CHAPTER 3

Supply and Demand

PowerPoint Slides
by Can Erbil
2004 Worth Publishers, all rights reserved

Diamond Water Paradox

Demand & Supply
Change in quantity v. Change in Demand/Supply
Factors that cause the demand and supply curves
to shift
The equilibrium price
How the equilibrium price changes when the
supply and demand curves shift

 Demanddescribesthebehaviorofbuyers
Supplydescribesthebehaviorofsellers
SELLERS,notproducers
Product&FactorMarkets

Demand is how much of a good or

service consumers will want to buy at a
given price

Higher price for a good, other things equal, leads people

to demand a smaller quantity of the good.
5

Diminishing Marginal Utility

Substitution Effect
Income Effect

Definition:
Receiving less marginal utility with each unit
consumed
Consumer will only buy more if the Price is lowered
to offset reduced marginal utility

Total Utility v. Marginal Utility

Total satisfaction received from consumption of G/S
Additional satisfaction received from consumption
of one more G/S
Extra benefit from consuming one more good

 Substitution

Effect:

As price of G/S drops, there is incentive for buyer

to substitute that lower priced item for more
expensive alternatives.
Example: pretzels vs. chips
Income

Effect:

As price of G/S drops, more more is available to

buy another G/S
Caribou drink on sale frees up more $$ to buy
another

 Change

in Demand

caused by a change in an outside

determinant
SHIFT of entire demand curve
Change

in Quantity Demanded

caused only by a change in price of said

product
Movement ALONG the demand curve

10

11

INEPT

 When

individuals have more income they

are normally more likely to purchase a good
at any given price
if the good is a Normal Good

Normal

Goods

Inferior

Goods

Steaks, cars, cell phones

Increase in income shifts demand of normal good
to the right
Bus rides, used clothing
Increase in income shifts demand of inferior good
to the left

 Increase

in # of buyerincrease in demand
Decrease in # of buyersdecrease in
demand
Baby

Boomer generation led to increased

demand in anything baby related

 Expectations

regarding price or quantity

available
Examples:

Gretzkys last game

Freeze in Florida, stock up on OJ before price goes
up

Substitutes:
Fall in price of one makes consumers less
willing to buy the other
A fall in the price of the substitute makes
demand shift to the left (decrease) for the
original good
Example: Beef and chicken..price of beef
and demand for chicken move in same
direction

Complimentary goods:
Price and Demand move in opposite
direction
When price of one good makes consumers
more or less willing to buy another good
Usually consumed together (movies and
popcorn)

Price of movie - up , demand for popcorn - down

Price of movie - down, demand for popcorn up

Unrelated Goods
Computers and shovels have no effect on
demand with change in price

 Like

product or service moredemand

curve shifts to right
Like lessdemand curve shifts to left
Examples

New products: CDs replaced cassette tapes

Ipods replaced CDs
Health fads: broccoli, health clubs, eggs
Fashion trends: bell bottoms

 INCOME
NUMBER

OF BUYERS
EXPECTATIONS
PRICES OF RELATED GOODS
TASTES

 LawofDemand
DownwardslopingDemandcurve
ChangeinDemandv.ChangeinQtyDemanded
Determinants/ShiftersofDemand

INEPT

Income
Number
Expectations
PriceofOtherGoods
Tastes

 LawofSupply
UpwardslopingSupplycurve
ChangeinSupplyv.ChangeinQtySupply
Determinants/ShiftersofSupply

PIGNET

PriceofOtherGoodsProduced
Input(resources)
GovernmentIntervention(taxes&subsidies)
NumberofSellers
ExpectationsofFuturePrices
Technology

Supplyisacurveshowingtheamountsofa
productthatproducersarewillingandableto
makeavailableforsaleateachofaseriesof
possiblepricesduringaspecificperiodoftime

WillingnessoffirmstosupplyG/Satagivenprice

Figure 3-6 A Decrease in Supply

Krugman and Wells: Microeconomics
Copyright 2005 by Worth Publishers

AsPrises,theQsuppliedrises;asPfalls,
theQsuppliedfalls

Examplesoflawofsupply

Farming

Releasecornfromsiloifexpectedlowerfuturedemand
ShiftingresourcesintodifferentcropifPwarrants

 Whywouldyousellmoreticketsatahigherprice?
Priceisanincentivetocoverhighercost
Revenueisthatincentive(profitmargin)

INCREASINGOPPORTUNITYCOSTS
Shiftingofmoreandmoreresources
ToIncreasethesupplyofsoybeans,aproducer
mustbeofferedahigherprice.

Higherpriceisincentivetoincrease
supply

ChangeinQ
supplied
Change/shiftin
supply

ChangeinQuantitySuppliedv.
Change/ShiftinSupply
Change

in Quantity Supplied caused

by
Change in price of own good
i.e. Price of Jostens rings increases causing an
increase in the quantity supplied of the rings
Increase in price may have been caused by an
increase in the DEMAND of Jostens rings.
Change/Shift

in Supply

Shift/movement of actual supply CURVE

Caused by PIGNET/Determinates (outside
factors affecting supply)

 PriceofOtherGoods
InputPrices(ResourcePrices)
GovernmentIntervention
NumberofSellers
ExpectationsofPrice
Technology

Shiftproductionfromproductwithalower
PtoaproductthathasahigherP

Resultinginhigherprofits

Examples:
Inputcostsofscissorsincreasesoshiftmore
production(increaseSupply)ofknives
PofwrenchesdropssoshiftSupplytohammers
w/higherP

DropinPofwrenchescausedbydecreasein
Demandofwrenches

HigherresourcePriceincreasesproductioncosts&
lowersprofits
P(Resource)increase=Sdecrease
P(Resource)decrease=Sincrease

Example:

DecreaseinResourcePofseedandfertilizerIncrease
Supplyofcorn

Taxes=costs

IncreaseinTaxes=decreaseinSupply

Subsidies=revenue(taxesinreverse)

Governmentsubsidizesproductionofproduct,itlowers
cost(farming)increaseSupply

IncreaseinSubsidies=increaseinSupply

IncreaseinsupplierswillincreaseS

Shiftstoright

DecreaseinsupplierswilldecreaseS
Shiftstoleft

Changein#ofsellers?

Whatcausesellerstoentermarket?

WanttotakeadvantageofhigherP=higherprofits

SimilartoexpectationswithDemand
ExpectationoffuturePincreasewilldecreasethe
supplycurvenow
ExpectationofPdecreasewillincreasethesupply
curve
Examples
WayneGretzkyexample
FarmeranticipateshigherPofcorn

Improvementsintechallowfirmstoproduce
sameunitswithfewerresources,thusless
costs
Increaseintech=IncreaseinS

 WhereSupplycurve

intersectsDemand
curve
MarketClearing
Price

Priceisatrestor
inbalance

Whyisthisso?

EPisPwherebuyers
arewillingtobuy&
sellersarewillingto
sell

 Marketautocorrects

itself
MarketP=$350
Clearanceracks
WhatdoSellersdoto

offsetthis?
ReducePbringinmore
buyers
ReachesEPof$250

 MarketP=$150

Longlines
Howdobuyersgetlimited
supply?
CompetitionwilldriveP
higher

ReachesEPof$250

 IncreaseinDemand(shifttoright)

Price&Qtyincrease
DecreaseinDemand(shifttoleft)

Price&Qtydecrease
IncreaseinSupply(shifttoright)

Pricedecreases&Qtyincreases
DecreaseinSupply(shifttoleft)

Priceincreases&Qtydecreases

 WhatwouldcausebothSupply&Demandto

change?

Outsidefactorsaffectingsupplyanddemand
Example:PinkSalmon

Improvedtechnology(larger&moreefficientfishingboats)&
higherprofits

Increaseinconsumerincome&reductionsinpriceof
substitutes

Sincrease&Ddecrease

Sdecrease&Dincrease

EqlPdecreases
EqlQdependsonwhich
changewaslarger

EqlPincreases
EqlQdependsonwhich
changewaslarger

Supply&Dincrease

EqlP(dependsonwhich
changewaslarger)
EqlQincreases

Supply&Demand
decrease

EqlP(dependsonwhich
changewaslarger)
EqlQdecreases

Figure 3-14 Simultaneous Shifts of the Demand and Supply Curves

Krugman and Wells: Microeconomics
Copyright 2005 by Worth Publishers