 The English historian Thomas Carlyle

once said:

“Teach any parrot the

words supply and demand
and you’ve got an
economist.”
 Demand means the willingness and
capacity to pay.
 Prices are the tools by which the market

coordinates individual desires.

 Demand is the amount of a product that
people are willing and able to purchase at
each possible price during a given period
of time.

 The quantity demand is the amount of a

product that people are willing and able to
purchase at one, specific price.
 Law of demand – there is an inverse
relationship between price and quantity
demanded.
◦ Quantity demanded rises as price falls, other
things constant.
◦ Quantity demanded falls as prices rise, other
things constant.
 What accounts for the law of demand?

– People tend to substitute for goods

whose price has gone up.
 The demand curve is the graphic
representation of the law of demand.
 The demand curve slopes downward and

to the right.
 As the price goes up, the quantity

demanded goes down.

 The demand table assumes all the
following:
◦ As price rises, quantity demanded declines.
◦ Quantity demanded has a specific time
dimension to it.
◦ All the products involved are identical in shape,
size, quality, etc.
◦ The schedule assumes that everything else is
held constant.
◦ You plot each point in the demand table on a
graph and connect the points to derive the
demand curve.
◦ The demand curve graphically conveys the
same information that is on the demand table.
 A Demand
A Demand Table $6.0
0 Curve
Price perDVD rentals 5.00

Price per DVDs (in

cassette demanded
per week 4.00 E

A $0.5 9 3.50 G
3.00 D
B 0 8 Demand
dollars)
2.00 C for
C 1.00 6 DVDs
D 2.00 4 1.00
F B
A
E 3.00 2 .50
0
4.00 1 2 3 4 5 6 7 8 9 10111213
Quantity of DVDs demanded
(per week)
Price (per unit)

PA A

D
0
QA
Quantity demanded (per unit of time)
 Other things constant places a limitation
on the application of the law of demand.
◦ All other factors that affect quantity demanded
are assumed to remain constant, whether they
actually remain constant or not.
◦ Other things constant places a limitation on the
application of the law of demand.
◦ These factors may include changing tastes,
prices of other goods, income, even the
weather.
 Shifts in Demand Versus
Movements Along a Demand
Curve
 Demand refers to a schedule of
quantities of a good that will be bought
per unit of time at various prices, other
things constant.
 Graphically, it refers to the entire

demand curve.
 Shifts in Demand Versus
Movements Along a Demand
Curve

 Quantity demanded refers to a specific

amount that will be demand per unit of
time at a specific price.

• Graphically, it refers to a specific

point on the demand curve.
 Shifts in Demand Versus
Movements Along a Demand
Curve

 A movement along a demand curve is

the graphical representation of the
effect of a change in price on the
quantity demanded.
 Shifts in Demand Versus
Movements Along a Demand
Curve
 A shift in demand is the graphical
representation of the effect of anything
other than price on demand.
 $2 B
Price (per unit)

Change in quantity demanded

(a movement along the curve)

A
$1

D1
0
100 200
Quantity demanded (per unit of time)
 Change in demand
(a shift of the curve)
$2
Price (per unit)

B A
$1

D0

D1
100 200 250
Quantity demanded (per unit of time)
 Number of buyers
Income

Tastes

Expectations
Prices of related goods
 Shift factors of demand are factors that
cause shifts in the demand curve:
◦ Society's income.
◦ The prices of other goods.
◦ Tastes.
◦ Expectations.
◦ Number of Buyers
◦ Taxes on subsidies to consumers.
 An increase in income will increase
demand for normal goods.
 Normal goods: Goods for which demand

goes up when income is higher and for

which demand goes down when income is
lower.
 An increase in income will decrease

demand for inferior goods.

 Inferior goods: Goods for which demand

tends to fall when income rises.

 When the price of a substitute good falls,
demand falls for the good whose price
has not changed.
 Substitutes: Goods that can serve as

replacements for one another:

 When the price of a complement good

falls, demand rises for the good whose

price has not changed.
 Complements, complementary goods:

Goods that “go together”:

 A market demand curve is the horizontal
sum of all individual demand curves.
◦ This is determined by adding the individual
demand curves of all the demanders.
◦ Sellers estimate total market demand for their
product which becomes smooth and downward
sloping curve.
 Taxes levied on consumers increase the
cost of goods to consumers, thereby
reducing demand.
 Subsidies have an opposite effect.
 There is a direct relationship between
price and quantity supplied.
◦ Quantity supplied rises as price rises, other
things constant.
◦ Quantity supplied falls as price falls, other
things constant.
 The law of supply is accounted for by two
factors:

– When prices rise, firms substitute

production of one good for another.

– Assuming firms’ costs are constant, a

higher price means higher profits.

Not in your book but something to think about!

 The supply curve is the graphic
representation of the law of supply.
 The supply curve slopes upward to the

right.
 The slope tells us that the quantity

supplied varies directly – in the same

direction – with the price.
Price (per unit)

A
PA

0
QA
Quantity supplied (per unit of time)
Movement along a supply curve

Shift of a supply curve

 S0
Price (per unit)

Change in quantity
A supplied (a movement
$15
along the curve)

1,250 1,500
Quantity supplied (per unit of time)
 S0
S1
Price (per unit)

A B
$15
Shift in Supply
(a shift of the curve)

1,250 1,500
Quantity supplied (per unit of time)
 Other factors besides price affect how
much will be supplied:
◦ Prices of inputs used in the production of a
good.
◦ Technology.
◦ Suppliers’ expectations.
◦ Taxes and subsidies.
 Resource
Prices

Technology
Prices of Related
Goods and Services
And
Productivity
Supply

Number Expectations
Of Of
Producers Producers
 The market supply curve is derived by
horizontally adding the individual supply
curves of each supplier.
 When taxes go up, costs go up, and
profits go down, leading suppliers to
reduce output.
 When government subsidies go up, costs

go down, and profits go up, leading

suppliers to increase output.
 Equilibrium is a concept in which
opposing dynamic forces cancel each
other out.

 Equilibrium The condition that exists

when quantity supplied and quantity
demanded are equal. At equilibrium,
there is no tendency for price to change.
 Equilibrium price – the price toward
which the invisible hand drives the
market.

• Equilibrium quantity – the amount

bought and sold at the equilibrium
price.
 When the market is not in equilibrium,
you get either excess supply or excess
demand, and a tendency for price to
change.
 Excess demand – a shortage, the
quantity demanded is greater than
quantity supplied
 Prices tend to rise.
 Excess supply – a surplus, the quantity

supplied is greater than quantity

demanded
 Prices tend to fall.
 $5.00
S
4.00 Excess supply
Price per DVD

3.50 A
3.00
2.50 E

2.00 C
1.50
Excess demand
1.00 D
1 2 3 4 5 6 7 8 9 10 11 12
Quantity of DVDs supplied and demanded
 S0
Price (per DVDs)

B
$2.50 Excess demand
A
2.25

D0 D1

0 8 9 10
Quantity of DVDs (per week)
 S1
S0
Price (per DVDs)

C
$2.50 Excess demand
B
2.25 A

D0

0 8 9 10
Quantity of DVDs (per week)
If both the demand curve and supply curve
move to the left, we can predict:
1. price will fall, but we cannot predict
quantity.
2. price will rise, but we cannot predict
quantity.
3. quantity will rise, but we cannot predict
price.
4. quantity will fall, but we cannot predict
price.
Price

Q2 Q3 Q1 Quantity
Suppose that both the price of gasoline and
the amount of gasoline sold decline. Which
of the following would account for this?
1. A shift left of the demand curve, but no
change in the supply curve
2. A shift right of the demand curve, but no
change in the supply curve
3. A shift left of the supply curve, but no
change in the demand curve
4. A shift right of the supply curve, but no
change in the demand curve
Price

P1

P2

Q2 Q1 Quantity