Economics
Third Edition, Global Edition
Chapter 4
Demand, Supply, and
Equilibrium
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Learning Objectives
4.1 Markets
4.2 How Do Buyers Behave?
4.3 How Do Sellers Behave?
4.4 Supply and Demand in Equilibrium
4.5 What Would Happen if the Government Tried to Dictate
the Price of Gasoline?
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Key Ideas
1. In a perfectly competitive market, (1) sellers all sell an identical
good or service, and (2) any individual buyer or any individual seller
isn’t powerful enough on his or her own to affect the market price of
that good or service.
2. The demand curve plots the relationship between the market price
and the quantity of a good demanded by buyers.
3. The supply curve plots the relationship between the market price and
the quantity of a good supplied by sellers.
4. The competitive equilibrium price equates the quantity demanded
and the quantity supplied.
5. When prices are not free to fluctuate, markets fail to equate quantity
demanded and quantity supplied.
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Evidence-Based Economics
How much more gasoline would people buy if its price were
lower?
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Markets
When you go to the supermarket, which cost more: organic eggs or
regular eggs?
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Markets
Why do organic eggs cost more than regular eggs?
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Markets
A market is a group of economic agents who are trading a good or
service plus the rules and arrangements for trading.
A market may have a physical location or not.
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Markets
The market price is the price at which buyers and sellers conduct
transactions.
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Markets
The competitive equilibrium price equates the quantity demanded
and the quantity supplied.
Prices act as a selection device that encourages trade between the
sellers who can produce goods at a relatively low cost and the
buyers who place a relatively high value on the goods.
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Markets
In a perfectly competitive market
• every buyer pays and every seller charges the same market
price,
• no buyer or seller is big enough to influence that market price,
and
• all sellers sell an identical good or service.
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How Do Buyers Behave?
How might the price of gasoline affect the demand for
personal vehicles?
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How Do Buyers Behave?
Quantity Demanded
The amount of a good that buyers are willing to purchase
at a given price.
Demand Schedule
A table that reports the quantity demanded at different
prices, holding all else equal.
Demand Curve
Plots the quantity demanded at different prices.
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How Do Buyers Behave?
Exhibit 4.1 Chloe’s Demand Schedule and Demand Curve
for Gasoline
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How Do Buyers Behave?
Why are some people willing to pay more for a gallon of
gasoline than others?
Why isn’t the price the same for everyone?
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How Do Buyers Behave?
Market Demand Curve
The sum of the individual demand curves of all the
potential buyers. The market demand curve plots the
relationship between the total quantity demanded and the
market price, holding all else equal.
Law of Demand
In almost all cases, the quantity demanded rises when the
price falls (holding all else equal).
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How Do Buyers Behave?
Exhibit 4.2 Aggregation of Demand Schedules and Demand
Curves
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How Do Buyers Behave?
Exhibit 4.3 Market Demand Curve for Oil
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How Do Buyers Behave?
Movement along the demand curve occurs when the own-
price changes.
Shifts of the Demand Curve occur when one of the
following changes:
1. tastes and preferences
2. income and wealth
3. availability and prices of related goods
4. number and scale of buyers
5. buyers’ expectations about the future
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How Do Buyers Behave?
Exhibit 4.4 Shifts of the Demand Curve versus Movement
along the Demand Curve
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How Do Buyers Behave?
Exhibit 4.4 Shifts of the Demand Curve versus Movement
along the Demand Curve
Demand Shifts when one of
the following changes:
1. tastes and preferences
2. income and wealth
3. availability and prices of
related goods
4. number and scale of
buyers
5. buyers’ expectations about
the future
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How Do Buyers Behave?
Exhibit 4.4 Shifts of the Demand Curve versus Movement
along the Demand Curve
The only reason for a
movement along the
demand curve:
A change in the product’s own
price
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How Do Buyers Behave?
Changes in Tastes and Preferences
A change in what we personally like, enjoy, or value
Changes in Income and Wealth
A change in income affects your ability to pay for goods
and services
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How Do Buyers Behave?
Normal goods and inferior goods
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How Do Buyers Behave?
Changes in Availability and Prices of Related Goods
A change in the availability and prices of related goods will
shift the demand curve.
Substitutes and Complements
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How Do Buyers Behave?
Changes in the Number and Scale of Buyers
When the number of buyers increases, the demand curve
shifts right. When the number of buyers decreases, the
demand curve shifts left.
Changes in Buyer’s Beliefs about the Future
Consumers’ beliefs about the future influence demand.
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Evidence-Based Economics
How much more gasoline would people buy if its price were
lower?
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Evidence-Based Economics
Exhibit 4.5 The Quantity of Gasoline Demanded (per
person) and the Price of Gasoline in Brazil, Mexico, and
Venezuela (2013)
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How Do Sellers Behave?
How much would you have to be paid to sell you smartphone
right now in class?
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How Do Sellers Behave?
Quantity Supplied
The amount of a good that sellers are willing to sell at a
given price.
Supply Schedule
A table that reports the quantity supplied at different prices.
Supply Curve
Plots the quantity supplied at different prices.
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How Do Sellers Behave?
Exhibit 4.6 ExxonMobil’s Supply Schedule for Oil and
Supply Curve for Oil
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How Do Sellers Behave?
Market Supply Curve
Plots the relationship between the total quantity supplied
and the market price, holding all else equal.
Law of Supply
In almost all cases, the quantity supplied rises when the
price rises (holding all else equal).
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How Do Sellers Behave?
Exhibit 4.7 Aggregation of Supply Schedules and Supply
Curves
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How Do Sellers Behave?
Exhibit 4.7 Aggregation of Supply Schedules and Supply
Curves
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How Do Sellers Behave?
Why would some oil producers be the in the market at
certain prices while others would not?
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How Do Sellers Behave?
Shifts of the Supply Curve occur when one of the following
changes:
1. input prices
2. technology
3. number and scale of sellers
4. sellers’ expectations about the future
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How Do Sellers Behave?
Exhibit 4.9 Shifts of the Supply Curve versus Movement
along the Supply Curve
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How Do Sellers Behave?
Exhibit 4.9 Shifts of the Supply Curve versus Movement
along the Supply Curve
Supply shifts when one of the
following changes:
1. input prices
2. technology
3. number and scale of sellers
4. sellers’ expectations about
the future
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How Do Sellers Behave?
Exhibit 4.9 Shifts of the Supply Curve versus Movement
along the Supply Curve
The only reason for a
movement along the supply
curve:
A change in the product’s own
price
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How Do Sellers Behave?
Changes in Prices of Inputs Used to Produce Goods
An input is a good or service used to produce another
good or service.
Changes in Technology Used to Produce the Good
What if a new technology made it easier to access
previously unavailable oil reserves (e.g. fracking)?
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How Do Sellers Behave?
Shift of Supply Curve for Oil due to Fracking
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How Do Sellers Behave?
Changes in the Number and Scale of Sellers
When the number of sellers increases, the supply curve
shifts to the right. When the number of sellers decreases,
the supply curve shifts to the left.
Changes in Sellers’ Beliefs about the Future
Corn farmers in the Midwest build storage for their crops
based on the belief that prices will improve during non-
harvest months
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Supply and Demand in Equilibrium
Competitive Equilibrium
The point at which the market comes to an agreement
about
• what the price will be (competitive equilibrium price)
and
• how much will be exchanged (competitive equilibrium
quantity) at that price.
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Supply and Demand in Equilibrium
Competitive markets converge to the price at which quantity
supplied and quantity demanded are the same.
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Supply and Demand in Equilibrium
Exhibit 4.10 Demand Curve and Supply Curve for Oil
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Supply and Demand in Equilibrium
Exhibit 4.10 Demand Curve and Supply Curve for Oil
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Supply and Demand in Equilibrium
Excess Demand
Occurs when consumers want more than suppliers provide
at a given price. This situation results in a shortage.
Excess Supply
Occurs when suppliers provide more than consumers want
at a given price. This situation results in a surplus.
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Supply and Demand in Equilibrium
Exhibit 4.11 Excess Supply
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Supply and Demand in Equilibrium
Exhibit 4.12 Excess Demand
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Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
We are now ready to put this framework into action.
What would happen if a major oil exporter suddenly
ceased production, as Libya did in 2011?
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Supply and Demand in Equilibrium
Exhibit 4.13 A Leftward Shift of the Supply Curve
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Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Now consider the opposite case. What would happen if a
technological breakthrough shifted the supply curve to the
right?
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Supply and Demand in Equilibrium
Exhibit 4.14 A Rightward Shift of the Supply Curve
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Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
We can also predict the effect of a shift in the demand
curve.
What would happen if rising environmental concerns and
new energy-saving technologies led consumers to use less
oil at any given price?
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Supply and Demand in Equilibrium
Exhibit 4.15 A Leftward Shift of the Demand Curve
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Supply and Demand in Equilibrium
Curve Shifting in Competitive Equilibrium
Sometimes both curves shift at the same time.
The fracking revolution has shifted the supply curve for oil
to the right at the same time that rising environmental
consciousness and energy-saving technology have shifted
the demand curve for oil to the left.
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Supply and Demand in Equilibrium
Exhibit 4.16 The Demand Curve Shifts Left and the Supply
Curve Shifts Right
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Supply and Demand in Equilibrium
Exhibit 4.16 The Demand Curve Shifts Left and the Supply
Curve Shifts Right
Q2 < Q 1
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Supply and Demand in Equilibrium
Exhibit 4.16 The Demand Curve Shifts Left and the Supply
Curve Shifts Right
Q2 = Q 1
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Supply and Demand in Equilibrium
Exhibit 4.16 The Demand Curve Shifts Left and the Supply
Curve Shifts Right
Q2 > Q 1
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Supply and Demand in Equilibrium
It’s time to revisit the question:
Why do organic eggs cost more than regular eggs?
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Supply and Demand in Equilibrium
Demand Side:
Organic eggs are healthier.
What’s wrong with this
picture?
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Supply and Demand in Equilibrium
Supply Side:
Organic eggs are more
expensive to produce.
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Supply and Demand in Equilibrium
Why do the price of roses increase right before Valentine’s
Day?
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Supply and Demand in Equilibrium
Rightward Shift in Demand for Roses
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Supply and Demand in Equilibrium
Why doesn’t the price of beer increase right before Super
Bowl Sunday (or the FIFA World Cup)?
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Supply and Demand in Equilibrium
Rightward Shift in Supply and Demand for Beer
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Supply and Demand in Equilibrium
Both the Demand Curve and Supply Curve Shift Right
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Supply and Demand in Equilibrium
The Demand Curve Shifts Right and the Supply Curve
Shifts Left
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Supply and Demand in Equilibrium
The Demand Curve Shifts Left and the Supply Curve
Shifts Right
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Supply and Demand in Equilibrium
Both the Demand Curve and the Supply Curve Shift Left
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Supply and Demand in Equilibrium
Why is there a parking problem on campus?
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Supply and Demand in Equilibrium
Does the price control actually help students?
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What Would Happen if the Government
Tried to Dictate the Price of Gasoline?
During the U.S. oil crisis of
1973–1974, the U.S.
government effectively
capped the price of gasoline
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Evidence-Based Economics Problem
Recall from the Evidence-Based Economics section that
governments can raise or lower the domestic price of
gasoline by respectively taxing or subsidizing its sale.
Using the Law of Demand, let’s analyze what happens to
your gasoline demand under different government policy
regimes. All of the price data are from 2020 and calculated
by Bloomberg.
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Evidence-Based Economics Problem
a. You move from the United States, where the price of
gasoline is $2.40 per gallon, to Kuwait, where the
government subsidizes gasoline so the price is only
$1.27 per gallon.
Will your quantity demanded rise or fall?
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Evidence-Based Economics Problem
b. You then move from Kuwait to the Netherlands, where
the government heavily taxes gasoline so the price is
$6.46 per gallon.
Rank your quantity of gasoline demanded across the
three countries: United States, Kuwait, and Netherlands.
Given the information provided in this question, what do
you need to assume to rank the quantity of gasoline
demanded across the three countries?
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Evidence-Based Economics Problem
c. When you move from Kuwait to the Netherlands, is the
change in your gasoline consumption a movement along
your demand curve or a shift of your demand curve?
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Evidence-Based Economics Problem
d. Wherever you live, you have recently gained a new
interest in rock climbing, which leads you to take long
road trips, increasing the number of gallons of gasoline
you demand per year (holding the price of gasoline fixed).
Is this a movement along your demand curve or a shift in
your demand curve?
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