Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
Supply and Demand
Chapter 4
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 2
Laugher Curve
Q. What do you get when you cross the
Godfather with an economist?
A. An offer you can't understand.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 3
Demand
uDemand means the willingness and
capacity to pay.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 4
Demand
uPrices are the tools by which the
market coordinates individual desires.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 5
The Law of Demand
uQuantity demanded rises as price falls,
other things constant.
uQuantity demanded falls as prices rise,
other things constant.
l Thus, there is an inverse relationship
between price and quantity demanded.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 6
The Law of Demand
uWhat accounts for the law of demand?
uPeople tend to substitute for goods
whose price has gone up
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 7
The Demand Curve
uThe demand curve is the graphic
representation of the law of demand.
uThe demand curve slopes downward
and to the right.
l As the price goes up, the quantity
demanded goes down.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 8
The Demand Curve
uThe slope tells us that quantity
demanded varies indirectly—in the
opposite direction—with price.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 9
Other Things Constant
uOther things constant means that all
other factors that affect the analysis are
assumed to remain constant, whether
they actually remain constant or not.
uThese factors may include changing
tastes, prices of other goods, even the
weather.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 10
D
P
ric
e
(p
er
u
ni
t)
0
Quantity demanded (per unit of time)
PA
QA
A
A Sample Demand Curve
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 11
Shifts in Demand Versus
Movements Along a Demand
Curve
uDemand refers to a schedule of
quantities of a good that will be bought
per unit of time at various prices, other
things constant.
uGraphically, it refers to the entire
demand curve.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 12
Shifts in Demand Versus
Movements Along a Demand
Curve
uQuantity demanded refers to a
specific amount that will be demand per
unit of time at a specific price.
uGraphically, it refers to a specific point
on the demand curve.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 13
Shifts in Demand Versus
Movements Along a Demand
Curve
uA movement along a demand curve is
the graphical representation of the
effect of a change in price on the
quantity demanded.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 14
Shifts in Demand Versus
Movements Along a Demand
Curve
uA shift in demand is the graphical
representation of the effect of anything
other than price on demand.
uThe original curve will move to the right
or to the left.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 15
Change in Quantity Demanded
0
D1
Change in quantity demanded
(a movement along the curve)
B
P
ric
e
(p
er
u
ni
t)
Quantity demanded (per unit of time)
100
$2
$1
200
A
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 16
D0
D1
Shift in Demand
P
ric
e
(p
er
u
ni
t)
Quantity demanded (per unit of time)
100
$2
$1
200
B A
Change in demand
(a shift of the curve)
250
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 17
Shift Factors of Demand
uShift factors of demand are those that
cause shifts in the demand curve to the
right or left.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 18
Shift Factors of Demand
uShift factors of demand include—but
are not limited—to the following:
l Society's income
l The prices of other goods
l Tastes
l Expectations
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 19
Shift Factors of Demand
uA rise in income will increase demand
for goods.
uWhen the prices of substitute goods
fall, you will consume less of the good
whose price has not changed.
uA change in taste will change demand
with no change in price.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 20
Shift Factors of Demand
u If you expect your income to rise, you
may consume more now.
u If you expect prices to fall in the future,
you may put off purchases today.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 21
The Demand Table
uThe demand table assumes all the
following:
l As price rises, quantity demanded
declines.
l Quantity demanded has a specific time
dimension to it.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 22
The Demand Table
uThe demand table assumes all the
following:
l All the products involved are identical in
shape, size, quality, etc.
l The schedule assumes that everything else
is held constant.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 23
From a Demand Table to a
Demand Curve
uYou plot each point in the demand table
on a graph and connect the points to
derive the demand curve.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 24
From a Demand Table to a
Demand Curve
uThe demand curve graphically conveys
the same information that is on the
demand table.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 25
From a Demand Table to a
Demand Curve
uThe curve represents the maximum
price that you will for various quantities
of a good—you will happily pay less.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 26
Pr
ice
p
er
c
as
se
tte
(i
n
do
lla
rs
)
A Demand Curve
Quantity of cassettes demanded (per week)
1 2 3 4 5 6 7 8 9 10 11 12
13
$
.50
0
E
D
C
BF
A
From a Demand Table to a
Demand Curve
Price per
cassette
A
B
C
D
E
A Demand Table
Cassette rentals
demanded per
week
$
9
8
6
4
2
Demand for
cassettes
G
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 27
Individual and Market
Demand Goods
uA market demand curve is the
horizontal sum of all individual demand
curves.
l This is determined by adding the
individual demand curves of all the
demanders.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 28
Individual and Market
Demand Goods
uReal world sellers do not add up
individual demand curves.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 29
Individual and Market
Demand Goods
uThey estimate total market demand for
their product which becomes smooth
and downward sloping curve.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 30
Individual and Market
Demand Goods
uThe demand curve is downward sloping
for the following reasons:
l At lower prices, existing demanders buy
more.
l At lower prices, new demanders enter the
market.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 31
From Individual Demands
to a Market
(1)
Price per
cassette
$.
(2)
Alice’s
demand
(3)
Bruce’s
demand
(2)
Cathy’s
demand
(3)
Market
demand
9
8
7
6
5
4
3
2
6
5
4
3
2
1
0
0
1
1
0
0
0
0
0
0
16
14
11
9
7
5
3
2
A
B
C
D
E
F
G
H
Quantity of cassettes demanded per week
2
Cathy Bruce Alice
D
A
C
E
F
G
$
0
Pr
ice
p
er
c
as
se
tte
(i
n
do
lla
rs
)
4 6 8 10 12 14 16
B
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 32
Supply
u Individuals control the factors of
production.
l Factors of production are the resources or
inputs, necessary to produce goods or
services.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 33
Supply
u Individuals supply factors of production
to intermediaries or firms.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 34
Supply
uThe analysis of the supply of produced
goods has two parts:
l An analysis of the supply of the factors of
production to households and firms.
l An analysis of why firms transform those
factors of production into usable goods and
services.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 35
The Law of Supply
uQuantity supplied rises as price rises,
other things constant.
uQuantity supplied falls as price falls,
other things constant.
uThus, there is a direct relationship
between price and quantity supplied.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 36
The Law of Supply
uThe law of supply is accounted for by
two factors:
l In the face of rising prices, firms arrange
their activities to supply more of the good to
the market, substituting production of that
good for the production of other goods.
l Assuming firms' costs are constant, a higher
price means higher profits.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 37
The Supply Curve
uThe supply curve is the graphic
representation of the law of supply.
uThe supply curve slopes upward to the
right.
uThe slope tells us that the quantity
supplied varies directly—in the same
direction—with the price.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 38
Quantity supplied (per unit of time)
0
S
A
P
ric
e
(p
er
u
ni
t)
PA
QA
A Sample Supply Curve
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 39
Shifts in Supply Versus
Movements Along a Supply
Curve
uSupply refers to a schedule of
quantities a seller is willing to sell per
unit of time at various prices, other
things constant.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 40
Shifts in Supply Versus
Movements Along a Supply
Curve
u If the amount supplied is affected by
anything other than a change in price,
there will be a shift in supply.
l Shift in supply -- the graphic
representation of the effect of a change in a
factor other than price on supply.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 41
Shifts in Supply Versus
Movements Along a Supply
Curve
uQuantity supplied refers to a specific
amount that will be supplied at a
specific price.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 42
Shifts in Supply Versus
Movements Along a Supply
Curve
uChanges in price causes changes in
quantity supplied represented by a
movement along a supply curve.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 43
Shift in Supply
P
ric
e
(p
er
u
ni
t)
Quantity supplied (per unit of time)
S0
Shift in Supply
(a shift of the curve)
S1
$15
A B
1,250 1,500
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 44
Change in quantity
supplied (a movement
along the curve)
Change in Quantity Supplied
P
ric
e
(p
er
u
ni
t)
Quantity supplied (per unit of time)
S0
$15
A
1,250 1,500
B
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 45
Shift Factors of Supply
uShift factors of supply are those factors
that cause shifts in the entire supply
curve to the left or right.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 46
Shift Factors of Supply
uThe following are shift factors of supply:
l Changes in the prices of inputs used in the
production of a good
l Changes in technology
l Changes in suppliers' expectations
l Changes in taxes and subsidies
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 47
Shift Factors of Supply
uChanges in the prices of inputs used in
the production of a good.
l If costs go up, then profits go down, and
the incentive to supply also goes down.
l If costs go up substantially, the firm may
even shut down.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 48
Shift Factors of Supply
uTechnology makes costs go down,
profits go up, thus the incentive to
supply also goes up.
l This is especially true when technology
replaces labor.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 49
Shift Factors of Supply
u If they expect prices to rise in the
future, suppliers may store today's
production for an expected windfall
If they expect prices to fall in the future,
suppliers may sell off more of their
inventories today.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 50
Shift Factors of Supply
u If taxes go up, costs also go up, and
profits go down, leading suppliers to
reduce output.
u If government subsidies go up, costs go
down, and profits go up, leading
suppliers to increase output.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 51
From a Supply Table to a
Supply Curve
uTo derive a supply curve from a supply
table, you plot each point in the supply
table on a graph and connect the points.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 52
From a Supply Table to a
Supply Curve
uThe supply curve represents the set of
minimum prices an individual seller will
accept for various quantities of a good.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 53
From a Supply Table to a
Supply Curve
uCompeting suppliers’ entry into the
market places a limit on the price any
supplier can charge.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 54
Individual and Market
Supply Curves
uThe market supply curve is derived by
horizontally adding the individual supply
curves of each supplier.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 55
From Individual Supplies to
a Market Supply
Quantities
Supplied
A
B
C
D
E
F
G
H
I
(1)
Price
(in dollars)
(2)
Ann's
Supply
(5)
Market
Supply
(4)
Charlie's
Supply
$
0
1
2
3
4
5
6
7
8
0
0
1
2
3
4
5
5
5
0
0
0
0
0
0
0
2
2
0
1
3
5
7
9
11
14
15
(3)
Barry's
Supply
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 56
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
From Individual Supplies to
a Market Supply
P
ric
e
pe
r
ca
ss
et
te
(
in
d
ol
la
rs
)
Charlie Barry Ann
Quantity of cassettes supplied (per week)
$
0
I
H
G
F
E
D
C
B
A
Market Supply
CA
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 57
The Marriage of Supply and
Demand
uThe English historian Thomas Carlyle
once said:
“Teach any parrot the words supply and
demand and you’ve got an economist.”
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 58
The Dynamic Laws of
Supply and Demand
uSupply and demand come together to
determine equilibrium quantity and
equilibrium price.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 59
Excess Supply and Excess
Demand
uExcess supply – prices tend to fall if
quantity supplied is greater than
quantity demanded.
uExcess demand – prices tend to rise if
quantity demanded is greater than
quantity supplied.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 60
Price Adjusts
uThe larger the difference between
quantity demanded and quantity
supplied, the greater the pressure for
prices to rise (if there is excess
demand) or fall (if there is excess
supply.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 61
Price Adjusts
uWhen quantity demanded equals
quantity supplied, prices have no
tendency to change.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 62
A
The Marriage of Supply and
Demand
P
ric
e
pe
r
ca
ss
et
te
(
in
d
ol
la
rs
) $
S
D
Quantity of cassettes supplied and demanded
(per week)
C
Excess demand
1 2 3 4 5 6 7 8 9 10 11 12
Excess supply
Excess supply
B
E
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 63
Equilibrium
uEquilibrium is a concept in which
opposing dynamic forces pushing
cancel each other out.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 64
Equilibrium
u In supply and demand analysis,
equilibrium means that the upward
pressure on price is exactly offset by the
downward pressure on price.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 65
Equilibrium
uEquilibrium price is the price toward
which the invisible hand drives the
market.
uEquilibrium quantity is the amount
bought and sold at the equilibrium price.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 66
Equilibrium Isn't:
uA state of the world—it's a
characteristic of the model used to look
at the world.
u Inherently good or bad—but simply a
state in which dynamic pressures offset
each other.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 67
Desirable Characteristics of
Supply/Demand Equilibrium
uConsumer surplus – the distance
between the demand curve and the
price the demander pays is net benefit
to consumers.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 68
Desirable Characteristics of
Supply/Demand Equilibrium
uProducer surplus – if a producer
receives more than the price he would
be willing to sell it for, he receives a net
benefit.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 69
Desirable Characteristics of
Supply/Demand Equilibrium
uWhat's good about equilibrium is that it
makes the combination of consumer
and producer surplus as large as it can
be.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 70
Desirable Characteristics of
Supply/Demand Equilibrium
uMarkets allow trade, thereby leading to
an increase in the combination of
consumer and producer surplus.
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
4 - 71
Consumer and Producer
Surplus
P
ric
e
Supply
Demand
Quantity
0
$10
9
8
7
6
5
4
3
2
1
10987654321
Producer
Surplus
Consumer Surplus
Lost
Surplus
Copyright © 2001 by The McGraw-Hill Companies, Inc. All rights -Hill/Irwin
Supply and Demand
End of Chapter 4
