CHAPTER 3 Supply and Demand Principles of Microeconomics

CHAPTER 3 Supply and Demand Principles of Microeconomics (Economics 102) UNR, 2 nd Summer Term, 2008 Luis Pires, Ph. D.

Supply and Demand ØCompetitive market ØThe supply and demand model Ø 1. The demand curve Ø 2. The supply curve ØFactors that cause the demand curve to shift, and factors that cause the supply curve to shift Ø 3. The equilibrium price Ø 4. How the equilibrium price changes when the supply and demand curves shift

1. The Law of Demand Higher price for a good, other things equal, leads people to demand a smaller quantity of the good.

An Increase in Demand

Movement Along the Demand Curve vs. Shift of the Demand Curve

Shifts of the Demand Curve

What causes a demand curve to shift? Ø Changes in the Prices of Related Goods Ø Substitutes Ø Complements Ø Changes in Income Ø Normal Goods Ø Inferior Goods Ø Changes in Tastes Ø Changes in Expectations

2. The Supply Curve

A Decrease in Supply

Movement Along the Supply Curve vs. Shift of the Supply Curve

Shifts of the Supply Curve

What causes a supply curve to shift? Ø Changes in Input Prices Ø An input is a good that is used to produce another good. Ø Changes in Technology Ø Changes in Expectations

3. Market Equilibrium

Price Above Its Equilibrium Level Creates a Surplus

Price Below Its Equilibrium Level Creates a Shortage

4. Equilibrium and Shifts of the Demand Curve

Equilibrium and Shifts of the Supply Curve

Simultaneous Shifts of the Demand Supply Curves

Simultaneous Shifts of the Demand Supply Curves Supply Increases Supply Decreases Demand Increases Price: ? Quantity: up Price: up Quantity: ? Demand Decreases Price: down Quantity: ? Price: ? Quantity: down

Effects of the “War on Drugs”