Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Part I: Introduction to Economics
1. The Principles and Practice of Economics
2. Economic Methods and Economic Questions
3. Optimization: Doing the Best You Can
4. Demand, Supply, and Equilibrium
1 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Chapter 4
Demand, Supply, and
Equilibrium
2015.10.2.
2 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
1 Markets
2 How Do Buyers Behave?
3 How Do Sellers Behave?
4 Supply and Demand in Equilibrium
5 Government Tried to Dictate the Price of Gasoline?
3 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• 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.
• The demand curve plots the relationship
between the market price and the quantity of a
good demanded by buyers.
4 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• The supply curve plots the relationship
between the market price and the quantity of a
good supplied by sellers.
• The competitive equilibrium price equates the
quantity demanded and the quantity supplied.
• When prices are not free to fluctuate, markets
fail to equate quantity demanded and quantity
supplied.
5 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Q: How much more gasoline would people buy if
its price were lower?6 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
4.1 Markets
• The market is a group of economic agents who are
trading a good or service, and the rules and
arrangements for trading.
• e.g. markets with specific physical location or through
online transactions.7 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Competitive Markets
• If all sellers and all buyers face the same price, that price
is refereed to as the market price.
• In a perfectly competitive market
• all sellers sell an identical good or service,• any individual buyer or any individual seller is not
powerful enough to affect the market price.• Buyers and sellers are price takers.
• Very few, if any, markets are perfectly competitive.
• If sellers have nearly identical goods and most markets
participants face lots of competition, then the perfectly
competitive model is a good approximation of how
actual markets work.
8 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
4.2 How Do Buyers
Behave?
• Quantity demanded is the amount of the good
or service that buyers are willing to purchase at
a given price.
• Demand schedule is the table that reports the
quantity demanded at different prices, holding
all else equal.
9 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Demand Curves
• Demand curve plots the quantity demanded at
different prices.
Exhibit 4.1 Chloe’s Demand Schedule and Demand Curve for Gasoline
10 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• The price of gasoline and the quantity
demanded are negatively related.• Almost all goods have demand curves exhibit
this fundamental negative relationship, whicheconomists call the Law of Demand:
• the quantity demanded rises when the price falls
(holding all else equal).
11 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Willingness to Pay (願付價格)
• Willingness to pay is the highest price that a
buyer is willing to pay for an extra unit of a
good, which is the height of the demand curve
for that marginal unit of the good.
• As you consume more of a good, your
willingness to pay for an additional unit
declines, this is called diminishing marginal
benefit.
12 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
From Individual Demand Curves to Aggregated
Demand Curves
• The sum of all individual demand curves of all
potential buyers is the aggregation of the
individual demand curves.
• The market demand curve plots the
relationship between the total quantity
demanded and the market price, holding all
else equal.
13 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Exhibit 4.2 Aggregation of Demand Schedules and Demand Curves
14 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Building the Market Demand Curve
Exhibit 4.3 Market Demand Curve for Oil
• The key property of a demand curve is the negative
relationship between price and quantity demanded.
• Market price for oil from 2011 to 2013: $100 per barrel.15 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Shifting the Demand Curve
The demand curve shifts when one of the
following five major factors change:
• Tastes and preferences
• Income and wealth
• Availability and prices of related goods
• Number and scale of buyers
• Buyers’ expectations about the future
16 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Changing Tastes and Preferences
• For example, concern for global warming will
decrease the demand for gasoline. Demand
curve will shift to the left.
• Changes in tastes could also increase the
demand for gasoline, and shift the demand
curve to the right.
17 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Exhibit 4.4 Shifts of the Demand Curve vs. Movement Along the Demand Curve
18 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Changing Income or Changing Wealth
• For a normal good (正常財), an increase in
income causes the demand curve to shift to the
right (holding the good’s price fixed).
• If rising income shift the demand curve to the
left (holding the good’s price fixed), then the
good is called an inferior good. (劣等財)
19 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Changing Availability and Prices of Related Goods
• Public transportation and gas are substitutes
(替代品), because a fall in the price of public
transportation leads people drive their cars
less, producing a left shift in the demand curve
for gas.
• Two goods are said to be complements (互補
品) when the fall in the price of one good, leads
to a right shift in the demand curve for the
other good.
20 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Changing Number and Scale of Buyers
• Switches from gasoline to battery power cars.
Changing Buyers’ Beliefs About the Future
• Expecting job losses.
21 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Q: How much more gasoline would people buy if
its price were lower?22 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Exhibit 4.5 The Quantity of Gasoline Demanded (per person) and the Price of Gasoline inBrazil, Mexico, and Venezuela
Price per gallon in 2013: Brazil $5.58, Venezuela $0.04.23 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
4.3 How Do Sellers
Behave?
• Quantity supplied is the amount of a good that
sellers are willing to sell at a given price.
• Supply schedule is the table that reports the
quantity supplied at different prices.
• Supply curve plots the quantity supplied at
different prices.
24 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline? Exhibit 4.6 ExxonMobil’s Supply Schedule for Oil and Supply Curve for Oil
• In almost all cases, quantity supplied and price
are positively related (holding all else equal),
which economists call the Law of Supply.25 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Willingness to Accept
• For an optimizing firm, the height of the
supply curve is the firm’s marginal cost.
• The height of the supply curve is also the
lowest price that a seller is willing to get paid to
sell an extra unit of a good, economists call this
the seller’s willingness to accept.
26 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
From the Individual Supply Curve to the Market
Supply Curve
Exhibit 4.7 Aggregation of Supply Schedules and Supply Curves
27 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• Market supply curve plots the relationship
between the total quantity supplied and the
market price, holding all else equal.
Exhibit 4.7 Market Supply Curve for Oil
28 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Shifting the Supply Curve
The supply curve shifts when the following
variables change:
• Prices of input used to produce the good
• Technology used to produce the good
• Number and scale of sellers
• Sellers’ expectations about the future
29 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Changing Prices of Input
• An input is a good or service used to produce
another good or service.
• An increase in the price of steel shifts the
supply of oil to the left.
• An decrease in the price of steel shifts the
supply of oil to the right.
30 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Exhibit 4.9 Shifts of the Supply Curve vs. Movement Along the Supply Curve
31 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Changes in the Technology
• Improvement in technology shifts the supply to
the right.
Changes in the Number and Scale of Sellers
• During the Libyan civil war, the worldwide
supply curve of oil shifted to the left by 1.5
million barrels per day.
Changes in Sellers’ Beliefs About the Future
• Expecting a winter spike in natural gas prices,
natural gas suppliers shift the supply curve to
the left in the summer.
32 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
4.4 Supply and Demand
in Equilibrium• Competitive markets converge to the price at which
quantity supplied and quantity demanded are the same.
Exhibit 4.10 Demand Curve and Supply Curve for Oil33 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• Competitive equilibrium (均衡) is 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.
• Excess supply occurs when suppliers provide
more than consumers want at a given price.
This situation results in a surplus.
34 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Exhibit 4.11 Excess Supply
35 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• Excess demand occurs when consumers want more than
suppliers provide at a given price. This situation results
in a shortage.
Exhibit 4.12 Excess Demand
36 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Curve Shifting in Competitive Equilibrium
• What would happen if a major oil exporter suddenly
stopped production, as Libya did in 2011?
Exhibit 4.13 A Left Shift of the Supply Curve
37 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• What would happen if rising environmental concerns led
consumers to cut back their carbon footprint by using
less oil?
Exhibit 4.14 A Left Shift of the Demand Curve
38 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• How simultaneous shifts in the supply and the demand
curves translate into changes in the market price and the
quantity of transactions.
Exhibit 4.15 Both the Demand Curve and the Supply Curve Shift Left39 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
40 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
4.5 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 (price
ceiling) of gasoline, causing quantity
demanded to exceed quantity supplied.
41 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
• When the quantity demanded is greater than
the quantity supplied, there is a shortage of
gasoline at the capped price.
• What will happen? Who gets to buy the
gasoline?
• Long waiting lines, fighting?
• Rent and other price controls.
42 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
The Unintended Consequence of Fixing Market Prices
Exhibit 4.16 Excess Demand for Henrico County’s Laptops
• What will happen to a first-come, first-served sale of
1,000 Apple laptops for $50 each?
• What determines who will get the 1,000 Laptops
supplied?43 / 44
Chapter 4
Demand,
Supply, and
Equilibrium
Outline
Markets
How Do Buyers
Behave?
How Do Sellers
Behave?
Supply and
Demand in
Equilibrium
Government
Tried to Dictate
the Price of
Gasoline?
Exhibit Excess Demand when prices are fixed
• How is this related to the college admission in Taiwan?
• Situations where prices are fixed at the level higher than
the equilibrium market prices (price floor), what will
happen?
44 / 44
