CHAPTER 3Supply and Demand

2

Supply and Demand

Competitive marketThe supply and demand model

The demand curveThe supply curveFactors that cause the demand curve to shift, and

factors that cause the supply curve to shiftThe equilibrium priceHow the equilibrium price changes when the supply

and demand curves shift

3

The Law of Demand

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

4

An Increase in Demand

5

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

6

Shifts of the Demand CurveShifts of the Demand Curve

7

What causes a demand curve to shift?

Changes in the Prices of Related GoodsSubstitutesComplements

Changes in IncomeNormal GoodsInferior Goods

Changes in TastesChanges in Expectations

8

The Supply Curve

9

A Decrease in Supply

10

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

11

Shifts of the Supply Curve

12

What causes a supply curve to shift?

Changes in Input PricesAn input is a good that is used to produce another good.

Changes in Technology

Changes in Income

Changes in Expectations

13

Market Equilibrium

14

Price Above Its Equilibrium Level Creates a Surplus

15

Price Below Its Equilibrium Level Creates a Shortage

16

Equilibrium and Shifts of the Demand Curve

17

Equilibrium and Shifts of the Supply Curve

18

Simultaneous Shifts of the Demand and Supply Curves

19

Effects of the “War on Drugs”

20

The End of Chapter 3

coming attraction:Chapter 4:

The Market Strikes Back