Chapter 3

Demand, supply, and the market

David Begg, Stanley Fischer and Rudiger Dornbusch, Economics,

6th Edition, McGraw-Hill, 2000
Power Point presentation by Peter Smith
Some key terms
Market
a set of arrangements by which buyers and sellers are in
contact to exchange goods or services
Demand
the quantity of a good buyers wish to purchase at each
conceivable price
Supply
the quantity of a good sellers wish to sell at each
conceivable price
Equilibrium price
price at which quantity supplied = quantity demanded

3.2
The Demand curve shows the relation
between price and quantity demanded
holding other things constant
Other things include:
the price of related
Price

goods
consumer incomes
consumer
preferences
Changes in these other
things affect the
D
position of the demand
curve
Quantity

3.3
The Supply curve shows the relation
between price and quantity supplied holding
other things constant
Other things
include:
Price

S
technology
input costs
government
regulations
Changes in these
other things affect the
position of the
Quantity demand curve

3.4
 Market equilibrium

S
Price

D0
Market equilibrium is
at E0 where quantity
P0 demanded equals
E0
quantity supplied
with price P0 and
quantity Q0
S D0
Q0 Quantity

3.5
 Market equilibrium

S
Price

D0
If price were above P0
there would be excess
P0 supply
E0
producers wish to
supply more than
consumers wish to
S D0 demand
Q0 Quantity

3.6
 A shift in demand
If the price of a substitute
D1 S good increases ...
Price

D0
more will be demanded at
P1 E1 each price
P0 E0
The demand curve shifts
from D0D0 to D1D1.
S D0 D1
The market moves to a
Q0 Q1 Quantity new equilibrium at E1.

3.7
 A shift in supply
S1 Suppose safety
S0 regulations are tightened,
Price

D increasing producers costs

E2 The supply curve
P1
shifts to S1S1
P0 E0
If price stayed at P0 there
S1 would be excess demand
S0 D
So the market moves to a
Q1 Q0 Quantity new equilibrium at E2.

3.8
 Two ways in which demand may increase

(1) A movement
along the demand
Price

curve from A to B
represents
P0 A consumer reaction
P1 to a price change
B
D
this could follow a
supply shift
Q0 Q1 Quantity

3.9
 Two ways in which demand may increase

(2) A movement of
the demand curve
Price

from D0 to D1
leads to an increase in
P0 C demand at each price
A
e.g. at P0 quantity
B
demanded increases
D1 from Q0 to Q1
D0
Q0 Q1 Quantity

3.10
 A market in disequilibrium
Suppose a disastrous
Price

S harvest moves the

supply curve to SS
P2 government may try to
P0 E protect the poor, setting
a price ceiling at P1
P1 A B which is below P0, the
equilibrium price level
D RATIONING is needed to
S cope with the resulting
excess demand
Q1 Q 0 Quantity

3.11
What, How and For Whom
The market:
decides how much of a good should be produced
by finding the price at which the quantity demanded
equals the quantity supplied
tells us for whom the goods are produced
those consumers willing to pay the equilibrium price
determines what goods are being produced
there may be goods for which no consumer is prepared
to pay a price at which firms would be willing to supply

3.12