CHAPTER 3

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 Why is this
chapter important?

It introduces basic
supply and demand
analysis.
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 What is the law of
demand?

The principle that there is an

inverse relationship between
the price of a good and the
quantity buyers are willing to
purchase in a defined time
period, ceteris paribus
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 EXHIBIT 1

Demand Schedule and Demand Curve

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What is a demand curve?
A curve that shows
the quantities of a
good or service that
people are willing
and able to buy at
different prices
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 Why does a demand
curve
have a negative slope?

As the price per unit of a good or service falls,

buyers can afford to buy more units per period
of time.

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 3-1 What is Demand? (3 of 9)

● 3-1c Why Does Quantity Demanded Go Down as

Price Goes Up?
• Law of Diminishing Marginal Utility: Over a
given period, the marginal (or additional) utility
or satisfaction gained by consuming equal
successive units of a good will decline as the
amount consumed increases
• Why?
• People substitute lower priced goods for higher
priced goods
• Because of the law of diminishing marginal
utility 7

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 3-1 What is Demand? (4 of 9)

● 3-1d Individual Demand Curve & Market Demand

Curve
• There is a difference between these two demand
curves:
• An individual demand curve represents the
price-quantity combinations of a particular
good for a single buyer
• A market demand curve represents the price-
quantity combinations of a good for all buyers;
the curve is derived by “adding up” individual
demand curves, as shown in Exhibit 2
8

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What is market demand?

The summation of the

individual demand
schedules in a market

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 EXHIBIT 2 Market Demand Schedule for Blu-
Rays

Quantity demanded per year

Price per Blu-ray Fred + Mary = Total demand
$25 1 0 1
20 2 1 3
15 3 3 6
10 4 5 9
5 5 7 12

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 EXHIBIT 2 The Market Demand Curve for Blu-
Rays

Fred’s demand curve + Mary’s demand curve = Market demand curve

Price per Blu-ray

20 20 20
(dollars)

D1 D2 Dtotal
5 5 5

0 2 5 0 1 7 0 3 12
Quantity of Quantity of Quantity of
Blu-rays Blu-rays Blu-rays
(per year) (per year) (per year)

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 EXHIBIT 5
A Change in Demand versus a Change in Quantity
Demanded

12

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 When price changes,
what is the effect on the
demand curve?

The demand curve does not shift, and there is a

change in quantity demanded.

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 EXHIBIT 3 Movement along a Demand Curve
versus
(a)aIncrease
Shift in Demand
in quantity demanded
(slide 1 of 2)

20
A
Price per Blu-ray

15
(dollars)

B
10
D
5

0 10 20 30 40 50
Quantity of Blu-rays
(millions per year)
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 When a variable other
than price changes,
what is the effect on the
demand curve?

The whole demand curve shifts, and there is a

change in demand.

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 EXHIBIT 4 Terminology for Changes in Price
and Nonprice Determinants of Demand (slide 2 of
2)

Quantity of good or service per unit of time

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What causes a shift
in a demand curve?

• Number of buyers in the market

• Tastes and preferences
• Income
• Expectations of buyers
• Prices of related goods

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 What is a normal good?

Any good for which there is a direct relationship

between changes in income and its demand
curve

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 What does a direct
relationship between
price and quantity mean?

The two variables move in the same direction.

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What is an inferior good?

Any good for which there is an inverse

relationship between changes in income and its
demand curve

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 What does an inverse
relationship between
price and quantity mean?

The two variables move in opposite directions.

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 What is a substitute
good?

A good that competes with another good for

consumer purchases

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 What happens when the
price increases for a good
that has a substitute?

The demand curve for the substitute good

increases.

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What happens when the
price decreases for a
good that has a
substitute?

The demand curve for the substitute good

decreases.

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 What is a
complementary good?

A good that is jointly consumed with another

good

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 What happens when the
price increases for a good
that has a complement?

The demand curve for the complementary good

decreases.

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 What happens when the
price decreases for a
good that has a
complement?

The demand curve for the complementary good

increases.

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 EXHIBIT 5 Summary of the Impact of Changes
in Nonprice Determinants of Demand on the
Relationship
Nonprice Demand
to changes in Curve
Shift in the
(slide 1 of 7)
determinant demand demand
of demand curve curve Examples

1. Number Direct Price Immigration from

of buyers Mexico increases the
demand for Mexican
food products in
grocery stores.
D1 D2
0 Quantity
Price A decline in the
birthrate reduces the
demand for baby
clothes.
D2 D1
0 Quantity
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EXHIBIT 5 Summary of the Impact of Changes in
Nonprice Determinants of Demand on the Demand
Curve (slide 2 of 7)
Relationship
Nonprice to changes in Shift in the
determinant demand demand
of demand curve curve Examples

2. Tastes and Direct Price For no apparent

preferences reason, consumers
want Beanie Babies
and demand
increases.
D1 D2
0 Quantity
Price After a while, the fad
dies and demand
declines.

D2 D1
0 Quantity
© 2019 Cengage. All rights reserved.
 EXHIBIT 5 Summary of the Impact of Changes
in Nonprice Determinants of Demand on the
Relationship
Nonprice Demand
to changes in Curve
Shift in the
(slide 3 of 7)
determinant demand demand
of demand curve curve Examples

3. Income Direct Price Consumers’ incomes

increase, and the
a. Normal
demand for steaks
goods
increases.

D1 D2
0 Quantity
Price A decline in income
decreases the
demand for air travel.

D2 D1
0 Quantity
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 EXHIBIT 5 Summary of the Impact of Changes
in Nonprice Determinants of Demand on the
Relationship
Nonprice Demand
to changes in Curve
Shift in the
(slide 4 of 7)
determinant demand demand
of demand curve curve Examples

b. Inferior Inverse Price Consumers’ incomes

goods increase, and the
demand for
hamburgers
D2 D1 decreases.

0 Quantity

Price A decline in income

increases the demand
for bus service.

D1 D2
0 Quantity
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 EXHIBIT 5 Summary of the Impact of Changes
in Nonprice Determinants of Demand on the
Relationship
Nonprice Demand
to changes in Curve
Shift in the
(slide 5 of 7)
determinant demand demand
of demand curve curve Examples

4. Expectations Direct Price Consumers expect that

of buyers gasoline will be in short
supply next month and
that prices will rise
sharply. Consequently,
D1 D2 consumers fill the tanks
0 Quantity in their cars this month,
and there is an increase
Price in demand for gasoline.
Months later,
consumers expect the
price of gasoline to fall
D2 D1
soon, and the demand
0 Quantity for gasoline decreases.
© 2019 Cengage. All rights reserved.
 EXHIBIT 5 Summary of the Impact of Changes
in Nonprice Determinants of Demand on the
Relationship
Nonprice Demand
to changes in Curve
Shift in the
(slide 6 of 7)
determinant demand demand
of demand curve curve Examples

5. Prices of Direct Price A reduction in the

related price of tea
goods decreases the
demand for coffee.
a. Substitute
goods D1 D2
0 Quantity
Price An increase in the
price of airfares
causes higher demand
for bus transportation.
D2 D1
0 Quantity
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 EXHIBIT 5 Summary of the Impact of Changes
in Nonprice Determinants of Demand on the
Relationship
Nonprice Demand
to changes in Curve
Shift (slide
in the 7 of 7)
determinant demand demand
of demand curve curve Examples
b. Complementary Inverse Price A decline in the
goods price of cellular
service increases
the demand for
cell phones.
D1 D2

0 Quantity

Price A higher price for

peanut butter
decreases the
demand for jelly.

D2 D1
0 Quantity
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 What is the law of
supply?

The principle that there is a direct relationship

between the price of a good and the quantity
sellers are willing to offer for sale in a defined
time period, ceteris paribus

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 What is supply?

A curve or schedule showing the various

quantities of a product sellers are willing to
produce and offer for sale at possible prices
during a specified period of time, ceteris paribus

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 EXHIBIT 6 An Individual Seller’s Schedule for
Blu-Rays

Quantity supplied
Point Price per Blu-ray (thousands per
year)
A $20 50
B 15 45
C 10 35
D 5 20

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 EXHIBIT 6 An Individual Seller’s Supply Curve
for Blu-Rays
A
20
B
Price per Blu-rays

15
(dollars)

C
10
D
5
Supply curve

0 10 20 30 40 50
Quantity of Blu-rays
(thousands per year)
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Why does a supply curve
have a positive slope?

Only at a higher price will it be profitable for

sellers to incur the higher opportunity cost with
producing and supplying a larger quantity.

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 What is market supply?

The horizontal summation of all the quantities

supplied at various prices that might prevail in
the market

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 EXHIBIT 7 The Market Supply Schedule for Blu-
Rays

Quantity supplied (thousands per year)

Enterta High
Price per Blu-ray in City + Vibes = Total supply
$25 25 35 60
20 20 30 50
15 15 25 40
10 10 20 30
5 5 15 20

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 EXHIBIT 7 The Market Supply Curve for Blu-
Rays

Entertain City High Vibes

+ = Market supply curve
supply curve supply curve
S1 S2 Stotal
Price per Blu-ray

25 25 25
(dollars)

15 15 15
5 5 5
0 15 25 0 25 35 0 40 60
Quantity of Quantity of Quantity of
Blu-rays Blu-rays Blu-rays

(thousands (thousands (thousands

per year) per year) per year)

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 When price changes,
what is the effect on
the supply curve?

The supply curve does not shift, and there is a

change in quantity supplied.

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 EXHIBIT 8 Movement along a Supply Curve
versus a Shift in
(a) Increase inquantity
Supplysupplied
(slide 1 of 2)

S
20
Price per Blu-ray

15 B
(dollars)

10 A
5

0 10 20 30 40
Quantity of Blu-rays
(millions per year)
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 When a variable other
than price changes,
what is the effect on the supply
curve?

The whole supply curve shifts, and there is a

change in supply.

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 EXHIBIT 8 Movement along a Supply Curve
versus (b)
a Shift in in
Increase Supply
supply (slide 2 of 2)

S1 S2
20
A B
Price per Blu-ray

15
(dollars)

10
5

0 10 20 30 40
Quantity of Blu-rays
(millions per year)
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What conclusion can we make
about changes in nonprice
determinants as related to the
supply curve?

Changes in nonprice determinants can produce

only a shift in the supply curve and not a
movement along the supply curve.

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 EXHIBIT 9 Terminology for Changes in Price
and Nonprice Determinants of Supply (slide 1 of 2)

Change Effect Terminology

Price increases Upward movement along Increase in the
the supply curve quantity supplied
Price decreases Downward movement Decrease in the
along the supply curve quantity supplied
Nonprice Leftward or rightward shift Decrease or
determinant in the supply curve increase in supply

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 EXHIBIT 9 Terminology for Changes in Price
and Nonprice Determinants of Supply (slide 2 of 2)

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 What causes a shift
in a supply curve?

• Number of sellers in the market

• Technology
• Resource prices
• Taxes and subsidies
• Expectations of producers
• Prices of other goods and services the firm
could produce

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 EXHIBIT 10 Summary of the Impact of Changes in
Nonprice Determinants of Supply on the Supply Curve
Relationship
Nonprice to changes in (slide 1 in
Shift ofthe
6)
determinant supply curve supply curve
of supply Examples

1. Number Direct Price S1 The United States

of sellers S2 lowers trade
restrictions on
foreign textiles, and
the supply of textiles
in the United States
0 Quantity increases.

Price S2 A severe drought

S1 destroys the orange
crop, and the supply of
oranges decreases.

0 Quantity
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 EXHIBIT 10 Summary of the Impact of Changes in
Nonprice Determinants of Supply on the Supply Curve
Relationship
Nonprice to changes in (slide 2 in
Shift ofthe
6)
determinant supply curve supply curve
of supply Examples

2. Technology Direct Price S1 New methods of

S2 producing
automobiles reduce
production costs,
and the supply of
automobiles
0 Quantity increases.

Price S2 Technology is
S1 destroyed by war, and
production costs
increase; the result is
a decrease in the
supply of good X.
0 Quantity
© 2019 Cengage. All rights reserved.
 EXHIBIT 10 Summary of the Impact of Changes in
Nonprice Determinants of Supply on the Supply Curve
Relationship
Nonprice to changes in (slide 3 in
Shift ofthe
6)
determinant supply curve supply curve
of supply Examples

3. Resource Inverse Price S1 A decline in the price

prices S2 of computer chips
increases the supply
of computers.

0 Quantity
Price S2 An increase in the cost
S1 of farm equipment
decreases the supply
of soybeans.

0 Quantity
© 2019 Cengage. All rights reserved.
 EXHIBIT 10 Summary of the Impact of Changes in
Nonprice Determinants of Supply on the Supply Curve
Relationship
Nonprice to changes in (slide 4 in
Shift ofthe
6)
determinant supply curve supply curve
of supply Examples

4. Taxes and Inverse Price S2 An increase in the

subsidies S1 per-pack tax on
cigarettes reduces
the supply of
cigarettes.

0 Quantity
Direct Price S1 A government
S2
payment to dairy
farmers based on the
number of gallons
produced increases
the supply of milk.
0 Quantity
© 2019 Cengage. All rights reserved.
 EXHIBIT 10 Summary of the Impact of Changes in
Nonprice Determinants of Supply on the Supply Curve
Relationship
Nonprice to changes in (slide 5 in
Shift ofthe
6)
determinant supply curve supply curve
of supply Examples

5. Expectations Inverse Price S2 Oil companies

S1 anticipate a substantial
rise in future oil prices,
and this expectation
causes these
companies to decrease
0 Quantity their current supply of
S1 oil.
Price S2 Farmers expect the
future price of wheat
to decline, so they
increase the present
supply of wheat.
0 Quantity
© 2019 Cengage. All rights reserved.
 EXHIBIT 10 Summary of the Impact of Changes in
Nonprice Determinants of Supply on the Supply Curve
Relationship
Nonprice to changes in (slide 6 in
Shift ofthe
6)
determinant supply curve supply curve
of supply Examples

6. Prices of Inverse Price S2 A rise in the price of

other goods S1 brand-name drugs
and services causes drug
companies to
decrease the supply
of generic drugs.
0 Quantity
Price S1 A decline in the price
S2 of tomatoes causes
farmers to increase
the supply of
cucumbers.

0 Quantity
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 What is a market?

Any arrangement in which buyers and sellers

interact to determine the price and quantity of
goods and services exchanged

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 What is a surplus?

A market condition existing at any price where

the quantity supplied is greater than the
quantity demanded

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 What is a shortage?

A market condition existing at any price at

where the quantity supplied is less than the
quantity demanded

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 What is equilibrium?

A market condition that occurs at any price and

quantity at which the quantity demanded and
the quantity supplied are equal

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 EXHIBIT 11 Demand, Supply, and
Equilibrium for Sneakers (Pairs per Year)

(1) (2) (3) (4) (5) (6)

Price Quantity Quantity Differenc Market Pressur
per demanded supplied e (3)–(2) conditio e on
pair n price
$105 25,000 75,000 +50,000 Surplus Downwar
d
90 30,000 70,000 +40,000 Surplus Downwar
d
75 40,000 60,000 +20,000 Surplus Downwar
d
60 50,000 50,000 0 Equilibriu Stationar
m y
45 60,000 35,000 –25,000 Shortage Upward
30 80,000 20,000 –60,000 Shortage Upward
© 2019 Cengage. All rights reserved.
EXHIBIT 12 The Supply and Demand for
Sneakers

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What is the price system?

A mechanism that uses the forces of supply and

demand to create an equilibrium through rising
and falling prices

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 What is consumer
surplus?

The value of the difference between the price

consumers are willing to pay for a product on
the demand curve and the price actually paid for
it

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 How is consumer
surplus measured?

Total consumer surplus measured in dollars is

represented by the total area under the market
demand curve and above the equilibrium price.

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EXHIBIT A-1 Market Demand Curve
and Consumer Surplus (slide 1 of 2)

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EXHIBIT A-1 Market Demand Curve
and Consumer Surplus (slide 2 of 2)

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What is producer surplus?

The value of the difference between the actual

selling price of a product and the price
producers are willing to sell it for on the supply
curve

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 How is producer
surplus measured?

Total producer surplus measured in dollars is

represented by the total area above the supply
curve and under the equilibrium price.

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 EXHIBIT A-2 Market Supply Curve
and
(a) Producer
Producer Surplus
surplus at selected
(slide 1prices
of 2)

4.00
S
3.50
Price per pound

3.00
(dollars)

2.50
2.00 Equilibrium
E price
1.50 C
1.00
B
0.50
x A
0 1 2 3 4 5 6 7
Quantity of ground beef
(millions of pounds per year)
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 EXHIBIT A-2 Market Supply Curve
and(b)Producer Surplus
Total producer surplus
(slide 2 of 2)

4.00 S
3.50
Price per pound

3.00
(dollars)

2.50 E
2.00 Equilibrium
1.50 Producer price
surplus
1.00
0.50

0 1 2 3 4 5 6 7
Quantity of ground beef
(millions of pounds per year)
© 2019 Cengage. All rights reserved.
 3-3 The Market: Putting Supply and
Demand Together (10 of x)
● 3-3g Equilibrium in Terms of Consumers’ and
Producers’ Surplus
• Consumers’ Surplus (CS): The difference
between the maximum price a buyer is willing
and able to pay for a good or service and the
price actually paid
• Producers’ (Sellers’) Surplus (PS): The
difference between the price sellers receive for a
good and the minimum or lowest price for which
they would have sold the good. (PS = Price
received-Minimum selling price)
• Total Surplus (TS): The sum of consumers’
surplus and producers’ surplus. (TS = CS + PS) 72
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Cengage. accessible
All rights website, in whole or in part. ©SashkinShutterstock
reserved.
 EXHIBIT 17
Equilibrium, Consumers’ Surplus, and Producers’
Surplus

73

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© 2019or posted to a publicly
Cengage. accessible
All rights website, in whole or in part. ©SashkinShutterstock
reserved.
 3-3 The Market: Putting Supply and
Demand Together (11 of x)

● 3-3h What Can Change Equilibrium Price and

Quantity?
• Equilibrium price and quantity are determined by
supply and demand
• Exhibit 18 illustrates eight different cases where
this scenario occurs
● 3-3i It Is Important to Know Why the Price
Changed: Back to Substitutes and Complements
• Two goods are substitutes if, as the price of one
rises (falls), the demand for the other rises (falls)

74

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© 2019or posted to a publicly
Cengage. accessible
All rights website, in whole or in part. ©SashkinShutterstock
reserved.
 What causes a change in
market equilibrium?

• A change in demand
• A change in supply

© 2019 Cengage. All rights reserved.

 CAUSATION CHAIN

Increase in Increase in
Increase in equilibrium quantity
demand price supplied

© 2019 Cengage. All rights reserved.

 EXHIBIT 1 The Effects of Shifts in
Demand on
(a)Market Equilibrium
Increase in demand (slide 1 of 2)

S
1,200
E2
Price per cruise

900
(dollars)

E1
600
D2
300 Shortage of
D1 8,000 cruises
0 4 8 12 16 20
Quantity of Caribbean cruises
(thousands per year)
© 2019 Cengage. All rights reserved.
CAUSATION CHAIN

© 2019 Cengage. All rights reserved.

 EXHIBIT 1 The Effects of Shifts in
Demand on
(b)Market
DecreaseEquilibrium
in demand (slide 2 of 2)

Surplus of 20,000 S
gas guzzlers
40
Price per gas guzzler
(thousands of dollars)

E1
30
E2
20
D1
10
D2
0 10 20 30 40 50
Quantity of gas guzzlers
(thousands per month)
© 2019 Cengage. All rights reserved.
CAUSATION CHAIN

© 2019 Cengage. All rights reserved.

 EXHIBIT 2 The Effects of Shifts in
Supply on(a)
Market
IncreaseEquilibrium
in supply (slide 1 of 2)

Surplus of 4,000
babysitters S1 S2
12.00
E1
Price per hour

9.00
(dollars)

E2
6.00
3.00
D
0 2 4 6 8 10
Quantity of babysitters
(thousands per month)
© 2019 Cengage. All rights reserved.
CAUSATION CHAIN

© 2019 Cengage. All rights reserved.

 EXHIBIT 2 The Effects of Shifts in
Supply on(b)
Market Equilibrium
Decrease in supply (slide 2 of 2)

S2 S1
Price per 1,000 board feet

800
E2
600
E1
(dollars)

400
Shortage
200 of 4 D
billion
board feet
0 2 4 6 8 10
Quantity of lumber
(billions of board feet per year)
© 2019 Cengage. All rights reserved.
 EXHIBIT 3 The Effects of Shifts
in Demand and Supply on Market Equilibrium

Effect on Effect on
Change equilibrium price equilibrium
quantity
Demand increases Increases Increases
Demand decreases Decreases Decreases
Supply increases Decreases Increases
Supply decreases Increases Decreases

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