ECON 300 PPT CH - 02

Understanding Economics
6th edition
by Mark Lovewell
Copyright 2012 by McGraw-Hill Ryerson

Limited. All rights reserved.
6th edition
by Mark Lovewell
Chapter 2
Demand and Supply
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights reserved.
Learning Objectives
After this chapter, you will be able to:
1. comprehend the nature of demand, changes in
quantity demanded, changes in demand, and the
factors that affect demand
2. understand the nature of supply, changes in
quantity supplied, changes in supply, and the
factors that affect supply
3. explain how markets reach equilibrium the point
at which demand and supply meet

What Is Demand?
Demand is a relationship between a products
price and quantity demanded.
Demand is shown using a schedule or curve.
The law of demand states that price and
quantity demanded are inversely related.
Market demand is the sum of quantities
demanded by all consumers in a market.

The Demand Curve
Figure 2.1, page 34
Your Demand Curve for Strawberries
Your Demand Schedule 2.50 a
for Strawberries
b
2.00
Quantity Point
Price ($ per kg)

Price
($ per kg) Demanded on c
(kg per month) graph 1.50
D
$2.50 7 a 1.00
2.00 9 b
0.50
1.50 11 c
0 1 3 5 7 9 11 13
Quantity Demanded
(kg per month)

Deriving Market Demand
Figure 2.2, page 36
Your Demand Curve for Strawberries Friends Demand Curve for Strawberries
Price ($ per kg)

2.50
Price ($ per kg)
2.50
2.00 2.00
1.50 1.50
1.00 D0 1.00 D1
0.50 0.50
0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7
Quantity Demanded (kg per month) Quantity Demanded (kg per month)
Market Demand Curve for Strawberries

Individual and Market Demand
Schedules for Strawberries
Price ($ per kg)

2.50
Price You Friend Market 2.00
1.50
($ per (D0) (D1) (Dm)
kg) 1.00
(kg per month) Dm
0.50
$2.50 1 2 3
2.00 2 3 5
1.50 3 4 7 0 1 2 3 4 5 6 7
Quantity Demanded (kg per month)

Changes in Demand (a)
Changes in demand:
are shown by shifts in the demand curve
are caused by changes in demand factors

Changes in Demand (b)
Figure 2.3, page 37
Market Demand Curve for Strawberries
Market Demand Schedule 2.50
for Strawberries
2.00
Price Quantity Demanded
Price ($ per kg)

($ per (millions of kg)
kg) (D2) (D0) (D1) 1.50
D2 D0 D1
$2.50 5 7 9 1.00
2.00 7 9 11
0.50
1.50 9 11 13
0 1 3 5 7 9 11 13
Quantity Demanded
(millions of kg per year)

Demand Factors (a)
Demand factors include the following:
The number of buyers (an increase causes a
rightward demand shift)
Income
For normal products, an increase causes a rightward
demand shift.
For inferior products, an increase causes a leftward
demand shift.

Demand Factors (b)
Prices of other products
For substitute products, a rise in the other
products price causes a rightward demand
shift.
For complementary products, a rise in the other
products price causes a leftward demand shift.
Consumer preferences
Consumer expectations

Changes in Quantity
Demanded (a)
Changes in quantity demanded:
are shown by movements along demand curve
are caused by price changes

Changes in Quantity Demanded (b)
Figure 2.4, page 39
Change in Quantity Demanded Change in Demand

Price ($ per pair of skis)
Price ($ per pair of skis)

a
2.00 2.00
b
1.50 1.50
1.00 1.00
D0 D0 D1
0.50 0.50
0 5000 6000 0 5000
Quantity Demanded (pairs of skis) Quantity Demanded (pairs of skis)

What Is Supply?
Supply:
is a relationship between a products price and
quantity supplied
is shown using a schedule or curve
The law of supply states there is a direct
relationship between price and quantity
supplied.

The Supply Curve
Figure 2.5, page 41
Market Supply Curve for Strawberries
Market Supply Schedule f
for Strawberries S
2.50
e
Price Quantity Supplied Points
($ per kg) (millions of kg) on graph 2.00 d
Price ($ per kg)

1.50
$2.50 13 f
2.00 9 e 1.00
1.50 5 d
0.50
0 1 3 5 7 9 11 13
Quantity Supplied

Changes in Supply (a)
Changes in supply:
are shown by shifts in the supply curve
are caused by changes in supply factors

Changes in Supply (b)
Figure 2.6, page 42
Market Supply Curve for Strawberries
S2 S0 S1
Market Supply Schedule
2.50
for Strawberries
Price Quantity Supplied 2.00
Price ($ per kg)

($ per (millions of kg)
kg) (S ) (S0) (S1)
1.50
2
$2.50 11 13 15 1.00
2.00 7 9 11 0.50
1.50 3 5 7
0 1 3 5 7 9 11 13 15
Quantity Supplied

Supply Factors (a)
Supply factors include the following:
Number of producers (an increase causes a
rightward supply shift)
Resource prices (an increase causes a leftward
supply shift)
State of technology (an improvement causes a
Prices of related products (an increase causes a
leftward supply shift)

Supply Factors (b)
Changes in nature (for some products, an
improvement causes a rightward supply shift)
Producer expectations (an expectation of lower
prices in the future causes an immediate

Changes in Quantity Supplied (a)
Changes in quantity supplied:
are shown by movements along the supply
curve
are caused by price changes

Changes in Quantity Supplied (b)
Figure 2.7, page 44
Change in Quantity Supplied Change in Supply
S0 S0 S1
120 b 120
100 a 100
Price ($ per kg)
Price ($ per kg)

80 80
60 60
40 40
20 20
0 1 2 0 1 2
Quantity Supplied Quantity Supplied

(millions of kg per year) (millions of kg per year)

Market Equilibrium (a)
When a product is in surplus:
there is excess supply
price is pushed down
When a product is in shortage:
there is excess demand
price is pushed up

Market Equilibrium (b)
Figure 2.8, page 46
Market Demand and Supply Market Demand and Supply Curves
Schedules for Strawberries for Strawberries
S
3.00 Surplus
Surplus (+)
Quantities or Shortage
Price (millions of kg) (-) 2.50 a a
Price ($ per kg)

($ per D S (millions of
kg) kg) 2.00 e
$3.00 5 13 13 b b
1.50
2.50 7 11 11 Shortage
1.00
2.00 9 9 9
D
1.50 11 7 7
1.00 13 5 5
0 1 3 5 7 9 11 13 15
Quantity

Changes in Equilibrium
(a)
A rightward demand shift pushes up both
equilibrium price and quantity.
A leftward demand shift pushes down both
equilibrium price and quantity.

A rightward supply shift pushes equilibrium
price down and equilibrium quantity up.

A leftward supply shift pushes equilibrium
price up and equilibrium quantity down.

Demand Changes and Equilibrium
Market Demand and Supply Curves
Figure 2.9, page 47
for Strawberries
Market Demand and Supply S
Schedules for Strawberries 3.00
2.50 b
Price Quantities
Price ($ per kg)

(D0) (D1) (S)
2.00 a
($ per kg.) (millions of kg)
$3.00 5 9 13 1.50
2.50 7 11 11 shortage
1.00
D0 D1
2.00 9 13 9
1.50 11 15 7
1.00 13 17 5
0 1 3 5 7 9 11 13 15 17
Quantity

Supply Changes and Equilibrium
Market Demand and Supply Curves
Figure 2.10, page 48
for Strawberries
Market Demand and Supply S0 S1
2.50 Surplus
Price Quantities
Price ($ per kg)

(D0) (S0) (S1) a
($ per kg) (millions of kg) 2.00
b
$3.00 5 13 17 1.50
2.50 7 11 15 1.00
D0
2.00 9 9 13
1.50 11 7 11
1.00 13 5 9
0 1 3 5 7 9 11 13 15 17
Quantity

(b)
A simultaneous rightward shift in demand and
supply raises equilibrium quantity, but the
effect on equilibrium price depends on the
relative sizes of the two shifts.
if demand shifts rightward more than supply,
then price rises
if supply shifts rightward more than demand,
then price falls

Effects of Increases in Demand and
Supply Market Demand and Supply Curves
Figure 2.11 page 49
for Strawberries
Market Demand and Supply S0 S1
Price Quantities 2.50
Price ($ per kg)

(D0) (D1) ( S0) (S1) a b
($ per kg.) (millions of kg) 2.00
$3.00 5 9 13 17 1.50
2.50 7 11 11 15
1.00
9 13 9 13 D0 D1
2.00
1.50 11 15 7 11
1.00 13 17 5 9
0 1 3 5 7 9 11 13 15 17
Quantity

(c)
A simultaneous rightward shift in demand and
leftward shift in supply raises equilibrium
price, but the effect on equilibrium quantity
depends on the relative sizes of the two shifts.
if supply shifts leftward more than demand
shifts rightward, then quantity falls
if demand shifts rightward more than supply
shifts leftward, then quantity rises

Effects of a Demand Increase and
Supply Decrease Market Demand and Supply Curves
Figure 2.12 page 50
for Strawberries
Market Demand and Supply S S0
3.00 b
Schedules for Strawberries 1
Price Quantities 2.50
Price ($ per kg)

(D0) (D1) ( S0) (S1)
($ per kg.) (millions of kg) 2.00
a
$3.00 5 7 13 11 1.50
2.50 7 9 11 9
1.00
9 11 9 7 D0 D1
2.00
1.50 11 13 7 5
1.00 13 15 5 3
0 1 3 5 7 9 11 13 15 17
Quantity

Spoilt for Choice
William Stanley Jevons:
assumed measurable utility
outlined the law of diminishing marginal utility,
which states that a consumers marginal utility
declines as more of a product is consumed
showed how this law can be illustrated using
the downward-sloping marginal utility graph for
a given consumer and product, based on that
consumers total utility graph

Spoilt for Choice (b)
Figure A, page 57
Total Utility
Consumers Total and Marginal
Utility From Cappuccino 28 e
d
Quantity Total Margina 24
Consume Utility l c
d (utils) Utility 20
Utility (utils)
(cups) (utils) 16
0 0 (a) b
12 (f) 12
1 12 (b)
8 (g) 8
2 20 (c)
4 (h) 4
3 24 (d) a
2 (i)
4 26 (e) 0 1 2 3 4
Cups of Cappuccino
Marginal Utility
16
Utility (utils)
f
12
g
8
h
4 i
0 1 2 3 4
Cups of Cappuccino

The Utility-Maximizing
Rule
Jevons devised the utility-maximizing
rule
this rule states a consumer should reach
the same marginal utility per dollar for all
products consumed
in mathematical terms:
MU1 MU2
=
P1 P2

Spoilt for Choice (c)
Figure B, page 58
Cups of Cappuccino Danish Pastries
(price = $1) (price = $2)
Quantity Margina Marginal Quantity Margina Marginal
l Utility l Utility
Utility per $ Utility per $
(MU1) (MU1/P1=MU1/$1) (MU2) (MU2/P2=MU2/$2)
(utils per $) (utils per $)
0 (utils) 0 (utils)
12 12 16
1 1
8 8 12 8
2 2
4 4 8 6
3 3
2 2 4 4
4 4
2
Cappuccinos Danish Pastries
Marginal Utility
Marginal Utility
12 12
Per $ (utils)
Per $ (utils)
8 8
4 4
0 1 2 3 4 0 1 2 3 4
Cups of Cappuccino Pastries

Through the Ranks (OLC)
Indifference Curves
Using indifference curves, consumer
preferences can be shown without the need to
assume measurable utility.
An individual consumer must merely rank
his/her options for various bundles of two
products in order of preference.
A consumer may prefer one bundle to
another, or be indifferent between the two.

An Indifference Curve (a)
An indifference curve shows all bundles of two
goods to which a particular consumer is
indifferent.
The curve is downward-sloping because, for
any point on the curve, all points to the
northeast provide more utility and all points to
the southwest provide less utility.

An Indifference Curve (b)
Alices Indifference Curve
Alices Indifference Schedule
a At each point on
4 the curve, Alice
Milkshakes Hamburgers Point on
Milkshakes
derives the same
Graph 3 b level of utility.
4 3 a c
2
3 4 b
d
2 7 c 1
I0
1 12 d
0 4 8 12
Hamburgers

The Marginal Rate of
Substitution
The absolute value of an indifference curves
slope is the marginal rate of substitution
(MRS).
An indifference curve is convex, since the
curves MRS diminishes as more of the
product on the horizontal axis (hamburgers),
and less on the vertical axis (milkshakes) is
consumed.

Diminishing Marginal Rate of
Substitution
The diminishing marginal rate of substitution

occurs because, as hamburger consumption
rises, more hamburgers must be gained to
make the consumer willing to sacrifice another
milkshake.

A Map of Indifference Curves (a)
A map of indifference curves can be drawn for
an individual consumer, with each indifference
curve further to the northeast representing a
higher level of utility

A Map of Indifference Curves (b)
A Map of Indifference Curves
Each curve shows

points that give
4
different levels
Milkshakes
of utility for Alice.
3
2
I2
I1
1
I0
0 4 8 12
Hamburgers

The Budget Line (a)
A consumers budget line:
is drawn based on the assumption that all the
consumers budget is spent on hamburgers and
milkshakes
has a vertical intercept equal to the consumers
budget divided by the price of milkshakes
has a horizontal intercept equal to the
consumers budget divided by the price of
hamburgers

The Budget Line (b)
has a slope whose absolute value equals the
ratio of the two prices (the price of hamburgers
divided by the price of milkshakes)
divides the graph into an attainable region
southwest of the line, and an unattainable
region northeast of the line

The Budget Line (c)
Alices Budget Line

Alices Budget Schedule
5 The budget curve
$15/$3 shows all those
Milkshakes Hamburgers
4 points Alice
can reach with her
Milkshakes
5 0 limited budget.
3
4 2
3 4 2 $15/$1.50
2 6
1
1 8
0 10
0 4 8 10 12
Hamburgers

The Utility-Maximizing Point (a)
The consumer maximizes utility by reaching
the highest possible indifference curve on the
budget line.
This utility-maximizing point occurs on the
indifference curve that just touches the
budget line at a single point.

The Utility-Maximizing Point
(b)
Alices greatest
5 achievable utility
is on the indifference
4
curve which touches
b (4, 3)
Milkshakes
her budget line at
3 a single point.
1 I0
0 4 8 10 12
Hamburgers

Deriving a Demand Curve (a)
The consumers demand curve for
hamburgers can be found by tracing out the
results of a change in the price of hamburgers
given a constant money budget and price for
milkshakes.

Deriving a Demand Curve (b)
A decline in the price of
hamburgers from $1.50
to $1 causes Alices quantity
5
Price ($ per hamburger)

demanded to rise from
1.50 4 to 6, as shown by her
4
demand curve, D.
Milkshakes
3 b e (6,3)
1.00
2
.50
1 I1
D
I0
0 4 8 10 12 15 0 4 8 12
Hamburgers Quantity (hamburgers per week)

66h edition
by Mark Lovewell
Chapter 2
The End
Copyright 2012 by McGraw-Hill Ryerson Limited. All rights reserved.

ECON 300 PPT CH - 02

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Understanding Economics

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Price ($ per kg)

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Price ($ per kg)

Market Demand Curve for Strawberries

Price ($ per kg)

Quantity Demanded (kg per month)

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Copyright 2012 by McGraw-Hill Ryerson

Price ($ per kg)

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Change in Quantity Demanded Change in Demand

Price ($ per pair of skis)

0 5000 6000 0 5000

Quantity Demanded (pairs of skis) Quantity Demanded (pairs of skis)

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Price ($ per kg)

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Price ($ per kg)

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Change in Quantity Supplied Change in Supply

Price ($ per kg)

Quantity Supplied Quantity Supplied

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Price ($ per kg)

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equilibrium price and quantity.

price down and equilibrium quantity up.

price up and equilibrium quantity down.

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Price ($ per kg)

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Price ($ per kg)

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then price falls

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Price Quantities 2.50

Price ($ per kg)

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shifts leftward, then quantity rises

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Price Quantities 2.50

Price ($ per kg)

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