ECON 101 Introduction to Microeconomics

WEEK 4 (Winter 2023)

Jan 24, 2023

Ashutosh Sarker, Ph.D.

Department of Economics
University of Alberta

Note: I’m still updating the slides. There will only be a few changes
in the final version, so you should start studying the chapter as soon
as you can while going through these slides before the final version is
available. I will upload the final version a few hours before the lecture
starts.
RECAP
▪ Economic model – Simplification
▪ Two simplified models –
• Circular flow diagram
• Production Possibilities frontier (PPF)
▪ Positive vs. Normative
▪ Trade – Voluntary exchange
▪ Absolute advantage – looks at lower input cost
▪ Comparative advantage – looks at lower
opportunity cost
▪ Specialization gives gain from trade

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Chapter 4

Market Forces of
Supply and Demand

3
Learning Objectives (Week 4)
This chapter answers the following questions:
• What factors affect buyers’ demand for
goods?
• What factors affect sellers’ supply of goods?
• How do supply and demand determine the
price of a good and the quantity sold?
• How do changes in the factors that affect
demand or supply affect the market price and
quantity of a good?
• How do markets allocate resources?
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Concepts Highlights, Part 1

Demand: A buyer’s willingness and ability to purchase

for a certain good or service.

Quantity Demanded: The amount of a good or

service that a buyer is willing and able to purchase.

Supply: A seller’s willingness and ability to sell a

certain good or service.

Quantity Supplied: The amount of a good that sellers

are willing and able to sell.

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Concepts Highlights, Part 2

Law of Demand: The claim that, other things equal,

the quantity demanded of a good falls when the price of
the good rises.

Law of Supply: The claim that, other things equal, the

quantity supplied of a good rises when the price of the
good rises.

Surplus: A situation in which quantity supplied is greater

than quantity demanded.

Shortage: A situation in which quantity demanded is

greater than the quantity supplied.
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Concepts Highlights, Part 3

Market Forces of Supply and Demand: Supply and

Demand are the two sources that make market economies work.
They determine the quantity of each good produced and the
price at which it is sold.

Market: A market comprises a group of buyers and sellers of a

particular good or service and the institution or arrangement by
which they trade.

Perfect Competition: Many buyers and sellers; buyers and

sellers are price takers.

Monopoly: There is only one seller. Buyers are price takers.

E.g., water, electricity, or gas supplied by a local public utility.
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Concepts Highlights, Part 4
Price of Quantity of
Ice-Cream Cones
Demand Schedule: A Cone Demanded
table that shows the $0.00 12 cones
relationship between the 0.50 10
1.00 8
price of a good and the 1.50 6
quantity demanded. 2.00 4
2.50 2
3.00 0
Demand Schedule
Demand Curve: a graph
of the relationship between
the price of a good and the
quantity demanded.

Demand Curve 8
Concepts Highlights, Part 5
Supply Schedule: A table
that shows the relationship
between the price of a good
and the quantity supplied.

Supply Schedule
Supply Curve: A graph of
the relationship between the
price of a good and the
quantity supplied.

Supply Curve
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Concepts Highlights, Part 6
Normal Good: A good for which an increase in income leads to
an increase in demand. E.g., ice cream and clothes.

Inferior Good: A good for which an increase in income leads to

a decrease in demand. E.g., bus rides.
(hint: buy a car or take a cab, instead.)

Substitutes: two goods for which an increase in the price of

one leads to an increase in the demand for the other. E.g.,
hotdogs (hot sausage) and hamburgers; sweaters and jackets;
movie tickets and video rentals; coffee and tea.

Complements: two goods for which an increase in the price of

one leads to a decrease in the demand for the other. E.g., petrol
and cars; computer and software; mobile phone and sim card.
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Concepts Highlights, Part 7

Markets and competition

Buyers Sellers
determine determine
demand supply

A competitive
market has many
buyers and sellers
each with a
negligible impact on
the market price

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Individual and Market Demand, Part 1
Demand Schedule and Demand Curve

Demand schedule Demand curve

Table showing Graph showing

relationship between relationship between
the price of a good and the price of a good and
the quantity demanded, the quantity demanded,
holding all other holding all other
relevant factors fixed. relevant factors fixed.

Other relevant factors: prices of other goods, tastes, income, expectations, and number of buyers. 12
Individual and Market Demand, Part 2
Market demand schedule is the sum of all individual
demand schedules for a particular good or service

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Individual and Market Demand, Part 3
Individual demand curves are summed horizontally to obtain the market demand curve.

Catherine’s demand + Nicholas’s demand = Market demand

Price of Price of Price of
Ice-Cream Ice-Cream Ice-Cream
Cones Cones Cones

$3.00 DCatherine $3.00 $3.00

DNicholas
2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50 DMarket

1.00 1.00 1.00

0.50 0.50 0.50

0 1 2 3 4 5 6 7 8 9 10 11 12 0 1 2 3 4 5 6 7 0 2 4 6 8 10 12 14 16 18

Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones Quantity of Ice-Cream Cones

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Change in Demand and Shift in Demand
• Change in Demand:
Movement along the demand
curve

• Shift in Demand:
Demand curve shifts because of
increase or decrease in demand

Change in Demand

Shift in Demand 15
Shift in Demand Curve, Part 1
Variables that can shift the demand curve
1. Income

2. Price of related goods

3. Tastes

4. Expectations

5. Number of buyers Shift in Demand

6. Advertisements/Announcements

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Shift in Demand Curve, Part 2
1. Income
– Normal good, other things
constant
• An increase in income leads to
an increase in demand: Shifts D Normal Goods
curve to the right
– Inferior good, other things
constant
• An increase in income leads to
a decrease in demand: Shifts D Inferior Goods
curve to the left
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 Shift in Demand Curve, Part 3
2. Prices of related goods (1)
• Two goods are substitutes if
• An increase in the price of
one leads to an increase in
the demand for the other Cappuccino
• Examples: pizza and
hamburgers
• An increase in the price of
pizza increases demand for
hamburgers, shifting
Latte
hamburger demand curve
Cappuccino and latte
to the right
are substitutes 18
Shift in Demand Curve, Part 4
2. Prices of related goods (2)
• Two goods are
complements if a fall in the
price of one good raises DVD Player
the demand for another
good.

• Example: petrol and car; DVD

Source: Internet
computer and software;
DVD player and DVD are
peanut butter and jam complements

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Shift in Demand Curve, Part 5

3. Tastes
– Anything that causes a shift in tastes
toward a good will increase demand for
that good and shift its D curve to the right
– Example:
• The Atkins diet became popular in the ’90s,
caused an increase in demand for eggs,
shifted the egg demand curve to the right

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Shift in Demand Curve, Part 6

4. Expectations about the future

– Expect an increase in income, increase in
current demand
– Expect higher prices, increase in current
demand
– Example:
• If people expect their incomes to rise, their D
for meals at expensive restaurants may
increase now

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Shift in Demand Curve, Part 7

5. Number of buyers – increase

• Market demand – increases

6. Advertisements/Announcements –
Advertisements increase the demand

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Shift in Demand Curve, Part 8
TABLE 4.1
Variables That Influence Buyers

This table lists the variables that affect how much consumers choose to buy of any
good. Notice the special role that the price of the good plays: A change in the good’s
price represents a movement along the demand curve, whereas a change in one of
the other variables shifts the demand curve.
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Shift in Demand Curve, Part 9

Active Learning 1: The demand curve

Draw the demand curve for orange juice, D1, and a
point A (P1, Q1) on the demand curve. What
happens in each of the following scenarios? Why?

A. The price of apple juice increases

B. The price of orange juice falls
C. Consumers’ income falls (and orange juice is a
normal good)

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Shift in Demand Curve, Part 10
Active Learning 1A. Price of apple juice increases
• Orange juice and apple juice
are substitutes.
• A higher price of apple juice
prompts consumers to buy
more orange juice (at P1)
• The demand for orange juice
increases (shifts to the right)

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 Shift in Demand Curve, Part 11
Active Learning 1B. The price of orange juice falls
Price of
orange
juice • Move down along
the demand curve
A to a point with lower
P1 P, higher Q.
B
P2
• The D curve does
D1 not shift.
Q1 Q2 Quantity of
orange juice

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Shift in Demand Curve, Part 12
Active Learning 1C. Consumers’ income falls
Price of • Orange juice is a
orange
juice
normal good.
• A lower income
prompts consumers to
A buy less orange juice
P1
(at P1).
• The demand for orange
juice decreases (shifts
D2 D1 to the left
Q2 Q1 Quantity of
orange juice

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Shift in Demand Curve, Part 13
Shifts in the Demand Curve versus Movements along the Demand Curve

If warnings on cigarette packages convince smokers to smoke less, the demand curve for
cigarettes shifts to the left.
• In panel (a), the demand curve shifts from D1 to D2
At a price of $10.00 per pack, the quantity demanded falls from 20 to 10 cigarettes per day,
as reflected by the shift from point A to point B. By contrast, if a tax raises the price of
cigarettes, the demand curve does not shift. Instead, we observe a movement to a different
point on the demand curve.
• In panel (b), when the price rises from $10.00 to $20.00, the quantity demanded falls from
20 to 12 cigarettes per day, as reflected by the movement from point A to point C. 28
Individual and Market Supply, Part 1

Supply schedule and curve

Supply schedule Supply curve

Table showing Graph showing

relationship between relationship between
the price of a good and the price of a good and
the quantity supplied, the quantity supplied,
holding all other holding all other
relevant factors fixed. relevant factors fixed.
Other relevant factors fixed: input prices, technology, expectations, and number of sellers. 29
Individual and Market Supply, Part 2
Ben’s Supply Schedule and Supply Curve
Price of Ice-Cream Cones
Supply curve
Price of Quantity
Ice-cream Of Cones $3.00
1. An increase
Cone Supplied 2.50 in price . . .
$0.00 0 cones
0.50 0 2.00
1.00 1 1.50 2. . . . increases
1.50 2 quantity of cones
2.00 3 1.00
supplied.
2.50 4
3.00 5 0.50

Supply Schedule 0 1 2 3 4 5 6 7 8 9 10 11 12
Quantity of Ice-Cream Cones

Supply Curve
The supply schedule is a table that shows the quantity supplied at each price. This supply curve,
which graphs the supply schedule, illustrates how the quantity supplied of the good changes as
its price varies. Because a higher price increases the quantity supplied, the supply curve slopes
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upward.
Individual and Market Supply, Part 3
Market Supply as the Sum of Individual Supplies
Market supply schedule is the sum of all individual supply schedules for a
particular good or service

The quantity supplied in a market is the sum of the quantities supplied by all the
sellers at each price. Thus, the market supply curve is found by adding horizontally
the individual supply curves. At a price of $2.00, Ben supplies 3 ice-cream cones,
and Jerry supplies 4 ice-cream cones. The quantity supplied in the market at this
price is 7 cones.
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Individual and Market Supply, Part 4
Market Supply as the Sum of Individual Supplies
Ben’s supply + Jerry’s supply = Market supply
Price of Price of Price of
Ice-Cream Ice-Cream Ice-Cream
Cones Cones Cones
SBen
SMarket
$3.00 $3.00 SJerry $3.00

2.50 2.50 2.50

2.00 2.00 2.00

1.50 1.50 1.50

1.00 1.00 1.00

0.50 0.50 0.50

0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 0 2 4 6 8 1012141618
Quantity of Quantity of Quantity of
Ice-Cream Cones Ice-Cream Cones Ice-Cream Cones
Individual supply curves are summed horizontally to obtain the market supply curve. 32
Change in Supply and Shift in Supply
• Change in Supply:
Movement along the
supply curve
• Shift in Supply:
Supply curve shifts
because of increase
or decrease in supply.

Change in Supply

Shift in Supply
33
Shift in Supply Curve, Part 1
Variables that can shift the Supply Curve
FIGURE 4.7
1. Input Prices

2. Technology

3. Expectations

4. Number of
Sellers

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Shift in Supply Curve, Part 2

1. Input prices
– Supply is negatively related to prices of
inputs
– Examples of input prices: wages, prices
of raw materials
– A fall in input prices makes production
more profitable at each output price
• Firms supply a larger quantity at each price
• The S curve shifts to the right

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Shift in Supply Curve, Part 3

Supply Curve Shifters: Input Prices

Suppose the price

of milk falls.

At each price, the

quantity of lattes
supplied will
increase (by 5 in
this example).

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Shift in Supply Curve, Part 4

• Technology
• Determines how much inputs are required to
produce a unit of output
– A cost-saving technological improvement
has the same effect as a fall in input
prices, shifts S curve to the right
• Number of sellers
– An increase in the number of sellers
• Increases the quantity supplied at each price
• Shifts S curve to the right
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Shift in Supply Curve, Part 5

• Expectations about future

– Example: Events in the Middle East lead
to expectations of higher oil prices
• Owners of Texas oilfields reduce supply now,
save some inventory to sell later at the higher
price
• S curve shifts left
– Sellers may adjust supply* when their
expectations of future prices change
(*If good not perishable)
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Shift in Supply Curve, Part 6

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Shift in Supply Curve, Part 7
Active Learning 2 Supply curve
Draw a supply curve for tax return preparation software. What happens to
it in each of the following scenarios?
A. Retailers cut the price of the software.
B. A technological advance allows the software to be produced at lower
cost.
C. Professional tax return
preparers raise the price of
the services they provide.

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Shift in Supply Curve, Part 8

Active Learning 2 A. Fall in price of tax return software

S curve does not

shift.

Move down along

the curve to a lower
P and lower Q.

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Shift in Supply Curve, Part 9
Active Learning 2 B. Fall in cost of producing software

S curve shifts to the

right:

at each price, Q
increases.

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Shift in Supply Curve, Part 10
Active Learning 2 C. Professional preparers raise
their price

Trick question:

This shifts the

demand curve for tax
preparation software,
not the supply curve.

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Supply and Demand Together, Part 1
P
Equilibrium: D
$6.00
S
Price has
$5.00
reached the
level where $4.00
quantity $3.00
supplied equals $2.00
quantity $1.00
demanded
$0.00
Q
0 5 10 15 20 25 30 35

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Supply and Demand Together, Part 2
Equilibrium price: price where Q supplied = Q demanded
Equilibrium quantity: Q supplied and demanded at the
equilibrium price
P D S
$6.00 P QD QS
$5.00 $0 24 0
$4.00 1 21 5
2 18 10
$3.00
3 15 15
$2.00 4 12 20
$1.00 5 9 25
$0.00 6 6 30
Q
0 5 10 15 20 25 30 35
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Supply and Demand Together, Part 3
Markets Not in Equilibrium: Surplus Surplus (excess supply):
quantity supplied is
P greater than quantity
D S
$6.00 Surplus demanded
$5.00
Example: if P = $5,
$4.00 then QD = 9 lattes
$3.00 and QS = 25 lattes
$2.00
resulting in a surplus of
$1.00 16 lattes
$0.00
Q
0 5 10 15 20 25 30 35
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Supply and Demand Together, Part 4
Markets Not in Equilibrium: Surplus Facing a surplus,
sellers try to increase
P sales by cutting price.
D S
$6.00 Surplus
$5.00 This causes QD to rise
$4.00
and QS to fall…
$3.00
$2.00 …which reduces the
$1.00 surplus.
$0.00
Q
0 5 10 15 20 25 30 35
47
Supply and Demand Together, Part 5
Markets Not in Equilibrium: Surplus Facing a surplus,
sellers try to increase
P sales by cutting price.
D S
$6.00 Surplus
$5.00 This causes QD to rise
$4.00
and QS to fall…
$3.00
Prices continue to fall
$2.00 until market reaches
$1.00 equilibrium.
$0.00
Q
0 5 10 15 20 25 30 35
48
Supply and Demand Together, Part 6
Markets Not in Equilibrium: Shortage Shortage (excess demand):
quantity demanded is
greater than quantity
P D S
$6.00
supplied

$5.00 Example: if P = $1,

$4.00 then QD = 21 lattes
and QS = 5 lattes
$3.00
$2.00 resulting in a shortage of 16
$1.00 lattes

$0.00 Shortage
Q
0 5 10 15 20 25 30 35
49
Supply and Demand Together, Part 7
Markets Not in Equilibrium: Shortage

Facing a shortage,
sellers raise the price,

causing QD to fall

and QS to rise,

…which reduces the

shortage.

50
 Supply and Demand Together, Part 8
Markets Not in Equilibrium: Shortage
Facing a shortage,
sellers raise the price,
P D S causing QD to fall
$6.00

$5.00 and QS to rise,

$4.00

$3.00
…which reduces the
shortage.
$2.00 Prices continue to rise
$1.00 until market reaches
Shortage
equilibrium.
$0.00
Q
0 5 10 15 20 25 30 35
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Supply and Demand Together, Part 9
Three steps to analyzing changes in equilibrium (1)

1. Decide whether the event shifts the supply or demand

curve (or both).
2. Decide whether the curve(s) shift(s) to the left or to the
right.
3. Use the supply-and-demand diagram to see how the
shift affects equilibrium price and quantity .
• Compare the initial and the new equilibrium
• Effects on equilibrium price and quantity

52
Supply and Demand Together, Part 10
Three steps to analyzing changes in equilibrium (2)
FIGURE 4.12
A Shift in Both Supply and Demand

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Supply and Demand Together, Part 11
Three steps to analyzing changes in equilibrium (3)
TABLE 4.4
What Happens to Price and Quantity When Supply or Demand Shifts?

No Change in An Increase in A Decrease in

Supply Supply Supply
No Change in P same P down P up
Demand Q same Q up Q down
An Increase in P up P ambiguous P up
Demand Q up Q up Q ambiguous
A Decrease in P down P down P ambiguous
Demand Q down Q ambiguous Q down

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CHAPTER 04 IN A NUTSHELL, Part 1

• Economists use the model of supply and demand

to analyze competitive markets.
– Many buyers and sellers, all are price takers
• The demand curve shows how the quantity of a
good demanded depends on the price.
– Law of demand: as the price of a good falls, the
quantity demanded rises; the D curve slopes
downward
• Other determinants of demand: income, prices of
substitutes and complements, tastes, expectations,
and number of buyers.
– If one of these factors changes, the D curve shifts
55
CHAPTER 04 IN A NUTSHELL, Part 2

• The supply curve shows how the quantity of a

good supplied depends on the price.
– Law of supply: as the price of a good rises, the
quantity supplied rises; the S curve slopes upward.
• Other determinants of supply: input prices,
technology, expectations, and number of sellers.
– If one of these factors changes, supply curve shifts.
• The intersection of the supply and demand curves
determines the market equilibrium.
– At the equilibrium price, quantity demanded =
quantity supplied

56
 CHAPTER 04 IN A NUTSHELL, Part 3

• The behavior of buyers and sellers naturally drives

markets toward their equilibrium.
– When the market price is above the equilibrium
price, there is a surplus of the good, which
causes the market price to fall.
– When the market price is below the equilibrium
price, there is a shortage, which causes the
market price to rise.

57
CHAPTER 04 IN A NUTSHELL, Part 4

• To analyze how any event influences a market, we

use the supply-and-demand diagram to examine
how the event affects the equilibrium price and
quantity.
1. Decide whether the event shifts the supply curve
or the demand curve (or both).
2. Decide in which direction the curve shifts.
3. Compare the new equilibrium with the initial one.
• In market economies, prices are the signals that
guide economic decisions and thereby allocate
scarce resources.

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Next week, we will cover
Chapter 5 Elasticity and Its
Applications

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Thank you

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