chapter 3: demand, supply, and price © 2014 pearson education canada inc

Chapter 3: Demand, Supply,

and Price

© 2014 Pearson Education Canada Inc.

Chapter Outline/Learning Objectives

Section Learning ObjectivesAfter studying this chapter, you will be able to

3.1 Demand 1. list the factors that determine the quantity demanded of a good.

2. distinguish between a shift of the demand curve and a movement along the demand curve.

3.2 Supply 3. list the factors that determine the quantity supplied of a good.

4. distinguish between a shift of the supply curve and a movement along the supply curve.

3.3 The Determination of Price

5. explain the forces that drive market price to equilibrium, and how equilibrium price is affected by changes in demand and supply.

Chapter 3, Slide © 2014 Pearson Education Canada Inc. 2

3.1 Demand

Quantity Demanded

The total amount that consumers desire to purchase in some time period is called the quantity demanded of a product.

Quantity bought (or exchanged) refers to actual purchases.

Quantity demanded is a flow, as opposed to a stock.

EXTENSIONS IN THEORY 3-1

The Distinction Between Stocks and Flows


Quantity Demanded and Price

A basic hypothesis is that—ceteris paribus—the price of a product and the quantity demanded are negatively related.

Why? There are usually several products that can satisfy any given want or desire.

A reduction in the price of a product means that the specific desire can now be satisfied more cheaply by buying more of that product.


Demand Schedules and Demand Curves

Fig.3-1 The Demand for Apples

Demand Schedule Demand Curve

Chapter 3, Slide © 2014 Pearson Education Canada Inc.

Reference Point

Price($ per bushel)

Quantity Demanded

U $ 20 110

V 40 85

W 60 65

X 80 50

Y 100 40

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Determinants of Demand

1. Consumer preferences

• If tastes change, demand changes

2. Consumer incomes

• Normal Products: buy more when income rises, less when income falls

• Inferior Products: buy more when income falls, less when income rises


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3. Prices of Related Products:

• Products are related if a change in the price of one product causes a change in demand for the other product

• Two types of related products: • Substitutes • Complements


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3. Prices of Related Products • Substitute Product

• similar products that can be substituted for each other • increase in price of one product causes increased demand

for the related product


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3. Prices of Related Products • Complementary Product

• tend to be bought together • Increase in price of one product causes a decrease in

demand for related product


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4. Expectations of future prices, income, availability• If prices or incomes expected to rise, consumers

buy more• If goods expected to be scarcer, buy more now

5. Population size, income, and age distribution• Increases in population or incomes cause increase

in demand • Changes in age distribution affect demand


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A change in variables other than price will shift the demand curve to a new position.

• average household income

• prices of other products

• distribution of income or population

• expectations about the future

Fig. 3-2 An Increase in the Demand for Apples


Fig. 3-3 Shifts in the Demand Curve

A rightward shift indicates an increase in demand.

A leftward shift indicates a decrease in demand.


Fig. 3-4 Shifts of and Movements Along the Demand Curve

A change in demand is a change in quantity demanded at every price—a shift of the entire curve.

A change in quantity demanded refers to a movement from one point on a demand curve to another point, either on the same demand curve or on a new one.

© 2014 Pearson Education Canada Inc. Chapter 3, Slide 13

Self Test

Market for pretzels:• What might have happened to the price of a complementary

product, like beer, to cause the demand for pretzels to change? • What might have happened to the price of a substitute product, like

nuts?

Price Demand (D1) Demand (D2)

$2.00 10 000 11 000

3.00 9 600 10 600

4.00 9 200 10 200


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Demand Concepts Review

Which of the following would cause a movement along the demand curve for ski-lift tickets, other things being equal? A) a change in tastes in favour of skiing

B) an increase in population

C) an increase in price as the supply curve for lift tickets shifts to the left

D) a rise in the price of ski boots and skis

E) a rise in average household income

15© 2014 Pearson Education Canada Inc.


If the price of tea falls and as a consequence the demand for sugar rises, then tea and sugar are

A) substitute goods.

B) complementary goods.

C) independent goods.

D) neutral goods.

E) luxury goods.

3.2 Supply

Quantity Supply

The amount of a product that firms desire to sell in some time period is called the quantity supplied of that product.

Quantity supplied is the amount that firms are willing to offer for sale and not necessarily the quantity actually sold.

Quantity supplied is a flow as opposed to a stock.


Quantity Supplied and Price

A basic hypothesis is that—ceteris paribus—the price of the product and the quantity supplied are positively related.

Why? Producers are interested in making profits. If the price of a particular product rises, then the production and sale of this product is more profitable.


Supply Schedule Supply Curve

Fig. 3-5 The Supply of Apples

© 2014 Pearson Education Canada Inc. Chapter 3, Slide

Reference Point

Price($ per bushel)

Quantity Supplied

u $ 20 20

v 40 45

w 60 65

x 80 80

y 100 95

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A change in supply is a change in the quantity that will be supplied at every price—a shift of the entire curve.

A change in quantity supplied refers to a movement from one point on a supply curve to another point, either on the same supply curve or on a new one.

Fig. 3-6 An Increase in the Supply of Apples


Determinants of Supply

1. Prices of Productive Resources• If the price of a productive resource increases,

firms will supply less2. Business Taxes

• If business taxes rise, firms will supply less3. Technology

• An improvement in technology leads to a fall in the cost of production and an increase in supply


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Determinants of Supply

4. Prices of Substitutes in Production• An increase in the price of one product will cause

a drop in the supply of products that are substitutes in production

5. Future Expectation of Suppliers• Lower expected future prices will lead to an

increase in supply6. Number of Suppliers

• A decrease in the number of suppliers will reduce market supply


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Concept Check: Supply

Refer to Figure 3-2. A shift of the supply curve from S to S1 could be caused by

A) an increase in the price of energy-efficient light bulbs.

B) a decrease in the price of energy-efficient light bulbs.

C) a decrease in the price of glass, a major input in the production of energy-efficient light bulbs.

D) a change in consumers' preferences away from ordinary light bulbs toward energy-efficient light bulbs.

E) an expectation that new government regulations will ban the use of energy-efficient light bulbs.



In which statement is the term "supply" used correctly?

(1)An increase in the price of leather will cause a decrease in the supply of leather. (2)An increase in the price of leather will cause a decrease in the supply of leather boots.

A) not enough information to tell

B) the second statement only

C) the first statement only

D) both statements

E) neither statement

3.3 The Determination of Price

The Concept of a Market

A market may be defined as any situation in which buyers and sellers negotiate the transaction of some goods or services.

Markets may differ in the degree of competition among various buyers and sellers.

In a perfectly competitive market buyers and sellers are price takers.


Graphical Analysis of a Market

At the equilibrium price, every buyer finds a seller and every seller finds a buyer—the market “clears.”

Fig. 3-7 Determination of Equilibrium Price


Changes in Market PricesThe four “laws” of supply and demand:

1. An increase in demand causes an increase in both the equilibrium price and equilibrium quantity.

2. A decrease in demand causes a decrease in both equilibrium price and equilibrium quantity.


Fig. 3-8(i) Shifts in the Demand Curve

Chapter 3, Slide 27

Changes in Market Prices

3. An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity.

4. A decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity.


Fig. 3-8(ii) Shifts in the Supply Curve

Chapter 3, Slide 28

Price Demand Supply Surplus/Shortage

$2.00 60 30

2.25 58 33

2.50 56 36

2.75 54 39

3.00 52 42

3.25 50 45

3.50 48 48

3.75 46 51

4.00 44 54

© 2014 Pearson Education Canada Inc. 29

Price Demand Supply 1 Supply 2

$4.00 140 60

4.25 130 70

4.50 120 80

4.75 110 90

5.00 100 100

5.25 90 110

5.50 80 120

Equilibrium P&Q ?Equilibrium P&Q ?Supply increases by 50% - new equilibrium?Supply increases by 50% - new equilibrium?


What effect will the following changes have What effect will the following changes have upon (i) the demand for, (ii) the price, and (iii) upon (i) the demand for, (ii) the price, and (iii) the quantity traded of commercially brewed the quantity traded of commercially brewed beer?beer?

- A new medical report praising the healthy - A new medical report praising the healthy effects of drinking beereffects of drinking beer

- A big decrease in the price of home-brewing - A big decrease in the price of home-brewing kitskits

- A rapid increase in population growth- A rapid increase in population growth - Talk of a possible future strike of brewery - Talk of a possible future strike of brewery

workersworkers


a. Day-care servicesa. Day-care servicesMore mothers with small children are returning to the More mothers with small children are returning to the

labour force; gov’t introduces subsidies for day-care labour force; gov’t introduces subsidies for day-care operatorsoperators

b. Marijuanab. MarijuanaThe gov’t severely increases penalties for buying and for The gov’t severely increases penalties for buying and for

sellingsellingc.Compact discsc.Compact discsNew processing method reduces cost of producing CDs; New processing method reduces cost of producing CDs;

consumers are switching to high digital downloadsconsumers are switching to high digital downloadsd. Organic vegetablesd. Organic vegetablesVegetarianism increases due to medical report; tighter Vegetarianism increases due to medical report; tighter

regulations on definition of organically grown regulations on definition of organically grown products introducedproducts introduced


Self-Test What impact will the following events have on the price of wine?

a) A poor harvest in the grape industry results in a big decrease in the supply of grapes

b) The number of wineries increases

c) The sales tax on wine increases

d) The introduction of a new fermentation method reduces the time needed for the wine to ferment

e) The gov’t introduces a subsidy for each bottle of wine produced domestically


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Three conditions must be satisfied in order for price determination in a market to be well described by the demand-and-supply model:

1. Large number of consumers; each one small relative to the size of the market.

2. Large number of producers; each one small relative to the size of the market.

3. Producers must be selling 'homogeneous' versions of the product.

APPLYING ECONOMIC CONCEPTS 3-1

Why Apples But Not iPhones?


Relative Prices and Inflation

The absolute price of a product is the amount of money that must be spent to acquire one unit of that product.

A relative price is the price of one good in terms of another.

Demand and supply curves are drawn in terms of relative prices rather than absolute prices.


EXTENSIONS IN THEORY 3-2

The Algebra of Market Equilibrium

Chapter 3, Slide 35


Quantity Demanded (millions)

Quantity Supplied (millions)

Price ($) Year 1 Year 2 Year 1 Year 2

30 80 95 140 125

26 90 105 135 120

22 100 115 130 115

18 110 125 125 110

14 120 135 120 105

10 130 145 115 100

The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.


1. The equilibrium price and quantity for overnight parcel delivery in Year 1 is ________ and ________ million parcels.

2. If the price of overnight parcel delivery in Year 2 is $10, how many parcels will actually be delivered?

3. Which of the following statements describes a likely event in the market for overnight parcel delivery? From Year 1 to Year 2,

A) there was a decrease in consumers' income.

B) there was an improvement in technology for tracking overnight parcels.

C) the price of regular parcel delivery decreased.

D) there was a rise in the price of jet fuel.

E) the number of suppliers of overnight parcel delivery service increased.

chapter 3: demand, supply, and price © 2014 pearson education canada inc

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