Chapter 3:
Demand, Supply,
and Price
Copyright © 2017 Pearson Canada Inc.
Chapter Outline/Learning Objectives
Section Learning Objectives
After studying this chapter, you will be able to
3.1 Demand 1. list the factors that determine the quantity
demanded of a good.
2. distinguish between a shift of the demand curve
and a movement along the demand curve.
3.2 Supply 3. list the factors that determine the quantity supplied
of a good.
4. distinguish between a shift of the supply curve and
a movement along the supply curve.
3.3 The Determination 5. explain the forces that drive market price to
of Price equilibrium, and how equilibrium price is affected
by changes in demand and supply.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 2
3.1 Demand
Quantity Demanded
The total amount that consumers desire to purchase in some time
period is called the quantity demanded of a product.
Quantity bought (or exchanged) refers to actual purchases.
Quantity demanded is a flow, as opposed to a stock.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 3
EXTENSIONS IN THEORY 3-1
The Distinction Between Stocks and Flows
• Flow variable: it is so much per unit of time
• Stock variable: has a meaning at a point in time
Examples:
• Income earned is a flow
• Consumers’ expenditure is a flow
• Amount of money in a bank account is a stock
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Quantity Demanded and Price
A basic hypothesis is that—ceteris paribus—the price of a product
and the quantity demanded are negatively related.
Why? There are usually several products that can satisfy any given
want or desire.
A reduction in the price of a product means that the specific desire
can now be satisfied more cheaply by buying more of that product.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Demand Schedules and Demand Curves
Fig.3-1 The Demand for Apples
Demand Schedule Demand Curve
Reference Price Quantity
Point ($ per bushel) Demanded
U $ 20 110
V 40 85
W 60 65
X 80 50
Y 100 40
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 5
A change in variables other than price will shift the demand curve to
a new position.
Fig. 3-2 An Increase in the Demand for
• average Apples
household
income
• prices of
other products
• distribution
of income
or population
• expectations
about the future
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 6
Fig. 3-3 Shifts in the Demand Curve
A rightward shift indicates an increase in demand.
A leftward shift indicates a decrease in demand.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 7
Shifts in the Demand Curve
• average household income: normal vs. inferior goods
• Normal good: quantity demanded increases when income rises.
• Inferior good: quantity demanded falls when income rises.
• distribution of income: changes for particular groups
• prices of other products: substitutes vs complements
• Substitutes: Goods that can be used in place of another good to satisfy
needs. E.g: coffee and tea
• Complements: Goods that need to be consumed together. E.g: milk and
cereals
• population
• expectations about the future
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Fig. 3-4 Shifts of and Movements Along the Demand Curve
A change in demand is a
change in quantity demanded
at every price—a shift of
the entire curve.
A change in quantity
demanded refers to a
movement from one point
on a demand curve to
another point, either on
the same demand curve or
on a new one.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 8
3.2 Supply
Quantity Supply
The amount of a product that firms desire to sell in some time period
is called the quantity supplied of that product.
Quantity supplied is the amount that firms are willing to offer for sale
and not necessarily the quantity actually sold.
Quantity supplied is a flow as opposed to a stock.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 9
Quantity Supplied and Price
A basic hypothesis is that—ceteris paribus—the price of the product
and the quantity supplied are positively related.
Why? Producers are interested in making profits. If the price of a
particular product rises, then the production and sale of this product
is more profitable.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 10
Fig. 3-5 The Supply of Apples
Supply Schedule Supply Curve
Reference Price Quantity
Point ($ per bushel) Supplied
u $ 20 20
v 40 45
w 60 65
x 80 80
y 100 95
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 11
A change in supply is a
change in the quantity Fig. 3-6 An Increase in the
Supply of Apples
that will be supplied at
every price—a shift of
the entire curve.
A change in quantity
supplied refers to a
movement from one
point on a supply curve
to another point, either
on the same supply curve
or on a new one.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 12
A change in any variable Fig. 3-6 An Increase in the
other than price will shift Supply of Apples
the supply curve to a new
position.
Changes in these variables
will shift the supply curve:
• prices of inputs
• technology
• number of suppliers
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 13
Shifts in the Supply Curve
• prices of inputs
• technology
• government taxes and subsidies: affect profits
• prices of other products: substitutes vs complements
• number of suppliers: entering (right), exiting (left)
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
3.3 The Determination of Price
The Concept of a Market
A market may be defined as any situation in which buyers and sellers
negotiate the transaction of some goods or services.
Markets may differ in the degree of competition among various
buyers and sellers.
In a perfectly competitive market buyers and sellers are price takers.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 14
APPLYING ECONOMIC CONCEPTS 3-1
Why Apples But Not iPhones?
Three conditions must be satisfied in order for price determination
in a market to be well described by the demand-and-supply model:
1. Large number of consumers; each one small relative to the size
of the market.
2. Large number of producers; each one small relative to the size
of the market.
3. Producers must be selling 'homogeneous' versions of the
product.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 18
Graphical Analysis of a Market
At the equilibrium price, every buyer finds a seller and every seller
finds a buyer—the market “clears.”
Fig. 3-7 Determination of Equilibrium Price
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 15
Changes in Market Prices
The four “laws” of supply
and demand: Fig. 3-8(i) Shifts in the Demand Curve
1. An increase in demand
causes an increase in
both the equilibrium
price and equilibrium
quantity.
2. A decrease in demand
causes a decrease in
both equilibrium
price and equilibrium
quantity.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 16
Changes in Market Prices
Fig. 3-8(ii) Shifts in the Supply Curve
3. An increase in supply
causes a decrease in
the equilibrium price
and an increase in the
equilibrium quantity.
4. A decrease in supply
causes an increase in
the equilibrium price
and a decrease in the
equilibrium quantity.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 17
A change in supply or in the quantity supplied?
1. The price of Canadian-grown peaches skyrockets during an unusually cold
summer that reduces the size of the peach harvest.
2. An increase in income leads to an increase in the price of beef and also to an
increase in beef sales.
3. Technological improvements in the microchip lead to price reductions for
laptop computers and an increase in computer sales.
4. Greater awareness of the health risks from smoking lead to a reduction in the
price of cigarettes and to fewer cigarettes being sold.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Discussion questions
1. Suppose a government economist predicts that this spring’s
excellent weather will result in a larger crops of wheat and canola
than farmers had expected. But the economist warns consumers
not to expect prices to decrease because the cost of production is
rising and foreign demand for Canadian crops is increasing. ‘The
classic pattern of supply and demand won’t work this time’, the
economist says.
2. What would be the effect on the equilibrium price and quantity
of marijuana if its sale and consumption were legalized?
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Demand and Supply of Coffee Beans
Q demanded
Price per Kg (millions Q supplied
Kg/year)
$2.00 28 10
$2.40 26 12
$3.10 22 13.5
$3.50 19.5 19.5
$3.90 17 22
$4.30 14.5 23.5
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Demand and Supply of Coffee Beans
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
The Algebra of Market Equilibrium
demand : Q* = a − bp *
supply : Q* = c + dp *
2 equations and 2 unknowns
a − bp* = c + dp *
a − c = (b + d)p *
Solving for p* :
a−c
p* =
b+d
Solving for Q* :
b(a − c) (ad + bc)
Q* = a − bp* = a − =
(b + d) b+d
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 20
The Algebra of Market Equilibrium
demand : Q* = 18 − 3p *
supply : Q* = 2 + 5p *
2 equations and 2 unknowns
18 − 3p* = 2 + 5p *
16 = 8p *
Solving for p* :
16
p* = =2
8
Solving for Q* :
Q* = 18 − 3(2) = 12
€
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 20
Relative Prices and Inflation
The absolute price of a product is the amount of money that must be
spent to acquire one unit of that product.
A relative price is the price of one good in terms of another.
Demand and supply curves are drawn in terms of relative prices
rather than absolute prices.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Exercise
Early in 2011, the world price of copper reached a record high of
over $ 10 000 per tonne. Two events appeared to lie behind this high
price. First, China’s rapid economic growth and the massive building
of infrastructure. Second, an explosion closed a mayor Chilean port
used for shipping a substantial fraction of the world’s copper output.
Use a demand-and-supply diagram to illustrate these events in the
copper market, and explain how each event shifts either the demand
curve or the supply curve.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Exercise
There has been explosive growth in the demand for the green leafy
vegetable kale in recent years, as consumers learned of its health
benefits. The demand curve has shifted significantly to the right.
However, the price of a bunch of kale in the grocery store has been
fairly stable.
Draw a demand and supply diagram showing the market for kale and
explain how the price of kale could remain stable in the face of such
an enormous growth in demand.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
Ice Storms, Hurricanes, and Economics
January 1998: Ice storm affecting Quebec, Eastern Ontario and parts
of United States. Electric power systems devastated. Increase
demand for portable gas-powered generators.
August 2005: Hurricane Katrina interrupted the local production of
oil. Temporary reduction in the world supply of oil.
Copyright © 2014 Pearson Canada Inc. Chapter 3, Slide 4
