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Demand, Supply,and Market

Equilibrium

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Demand

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quantity demandedThe amount (number of units)

of a product that a householdwould buy in a given period if it

could buy all it wanted at thecurrent market price.

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The most important relationship inindividual markets is that between

market price and quantity demanded.

CHANGES IN QUANTITY DEMANDEDVERSUS CHANGES IN DEMAND

Price Demand

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PRICE AND QUANTITY DEMANDED:THE LAW OF DEMAND

demand scheduleA table showinghow much of a

given product ahousehold wouldbe willing to buy at

different prices.

TABLE 3.1 Annas Demand Schedulefor Telephone Calls

PRICE (PER CALL)QUANTITY DEMANDED(CALLS PER MONTH)

$ 0 30

.50 25

3.50 77.00 3

10.00 1

15.00 0

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TABLE 3.1 Annas Demand Schedulefor Telephone Calls

PRICE (PER CALL)QUANTITY DEMANDED(CALLS PER MONTH)

$ 0 30

.50 25

3.50 7

7.00 3

10.00 1

15.00 0

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law of demand Negative relationship between

price and quantity demanded

Demand Curves Slope Downward

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To summarize what we know about the shape ofdemand curves:

1. They have a negative slope.

2. They intersect the quantity (X-) axis, a result oftime limitations and diminishing marginal utility.

3. They intersect the price (Y-) axis, a result oflimited incomes and wealth.

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DEMAND IN PRODUCT/OUTPUT MARKETS

OTHER DETERMINANTS OF HOUSEHOLD DEMAND

income The sum of all a households wages,salaries, profits, interest payments, rents, andother forms of earnings in a given period oftime. It is a flow measure.

Income and Wealth

wealth or net worth The total value of whata household owns minus what it owes. It is astock measure.

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normal goods Goods for whichdemand goes up when income ishigher and for which demand goesdown when incomeis lower.

inferior goods Goods for which

demand tends to fall when incomerises.

Income and Wealth

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Prices of Other Goods and Services

substitutes Goods that can serve asreplacements for one another: when the price of

one increases, demand for the other goes up.

perfect substitutes Identical products.

complements, complementary goods Goodsthat go together: a decrease in the price of one

results in an increase in demand for the other, and

vice versa.

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Tastes and Preferences

Expectations

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SHIFT OF DEMAND VERSUSMOVEMENT ALONG A DEMAND

CURVEIncome and Wealth

Prices of Other Goodsand Services

Tastes and Preferences

Expectations

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Change in price of a good or serviceleads to

Change in quantity demanded(movement along

the demand curve).

Change in income, preferences, or prices of othergoods or services

leads toChange in demand(shift of the demand curve).

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FROM HOUSEHOLD DEMAND TOMARKET DEMAND

market demand The sum of all the

quantities of a good or service demandedper period by all the households buying in

the market for that good or service.

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SUPPLY IN PRODUCT/OUTPUT MARKETS

profit The difference between revenues andcosts.

Successful firms make profits because they are

able to sell their products for more than itcosts to produce them.

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quantity suppliedThe amount of a particular

product that a firm would bewilling and able to offer for sale

at a particular price during agiven time period.

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law of supply The positive relationshipbetween price and quantity of a good

supplied:

Price Demand

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TABLE 3.3 Clarence Browns Supply Schedule forSoybeans

PRICE (PER BUSHEL)QUANTITY SUPPLIED

(BUSHELS PER MONTH)

$1.50 0

1.75 10,000

2.25 20,000

3.00 30,000

4.00 45,000

5.00 45,000

supply schedule A table showing howmuch of a product firms will sell at differentprices.

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supply curve A graph illustratinghow much of a product a firm will sellat different prices.

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OTHER DETERMINANTS OF SUPPLY

The Cost of Production

Regardless of the price that a firm can

command for its product, revenue must exceedthe cost of producing the output for the firm to

make a profit.

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SHIFT OF SUPPLY VERSUS MOVEMENT ALONG ASUPPLY CURVE

movement along a supply curve Thechange in quantity supplied brought about

by a change in price.

shift of a supply curve The change thattakes place in a supply curve corresponding

to a new relationship between quantitysupplied of a good and the price of that good.

The shift is brought about by a change in theoriginal conditions.

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TABLE 3.4 Shift of Supply Schedule for SoybeansFollowing Development of a New Disease-

Resistant Seed Strain

SCHEDULE D0 SCHEDULE D1

Price(Per Bushel)

Quantity Supplied

(Bushels Per YearUsing Old Seed)

Quantity Supplied

(Bushels Per YearUsing New Seed)

$1.50 0 5,000

1.75 10,000 23,000

2.25 20,000 33,000

3.00 30,000 40,000

4.00 45,000 54,000

5.00 45,000 54,000

FIGURE 3.7 Shift of Supply Curve for SoybeansFollowing Development of a New SeedStrain

SHIFT OF SUPPLY VERSUS

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SHIFT OF SUPPLY VERSUSMOVEMENT ALONG A DEMANDCURVE

The Cost of Production

Prices of Related

Products

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Change in price of a good or serviceleads to

Change in quantity supplied(movement along a supply curve).

Change in income, preferences, or prices of other goods or servicesleads to

Change in supply(shift of a supply curve).

As with demand, it is very important todistinguish between movements along supply

curves (changes in quantity supplied) and shifts

in supply curves (changes in supply):

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FROM INDIVIDUAL SUPPLY TO MARKET SUPPLY

market supply The sum of all that is

supplied each period by all producers of asingle product.

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FIGURE 3.8 Deriving Market Supply from Individual Firm Supply Curves

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MARKET EQUILIBRIUM

equilibrium The condition that exists whenquantity supplied and quantity demanded

are equal. At equilibrium, there is notendency for price to change.

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MARKET EQUILIBRIUM

EXCESS DEMANDexcess demand or shortage The conditionthat exists when quantity demanded exceedsquantity supplied at the current price.

Bidding at an auction starts with

excess demand and ends up withquantity demanded and quantitysupplied equal.

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MARKET EQUILIBRIUM

FIGURE 3.9 Excess Demand, or Shortage

When quantity demanded exceeds quantity supplied, price tends to rise. When the price in a marketrises, quantity demanded falls and quantity supplied rises until an equilibrium is reached at which

quantity demanded and quantity supplied are equal.

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MARKET EQUILIBRIUM

EXCESS SUPPLY

excess supply or surplus The conditionthat exists when quantity supplied exceeds

quantity demanded at the current price.

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MARKET EQUILIBRIUM

FIGURE 3.10 Excess Supply, or Surplus

When quantity supplied exceeds quantity demanded at the current price, the price tends to fall. Whenprice falls, quantity supplied is likely to decrease and quantity demanded is likely to increase until an

equilibrium price is reached where quantity supplied and quantity demanded are equal.

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MARKET EQUILIBRIUM

CHANGES IN EQUILIBRIUM

When supply and demand curves shift, the

equilibrium price and quantity change.

FIGURE 3.11 The Coffee Market: A Shift ofSupply and Subsequent Price

Adjustment

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MARKET EQUILIBRIUM

FIGURE 3.12 Examples of Supply and

Demand Shifts forProduct X

case econ08 03

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