![Page 1: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/1.jpg)
Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D.
![Page 2: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/2.jpg)
2
Overview
Market (who, what, how) Supply and demand is an economic model
Designed to explain how prices are determined in certain types of markets
What you will learn in this chapter How the model of supply and demand works and how
to use it1. The law of demand2. The law of supply3. The determination of market equilibrium4. Factors shifting demand or supply curves
![Page 3: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/3.jpg)
3
Summaries
Through the study of the chapter, you will be able to Characterize a market. Use a demand schedule and a demand curve to demonstrate the law
of demand. Explain the difference between a change in demand (shift of the
curve) and a change in quantity demanded (movement along the curve).
List the factors that will lead to a change in demand, and give examples of each.
Similar analysis for supply side. Explain how equilibrium price and quantity are determined in a
competitive market. Explain what will happen in a competitive market after a shift in the
supply curve, the demand curve, or both. Describe the three steps economists take to answer almost any
question about the economy.
![Page 4: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/4.jpg)
4
Markets
In economics, a market is not a place but rather a group of buyers and sellers with the potential to trade with each other Market is defined not by its location but by its
participants First step in an economic analysis is to define and
characterize the market or collection of markets to analyze
Economists think of the economy as a collection of individual markets
![Page 5: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/5.jpg)
5
How Broadly Should We Define The Market
Defining the market often requires economists to group things together Aggregation is the combining of a group of distinct
things into a single whole Markets can be defined broadly or narrowly,
depending on our purpose How broadly or narrowly markets are defined is
one of the most important differences between Macroeconomics and Microeconomics
![Page 6: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/6.jpg)
6
Defining Macroeconomic Markets
Goods and services are aggregated to the highest levels Macro models lump all consumer goods
into the single category “consumption goods”
Macro models will also analyze all capital goods as one market
Macroeconomists take an overall view of the economy without getting bogged down in details
![Page 7: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/7.jpg)
7
Defining Microeconomic Markets
Markets are defined narrowly Focus on models that define much more
specific commodities Always involves some aggregation
But stops it reaches the highest level of generality that macroeconomics investigates
![Page 8: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/8.jpg)
8
Buyers and Sellers
Buyers and sellers in a market can be Households Business firms Government agencies
All three can be both buyers and sellers in the same market, but are not always
For purposes of simplification this text will usually follow these guidelines In markets for consumer goods, we’ll view business firms
as the only sellers, and households as only buyers In most of our discussions, we’ll be leaving out the
“middleman”
![Page 9: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/9.jpg)
9
Competition in Markets
In imperfectly competitive markets, individual buyers or sellers can influence the price of the product
In perfectly competitive markets (or just competitive markets), each buyer and seller takes the market price as a given
What makes some markets imperfectly competitive and others perfectly competitive? Perfectly competitive markets have many small buyers
and sellers Each is a small part of the market, and the product is
standardized Imperfectly competitive markets have just a few large
buyers and sellers Or else the product of each seller is unique in some way
![Page 10: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/10.jpg)
10
Using Supply and Demand
Supply and demand model is designed to explain how prices are determined in perfectly competitive markets Perfect competition is rare but many markets come
reasonably close Perfect competition is a matter of degree rather
than an all or nothing characteristic
Supply and demand is one of the most versatile and widely used models in the economist’s tool kit
![Page 11: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/11.jpg)
11
Demand
A household’s quantity demanded of a good Specific amount household would choose to buy
over some time period, given A particular price that must be paid for the good All other constraints on the household
Market quantity demanded (or quantity demanded) is the specific amount of a good that all buyers in the market would choose to buy over some time period, given A particular price they must pay for the good All other constraints on households
![Page 12: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/12.jpg)
12
Quantity Demanded
Implies a choice How much households would like to buy when they take
into account the opportunity cost of their decisions? Is hypothetical
Makes no assumptions about availability of the good How much would households want to buy, at a specific
price, given real-world limits on their spending power? Stresses price
Price of the good is one variable among many that influences quantity demanded
We’ll assume that all other influences on demand are held constant, so we can explore the relationship between price and quantity demanded
![Page 13: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/13.jpg)
13
The Law of Demand
The price of a good rises and everything else remains the same, the quantity of the good demanded will fall The words, “everything else remains the
same” are important In the real world many variables change
simultaneously However, in order to understand the economy
we must first understand each variable separately
Thus we assume that, “everything else remains the same,” in order to understand how demand reacts to price
![Page 14: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/14.jpg)
14
The Demand Schedule
Demand schedule A list showing the quantity of a good that
consumers would choose to purchase at different prices, with all other variables held constant
Demand V.S. Quantities demanded - demand is the entire relationship between price and quantity
- quantities demanded are specific amount of goods buyers want to buy
![Page 15: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/15.jpg)
15
The Demand Curve
The market demand curve (or just demand curve) shows the relationship between the price of a good and the quantity demanded , holding constant all other variables that influence demand Each point on the curve shows the total
buyers would choose to buy at a specific price
Law of demand tells us that demand curves virtually always slope downward
![Page 16: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/16.jpg)
16
Figure 1: The Demand Curve
Number of Bottles per Month
Price per Bottle
A
B
$4.00
2.00
D
40,000 60,000
At $2.00 per bottle, 60,000 bottles are demanded (point B).
When the price is $4.00 per bottle, 40,000 bottles are demanded (point A).
![Page 17: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/17.jpg)
17
“Shifts” vs. “Movements Along” The Demand Curve
Move along the demand curve From a change in the price of the good we
analyze In maple syrup example, Figure 1
A fall in price would cause a movement to the right along the demand curve (point A to B)
See figure 3(a)
![Page 18: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/18.jpg)
18
Figure 3(a): Movements Along and Shifts of The Demand Curve
Quantity
Price
P2
Q2 Q1 Q3
P1
P3
Price increase moves us leftward along demand curve
Price increase moves us rightward along demand curve
![Page 19: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/19.jpg)
19
“Shifts” vs. “Movements Along” The Demand Curve
Shift of demand curve a change in other things than price of the good
causes a shift in the demand curve itself, for example, income
In Figure 2 Demand curve has shifted to the right of the old
curve (from Figure 1) as income has risen A change in any variable that affects demand—
except for the good’s price—causes the demand curve to shift
![Page 20: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/20.jpg)
20
Figure 2: A Shift of The Demand Curve
B C$2.00
60,000 80,000
D1D2
An increase in income shifts the demand curve for maple syrup from D1 to D2.
Number of Bottles per Month
Price per Bottle
At each price, more bottles are demanded after the shift
![Page 21: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/21.jpg)
21
“Change in Quantity Demanded” vs. “Change in Demand”
Language is important when discussing demand “Quantity demanded” means
A particular amount that buyers would choose to buy at a specific price
It is a number represented by a single point on a demand curve
When a change in the price of a good moves us along a demand curve, it is a change in quantity demand
The term demand means The entire relationship between price and quantity demanded
—and represented by the entire demand curve When something other than price changes, causing the entire
demand curve to shift, it is a change in demand
![Page 22: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/22.jpg)
22
Income: Factors That Shift The Demand Curve
An increase in income has effect of shifting demand for normal goods to the right However, a rise in income shifts demand for inferior
goods to the left A rise in income will increase the demand for a
normal good, and decrease the demand for an inferior good
Normal good and inferior good are defined by the relation between demand and income
![Page 23: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/23.jpg)
23
Wealth: Factors That Shift The Demand Curve
Your wealth—at any point in time—is the total value of everything you own minus the total dollar amount you owe
- Example An increase in wealth will
Increase demand (shift the curve rightward) for a normal good
Decrease demand (shift the curve leftward) for an inferior good
![Page 24: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/24.jpg)
24
Prices of Related Goods: Factors that Shift the Demand Curve
Substitute—good that can be used in place of some other good and that fulfills more or less the same purpose Example A rise in the price of a substitute increases the demand for
a good, shifting the demand curve to the right Complement—used together with the good we are
interested in Example A rise in the price of a complement decreases the demand
for a good, shifting the demand curve to the left
![Page 25: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/25.jpg)
25
Other Factors That Shift the Demand Curve
Population As the population increases in an area
Number of buyers will ordinarily increase Demand for a good will increase
Expected Price An expectation that price will rise (fall) in the future shifts the
current demand curve rightward (leftward) Tastes
Combination of all the personal factors that go into determining how a buyer feels about a good
When tastes change toward a good, demand increases, and the demand curve shifts to the right
When tastes change away from a good, demand decreases, and the demand curve shifts to the left
![Page 26: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/26.jpg)
26
Small Summary-- Factors Affecting Demand
Income (depends on good’s nature: normal or inferior)
Wealth (depends on good’s nature) Prices of substitutes (positively related) Prices of complements (negatively related) Population (positively related) Expected price (positively related) Tastes (positively related)
![Page 27: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/27.jpg)
27
Figure 3(b): Movements Along and Shifts of The Demand Curve
Quantity
Price
D2
D1
Entire demand curve shifts rightward when:• income or wealth ↑• price of substitute ↑• price of complement ↓• population ↑• expected price ↑• tastes shift toward good
![Page 28: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/28.jpg)
28
Figure 3(c): Movements Along and Shifts of The Demand Curve
Quantity
Price
D1
D2
Entire demand curve shifts leftward when:• income or wealth ↓• price of substitute ↓• price of complement ↑• population ↓• expected price ↓• tastes shift toward good
![Page 29: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/29.jpg)
29
Supply
A firm’s quantity supplied of a good is the specific amount its managers would choose to sell over some time period, given A particular price for the good All other constraints on the firm
Market quantity supplied (or quantity supplied) is the specific amount of a good that all sellers in the market would choose to sell over some time period, given A particular price for the good All other constraints on firms
![Page 30: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/30.jpg)
30
Quantity Supplied
Implies a choice Quantity that gives firms the highest possible profits when they
take account of the constraints presented to them by the real world Is hypothetical
Does not make assumptions about firms’ ability to sell the good How much would firms’ managers want to sell, given the price of
the good and all other constraints they must consider? Stresses price
The price of the good is just one variable among many that influences quantity supplied
We’ll assume that all other influences on supply are held constant, so we can explore the relationship between price and quantity supplied
![Page 31: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/31.jpg)
31
The Law of Supply
States that when the price of a good rises and everything else remains the same, the quantity of the good supplied will rise The words, “everything else remains the same” are
important In the real world many variables change simultaneously However, in order to understand the economy we must
first understand each variable separately We assume “everything else remains the same” in order
to understand how supply reacts to price
![Page 32: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/32.jpg)
32
The Supply Schedule and The Supply Curve
Supply schedule—shows quantities of a good or service firms would choose to produce and sell at different prices, with all other variables held constant
Supply curve—graphical depiction of a supply schedule Shows quantity of a good or service supplied at
various prices, with all other variables held constant
![Page 33: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/33.jpg)
33
Figure 4: The Supply Curve
F
G
2.00
S
40,000 60,000
$4.00
At $4.00 per bottle, quantity supplied is 60,000 bottles (point G).
When the price is $2.00 per bottle, 40,000 bottles are supplied (point F).
Number of Bottles per Month
Price per Bottle
![Page 34: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/34.jpg)
34
Shifts vs. Movements Along the Supply Curve
A change in the price of a good causes a movement along the supply curve In Figure 4
A rise (fall) in price would cause a rightward (leftward) movement along the supply curve
A drop in transportation costs will cause a shift in the supply curve itself In Figure 5
Supply curve has shifted to the right of the old curve (from Figure 4) as transportation costs have dropped
A change in any variable that affects supply—except for the good’s price—causes the supply curve to shift
![Page 35: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/35.jpg)
35
Figure 5: A Shift of The Supply Curve
S2
GJ
S1
60,000
$4.00
80,000
A decrease in transportation costs shifts the supply curve for maple syrup from S1 to S2.
Number of Bottles per Month
Price per Bottle
At each price, more bottles are supplied after the shift
![Page 36: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/36.jpg)
36
Factors That Shift the Supply Curve
Input prices A fall (rise) in the price of an input causes an increase
(decrease) in supply, shifting the supply curve to the right (left)
Price of Related Goods When the price of an alternate good rises (falls), the
supply curve for the good in question shifts leftward (rightward)
Technology Cost-saving technological advances increase the
supply of a good, shifting the supply curve to the right
![Page 37: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/37.jpg)
37
Factors That Shift the Supply Curve
Number of Firms An increase (decrease) in the number of sellers—
with no other changes—shifts the supply curve to the right (left)
Expected Price An expectation of a future price increase (decrease)
shifts the current supply curve to the left (right)
![Page 38: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/38.jpg)
38
Factors That Shift the Supply Curve
Changes in weather Favorable weather
Increases crop yields Causes a rightward shift of the supply curve for that crop
Unfavorable weather Destroys crops Shrinks yields Shifts the supply curve leftward
Other unfavorable natural events may effect all firms in an area Causing a leftward shift in the supply curve
![Page 39: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/39.jpg)
39
Figure 6(a): Changes in Supply and in Quantity Supplied
P2
Q3 Q1 Q2
P1
P3
Quantity
Price Price increase moves us rightward along supply curve
S
Price increase moves us leftward along supply curve
![Page 40: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/40.jpg)
40
Figure 6(b): Changes in Supply and in Quantity Supplied
Quantity
Price
S2
S1Entire supply curve shifts rightward when:• price of input ↓• price of alternate good ↓• number of firms ↑• expected price ↑• technological advance• favorable weather
![Page 41: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/41.jpg)
41
Figure 6(c): Changes in Supply and in Quantity Supplied
Quantity
Price
S1
S2Entire supply curve shifts rightward when:• price of input ↑• price of alternate good ↑• number of firms ↓• expected price ↑• unfavorable weather
![Page 42: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/42.jpg)
42
Summary: Factors That Shift The Supply Curve
The short list of shift-variables for supply that we have discussed is far from exhaustive
In some cases, even the threat of such events can cause serious effects on production
Basic principle is always the same Anything that makes sellers want to sell more or less of a
good at any given price will shift supply curve
![Page 43: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/43.jpg)
43
Figure 7: Market Equilibrium
E
HJ1.00
$3.00
D
S
50,000 75,00025,000
Excess Demand
4. until price reaches its equilibrium value of $3.00
.
2. causes the price to rise . . .
3. shrinking the excess demand . . .
1. At a price of $1.00 per bottle an excess demand of 50,000 bottles . . .
Number of Bottles per Month
Price per Bottle
![Page 44: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/44.jpg)
44
Excess Demand
Excess demand At a given price, the excess of quantity
demanded over quantity supplied Price of the good will rise as buyers
compete with each other to get more of the good than is available
![Page 45: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/45.jpg)
45
Figure 8: Excess Supply and Price Adjustment
3. shrinking the excess supply . . .
K L
E3.00
D
S
$5.00
50,00035,000 65,000
Excess Supply at $5.00
2. causes the price to drop,
4. until price reaches its equilibrium value of $3.00.
Number of Bottles per Month
Price per Bottle
1. At a price of $5.00 per bottle an excess supply of 30,000 bottles . . .
![Page 46: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/46.jpg)
46
Excess Supply
Excess Supply At a given price, the excess of quantity
supplied over quantity demanded Price of the good will fall as sellers
compete with each other to sell more of the good than buyers want
![Page 47: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/47.jpg)
47
Figure 9
1. An increase in demand . . .E
F'
3.00
D1
D2
S
$4.00
50,000 60,000
3. to a new equilibrium.
5. and equilibrium quantity increases too.
2. moves us along the supply curve . . .
Number of Bottles of Maple Syrup per Period
Price per Bottle
4. Equilibrium price increases
![Page 48: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/48.jpg)
48
An Ice Storm Hits: What Happens When Things Change
An ice storm causes a decrease in supply Weather is a shift variable for supply curve
Any change that shifts the supply curve leftward in a market will increase the equilibrium price
And decrease the equilibrium quantity in that market
![Page 49: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/49.jpg)
49
Figure 10: A Shift of Supply and A New Equilibrium
E'
E3.00
D
$5.00
50,00035,000
S2 S1
Number of Bottles
Price per Bottle
![Page 50: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/50.jpg)
50
Using Supply and Demand: The Invasion of Kuwait
Why did Iraq’s invasion of Kuwait cause the price of oil to rise? Immediately after the invasion, United
States led a worldwide embargo on oil from both Iraq and Kuwait
A significant decrease in the oil industry’s productive capacity caused a shift in the supply curve to the left
Price of oil increased
![Page 51: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/51.jpg)
51
Figure 12: The Market For Oil
P2
D
E'
P1E
Q2 Q1
S2
S1
Barrels of Oil
Price per Barrel of Oil
![Page 52: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/52.jpg)
52
Using Supply and Demand: The Invasion of Kuwait
Why did the price of natural gas rise as well? Oil is a substitute for natural gas Rise in the price of a substitute increases
demand for a good Rise in price of oil caused demand curve
for natural gas to shift to the right Thus, the price of natural gas rose
![Page 53: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/53.jpg)
53
Figure 13: The Market For Natural Gas
Cubic Feet of Natural Gas
Price per Cubic Foot of Natural
Gas
P4
P3
F
Q3 Q4
S
D2
F'
D1
![Page 54: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/54.jpg)
54
Figure 11: Changes in the Market for Handheld PCs
1. An increase in supply . . .
2. and a decrease in demand . . .
5. and quantity decreased as well.
A
B$400
D2003
S2002
S2003
D2002
$500
2.45 3.33 Millions of Handheld PCs per Quarter
Price per Handheld
PC
4. Price decreased . . .
3. moved the market to a new equilibrium.
![Page 55: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/55.jpg)
55
Both Curves Shift
When just one curve shifts (and we know the direction of the shift) we can determine the direction that both equilibrium price and quantity will move
When both curves shift (and we know the direction of the shifts) we can determine the direction for either price or quantity—but not both Direction of the other will depend on which curve
shifts by more
![Page 56: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/56.jpg)
56
The Three Step Process
Key Step 1—Characterize the Market Decide which market or markets best suit problem
being analyzed and identify decision makers (buyers and sellers) who interact there
Key Step 2—Find the Equilibrium Describe conditions necessary for equilibrium in
the market, and a method for determining that equilibrium
Key Step 3—What Happens When Things Change Explore how events or government polices change
market equilibrium
![Page 57: Theory of Supply and Demand Presentation by Said Cherkaoui, Ph.D](https://reader035.vdocuments.us/reader035/viewer/2022062314/56812ac3550346895d8e9072/html5/thumbnails/57.jpg)
57
http://www.glocentra.com
Emails: [email protected] [email protected]
Business Phone: 510-692-6460
Private Phone: 510-382-9040