Demand, Supply and

Equilibrium

Chapter 05

McGraw-Hill/Irwin Copyright 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives
After this chapter, you should be able to:
1. Define and differentiate individual demand and market
demand
2. Distinguish between changes in demand and changes in
quantity demanded
3. List and discuss the causes of changes in demand
4. Define and differentiate individual supply and market supply
5. Distinguish between changes in supply and changes in
quantity supplied
6. List and discuss the causes of changes in supply
7. Draw graphs of supply and demand curves
8. Identify equilibrium price and quantity
9. Explain why people have trouble selling their homes

5-2
 Individual Demand and Market Demand

The law of demand holds for both individuals and

markets.

Individual demand is the schedule of quantities that a

person would purchase at various prices.

Market demand is the schedule of quantities that

everyone in the market would buy at various prices.

5-3
 What is the market?
The market is where people buy and sell.
Local markets:
Gasoline, groceries

Regional:
Automobiles

National or international:
Computers

eBay has created a global market for goods that

previously had purely local markets.

5-4
 Changes in Demand
A change in demand: a change in the entire demand
schedule.

Price QD(1) QD(2)

$30 4 5
$25 9 11
$20 14 18
$15 18
28 $10 23
38 $ 5 26
50

5-5
 Increases in Demand
An increase in demand is an increase in the quantity
people are willing to purchase at all prices.

Price QD(1) QD(2)

$30 4 5
$25 9 11
$20 14
18 $15 18
28 $10 23
38 $ 5 26
50
The demand curve
shifts to the right.

5-6
 Changes in Quantity Demanded and
Changes in Demand
E and F are on the same line, so they are on the same schedule.
If they are on the same schedule, there can be no change in
demand.
A price change led to a change in quantity demanded.

Move from point E to point F a change in quantity demanded

5-7
 Increase in Demand
F to G is an increase in demand because people are willing to buy
more at all prices on Gs curve which is to the right of Fs curve

Move from point F to point G an increase in demand

5-8
 Practice Problems: A Change in What?

From H to G?
From H to E?
From F to G?

5-9
 What Causes Changes in Demand?

Changes in income

Changes in the prices of related goods and services

Changes in tastes and preferences

Changes in price expectations

Changes in population

5-10
 Changes in Income
The demand for NORMAL goods varies directly with
income.
When income goes up people buy more, therefore demand
goes up.

The demand for INFERIOR goods varies inversely

with income.
When income goes up people buy less, therefore demand
goes down.

5-11
 Changes in the Price of Related Goods
and Services
Substitute goods
Hot dogs and hamburgers; tuna and salmon

Direct relationship: price of hamburgers up, price of hot dogs

up. Why?
As p hamburgers up increased demand for hot dogs

increases p of hot dogs

Complementary goods
Hot dogs and buns; DVDs and DVD players; airfare and

hotel rooms
Inverse relationship: p hot dogs up decrease in quantity

demanded of hot dogs decrease in demand for hot dog

buns lower price of hot dog buns

5-12
5-13
5-14
 Changes in Taste and Preferences

Taste and preferences tend to change over time.

Energy-efficient cars and less-fattening foods

Designer clothing and brand-name sneakers

Fewer people are smoking (has been helped by a campaign

to reduce smoking).

5-15
 Changes in Price Expectations
If people expect the price of something to rise, they
rush out to stock up before it does.
This increases the demand.

If people expect the price of something to fall, they will

hold off buying it.
This decreases the demand.

Closely related is the introduction of or expiration of a

tax credit.
Did Cash for Clunkers increase the demand for new cars in
the summer of 2009?

5-16
 Changes in Population

As the nations population increases, the demand for

particular goods and services increase.
General growth increases the demand for food, housing,
autos, etc.
Immigration leads to population growth.

The changing age distribution affects demand.

In the next three decades there will be a higher demand for
retirement homes, nursing homes, wheelchairs, bifocal
glasses, etc.

5-17
Questions for Thought and Discussion
The rapid growth of the Chinese economy has
raised the average income of its citizens.
How would you expect that this has impacted the demand
for food in worldwide markets?
Try drawing this outcome.

If some gas stations on a state highway have a

contract that only permits price changes on Fridays,
why might there be long lines at these gas stations
on Thursdays?

5-18
Individual and Market Supply

5-19
Hypothetical Supply of American Cars, 2025

5-20
 Changes in Supply and Changes in
Quantity Supplied
Change in quantity supplied: movement along a
supply curve due to a change in price.
A change in supply: a change in the entire supply
schedule.
An increase in supply is an increase in the quantity
producers are willing to supply at all prices.

5-21
 Changes in Quantity Supplied
F and G are on the same line, so they are on the same schedule.
If they are on the same schedule, there can be no change in supply.
A price change led to a change in quantity supplied.

Move from point F to point G a change in quantity supplied

5-22
 Increase in Supply
F to E is an increase in supply because producers are willing to
supply more at all prices on Es curve which is to the right of Fs
curve

Move from point F to point E an increase in supply

5-23
 Practice Problems: A Change in What?

From G to F?
From H to E?
From E to G?

5-24
 What Causes Changes in Supply?
Changes in the cost of production
When costs rise, S decreases.
Technological advances (increase S)
Prices of other goods
Change in the number of suppliers
New suppliers increase S; shutdowns decrease S.
Changes in taxes
Tax increases reduce S; tax decrease raise S.
Changes in price expectations
Random causes, e.g. Hurricane Katrina in 2005

5-25
 Questions for Thought and Discussion

The shift to ethanol as a form of fuel (to alleviate global

warming) has led some farmers to sell their feed corn to
energy companies.

How would you expect that this would impact the supply of
feed corn in the global market for food?

How would the decreased availability of feed corn affect the

price of meat?

Try graphing these outcomes.

5-26
 Graphing Demand and Supply Curves

Sample Demand Schedule

Price QD
$ 13 1
$ 12 2
$ 11 4
$ 10 8
$ 9 15
$8 20

5-27
 Graphing Demand and Supply Curves

Sample Supply Schedule

Price QS
$ 13 23
$ 12 20
$ 11 15
$ 10 8
$ 9 3
$8 1

5-28
 Graphing Equilibrium
Sample D and S Schedules

Price QD QS
$ 13 1
23 $ 12
2 20
$ 11 4
15 $ 10
8 8
$ 9 15 3
$ 8 26 1

Equilibrium: where the demand & supply curves cross;

Q* = 8, P* = $10

5-29
 Above Equilibrium

Above P*, surpluses

P
Price tends toward
equilibrium. If
P
price is above
equilibrium, sellers
P
will lower prices
until the price
declines to the
equilibrium price.

5-30
 Below Equilibrium

Below P*, shortages

Price tends toward

equilibrium. If price
is below
equilibrium, buyers
will bid prices up
until the price rises P
to the equilibrium
price. P
P

5-31
Application: Why Cant I Sell My House?
You can sell virtually any good or service for which
there is a demand.
As long as people are willing and able to pay for that good or
service, you can sell it.

If you want to sell some good or service pretty quickly

and you get no bites, what do you do?
You lower the price.

What do you do if there is still no one willing and able

to pay your price?
You keep lowering it until you make a sale!

5-32
Simultaneous Shifts in Demand and Supply:
What Happens to Equilibrium?

D goes up and S goes

up
What happens to P* and
Q*?

5-33
Simultaneous Shifts: Which Curve Shifts
More and then What Happens to
Equilibrium?

5-34