PARKIN

MICROECONOMICS
Thirteenth Edition, Global Edition
3 DEMAND AND
SUPPLY
After studying this chapter, you will be able to:

• Describe a competitive market and think about a price

as an opportunity cost
• Explain the influences on demand
• Explain the influences on supply
• Explain how demand and supply determine prices and
quantities bought and sold
• Use the demand and supply model to make predictions
about changes in prices and quantities
 Markets and Prices

A market is any arrangement that enables buyers and

sellers to get information and do business with each other.
A competitive market is a market that has many buyers
and many sellers so no single buyer or seller can influence
the price.
The money price of a good is the amount of money
needed to buy it (the number of dollars that must be
given up in exchange of the object).
The relative price of a good—the ratio of its money price
to the money price of the next best alternative good—is its
opportunity cost.
Coffee 3$, Gum, 1$.
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 Demand

If you demand something, then you

1. Want it,
2. Can afford it, and
3. Have made a definite plan to buy it.
Wants are the unlimited desires or wishes people have for
goods and services. Demand reflects a decision about
which wants to satisfy.
The quantity demanded of a good or service is the
amount that consumers plan to buy during a particular time
period, and at a particular price (not necessarily the
quantity actually bought).
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 Demand

The Law of Demand

The law of demand states:
Other things remaining the same, the higher the price of a
good, the smaller is the quantity demanded; and …
the lower the price of a good, the larger is the quantity
demanded.
Why does a change in the price change the quantity
demanded? Two reasons:
■ Substitution effect
■ Income effect

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 Demand

Substitution Effect
When the relative price (opportunity cost) of a good or
service rises, people seek substitutes for it, so the quantity
demanded of the good or service decreases.
Income Effect
When the price of a good or service rises relative to
income, people cannot afford all the things they previously
bought, so the quantity demanded of the good or service
decreases.

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 Demand

Demand Curve and Demand Schedule

The term demand refers to the entire relationship between
the price of the good and quantity demanded of the good.
A demand curve shows the relationship between the
quantity demanded of a good and its price when all other
influences on consumers’ planned purchases remain the
same.
(Demand is illustrated by demand curve and
demand schedule. The term quantity demanded
refers to a point on a demand curve. )

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 Demand

Figure 3.1 shows a demand curve for energy bars.

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 Demand

A rise in the price, other

things remaining the
same, brings a decrease
in the quantity demanded
and a movement up along
the demand curve.
A fall in the price, other
things remaining the
same, brings an increase
in the quantity demanded
and a movement down
along the demand curve.

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 Demand

Willingness and
Ability to Pay
A demand curve is also a
willingness-and-ability-to-
pay curve.
The smaller the quantity
available, the higher is the
price that someone is willing
to pay for another unit.
Willingness to pay
measures marginal benefit.

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 Demand

A Change in Demand
When some influence on buying plans other than the price
of the good changes, there is a change in demand for
that good.
The quantity of the good that people plan to buy changes
at each and every price, so there is a new demand curve.
When demand increases, the demand curve shifts
rightward.
When demand decreases, the demand curve shifts
leftward.

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 Demand

Six main factors that change demand are:

■ The prices of related goods
■ Expected future prices
■ Income
■ Expected future income and credit
■ Population
■ Preferences

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 Demand

Prices of Related Goods

A substitute is a good that can be used in place of
another good. (bus ride/tax ride, hamburger/hot dog)
A complement is a good that is used in conjunction with
another good. (hamburgers/fries, coffee/cream)
When the price of a substitute for an energy bar rises or
when the price of a complement of an energy bar falls, the
demand for energy bars increases.

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 Demand

Expected Future Prices

If the price of a good is expected to rise in the future, current
demand for the good increases and the demand curve shifts
rightward. (people retime their purchases)
Income
When income increases, consumers buy more of most goods
and the demand curve shifts rightward.
A normal good is one for which demand increases as income
increases.
An inferior good is a good for which demand decreases as
income increases.
(air travel/long-distance bus trips)
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 Demand

Figure 3.2 shows an increase in demand.

An increase in income increases the demand for energy
bars and shifts the demand curve rightward.

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 Demand

Expected Future Income and Credit

When income is expected to increase in the future or when
credit is easy to obtain, the demand might increase now.
Population
The larger the population, the greater is the demand for all
goods. (parking space, college places)
Preferences
People with the same income have different demands if
they have different preferences.

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 Demand

A Change in the Quantity

Demanded Versus a
Change in Demand
Figure 3.3 illustrates the
distinction between a
change in demand and a
change in the quantity
demanded.

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 Demand

Movement Along the

Demand Curve
When the price of the
good changes and other
things remain the same,
the quantity demanded
changes and there is a
movement along the
demand curve.

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 Demand

A Shift of the Demand

Curve
If the price remains the
same but one of the other
influences on buyers’
plans changes, demand
changes and the demand
curve shifts.

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 Supply

If a firm supplies a good or service, then the firm

1. Has the resources and the technology to produce it,
2. Can profit from producing it, and
3. Has made a definite plan to produce and sell it.
Resources and technology determine what it is possible
to produce. Supply reflects a decision about which
technologically feasible items to produce.
The quantity supplied of a good or service is the amount
that producers plan to sell during a given time period at a
particular price.

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 Supply

The Law of Supply

The law of supply states:
Other things remaining the same, the higher the price of a
good, the greater is the quantity supplied; and
the lower the price of a good, the smaller is the quantity
supplied.
The law of supply results from the general tendency for the
marginal cost of producing a good or service to increase
as the quantity produced increases (Chapter 2, page 35).
Producers are willing to supply a good only if they can at
least cover their marginal cost of production.
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 Supply

Supply Curve and Supply Schedule

The term supply refers to the entire relationship between
the quantity supplied and the price of a good.
The supply curve shows the relationship between the
quantity supplied of a good and its price when all other
influences on producers’ planned sales remain the same.

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 Supply

Figure 3.4 shows a supply curve of energy bars.

A rise in the price, other

things remaining the
same, brings an increase
in the quantity supplied.
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 Supply
Minimum Supply Price
A supply curve is also a
minimum-supply-price
curve, a curve that shows
the lowest price at which
someone is willing to sell
an additional unit.

This lowest price is marginal

cost.
As the quantity produced
increases, marginal cost
increases.
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 Supply

A Change in Supply
When some influence on selling plans other than the price
of the good changes, there is a change in supply of that
good.
The quantity of the good that producers plan to sell
changes at each and every price, so there is a new supply
curve.
When supply increases, the supply curve shifts rightward.
When supply decreases, the supply curve shifts leftward.

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 Supply

The six main factors that change supply of a good are

 The prices of factors of production
 The prices of related goods produced
 Expected future prices
 The number of suppliers
 Technology
 State of nature

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 Supply

Prices of Factors of Production

If the price of a factor of production used to produce a
good rises, the minimum price that a supplier is willing to
accept for producing each quantity of that good rises.
So a rise in the price of a factor of production decreases
supply and shifts the supply curve leftward.

The price of jet fuel increased, the supply of air

travel decreased.
A rise in the minimum wage decreases the supply
of hamburgers.
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© 2019 Pearson Education Ltd.
 Supply

Prices of Related Goods Produced

A substitute in production for a good is another good that
can be produced using the same resources (energy
drink/suger drink).
The supply of a good increases if the price of a substitute
in production falls.
Goods are complements in production if they must be
produced together (beef/cowhide).
The supply of a good increases if the price of a
complement in production rises.

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 Supply

Expected Future Prices

If the price of a good is expected to rise in the future,
supply of the good today decreases and the supply curve
shifts leftward.
The Number of Suppliers
The larger the number of suppliers of a good, the greater is
the supply of the good. An increase in the number of
suppliers shifts the supply curve rightward.

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 Supply

Technology
Advances in technology create new products and lower the
cost of producing existing products.
So advances in technology increase supply and shift the
supply curve rightward.
The State of Nature
The state of nature includes all the natural forces that
influence production—for example, the weather.
A natural disaster decreases supply and shifts the supply
curve leftward.

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 Supply

Figure 3.5 shows an increase in supply.

An advance in the technology increases the supply of
energy bars and shifts the supply curve rightward.

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 Supply

A Change in the Quantity

Supplied Versus a
Change in Supply
Figure 3.6 illustrates the
distinction between a
change in supply and a
change in the quantity
supplied.

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 Supply

Movement Along the

Supply Curve
When the price of the
good changes and other
influences on sellers’ plans
remain the same, the
quantity supplied changes
and there is a movement
along the supply curve.

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 Supply

A Shift of the Supply

Curve
If the price remains the
same but some other
influence on sellers’ plans
changes, supply changes
and the supply curve
shifts.

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 Market Equilibrium

Equilibrium is a situation in which opposing forces balance

each other. Equilibrium in a market occurs when the price
balances the plans of buyers and sellers.
The equilibrium price is the price at which the quantity
demanded equals the quantity supplied.
The equilibrium quantity is the quantity bought and sold
at the equilibrium price.
■ Price regulates buying and selling plans.
■ Price adjusts when plans don’t match.

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 Market Equilibrium

Figure 3.7 illustrates the market equilibrium—the price at

which quantity demanded equals quantity supplied.

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 Market Equilibrium

Price as a Regulator

If the price is $2.00 a bar, the

quantity supplied exceeds the
quantity demanded.
There is a surplus of 6 million
energy bars.
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 Market Equilibrium

Price as a Regulator

If the price is $1.00 a bar, the

quantity demanded exceeds the
quantity supplied.
A shortage of 9 million bars.
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 Market Equilibrium

Price as a Regulator

If the price is $1.50 a bar, the

quantity supplied equals the
quantity demanded.
No shortage or surplus of bars.
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 Market Equilibrium

Price Adjustments
At prices above the
equilibrium price, a surplus
forces the price down.
At prices below the
equilibrium price, a shortage
forces the price up.
At the equilibrium price,
buyers’ plans and sellers’
plans agree and the price
doesn’t change until an event
changes demand or supply.
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 Predicting Changes in Price and
Quantity
An Increase in Demand
Figure 3.8 shows that
when demand increases
the demand curve shifts
rightward.
At the original price, there
is now a shortage.
The price rises, and the
quantity supplied
increases along the supply
curve.

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 Predicting Changes in Price and
Quantity
A Decrease in Demand
The figure shows that
when demand decreases
the demand curve shifts
leftward.
At the original price, there
is now a surplus.
The price falls, and the
quantity supplied
decreases along the
supply curve.

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 Predicting Changes in Price and
Quantity
An Increase in Supply
Figure 3.9 shows that
when supply increases the
supply curve shifts
rightward.
At the original price, there
is now a surplus.
The price falls, and the
quantity demanded
increases along the
demand curve.

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 Predicting Changes in Price and
Quantity
A Decrease in Supply
The figure shows that
when supply decreases
the supply curve shifts
leftward.
At the original price, there
is now a shortage.
The price rises, and the
quantity demanded
decreases along the
demand curve.

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 Predicting Changes in Price and
Quantity
Changes in Both Demand and Supply
A change in both demand and supply changes the
equilibrium price and the equilibrium quantity.
Figure 3.10 illustrates changes in the same direction.
Figure 3.11 illustrates changes in opposite directions.

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 Predicting Changes in Price and
Quantity
Both Demand and Supply
Change in the Same
Direction
An increase in demand and
an increase in supply
increase the equilibrium
quantity.
The change in equilibrium
price is uncertain because
the increase in demand
raises the price and the
increase in supply lowers it.
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© 2019 Pearson Education Ltd.
 Predicting Changes in Price and
Quantity
A decrease in both
demand and supply
decreases the equilibrium
quantity.
The change in equilibrium
price is uncertain because
the decrease in demand
lowers the price and the
decrease in supply raises
the price.

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 Predicting Changes in Price and
Quantity
Both Demand and Supply
Change in Opposite
Directions
A decrease in demand and
an increase in supply lowers
the equilibrium price.
The change in equilibrium
quantity is uncertain
because the decrease in
demand decreases the
quantity and the increase
in supply increases it.
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© 2019 Pearson Education Ltd.
 Predicting Changes in Price and
Quantity
An increase in demand
and a decrease in supply
raises the equilibrium
price.
The change in equilibrium
quantity is uncertain
because the increase in
demand increases the
quantity and the decrease
in supply decreases it.

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Q1. The demand and supply
schedules for gum are in the table. Quantity Quantity
Price demande supplied
d
a. Suppose that the price of gum is 70¢
(cents per (millions of packs a
a pack. Describe the situation in the pack) week)
gum market and explain how the
20 180 60
price adjusts.
40 140 100
b. Suppose that the price of gum is 30¢
60 100 140
a pack. Describe the situation in the
gum market and explain how the 80 60 180
price adjusts.

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Q1. a. At 70 cents a pack, there is a surplus of gum and the price falls. At
70 cents a pack, the quantity demanded is 80 million packs a week and
the quantity supplied is 160 million packs a week. There is a surplus of
80 million packs a week. The price falls until market equilibrium is
restored at a price of 50 cents a pack.

b. At 30 cents a pack, there is a shortage of gum and the price rises. At

30 cents a pack, the quantity demanded is 160 million packs a week and
the quantity supplied is 80 million packs a week. There is a shortage of
80 million packs a week. The price rises until market equilibrium is
restored at a price of 50 cents a pack.

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Q2 . In Q1, a fire destroys some factories that produce gum and the
quantity of gum supplied decreases by 40 million packs a week at each price.

a. Explain what happens in the market for gum and draw a graph to illustrate
the changes.

b. If, at the time as the fire the teenage population increases and the quantity
of gum demanded increases 40 million packs a week at each price. What is
the new market equilibrium? Show the changes on your graph.

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Q2. a. As the number of gum-producing factories decreases, the
supply of gum decreases. There is a new supply schedule and, in
Figure 3.1, the supply curves shifts leftward by 40 million packs at

each price to the new supply curve S1. After the fire, the quantity

supplied at 50 cents is now only 80 million packs, and there is a

shortage of gum. The price rises to 60 cents a pack, at which the new
quantity supplied equals the quantity demanded. The new equilibrium
price is 60 cents and the new equilibrium quantity is 100 million packs
a week.

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Q2 b. The new price is 70 cents a pack, and the quantity is 120
million packs a week. The demand for gum increases and the demand
curve shifts rightward by 40 million packs at each price. Supply
decreases by 40 millions packs a week and the supply curve shifts
leftward by 40 million packs at each price. These changes are shown

in Figure 3.2 by the shift of the demand curve from D to D1 and the

shift of the supply curve from S to S1. At any price below 70 cents a

pack there is a shortage of gum. The price of gum rises until the
shortage is eliminated.

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