quantity(1000s of slices per day)48216312Demand
Demand Schedule A demand scheduleshows how much ofa good or serviceconsumers will wantto buy at differentprices.22.214.171.124.910.011.514.2Price of coffeebeans (perpound)Quantity of coffeebeans demanded(billions of pounds)1.751.501.251.000.750.50$2.00Demand Schedule for Coffee Beans
Demand CurveA demand curve is the graphicalrepresentation of the demand schedule;it shows how much of a good or serviceconsumers want to buy at any givenprice.70 9 11 1513 17$2.001.751.501.251.000.750.50Price ofcoffee bean(per gallon)Quantity of coffee beans(billions of pounds)Demandcurve, DAs price rises,the quantitydemanded falls
An Increase in Demand An increase in thepopulation and otherfactors generate anincrease in demand –a rise in the quantitydemanded at any givenprice. This is represented bythe two demandschedules - oneshowing demand in2002, before the rise inpopulation, the othershowing demand in2006, after the rise inpopulation.126.96.36.199.910.011.514.28.59.09.710.712.013.817.0in 2002 in 2006$2.001.751.501.251.000.750.50Price of coffeebeans (perpound)Quantity of coffeebeans demanded(billions of pounds)Demand Schedules for Coffee Beans
An Increase in DemandA shift of the demand curve is a change in the quantity demanded at anygiven price, represented by the change of the original demand curve to a newposition, denoted by a new demand curve.Increase inpopulation more coffeedrinkersPrice ofcoffee beans(per gallon)70 9 11 1513 17$2.001.751.501.251.000.750.50 D1D2Demand curvein 2006Demand curvein 2002Quantity of coffee beans(billions of pounds)
Buyers and Sellers In Markets The Demand Curve Why do buyers purchase a greater quantity at lowerprices and vice-versa? The substitution effect The income effect
Buyers and Sellers In Markets The Substitution Effect The change in the quantity demanded of a good thatresults because buyers switch to substitutes when theprice of the good changes The Income Effect The change in the quantity demanded of a good thatresults because a change in the price of a good changesthe buyer’s purchasing power
Chapter 3 - Supply and Demand: An Slide 11Buyers and Sellers In Markets The Cost-Benefit Principle The reservation price is the benefit the buyer receivesfrom 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 smallerquantity than at lower prices
Movement Along the Demand Curve7 8.1 9.70 10 1513 17$2.001.751.501.251.000.750.50 D1D2A CBA shift of thedemand curve…… is not the samething as a movementalong the demandcurvePrice ofcoffeebeans (pergallon)Quantity of coffeebeans (billions ofpounds)A movement along the demandcurve is a change in thequantity demanded of a goodthat is the result of a change inthat good’s price.
Shifts of the Demand CurveA ―decrease in demand‖,means a leftward shift ofthe demand curve: at anygiven price, consumersdemand a smaller quantitythan before. (D1D3)PriceQuantityD3D1D2Increase indemandDecrease indemandAn ―increase in demand‖means a rightward shift ofthe demand curve: at anygiven price, consumersdemand a larger quantitythan before. (D1D2)
What Causes a Demand Curve to Shift? Changes in the Prices of Related Goods Substitutes: Two goods are substitutes if a fall in theprice of one of the goods makes consumers less willingto buy the other good. Complements: Two goods are complements if a fall inthe price of one good makes people more willing to buythe other good.
What Causes a Demand Curve to Shift? Changes in Income Normal Goods: When a rise in income increases thedemand for a good - the normal case - we say that thegood is a normal good. Inferior Goods: When a rise in income decreases thedemand for a good, it is an inferior good. Changes in Tastes Changes in Expectations
Individual Demand Curve and the Market DemandCurveThe market demand curve is the horizontal sum of theindividual demand curves of all consumers in that market.DDarla DDino0 0 10 203020 0$21$21$2130 40 50DMarket(a)Darla’s IndividualDemand Curve(b)Dino’s IndividualDemand Curve(c)Market Demand CurvePrice ofcoffeebeans (perpound)Price ofcoffeebeans (perpound)Price ofcoffeebeans (perpound)Quantity of coffeebeans (pounds)Quantity of coffeebeans (pounds)Quantity of coffeebeans (pounds)
Supply Schedule A supply scheduleshows how much of agood or servicewould be supplied atdifferent prices.Supply Schedule for Coffee BeansPrice ofcoffee beans(per pound)Quantity ofcoffee beanssupplied(billions ofpounds)$2.00 11.61.75 11.51.50 11.21.25 10.71.00 10.00.75 9.10.50 8.0
Supply CurveQuantity of coffee beans (billions of pounds)Price of coffeebeans (per pound)70 9 11 1513 17$2.001.751.501.251.000.750.50As price rises, thequantity supplied rises.A supply curve showsgraphically how much of agood or service peopleare willing to sell at anygiven price.Supplycurve, S
An Increase in Supply The entry of Vietnaminto the coffee beanbusiness generatedan increase insupply—a rise in thequantity supplied atany given price. This event isrepresented by thetwo supplyschedules—oneshowing supply beforeVietnam’s entry, theother showing supplyafter Vietnam came in.Supply Schedule for Coffee BeansPrice ofcoffee beans(per pound)Quantity of beans supplied(billions of pounds)Before entry After entry$2.00 11.6 13.91.75 11.5 13.81.50 11.2 13.41.25 10.7 12.81.00 10.0 12.00.75 9.1 10.90.50 8.0 9.6
An Increase in SupplyA shift of the supply curve is a change in the quantity supplied of a good at anygiven price.70 9 11 13 15 17$2.001.751.501.251.000.750.50S1S2Price of coffeebeans (perpound)Quantity of coffee beans(billions of pounds)… is not thesame thing as ashift of thesupply curveA movementalong the supplycurve…
Movement Along the Supply CurveA movement along the supply curve is a change in the quantity supplied of agood that is the result of a change in that good’s price.70 10 11.2 12 15 17$2.001.751.501.251.000.750.50S1S2ACBPrice of coffeebeans (perpound)Quantity of coffee beans(billions of pounds)… is not thesame thing asa shift of thesupply curveA movementalong the supplycurve…
Any ―increase insupply‖ means arightward shift of thesupply curve: at anygiven price, there is anincrease in thequantity supplied.(S1 S2)Shifts of the Supply CurveS3S1S2PriceQuantityDecrease insupplyIncrease insupplyAny ―decrease insupply‖ means aleftward shift of thesupply curve: at anygiven price, there is adecrease in thequantity supplied.(S1 S3)
Changes in input prices An input is a good that is used to produceanother good. Changes in the prices of related goods andservices Changes in technology Changes in expectations Changes in the number of producersWhat Causes a Supply Curve to Shift?
Individual Supply Curve and the Market SupplyCurveThe market supply curve is the horizontal sum of the individualsupply curves of all firms in that market.SFigueroa SBien Pho1 2 31 22 31 4 500 0$21$21$21SMarket(a)Mr. Figueroa’sIndividual Supply Curve(b)Mr. Bien Pho’s IndividualSupply Curve(c)Market Supply CurvePrice ofcoffeebeans (perpound)Price ofcoffeebeans (perpound)Price ofcoffeebeans (perpound)Quantity of coffeebeans (pounds)Quantity of coffeebeans (pounds)Quantity of coffeebeans (pounds)
Supply, Demand and Equilibrium Equilibrium in a competitive market: when the quantitydemanded of a good equals the quantity supplied ofthat good. The price at which this takes place is the equilibriumprice (a.k.a. market-clearing price): Every buyer finds a seller and vice versa. The quantity of the good bought and sold at that price is theequilibrium quantity.
Market equilibriumoccurs at point E,where the supplycurve and the demandcurve intersect.Price ofcoffee beans(per pound)Quantity of coffee beans(billions of pounds)70 10 1513 17$2.001.751.501.251.000.750.50SupplyDemandE EquilibriumEquilibriumpriceEquilibriumquantityMarket Equilibrium
There is a surplus of agood when the quantitysupplied exceeds thequantity demanded.Surpluses occur whenthe price is above itsequilibrium level.70 10 1513 17$2.001.751.501.251.000.750.50SupplyDemand8.1 11.2ESurplusQuantitydemandedQuantitysuppliedPrice of coffeebeans (per pound)Quantity of coffee beans(billions of pounds)Surplus
70 10 1513 17$2.001.751.501.251.000.750.50SupplyDemand9.1 11.5EShortageQuantitydemandedQuantitysuppliedPrice ofcoffee beans(per pound)Quantity of coffee beans(billions of pounds)There is a shortage of agood when the quantitydemanded exceeds thequantity supplied.Shortages occur whenthe price is below itsequilibrium level.Shortage
Equilibrium and Shifts of the Demand CurveQ2Q1P2P1D2SupplyD1E2E1Price of coffeebeansQuantity of coffee beansPricerisesQuantity risesAn increase indemand…… leads to amovement along thesupply curve due to ahigher equilibrium priceand higher equilibriumquantity
Equilibrium and Shifts of the Supply CurveP2P1Q1Q2DemandE1S1S2E2Price ofcoffee beansQuantity of coffee beansPricerisesQuantity fallsA decreasein supply…… leads to a movementalong the demand curvedue to a higherequilibrium price andlower equilibrium quantity
Technology Shifts of the Supply CurvePriceQuantityS1DemandE1E2An increase insupply …P2P1Q1Q2… leads to a movementalong the demand curve toa lower equilibrium priceand higher equilibriumquantity.PricefallsQuantity increasesS2Technological innovation: In the early1970s, engineers learned how to putmicroscopic electronic componentsonto a silicon chip; progress in thetechnique has allowed ever morecomponents to be put on each chip.
Simultaneous Shifts of Supply and DemandTwo opposing forcesdetermining theequilibrium quantity.The increase indemand dominates thedecrease in supply.Quantity of coffeeQ2Q1P2P1S2D2D1S1E1E2(a) One possible outcome: Price Rises, Quantity RisesPrice of coffeeSmall decreasein supplyLarge increasein demand
Simultaneous Shifts of Supply and DemandTwo opposing forcesdetermining theequilibrium quantity.Q1Q2P2P1S2D2D1S1E1E2(b) Another Possibility Outcome: Price Rises, Quantity FallsPrice of coffeeQuantity of coffeeLargedecreasein supplySmall increasein demand
Simultaneous Shifts of Supply and DemandWe can make the following predictions about the outcome whenthe supply and demand curves shift simultaneously:SimultaneousShifts ofSupply andDemandSupply Increases Supply DecreasesDemandIncreasesPrice: ambiguousQuantity: upPrice: upQuantity: ambiguousDemandDecreasesPrice: downQuantity: ambiguousPrice: ambiguousQuantity: down
A recent drought in Australia reduced the amount of grasson which Australian dairy cows could feed, thus limiting theamount of milk these cows produced for export. At the same time, a new tax levied by the government ofArgentina raised the price of the milk the country exported,thereby decreasing Argentine milk sales worldwide. These two developments produced a supply shortage in theworld market, which dairy farmers in Europe couldn’t fillbecause of strict production quotas set by the EuropeanUnion.Demand and Supply Shifts at Work in the GlobalEconomy
In China, meanwhile, demand for milk and milkproducts increased, as rising income levels drovehigher per-capita consumption. All these occurrences resulted in a strong upwardpressure on the price of milk everywhere in 2007.Demand and Supply Shifts at Work in the GlobalEconomy
SUMMARY1. The supply and demand model illustrates how acompetitive market works.2. The demand schedule shows the quantity demanded ateach price and is represented graphically by a demandcurve. The law of demand says that demand curves slopedownward.3. A movement along the demand curve occurs when aprice change leads to a change in the quantity demanded.When economists talk of increasing or decreasing demand,they mean shifts of the demand curve—a change in thequantity demanded at any given price.
SUMMARY4. There are five main factors that shift the demand curve:• A change in the prices of related goods or services• A change in income• A change in tastes• A change in expectations• A change in the number of consumers5. The market demand curve for a good or service is thehorizontal sum of the individual demand curves of allconsumers in the market.6. The supply schedule shows the quantity supplied ateach price and is represented graphically by a supplycurve. Supply curves usually slope upward.
SUMMARY7. A movement along the supply curve occurs when a pricechange leads to a change in the quantity supplied. Wheneconomists talk of increasing or decreasing supply, theymean shifts of the supply curve—a change in thequantity supplied at any given price.8. There are five main factors that shift the supply curve:• A change in input prices• A change in the prices of related goods and services• A change in technology• A change in expectations• A change in the number of producers9. The market supply curve for a good or service is thehorizontal sum of the individual supply curves of allproducers in the market.
SUMMARY10. The supply and demand model is based on the principlethat the price in a market moves to its equilibrium price,or market-clearing price, the price at which the quantitydemanded is equal to the quantity supplied. This quantityis the equilibrium quantity. When the price is above itsmarket-clearing level, there is a surplus that pushes theprice down. When the price is below its market-clearinglevel, there is a shortage that pushes the price up.11. An increase in demand increases both the equilibriumprice and the equilibrium quantity; a decrease in demandhas the opposite effect. An increase in supply reduces theequilibrium price and increases the equilibrium quantity; adecrease in supply has the opposite effect.12. Shifts of the demand curve and the supply curve canhappen simultaneously.