Chapter 3

Supply
Supply and
and Demand
Demand

The Law of Demand

The
The law
law of
of demand
demand holds
holds that
that other
other things
things
equal,
equal, as
as the
the price
price of
of aa good
good or
or service
service rises,
rises, its
its
quantity
quantity demanded
demanded falls.
falls.
The
The reverse
reverse isis also
also true:
true: as
as the
the price
price of
of aa good
good or
or
service
service falls,
falls, its
its quantity
quantity demanded
demanded increases.
increases.

Demand Curve

The
The demand
demand curve
curve has
has aa negative
negative slope,
slope, consistent
consistent with
with
the
the law
law of
of demand.
demand.

The Law of Supply

The
The law
law of
of supply
supply holds
holds that
that other
other things
things equal,
equal,
as
as the
the price
price of
of aa good
good rises,
rises, its
its quantity
quantity
supplied
supplied will
will rise,
rise, and
and vice
vice versa.
versa.
Why
Why do
do producers
producers produce
produce more
more output
output when
when
prices
prices rise?
rise?
They
They seek
seek higher
higher profits
profits
They
They can
can cover
cover higher
higher marginal
marginal costs
costs of
of production
production

Supply Curve

The
The supply
supply curve
curve has
has aa positive
positive slope,
slope, consistent
consistent with
with
the
the law
law of
of supply.
supply.

Equilibrium
In
In economics,
economics, an
an equilibrium
equilibrium isis aa situation
situation in
in
which:
which:
there
there isis no
no inherent
inherent tendency
tendency to
to change,
change,
quantity
quantity demanded
demanded equals
equals quantity
quantity supplied,
supplied,and
and
the
the market
market just
just clears.
clears.

Equilibrium

Equilibrium
Equilibriumoccurs
occursatataaprice
priceof
of$3
$3 and
andaaquantity
quantity of
of30
30
units.
units.

Shortages and Surpluses

A
Ashortage
shortage occurs
occurs when
when quantity
quantity demanded
demanded
exceeds
exceeds quantity
quantity supplied.
supplied.
A
Ashortage
shortage implies
implies the
the market
market price
price isis too
too low.
low.

A
Asurplus
surplus occurs
occurs when
when quantity
quantity supplied
supplied
exceeds
exceeds quantity
quantity demanded.
demanded.
A
Asurplus
surplus implies
implies the
the market
market price
price isis too
too high.
high.

Shift in the Demand Curve

A
Achange
change in
in any
any variable
variable other
other than
than price
price that
that
influences
influences quantity
quantity demanded
demanded produces
produces aa shift
shift in
in
the
the demand
demand curve
curve or
or aa change
change in
in demand.
demand.
Factors
Factors that
that shift
shift the
the demand
demand curve
curve include:
include:
Change
Change in
inconsumer
consumerincomes
incomes
Population
Populationchange
change
Consumer
Consumerpreferences
preferences
Prices
Pricesof
ofrelated
relatedgoods:
goods:

Substitutes:
Substitutes: goods
goodsconsumed
consumedin
inplace
placeof
ofone
oneanother
another
Complements:
Complements: goods
goodsconsumed
consumedjointly
jointly

Shift in the Demand Curve

This
This demand
demand curve
curve has
has shifted
shifted to
to the
the right.
right. Quantity
Quantity
demanded
demanded isis now
now higher
higher at
at any
any given
given price.
price.

Equilibrium After a Demand Shift

The
The shift
shift in
in the
the demand
demand curve
curve moves
moves the
the market
market
equilibrium
equilibriumfrom
from point
pointA
Ato
to point
point B,
B, resulting
resulting in
in aa higher
higher
price
price and
and higher
higher quantity.
quantity.

Shift in the Supply Curve

A
Achange
change in
in any
any variable
variable other
other than
than price
price that
that
influences
influences quantity
quantity supplied
supplied produces
produces aa shift
shift in
in
the
the supply
supply curve
curve or
or aa change
change in
in supply.
supply.
Factors
Factors that
that shift
shift the
the supply
supply curve
curve include:
include:
Change
Change in
in input
input costs
costs
Increase
Increase in
in technology
technology
Change
Change in
in size
size of
of the
the industry
industry

Shift in the Supply Curve

For
For an
an given
given rental
rental price,
price, quantity
quantity supplied
supplied isis now
now lower
lower
than
than before.
before.

Equilibrium After a Supply Shift

The
Theshift
shiftin
inthe
thesupply
supplycurve
curvemoves
movesthe
themarket
marketequilibrium
equilibriumfrom
from
point
pointAAto
topoint
pointB,
B,resulting
resultingin
inaahigher
higherprice
priceand
andlower
lowerquantity.
quantity.

Price Ceilings & Floors

A
Aprice
price ceiling
ceiling isis aa legal
legal maximum
maximum that
that can
can be
be
charged
charged for
for aa good.
good.
Results
Results in
in aa shortage
shortage of
of aa product
product
Common
Common examples
examples include
include apartment
apartment rentals
rentals and
and
credit
credit cards
cards interest
interest rates.
rates.

A
Aprice
price floor
floor isis aa legal
legal minimum
minimum that
that can
can be
be
charged
charged for
for aa good.
good.
Results
Results in
in aa surplus
surplus of
of aa product
product
Common
Common examples
examples include
include soybeans,
soybeans, milk,
milk,
minimum
minimumwage
wage

Price Ceiling

AAprice
priceceiling
ceilingisisset
setatat$2
$2resulting
resultingin
inaashortage
shortageof
of20
20
units.
units.

Price Floor

AAprice
pricefloor
floorisisset
setatat$4
$4resulting
resultingin
inaasurplus
surplusof
of20
20
units.
units.