Economics Today: Nineteenth Edition

Economics Today
Nineteenth Edition
Chapter 3
Demand and Supply
Copyright © 2018, 2016, 2014 Pearson

CopyrightEducation, Inc. All
© 2018, 2016, 2014 Pearson Rights
Education, Inc. All Reserved
Rights Reserved
Introduction
New techniques for producing oil have generated an
upsurge in oil production from 5.4 millions barrels per
day in 2010 to about 9 billion barrels per day now.
However, producers have been struggling to transport
all their oil to refineries because the federal government
has not permitted construction of oil pipelines linking
regions of new oil production to areas with refineries.
In this chapter you will understand the implications of
the increase in desired oil storage tanks.
Copyright © 2018, 2016, 2014 Pearson Education, Inc. All Rights Reserved
Learning Objectives
• 3.1 Explain the law of demand
• 3.2 Distinguish between changes in demand and
changes in quantity demanded
• 3.3 Explain the law of supply
• 3.4 Distinguish between changes in supply and
changes in quantity supplied
• 3.5 Understand how the interaction of demand
and supply determines the equilibrium price and
quantity
Chapter Outline
• 3.1 Demand
• 3.2 Shifts in Demand
• 3.3 Supply
• 3.4 Shifts in Supply
• 3.5 Putting Demand and Supply Together
Did You Know That ... (1 of 2)
• the price of eggs sold in supermarkets increased
by more than 100 percent within a three-week
period?
• Many people and firms would respond to the price
change by substituting away from egg
consumption.
• By using demand and supply, you can develop a
better understanding of why sometimes we
observe large decreases in the purchase of items
such as eggs.
Did You Know That ... (2 of 2)
• Market
– All of the arrangements that individuals have
for exchanging with one another
– Examples of markets:
 Automobile market
 Health care market
 Market for high-speed Internet access
– One of the most important activities in these markets is

the determination of prices.
3.1 Demand (1 of 7)
• Demand
– A schedule showing how much of a good or service
people will purchase at any price during a specified
time period, other things being constant
3.1 Demand (2 of 7)
• Law of demand
– A negative, or inverse, relationship between the price
of any good or service and the quantity demanded,
holding other factors constant (ceteris paribus)
 When the price of a good goes up, people buy less of it, other
things being equal.
 When the price of a good goes down, people buy more of it,
other things being equal.
3.1 Demand (3 of 7)
• What are we holding constant?
– Income
– Tastes and preferences
– Prices of other goods
– Many other factors
Example: The Law of Demand in the
Market for Cable TV Subscriptions
• Between 2000 and 2017, the inflation-adjusted
average nationwide price of a cable TV
subscription rose from $30 per month to about
$67 per month.
• During that period, the nationwide number of
cable TV subscriptions declined from more than
68 million to just over 50 million.
• This observation is consistent with the law of
demand.
3.1 Demand (4 of 7)
• Relative prices and money prices
– Relative price
 The price of a commodity in terms of
another commodity
– Money price
 The price we observe today in today’s dollars (absolute, or
nominal, price)
Table 3-1 Money Price versus Relative Price
Blank Money Price Relative Price

Blank
Blank Price
Price Price
Price Price
Price Price
Price
Last
Last Year
Year This
This Year
Year Last
Last Year
Year This
This Year
Year
Cloud
Cloud $300 $210
servers
servers $300 $210
External
$150 $140
hard drives
External
hard drives $150 $140
Example: Tips and Quality-Adjusted
Prices
• Why consumers commonly extend tips for
services such as the provision of food at
restaurants or tax services?
• Tipping behavior ensures a quality-adjusted price
that consumers are willing to pay for a delivered
service.
• Firms that allow employees to accept tips enable
consumers to pay a price consistent with the
overall quality of the service they actually do
receive.
3.1 Demand (5 of 7)
• The demand schedule is a table relating prices to
quantities demanded
– We must also consider:
 Time dimension (e.g., per year)
 Constant-quality units
3.1 Demand (6 of 7)
• Demand curve
– A graphical representation of the demand schedule
– A negatively sloped line showing the inverse
relationship between the price and the quantity
demanded (other things being equal)
Figure 3-1 The Individual Demand Schedule and
the Individual Demand Curve, Panel (a)
Panel (a)
Quantity of
Price per Constant-Quality
Constant-Quality Portable Power Banks
Combination Portable Power Bank per Year
A $5 10
B 4 20
C 3 30
D 2 40
E 1 50
Figure 3-1 The Individual Demand Schedule and
the Individual Demand Curve, Panel (b)
3.1 Demand (7 of 7)
• Individual versus market demand curves
• Market demand
– The demand of all consumers in the marketplace for a
particular good or service
– Summation at each price of the quantity demanded by
each individual
Figure 3-2 The Horizontal Summation of Two
Demand Curves, Panel (a)
Panel (a)
(1) (2) (3) (4) = (2) + (3)
Price per Buyer 1’s Buyer 2’s Combined Quantity
Portable Quantity Quantity Demanded
Power Bank Demanded Demanded per Year
$5 10 10 20
4 20 20 40
3 30 40 70
2 40 50 90
1 50 60 110
Figure 3-2 The Horizontal Summation of Two
Demand Curves, Panels (b), (c), and (d)
Figure 3-3 The Market Demand Schedule for
Portable Power Banks, Panel (a)
Panel (a)
Total Quantity Demanded of
Constant-Quality
Price per Constant-Quality Portable Power Banks per Year
Portable Power Bank (millions)
$5 2
4 4
3 6
2 8
1 10
Figure 3-3 The Market Demand Schedule for
Portable Power Banks, Panel (b)
3.2 Shifts in Demand (1 of 9)
• Scenario:
– Imagine that the government gives every registered
college student in the United States a digital device that
utilizes portable power banks.
 If some factor other than price changes, we can show its effect
by moving the entire demand curve, shifting the curve left or
right.
 In this case, there will be an increase in the number of flash
memory cards demanded at each and every possible price.
Figure 3-4 Shifts in the Demand Curve
• Ceteris paribus conditions
– These determinants of the relationship between price
and quantity are unchanged along a curve.
– Changes in these factors cause a curve to shift.
• Normal goods
– Goods for which demand rises as income rises; most
goods are normal goods
• Inferior goods
– Goods for which demand falls as income rises
• Determinants of demand
– Income
– Tastes and preferences
– The prices of related goods
 Substitutes
 Complements
• Substitutes
– Two goods are substitutes when a change in the price
of one causes a shift in demand for the other in the
same direction as the price change.
• Complements
– Two goods are complements when a change in the
price of one causes an opposite shift in the demand
curve for the other.
Example: Altered Tastes and Preferences
Generate Lower Demand for Chewing Gum
• For decades, dentists told patients that chewing
gum is not healthful for their teeth.
• As a result, the nationwide demand for chewing
gum has declined by more than 30 percent since
2009.
International Example: A Global Substitution
from Coal to Natural Gas as an Energy Source
• Since 2008, the global price of natural gas has
declined from $8 per thousand cubic feet to about
$2.50 per thousand cubic feet.
• This substantial decrease in the price of natural
gas induced consumers worldwide to substitute
away from coal consumption.
• Determinants of demand
– Expectations:
 Future prices
 Income
 Product availability
– Market size (number of buyers)
• Changes in demand versus changes in quantity
demanded:
– Whenever there is a change in a ceteris paribus
condition, there will be a change in demand:
 The entire demand curve will shift to the right or to the left.
 The only thing that can cause the entire curve to move is a
change in a determinant other than the good’s own price.
• Changes in demand versus changes in quantity
demanded:
– A change in a good’s own price leads to a change in
quantity demanded (a single point on a demand curve)
for any given demand curve:
 This is a movement along the same demand curve.
Figure 3-5 Movement along a Given Demand
Curve
3.3 Supply (1 of 3)
• Supply
– A schedule showing the relationship between price and
the quantity supplied for a specified time period, other
things being equal
– The amount of a product or service that firms are
willing to sell at alternative prices
3.3 Supply (2 of 3)
• Law of supply
– The higher the price of a good, the more of that good
sellers will make available over a specified time period,
other things being equal.
 At higher prices, a larger quantity will generally be supplied
than at lower prices, all other things held constant.
 At lower prices, a smaller quantity will generally be supplied
than at higher prices, all other things held constant.
3.3 Supply (3 of 3)
• The supply schedule is a table relating prices to
quantity supplied at each price.
• Supply curve
– A graphical representation of the supply schedule
– A positively sloped line (curve) showing the direct
relationship between price and quantity supplied, all
else being equal
Figure 3-6 The Individual Producer’s Supply
Schedule and Supply Curve for Portable Power
Banks, Panel (a)
Panel (a)
Price per Quantity of Portable
Constant-Quality Power Banks Supplied
Portable Power (thousands of constant-
Combination Bank quality units per year)
F $5 55
G 4 40
H 3 35
I 2 25
J 1 20
Figure 3-6 The Individual Producer’s Supply
Schedule and Supply Curve for Portable Power
Banks, Panel (b)
Figure 3-7 Horizontal Summation of Supply Curves,
Panel (a)
Panel (a)
(1) (2) (3) (4) = (2) + (3)
Price per Supplier 1’s Supplier 2’s Combined Quantity
Portable Quantity Supplied Quantity Supplied Supplied
Power Bank (thousands) (thousands) per Year (thousands)
$5 55 35 90
4 40 30 70
3 35 20 55
2 25 15 40
1 20 10 30
Figure 3-7 Horizontal Summation of Supply Curves,
Panels (b), (c), and (d)
Figure 3-8 The Market Supply Schedule and the
Market Supply Curve for Portable Power Banks,
Panel (a)
Panel (a)
Quantity of Portable Power

Price per Constant-Quality Banks Supplied (millions of
Portable Power Bank constant-quality units per year)
$5 10
4 8
3 6
2 4
1 2
Figure 3-8 The Market Supply Schedule and the
Market Supply Curve for Portable Power Banks,
Panel (b)
3.4 Shifts in Supply (1 of 3)
• Scenario:
– A new method of manufacturing flash memory cards
significantly reduces the cost of production.
– Producers of flash memory cards will supply more at
any given price.
Figure 3-9 Shifts in the Supply Curve
• Determinants of supply:
– Technology and productivity
– Cost of inputs
– Price expectations
– Taxes and subsidies
– Number of firms in the industry
Policy Example: Policies Generate Higher Water
Input Costs and Cut Agricultural Commodity
Supplies
• In recent years, both the U.S. government and the

California government have responded to severe
droughts by redirecting large volumes of water
away from farmers in favor of city water systems
and to rivers and streams with endangered fishes.
• As a result, supplies of agricultural commodities
have declined in California as farmers have had to
pay much higher prices for water for their crops
from private sources.
International Example: An Increase in
the Supply of Automobiles in China
• The number of automobile-manufacturing plants in
China has increased from 100 in 2010 to more
than 140 today.
• The result has been an increase in the supply of
automobiles in China of about 5 million vehicles.
• Changes in supply versus changes in quantity
supplied:
– Whenever there is a change in a ceteris paribus
condition, there will be a change in supply:
 The entire supply curve shifts to the right or to the left.
 The only thing that can cause the entire curve to move is a
change in a determinant other than the good’s own price.
– A change in a good’s own price leads to a change in
quantity supplied (a single point on a supply curve) for
any given supply curve:
 This is a movement along the same supply curve.
3.5 Putting Demand and Supply
Together (1 of 5)
• Equilibrium (market clearing) price
– The price that clears the market
– The price at which quantity demanded equals quantity
supplied
– The price where the demand curve intersects the
supply curve
Figure 3-10 Putting Demand and Supply Together,
Panel (a)
Panel (a)
(1) (2) (3) (4) (5)
Price per Quantity Quantity
Constant-Quality Supplied Demanded Difference (2) − (3)
Portable Power (portable power (portable power (portable power
Bank banks per year) banks per year) banks per year) Condition
Excess quantity supplied
$5 10 million 2 million 8 million
(surplus)
Excess quantity supplied
4 8 million 4 million 4 million
(surplus)
Market clearing
3 6 million 6 million 0 price–equilibrium (no surplus,
no shortage)
Excess quantity demanded
2 4 million 8 million −4 million
(shortage)
Excess quantity demanded
1 2 million 10 million −8 million
(shortage)
Figure 3-10 Putting Demand and Supply Together,
Panel (b)
Together (2 of 5)
• Equilibrium
– A situation in which quantity supplied equals quantity
demanded at a particular price
– There tends to be no movement of the price of the
quantity away from this point unless demand or supply
changes.
– Equilibrium is a stable point. Any point that is not
equilibrium is unstable and will not persist.
Together (3 of 5)
• The equilibrium price
– This is the price toward which the market price will
automatically tend to gravitate.
– There is no outcome better than this price for both
consumers and producers.
Together (4 of 5)
• Shortage
– A situation in which quantity demanded is greater than
quantity supplied
– Shortages exist at any price below the market clearing
price
– Shortages and scarcity are not the same thing.
Example: Long Lines at Restaurants Specializing in
Barbecued Brisket Signal a Shortage
• Long lines at restaurants serving barbecued

brisket have become commonplace in a number
of U.S. cities, such as Austin and New York City.
• At current prices, those local markets for
barbecued brisket are experiencing shortages as
the quantity demanded exceeds the quantity
supplied.
Together (5 of 5)
• Surplus
– A situation in which quantity supplied is greater than
quantity demanded
– Surpluses exist at any price above the market clearing
price.
What If ... the government requires buyers to
pay a price that is above the equilibrium price?
• The quantity supplied will remain above the
quantity demanded:
– A surplus will occur.
Policy Example: Should Shortages in the
Ticket Market Be Solved by Scalpers?
• If you’ve ever tried to get tickets to a big game,
you know all about shortages.
• Since the quantity of tickets is fixed, the price can
go pretty high.
• Scalpers take advantage of this situation.
Figure 3-11 Shortages of Super Bowl Tickets
You Are There: The Breakfast Cereal Industry
Confronts Changing Tastes and Preferences
• Even though the inflation-adjusted prices of
cereals have not changed significantly, there is a
steady decrease in the U.S. market for breakfast
cereals.
• Surveys of consumers indicate that tastes and
preferences have shifted away from eating cereals
at breakfast.
Issues & Applications: The U.S. Oil Gusher
Produces Shortages of Oil Storage Space
• Since 2010, increased domestically produced oil has
replaced oil that otherwise would have been imported and
shipped directly to refineries using existing transportation
networks.
• However, the federal government has refused to approve
the construction of new pipelines connecting regions of
new oil productions to these networks.
• The results have been an increase in the quantity
demanded of oil storage tanks by 25 percent at current oil
storage prices as well as periodic shortages of oil storage
space.
Summary Discussion of Learning
Objectives (1 of 4)
• 3.1 Explain the law of demand
– At a higher price people buy less; at a lower price
people buy more.
– Relative prices must be distinguished from money
prices since people respond to changes in relative
prices.
Objectives (2 of 4)
• 3.2 Distinguish between changes in demand and
changes in quantity demanded
– A change in quantity demanded is a movement along
the same demand curve.
– A change in demand is a shift of the whole demand
curve.
Objectives (3 of 4)
• 3.3 Explain the law of supply
– Firms offer more at a higher price; firms offer less at a
lower price.
• 3.4 Distinguish between changes in supply and

changes in quantity supplied
– A change in quantity supplied is a movement along the
same supply curve.
– A change in supply is a shift of the whole supply curve.
Objectives (4 of 4)
• 3.5 Understand how the interaction of demand
and supply determines the equilibrium price and
quantity
– The demand and supply curves intersect at the market
clearing, or equilibrium, point.
– Surpluses exist if the price of the good is greater than
the market price.
– Shortages exist when the price of a good is below the
market price.
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Copyright © 2018, 2016, 2014 Pearson

– One of the most important activities in these markets is

Blank Money Price Relative Price

– Market size (number of buyers)

Quantity of Portable Power

• In recent years, both the U.S. government and the

• Long lines at restaurants serving barbecued

• 3.4 Distinguish between changes in supply and

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