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Why did the price of coffee rise in 2014?
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Demand and Supply
4
CHAPTER CHECKLIST
When you have completed your
study of this chapter, you will be able to
1 Distinguish between quantity demanded and demand,
and explain what determines demand.
2 Distinguish between quantity supplied and supply, and
explain what determines supply.
3 Explain how demand and supply determine price and
quantity in a market, and explain the effects of changes
in demand and supply.
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COMPETITIVE MARKETS
A market is any arrangement that brings buyers and
sellers together.
A market might be a physical place or a group of
buyers and sellers spread around the world who never
meet.
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COMPETITIVE MARKETS
In this chapter, we study a competitive market that has
so many buyers and so many sellers that no individual
buyer or seller can influence the price.
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4.1 DEMAND
Quantity demanded is the amount of a good, service,
or resource that people are willing and able to buy during
a specified period at a specified price.
The quantity demanded is an amount per unit of time.
For example, the amount per day or per month.
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4.1 DEMAND
The Law of Demand
Other things remaining the same,
• If the price of the good rises, the quantity demanded
of that good decreases.
• If the price of the good falls, the quantity demanded of
that good increases.
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4.1 DEMAND
Demand Schedule and Demand Curve
Demand is the relationship between the quantity
demanded and the price of a good when all other
influences on buying plans remain the same.
Demand is illustrated by a demand schedule and a
demand curve.
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4.1 DEMAND
Demand schedule is a list of the quantities demanded
at each different price when all the other influences on
buying plans remain the same.
Demand curve is a graph of the relationship between
the quantity demanded of a good and its price when all
other influences on buying plans remain the same.
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4.1 DEMAND
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4.1 DEMAND
Individual Demand and Market Demand
Market demand is the sum of the demands of all the
buyers in a market.
The market demand curve is the horizontal sum of the
demand curves of all buyers in the market.
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4.1 DEMAND
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4.1 DEMAND
Changes in Demand
Change in demand is a change in the quantity that
people plan to buy when any influence other than the
price of the good changes.
A change in demand means that there is a new demand
schedule and a new demand curve.
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4.1 DEMAND
Figure 4.3 shows
changes in demand.
1. When demand
decreases, the
demand curve
shifts leftward
from D0 to D1.
2. When demand
increases, the
demand curve
shifts rightward
from D0 to D2.
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4.1 DEMAND
The main influences on buying plans that change
demand are
• Prices of related goods
• Expected future prices
• Income
• Expected future income and credit
• Number of buyers
• Preferences
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4.1 DEMAND
Prices of Related Goods
A substitute is a good that can be consumed in place
of another good.
For example, apples and oranges are substitutes.
The demand for a good increases if the price of one of
its substitutes rises.
The demand for a good decreases if the price of one of
its substitutes falls.
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4.1 DEMAND
A complement is a good that is consumed with
another good.
For example, ice cream and fudge sauce are
complements.
The demand for a good increases if the price of one of
its complements falls.
The demand for a good decreases if the price of one of
its complements rises.
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4.1 DEMAND
Expected Future Prices
A rise in the expected future price of a good increases
the current demand for that good.
A fall in the expected future price of a good decreases
current demand for that good.
For example, if the price of a computer is expected to fall
next month, the demand for computers today decreases.
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4.1 DEMAND
Income
A normal good is a good for which the demand
increases if income increases and demand decreases if
income decreases.
An inferior good is a good for which the demand
decreases if income increases and demand increases if
income decreases.
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4.1 DEMAND
Expected Future Income and Credit
When income is expected to increase in the future, or
when credit is easy to get and the cost of borrowing is
low, the demand for some goods increases.
When income is expected to decrease in the future, or
when credit is hard to get and the cost of borrowing is
high, the demand for some goods decreases.
Changes in expected future income and the availability
and cost of credit has the greatest effect on the demand
for big ticket items such as homes and cars.
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4.1 DEMAND
Number of Buyers
The greater the number of buyers in a market, the larger
is the demand for any good.
Preferences
When preferences change, the demand for one item
increases and the demand for another item (or items)
decreases.
Preferences change when:
• People become better informed.
• New goods become available.
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4.1 DEMAND
Change in Quantity Demanded Versus
Change in Demand
A change in the quantity demanded is a change in
the quantity of a good that people plan to buy that results
from a change in the price of the good.
A change in demand is a change in the quantity that
people plan to buy when any influence other than the
price of the good changes.
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4.1 DEMAND
Figure 4.4 illustrates and summarizes the distinction.
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4.2 SUPPLY
Quantity supplied is the amount of a good, service, or
resource that people are willing and able to sell during a
specified period at a specified price.
The Law of Supply
Other things remaining the same,
• If the price of a good rises, the quantity supplied of
that good increases.
• If the price of a good falls, the quantity supplied of that
good decreases.
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4.2 SUPPLY
Supply Schedule and Supply Curve
Supply is the relationship between the quantity
supplied of a good and the price of the good when all
other influences on selling plans remain the same.
Supply is illustrated by a supply schedule and a supply
curve.
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4.2 SUPPLY
A supply schedule is a list of the quantities supplied
at each different price when all other influences on
selling plans remain the same.
A supply curve is a graph of the relationship between
the quantity supplied and the price of the good when all
other influences on selling plans remain the same.
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4.2 SUPPLY
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4.2 SUPPLY
Individual Supply and Market Supply
Market supply is the sum of the supplies of all sellers
in a market.
The market supply curve is the horizontal sum of the
supply curves of all the sellers in the market.
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4.2 SUPPLY
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4.2 SUPPLY
Changes in Supply
A change in supply is a change in the quantity that
suppliers plan to sell when any influence on selling plans
other than the price of the good changes.
A change in supply means that there is a new supply
schedule and a new supply curve.
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4.2 SUPPLY
Figure 4.7 shows
changes in supply.
1. When supply
decreases, the
supply curve
shifts leftward
from S0 to S1.
2. When supply
increases, the
supply curve
shifts rightward
from S0 to S2.
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4.2 SUPPLY
The main influences on selling plans that change
supply are
• Prices of related goods
• Prices of resources and other inputs
• Expected future prices
• Number of sellers
• Productivity
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4.2 SUPPLY
Prices of Related Goods
A change in the price of one good can bring a change in
the supply of another good.
A substitute in production is a good that can be
produced in place of another good.
For example, a truck and an SUV are substitutes in
production in an auto factory.
• The supply of a good increases if the price of one of
its substitutes in production falls.
• The supply a good decreases if the price of one of its
substitutes in production rises.
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4.2 SUPPLY
A complement in production is a good that is
produced along with another good.
For example, cream is a complement in production of
skim milk in a dairy.
• The supply of a good increases if the price of one of
its complements in production rises.
• The supply a good decreases if the price of one of its
complements in production falls.
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4.2 SUPPLY
Prices of Resources and Other Inputs
Resource and input prices influence the cost of
production. And the more it costs to produce a good, the
smaller is the quantity supplied of that good.
Expected Future Prices
Expectations about future prices influence supply.
Expectations of future prices of resources also influence
supply.
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4.2 SUPPLY
Number of Sellers
The greater the number of sellers in a market, the larger
is supply.
Productivity
Productivity is output per unit of input.
An increase in productivity lowers costs and increases
supply. For example, an advance in technology
increases supply.
A decrease in productivity raises costs and decreases
supply. For example, a severe hurricane decreases
supply.
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4.2 SUPPLY
Change in Quantity Supplied Versus Change
in Supply
A change in quantity supplied is a change in the
quantity of a good that suppliers plan to sell that results
from a change in the price of the good.
A change in supply is a change in the quantity that
suppliers plan to sell when any influence on selling plans
other than the price of the good changes.
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4.2 SUPPLY
Figure 4.8 illustrates and summarizes the distinction.
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4.3 MARKET EQUILIBRIUM
Market equilibrium occurs when the quantity
demanded equals the quantity supplied.
At market equilibrium, buyers’ and sellers’ plans are
consistent.
Equilibrium price is the price at which the quantity
demanded equals the quantity supplied.
Equilibrium quantity is the quantity bought and sold
at the equilibrium price.
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4.3 MARKET EQUILIBRIUM
Figure 4.9 shows the
equilibrium price and
equilibrium quantity.
1. Market equilibrium at
the intersection of the
demand curve and
the supply curve.
2. The equilibrium price
is $1 a bottle.
3. The equilibrium
quantity is10 million
bottles a day.
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4.3 MARKET EQUILIBRIUM
Price: A Market’s Automatic Regulator
Law of market forces
• When there is a shortage, the price rises.
• When there is a surplus, the price falls.
Shortage occurs when the quantity demanded exceeds
the quantity supplied.
Surplus occurs when the quantity supplied exceeds the
quantity demanded.
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4.3 MARKET EQUILIBRIUM
Figure 4.10(a) achieves
market equilibrium.
At $1.50 a bottle:
1. Quantity supplied is 11
million bottles.
2. Quantity demanded is
9 million bottles.
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4.3 MARKET EQUILIBRIUM
3. There is a surplus of 2
million bottles.
4. Price falls until the
surplus is eliminated
and the market is in
equilibrium.
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4.3 MARKET EQUILIBRIUM
Figure 4.10(b) achieves
market equilibrium.
At 75 cents a bottle:
1. Quantity demanded is
11 million bottles.
2. Quantity supplied is 9
million bottles.
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4.3 MARKET EQUILIBRIUM
3. There is a shortage of
2 million bottles.
4. Price rises until the
shortage is eliminated
and the market is in
equilibrium.
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4.3 MARKET EQUILIBRIUM
Predicting Price Changes: Three Questions
We can work out the effects of an event by answering:
[Link] the event change demand or supply?
[Link] the event increase or decrease demand or supply—
shift the demand curve or the supply curve rightward or
leftward?
[Link] are the new equilibrium price and equilibrium
quantity and how have they changed?
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4.3 MARKET EQUILIBRIUM
Effects of Changes in Demand
Event: A new study says that tap water is unsafe.
In the market for bottled water:
[Link] tap water unsafe, demand for bottled water changes.
[Link] demand for bottled water increases, the demand curve
shifts rightward.
[Link] are the new equilibrium price and equilibrium
quantity and how have they changed?
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4.3 MARKET EQUILIBRIUM
Figure 4.11(a)
illustrates the outcome.
1. An increase in
demand shifts the
demand curve
rightward.
2. At $1.00 a bottle,
there is a shortage,
so the price rises.
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4.3 MARKET EQUILIBRIUM
3. The quantity supplied
increases along the
supply curve.
4. Equilibrium quantity
increases.
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4.3 MARKET EQUILIBRIUM
Event: A new zero-calorie sports drink is invented.
In the market for bottled water:
[Link] new drink is a substitute for bottled water, so the
demand for bottled water changes
[Link] demand for bottled water decreases and the demand
curve shifts leftward.
[Link] are the new equilibrium price and equilibrium
quantity and how have they changed?
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4.3 MARKET EQUILIBRIUM
Figure 4.11(b) shows the
outcome.
1. A decrease in
demand shifts the
demand curve
leftward.
2. At $1.00 a bottle,
there is a surplus, so
the price falls.
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4.3 MARKET EQUILIBRIUM
3. Quantity supplied
decreases along the
supply curve.
4. Equilibrium quantity
decreases.
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4.3 MARKET EQUILIBRIUM
When demand changes:
• The supply curve does not shift.
• But there is a change in the quantity supplied.
• Equilibrium price and equilibrium quantity change in
the same direction as the change in demand.
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4.3 MARKET EQUILIBRIUM
Effects of Changes in Supply
Event: European water bottlers buy springs and open
plants in the United States.
In the market for bottled water:
[Link] more suppliers of bottled water, supply changes.
[Link] supply of bottled water increases and the supply curve
shifts rightward.
[Link] are the new equilibrium price and equilibrium
quantity and how have they changed?
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4.3 MARKET EQUILIBRIUM
Figure 4.12(a) shows
the outcome.
1. An increase in supply
shifts the supply
curve rightward.
2. At $1 a bottle, there
is a surplus, so the
price falls.
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4.3 MARKET EQUILIBRIUM
3. Quantity demanded
increases along the
demand curve.
4. Equilibrium quantity
increases.
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4.3 MARKET EQUILIBRIUM
Event: Drought dries up some springs in the United
States.
In the market for bottled water:
[Link] changes the supply of bottled water.
[Link] supply of bottled water decreases and the supply curve
shifts leftward.
[Link] are the new equilibrium price and equilibrium
quantity and how have they changed?
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4.3 MARKET EQUILIBRIUM
Figure 4.12(b) shows
the outcome.
1. A decrease in supply
shifts the supply
curve leftward.
2. At $1.00 a bottle,
there is a shortage,
so the price rises.
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4.3 MARKET EQUILIBRIUM
3. Quantity demanded
decreases along the
demand curve.
4. Equilibrium quantity
decreases.
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4.3 MARKET EQUILIBRIUM
When supply changes:
• The demand curve does not shift.
• But there is a change in the quantity demanded.
• Equilibrium price changes in the opposite direction to
the change in supply.
• Equilibrium quantity changes in the same direction as
the change in supply.
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4.3 MARKET EQUILIBRIUM
Changes in Both Demand and Supply
When two events occur at the same time, work out how
each event influences the market:
[Link] each event change demand or supply?
[Link] either event increase or decrease demand or increase
or decrease supply?
[Link] are the new equilibrium price and equilibrium
quantity and how have they changed?
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4.3 MARKET EQUILIBRIUM
Figure 4.13(a) shows the
effects of an increase in
both demand and supply.
1. An increase in demand
shifts the demand curve
rightward. An increase
in supply shifts the
supply curve rightward.
2. Equilibrium price might
rise, fall, or not change.
3. Equilibrium quantity
increases.
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4.3 MARKET EQUILIBRIUM
Increase in Both Demand and Supply
Increases the equilibrium quantity.
The change in the equilibrium price is ambiguous
because the:
• Increase in demand raises the price.
• Increase in supply lowers the price.
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4.3 MARKET EQUILIBRIUM
Figure 4.13(b) shows the
effects of a decrease in
both demand and supply.
1. A decrease in demand
shifts the demand curve
leftward. A decrease in
supply shifts the supply
curve leftward.
2. Equilibrium price might
rise, fall or not change.
3. Equilibrium quantity
decreases.
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4.3 MARKET EQUILIBRIUM
Decrease in Both Demand and Supply
Decreases the equilibrium quantity.
The change in the equilibrium price is ambiguous
because the:
• Decrease in demand lowers the price
• Decrease in supply raises the price.
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4.3 MARKET EQUILIBRIUM
Figure 4.14(a) shows the
effects of a decrease in
demand and an increase
in supply.
1. A decrease in
demand shifts the
demand curve
leftward. An increase
in supply shifts the
supply curve
rightward.
2. Equilibrium price falls.
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4.3 MARKET EQUILIBRIUM
3. Equilibrium quantity
might increase,
decrease or not
change.
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4.3 MARKET EQUILIBRIUM
Decrease in Demand and Increase in Supply
Lowers the equilibrium price.
The change in the equilibrium quantity is ambiguous
because the:
• Decrease in demand decreases the quantity.
• Increase in supply increases the quantity.
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4.3 MARKET EQUILIBRIUM
Figure 4.14(b) shows the
effects of an increase in
demand and a decrease
in supply.
1. An increase in
demand shifts the
demand curve
rightward. A decrease
in supply shifts the
supply curve leftward.
2. Equilibrium price rises.
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4.3 MARKET EQUILIBRIUM
3. Equilibrium quantity
might increases,
decrease or not
change.
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4.3 MARKET EQUILIBRIUM
Increase in Demand and Decrease in Supply
Raises the equilibrium price.
The change in the equilibrium quantity is ambiguous
because the:
• Increase in demand increases the quantity.
• Decrease in supply decreases the quantity.
© 2018 Pearson
EYE on the PAST
When a fungus called coffee rust swept though Brazil
and other countries of South America in 2014, world
coffee production decreased and the price of coffee
beans increased.
The table provides some data
on the quantity and price of
coffee in 2013 and 2014.
The table tells us that the
quantity of coffee decreased
in 2014 and the price rose.
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EYE on the PAST
Did the price rise because demand increased?
Or did the price rise because supply decreased?
You know that when demand increases, the price rises, and
the quantity bought increases.
You also know that when supply decreases, the price rises
and the quantity bought decreases.
So: Did the demand for coffee increase? Or did the supply
of coffee decrease?
Because the quantity bought decreased when the price
rose in 2014, the supply of coffee decreased in 2014.
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EYE on the PAST
The figure shows the market
for coffee in 2013 & 2014.
The price was $1.04 a pound
and 19.4 billion pounds were
bought in 2013.
In 2014, supply decreased.
The price rose to $1.35 a
pound and 18.7 billion pounds
were bought.
The quantity demanded
decreased along the demand
curve.
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