ECONOMIC SECOND EDITION in MODULES S Paul Krugman Robin Wells with Margaret Ray and David Anderson MODULE 5 Supply and Demand Introduction and Demand Krugman Wells What a competitive market is and how it is described by the supply and demand model What the demand curve is The difference between movements along the demand curve and changes in demand The factors that shift the demand curve 3 of 19 Supply and Demand A Model of a Competitive Market A competitive market Many buyers and sellers Same good or service The supply and demand model is a model of how a competitive market works 4 of 19 Supply and Demand A Model of a Competitive Market Five key elements Demand curve Supply curve Demand and supply curve shifts Market equilibrium Changes in the market equilibrium 5 of 19 The Demand Schedule and the Demand Curve A demand schedule shows how much of a good or service consumers will want to buy at different prices Demand Schedule for Coffee Beans Price of coffee beans per pound Quantity of coffee beans demanded billions of pounds 2 00 7 1 1 75 7 5 1 50 8 1 1 25 8 9 1 00 10 0 0 75 11 5 0 50 14 2 6 of 19 The Demand Schedule and the Demand Curve Price of coffee bean per gallon A demand curve is the graphical representation of the demand schedule it shows how much of a good or service consumers want to buy at any given price 2 00 1 75 1 50 1 25 1 00 0 75 0 50 0 As price rises the quantity demanded falls 7 9 Demand curve D 11 13 15 17 Quantity of coffee beans billions of pounds 7 of 19 Shifts of the Demand Curve An increase in the population and other factors generate an increase in demand a rise in the quantity demanded at any given price Demand Schedules for Coffee Beans Price of coffee beans per pound 2 00 1 75 1 50 1 25 1 00 0 75 0 50 Quantity of coffee beans demanded billions of pounds in 2002 7 1 7 5 8 1 8 9 10 0 11 5 14 2 in 2006 8 5 9 0 9 7 10 7 12 0 13 8 17 0 8 of 19 Shifts of the Demand Curve This is represented by the two demand schedules One showing demand in 2002 before the rise in population The other showing demand in 2006 after the rise in population Demand Schedules for Coffee Beans Price of coffee beans per pound 2 00 1 75 1 50 1 25 1 00 0 75 0 50 Quantity of coffee beans demanded billions of pounds in 2002 7 1 7 5 8 1 8 9 10 0 11 5 14 2 in 2006 8 5 9 0 9 7 10 7 12 0 13 8 17 0 9 of 19 Shifts of the Demand Curve Increase in population more coffee drinkers Price of coffee beans per gallon 2 00 Demand curve in 2006 1 75 1 50 1 25 1 00 0 75 0 50 0 Demand curve in 2002 7 9 D1 11 D2 13 15 17 Quantity of coffee beans billions of pounds A shift of the demand curve is a change in the quantity demanded at any given price represented by the change of the original demand curve to a new position denoted by a new demand curve 10 of 19 Movement Along the Demand Curve Price of coffee beans per gallon A movement along the demand curve is a change in the quantity demanded of a good that is the result of a change in that good s price A shift of the demand curve 2 00 1 75 A 1 50 is not the same thing as a movement along the demand curve C 1 25 B 1 00 0 75 0 50 0 D1 7 8 1 9 7 10 13 15 D2 17 Quantity of coffee beans billions of pounds 11 of 19 Shifts of the Demand Curve Price Increase in demand An decrease A increasein indemand demand means means aa leftward shift rightward shiftofofthe thedemand demandcurve at any given curve at anyprice givenconsumers price demand a smaller consumers demand quantity a largerthan before D1 D3 quantity than before D1 D2 Decrease in demand D 3 D 1 D 2 Quantity 12 of 19 Understanding Shifts of the Demand Curve Changes in the Prices of Related Goods Substitutes Two goods are substitutes if a fall in the price of one of the goods makes consumers less willing to buy the other good Complements Two goods are complements if a fall in the price of one good makes people more willing to buy the other good 13 of 19 Understanding Shifts of the Demand Curve Changes in Income Normal Goods When a rise in income increases the demand for a good the normal case we say that the good is a normal good Inferior Goods When a rise in income decreases the demand for a good it is an inferior good 14 of 19 Understanding Shifts of the Demand Curve Changes in Tastes Changes in Expectations 15 of 19 Individual Demand Curve and the Market Demand Curve The market demand curve is the horizontal sum of the individual demand curves of all consumers in that market a Darla s Individual Demand Curve Price of coffee beans per pound 2 b Dino s Individual Demand Curve Price of coffee beans per pound 2 Price of coffee beans per pound c Market Demand Curve 2 D Market 1 1 D Darla 0 20 30 Quantity of coffee beans pounds 1 D Dino 0 10 20 Quantity of coffee beans pounds 0 30 40 50 Quantity of coffee beans pounds 16 of 19 Beating the Traffic All big cities have traffic problems Cities can develop strategies to reduce the demand for auto trips London has imposed a congestion charge on all cars entering the city currently about 8 13 Three years later traffic in central London was about 10 percent lower than before the charge 17 of 19 1 The supply and demand model illustrates how a competitive market works 2 The demand schedule shows the quantity demanded at each price and is represented graphically by a demand curve 3 The law of demand says that demand curves slope downward 4 A movement along the demand curve occurs when a price change leads to a change in the quantity demanded When economists talk of increasing or decreasing demand they mean shifts of the demand curve a change in the quantity demanded at any given price 18 of 19 5 There are five main factors that shift the demand curve A change in the prices of related goods or services A change in income A change in tastes A change in expectations A change in the number of consumers 6 The market demand curve for a good or service is the horizontal sum of the individual demand curves of all consumers in the market 19 of 19