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Chapter 3

 Supply and Demand

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The Law of Demand

• The law of demand holds that other things

equal, as the price of a good or service rises, its

quantity demanded falls. – The reverse is also true as the price of a good or

service falls, its quantity demanded increases.

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Demand Curve

The demand curve has a negative slope, consistent "ith

the la" of demand.

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The Law of Supply

• The law of supply holds that other things equal,

as the price of a good rises, its quantity

supplied "ill rise, and vice versa.• $hy do producers produce more output "hen

 prices rise%

 – They see& higher profits – They can cover higher marginal costs of production

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Supply Curve

The supply curve has a positive slope, consistent "ith

the la" of supply.

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Equilibrium

• )n economics, an equilibrium is a situation in

"hich

 – there is no inherent tendency to change, – quantity demanded equals quantity supplied, and

 – the mar&et *ust clears.

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Equilibrium

quili-rium occurs at a price of ! and a quantity of !/

units.

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Shortages and Surpluses

•  shortage occurs "hen quantity demanded

exceeds quantity supplied.

 –  shortage implies the mar&et price is too lo".•  surplus occurs "hen quantity supplied

exceeds quantity demanded.

 –  surplus implies the mar&et price is too high.

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Shift in the Demand Curve

• change in any varia-le other than price thatinfluences quantity demanded produces a shift in

the demand curve or a change in demand.• 3actors that shift the demand curve include – 4hange in consumer incomes

 – 5opulation change

 – 4onsumer preferences

 – 5rices of related goods• 6u-stitutes goods consumed in place of one another 

• 4omplements goods consumed *ointly

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Shift in the Demand Curve

This demand curve has shifted to the right. 7uantity

demanded is no" higher at any given price.

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Equilibrium After a Demand Shift

The shift in the demand curve moves the mar&et

equili-rium from point to point 8, resulting in a higher

 price and higher quantity.

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Shift in the Supply Curve

• change in any varia-le other than price that

influences quantity supplied produces a shift in

the supply curve or a change in supply.• 3actors that shift the supply curve include

 – 4hange in input costs

 – )ncrease in technology

 – 4hange in si9e of the industry

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Shift in the Supply Curve

3or an given rental price, quantity supplied is no" lo"er

than -efore.

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Equilibrium After a Supply Shift

The shift in the supply curve moves the mar&et equili-rium from

 point to point 8, resulting in a higher price and lo"er quantity.

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Prie Ceilings ! "loors

•  price ceiling  is a legal maximum that can -echarged for a good. – :esults in a shortage of a product

 – 4ommon examples include apartment rentals andcredit cards interest rates.

•  price floor  is a legal minimum that can -e

charged for a good. – :esults in a surplus of a product

 – 4ommon examples include soy-eans, mil&,minimum "age

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Prie Ceiling

price ceiling is set at 2 resulting in a shortage of 2/

units.

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Prie "loor

price floor is set at # resulting in a surplus of 2/

units.