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
for Strawberries
Point
on
graph
$2.50
2.00
1.50
11
Price ($ per kg)
Quantity
Demanded
(kg per month)
Price
($ per kg)
2.50
2.00
1.50
D
1.00
0.50
11
Quantity Demanded
(kg per month)

13
Deriving Market Demand

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

2.00
1.50
1.00
D0
0.50
0
1 2 3 4 5 6 7
Quantity Demanded (kg per month)
Individual and Market Demand

Schedules for Strawberries
Price
You
Friend
Market
($ per
kg)
(D0)
(D1)
(Dm)
$2.50
2.00
1.50
(kg per month)

1
2
3
2
3
4
3
5
7
2.50
2.00
1.50
1.00
D1
0.50
0
1 2 3 4 5 6 7
Market Demand Curve for Strawberries

Price ($ per kg)
2.50
2.50
2.00
1.50
1.00
Dm
0.50
0

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
for Strawberries
$2.50
2.00
1.50
Quantity Demanded
(millions of kg)
(D2)
(D0)
(D1)
5
7
9
7
9
11
9
11
13
Price ($ per kg)
Price
($ per
kg)
2.50
2.00
1.50
D2
1.00
D0
D1
0.50
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
2.00
a
b
1.50
1.00
D0
0.50
Change in Demand
Price ($ per pair of skis)
Price ($ per pair of skis)
Change in Quantity Demanded
2.00
1.50
1.00
D0
0.50
5000 6000
Quantity Demanded (pairs of skis)

D1
5000
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
for Strawberries
Price Quantity Supplied Points

($ per kg) (millions of kg) on graph
$2.50
13
2.00
1.50
Price ($ per kg)
2.50
2.00
1.50
1.00
0.50
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
Market Supply Schedule

for Strawberries
$2.50
11
13
15
2.00
11
1.50
2.50
Price ($ per kg)
Price
Quantity Supplied
($ per
(millions of kg)
kg) (S )
(S0)
(S1)
2
S0 S1
2.00
1.50
1.00
0.50
11
13
Quantity Supplied

15
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

S0
120
Price ($ per kg)
Price ($ per kg)
100
80
60
40
20
1
S0
120
100
Change in Supply
Quantity Supplied

80
60
40
20
Quantity Supplied
S1
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 Curves

for Strawberries
Market Demand and Supply

Quantities
Price (millions of kg)

($ per D
S
kg)
$3.00
13
13
2.50
11
11
2.00
1.50
11
1.00
13
Surplus
2.50
Price ($ per kg)
Surplus (+)
or Shortage
(-)
(millions of
kg)
3.00
a
a
e
2.00
1.50
Shortage
1.00

9 11 13 15
5
7
Quantity
3
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
Figure 2.9, page 47
for Strawberries
3.00
Price
2.50
Quantities
(D1) (S)
(millions of kg)
(D0)
($ per kg.)
$3.00
13
2.50
11
11
2.00
13
1.50
11
15
1.00
13
17
Price ($ per kg)

b
a
2.00
1.50
shortage
1.00
D0
11 13 15
Quantity
D1
17
Supply Changes and

Equilibrium
Figure 2.10, page 48
for Strawberries
3.00
Price
2.50
($ per kg)
Quantities
(S0)
(S1)
(millions of kg)
(D0)
$3.00
13
17
2.50
11
15
2.00
13
1.50
11
11
1.00
13
Price ($ per kg)

S0
S1
Surplus
a
2.00
b
1.50
1.00
D0
11 13 15
Quantity
17
(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
Figure 2.11 page 49
for Strawberries

$3.00
13
17
2.50
11
11
15
2.00
13
13
1.50
11
15
11
1.00
13
17
Price ($ per kg)
Price
Quantities
(D0) (D1) ( S0) (S1)
($ per kg.)
(millions of kg)
3.00
2.50
S0
S1
2.00
1.50
1.00
D0
11 13 15
Quantity
D1
17
(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
Figure 2.12 page 50
for Strawberries

$3.00
13
11
2.50
11
2.00
11
1.50
11
13
1.00
13
15
3.00
Price ($ per kg)
Price
Quantities
(D0) (D1) ( S0) (S1)
($ per kg.)
(millions of kg)
S0
2.50
2.00
a
1.50
1.00
D0 D1
11 13 15
Quantity
17
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
Total
Utility
(utils)
0
Margina
l
Utility
(utils)
(a)
12 (b)
20
24 (d)
26 (e)
12
(f)
(g)
(h)
(i)
(c)
Utility (utils)
Marginal Utility
12
8
4
0
f
g
h
2
1
3
Cups of Cappuccino

20
16
12
8
4
0
16
24
Utility (utils)
Quantity
Consume
d
(cups)
0
28
a
2
1
3
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
(price = $1)
Danish Pastries
(price = $2)
Quantity Margina
Marginal
l
Utility
Utility
per $
(MU1) (MU1/P1=MU1/$1)
(utils per $)
(utils)
0
12
12
1
8
8
2
4
4
3
2
2
4
Quantity Margina
Marginal
l
Utility
Utility
per $
(MU2) (MU2/P2=MU2/$2)
(utils per $)
(utils)
0
16
1
12
8
2
8
6
3
4
4
4
2
Danish Pastries
12
8
4
0
2
1
3
Cups of Cappuccino
Marginal Utility
Per $ (utils)
Marginal Utility
Per $ (utils)
Cappuccinos
12
8
4
0

2
1
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
Point on
4
3
3
4
a
b
12
Milkshakes
Milkshakes Hamburgers
Graph
At each point on
the curve, Alice
derives the same
level of utility.
b
c
I0
4
Hamburgers

12

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
different levels
of utility for Alice.
Milkshakes
4
3
2
1
I0
4
12
Hamburgers

I1
I2

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
Milkshakes Hamburgers
0
2
10
Milkshakes
The budget curve

shows all those
points Alice
can reach with her
limited budget.
$15/$3
3
2
$15/$1.50
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
achievable utility
is on the indifference
curve which touches
her budget line at
a single point.
Milkshakes
4
b (4, 3)
3
2
1
I0
4
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)
Price ($ per hamburger)
Milkshakes
4
b
e (6,3)
2
I1
1
I0
0
10 12
Hamburgers
15
A decline in the price of

hamburgers from $1.50
to $1 causes Alices quantity
demanded to rise from
4 to 6, as shown by her
demand curve, D.
1.50
1.00
.50
D
0
12
Quantity (hamburgers per week)

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

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Understanding Economics

Copyright 2012 by McGraw-Hill Ryerson

quantity demanded, changes in demand, and the

Copyright 2012 by McGraw-Hill Ryerson

Demand is a relationship between a products

Copyright 2012 by McGraw-Hill Ryerson

The Demand Curve

Your Demand Curve for Strawberries

Price ($ per kg)

Copyright 2012 by McGraw-Hill Ryerson

Deriving Market Demand

Friends Demand Curve for Strawberries

Price ($ per kg)

Price ($ per kg)

Figure 2.2, page 36

Individual and Market Demand

(kg per month)

Market Demand Curve for Strawberries

Quantity Demanded (kg per month)

Copyright 2012 by McGraw-Hill Ryerson

Changes in Demand (a)

Copyright 2012 by McGraw-Hill Ryerson

Changes in Demand (b)

Market Demand Curve for Strawberries

Price ($ per kg)

Copyright 2012 by McGraw-Hill Ryerson

Demand Factors (a)

Demand factors include the following:

rightward demand shift)

Copyright 2012 by McGraw-Hill Ryerson

Demand Factors (b)

Prices of other products

products price causes a rightward demand

Copyright 2012 by McGraw-Hill Ryerson

Changes in quantity demanded:

Copyright 2012 by McGraw-Hill Ryerson

Changes in Quantity Demanded (b)

Price ($ per pair of skis)

Price ($ per pair of skis)

Change in Quantity Demanded

Copyright 2012 by McGraw-Hill Ryerson

The law of supply states there is a direct

Copyright 2012 by McGraw-Hill Ryerson

The Supply Curve

Market Supply Curve for Strawberries

Price Quantity Supplied Points

Price ($ per kg)

Copyright 2012 by McGraw-Hill Ryerson

Changes in Supply (a)

Copyright 2012 by McGraw-Hill Ryerson

Changes in Supply (b)

Market Supply Curve for Strawberries

Market Supply Schedule

Price ($ per kg)

Copyright 2012 by McGraw-Hill Ryerson

Supply Factors (a)

Supply factors include the following:

rightward supply shift)

Copyright 2012 by McGraw-Hill Ryerson

Supply Factors (b)

improvement causes a rightward supply shift)

Copyright 2012 by McGraw-Hill Ryerson

Changes in Quantity Supplied (a)