EconomicsCombined Version

Edwin G. DolanBest Value Textbooks

4th edition

Chapter 2Supply and Demand

The Basics

Dolan, Microeconomics 4e, Ch. 2

Demand is the amount of a product that consumers are willing and able to purchase at each possible price during a given period of time, everything else (but price) held constant. (ceteris paribus)

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◦It is a relationship between prices and quantities.

Law of Demand: There is an inverse relationship between the price of a good and the quantity consumers are willing and able to purchase during a particular period of time.◦ As price of a good rises, consumers buy less.◦ Demand depicts the quantity-price relationship

ceteris paribus.

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A graphical representation of Demand

Change in Quantity Demanded - movement along the same demand curve in response to a price change.◦ Results from a price changeResults from a price change◦ A movement along a curveA movement along a curve

Change in Demand - shift in entire demand curve.◦ Results from a change in a determinant of Results from a change in a determinant of

demanddemand (a ceteris paribus variable)◦ A whole new curve

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The Demand Shifters are factors other than price that influence demand: income, tastes, prices of related goods, expectations, and numbers of buyers.

Δ Demand Shifters leads to Δ DEMAND itself – ie a whole new demand curve

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Changes in Consumer Income◦ Normal goods: goods for which demand

increases as income increases.◦ Inferior goods: goods for which demand

decreases as income increases.

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Δ the Number of Buyers

Δ Demographic Characteristics

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Δ Price of Related Goods◦ Substitute goods: goods that can be used in

place of each other.◦ Complementary goods: goods that are used

together.

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Δ Consumer Expectations

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Δ Consumer Tastes and Preferences

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Supply is the amount of a good or service that producers are willing and able to offer for sale at each possible price during a period of time, ceteris paribus.◦ It is a price-quantity relationship.

The quantity supplied is the amount sellers are willing and able to offer for sale during a period of time at a specific price, ceteris paribus.◦ It is a specific quantity tied to a specific price

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Law of Supply - there is a positive relationship between the price of a product and the amount of it that will be supplied.◦ As the price of a product rises, producers will be

willing to supply more. ◦ The height of the supply curve at any quantity

also shows the opportunity cost of producing the next unit of the good.

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A graphical representation of Supply

The production possibility frontier provides one explanation of why the supply curve has a positive slope

As the quantity of chicken produced increases, the opportunity cost of producing it increases, as shown by the increasing slope of the PPF

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Δ Quantity Supplied - movement along the same supply curve in response to a price change.◦ Results from Δ price◦ Movement along a curve

Δ Supply - shift in entire supply curve.◦ Results from Δ some other variables besides

price. (Δ a ceteris paribus variable)◦ Whole new curve

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Δ Resource Prices

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Δ Technology and Productivity

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Δ Expectations of Producers

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Δ Number of Producers Δ Prices of Related Goods

or Services◦ the opportunity cost of

producing any good is the lost production of some other good

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Supply Increases or Decreases

Supply shifts right or left

Supply NEVER, NEVER, NEVER goes UP or DOWN!! – not ever.

Note: The textbook uses the Up/Down language in an example in CH 3. It may be “technically” OK, but it WILL confuse you if you use it!!!

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When the plans of buyers and sellers mesh when tested in the market place, the market is in equilibrium

If the price is too high, there will be a surplus

If the price is too low, there will be a shortage

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The just right Price where qD = qS◦ Markets tend towards equilibrium unless

something prevents price adjustments

Which diagram best represents the effect on the market for beef of an increase in the cost of corn used as feed for beef cattle?

An increase in the price of an input will shift the supply curve as shown in the right-hand diagram

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Price Floor: price is not allowed to decrease below a certain level. Examples: minimum wage, agricultural price supports.◦ If the floor is above the equilibrium price, then it results

in a surplus.◦ In the labor market, a “surplus” means unemployment.

But how much? Price Ceiling: price is not allowed to increase

above a certain level. Example: rent controls.◦ If the ceiling is below the equilibrium price, then it results

in a shortage.

With demand curve in position D1, the market would be in equilibrium at a price of $13

With a price support (minimum price) of $13 and demand curve D2, there would be a surplus of milk

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Dolan, Economics Combined Version 4e, Ch. 2

Rent control (maximum rent) on housing will cause a shortage of rental housing

The shortage will be greater in the long run, when there is time to adjust the quantity of housing supplied

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A surplus occurs whenever qS>qD. A shortage occurs whenever qD>qS. Surpluses and shortages can be resolved

with price changes.

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1. Price of Passenger cars goes up dramatically:2. A public campaign encouraging conservation of fuel by using

public transportation and small cars whenever possible creates a change in preferences:

3. The price of tires quadruples:4. A huge strike hits truck manufacturers, shutting down many

plants:5. Gasoline prices plummet to $0.02 per gallon:6. The price of steel is cut in half:7. A major recession strikes and income levels drop:8. The price of camp trailers drops by 90%:

The Market for Pickup Trucks is in equilibrium. What happens in this market with each of the following changes? Draw a graphical representation and identify what happens in the market for Pickup Trucks to (A) Supply, (B) Demand, (C) Price in the market for pickup trucks, ceteris paribus, (D) Equilibrium Quantity Demanded and Quantity Supplied?