Dr. Gary Stone, Winthrop University

DEMAND AND SUPPLY

1. Demand (D) – A schedule showing how many units of a good or service measured in

homogeneous units consumers are willing able to buy at a series of prices over a specified

time frame, holding constant all other items which influence purchase decisions, such as

income, tastes, prices of related goods, and number of consumers.

Example: The demand for gasoline in the city of Wysocki is seen in this chart. Note that

“demand” is the entire schedule of data, and not just one particular number. We create the

demand curve for gasoline by plotting these combinations of price and quantity demanded

on a graph.

Price per Gallon Quantity Demanded

$0.90	100,000 gallons per week

$1.00	90,000 gallons per week

$1.10	80,000 gallons per week

$1.20	70,000 gallons per week

2. Quantity Demanded (Qd) – The amount of a good that consumers will want to buy at a

particular price of that good. In the demand table, the quantity demanded at a price of

$1.10 is 80,000 gallons per week.

3. The Law of Demand – As the price of a good rises, the quantity demanded (not the

demand) of that good falls, holding constant all other factors that influence how much of

the good consumers want to buy. Or, as the price of a good falls, the quantity demanded

will rise, holding constant all other factors.

4. The Determinants of Demand – All of those factors other than the price of the good itself

that influence how much of the good consumers want to buy. These items determine

where on a graph the demand curve is located. These factors also are called “demand

shifters” because if one of them changes, the entire demand curve will shift to the right or

the left. Some of the determinants of demand for Coca Cola are income, temperature,

number of consumers, and the price of Pepsi.

5. A Change in Quantity Demanded (Qd):

(a) shown graphically as a movement along the existing demand curve

(b) caused only by a change in the price of this good

Example: Assume the price of gasoline increases from $1.10 to $1.20. This results in a

movement along the existing demand curve for gasoline from point A to point B. There is

a decrease in quantity demanded from 80,000 gallons to 70,000 gallons.

6. A Change in Demand (D):

(a) shown graphically as a shift of the entire demand curve

(b) caused by a change in a determinant of demand (i.e., by something other than the price

of this good)

Example: Suppose because of an increase in population in the city of Wysocki, there is an

increase in the demand for gasoline. The quantity demanded is now greater at every price

of gasoline as shown in this revised demand schedule. Since the demand schedule has

changed, we say there has been a “change in demand.” See the following graph to see

how to illustrate this increase in the demand for gasoline.

Previous	New

Price	Quantity Demanded	Quantity Demanded

$0.90	100,000 gallons per week	110,000 gallons per week

$1.00	90,000 gallons per week	100,000 gallons per week

$1.10	80,000 gallons per week	90,000 gallons per week

$1.20	70,000 gallons per week	80,000 gallons per week

Note: To show an increase (decrease) in demand, shift the demand curve horizontally to

the right (left). Do not think of the curve as shifting up or down.

7. The “A, B, C” of a Change in Demand and a Change in Quantity Demanded

It is important to know the difference between a change in demand and a change in

quantity demanded. Here are three steps that work every time when some event makes

consumers want to buy more or less of a good.

(A) Do people want to buy more or less of the good as a result of the event that has taken

place? (This answer comes from common sense.)

(B) Was it the price of the good that changed or one of its determinants of demand? If it was

the price of this good that changed, we have a change in quantity demanded. If anything

else changed, we have a change in demand.

(C) How do we show the changes in (A) and (B) on the graph? If we have a change in

quantity demanded, we move along the existing demand curve. If we have a change in

demand, we shift the demand curve.

Example: Suppose the price of Coca Cola decreases. Assume all the determinants of demand of Coca Cola (including the price of Pepsi Cola) are unchanged.

For Coca Cola:

(A) Consumers will want to buy more Coca Cola now than before the price of Coke fell.

(B) Because it was the price of Coke that changed, we have a change in the quantity

demanded of Coke.

(C) To show an increase in the quantity demanded of Coca Cola, we move down along the

existing demand curve for Coca Cola.

For Pepsi Cola:

(A) Consumers will want to buy less Pepsi Cola now than before the price of Coke fell.

(B) Because it was not the price of Pepsi Cola that changed, we have a change in the demand

for Pepsi.

(C) To show a decrease in the demand for Pepsi, we shift the demand curve for Pepsi

horizontally to the left.

1. Supply (S) – A schedule showing how many units of a good or service measured in

homogeneous units producers are willing able to make at a series of prices over a specified

time frame, holding constant all other items which influence production decisions, such as

technology, prices of inputs, and number of producers.

Example: The supply of computers is seen in this chart. Note that “supply” is the entire

schedule of data, and not just one particular number. We create the supply curve for

computers by plotting these combinations of price and quantity supplied on a graph.

Price per Computer Quantity Supplied

$450	20,000 computers per month

$500	25,000 computers per month

$550	30,000 computers per month

$600	35,000 computers per week

2. Quantity Supplied (Qs) – The amount of a good that producers will want to sell at a

particular price of that good. In the supply table above, we see that the quantity supplied at

a price of $550 is 30,000 computers.

3. The Law of Supply – As the price of a good rises, the quantity supplied (not the supply) of

that good rises, holding constant all other factors that influence how much of the good

producers want to buy. Or, as the price of a good falls, the quantity supplied will fall,

holding constant all other factors.

4. The Determinants of Supply – All of those factors other than the price of the good itself

that influence how much of the good producers want to make. These items determine

where on a graph the supply curve is located. These factors also are called “supply

shifters” because if one of them changes, the entire supply curve will shift to the right or

the left. Some of the determinants of supply for new houses are the price of lumber, the

number of consumers, the technology of building houses, and expectations about the

economy.

5. A Change in Quantity Supplied ( Qs):

(a) shown graphically as a movement along the existing supply curve

(b) caused only by a change in the price of this good

Example: Assume the price of a computer increases from $500 to $550. This results in a

movement along the existing supply curve for computers from point A to point B. There is

an increase in quantity supplied from 25,000 to 30,000 computers per month..

6. A Change in Supply (S):

(a) shown graphically as a shift of the entire supply curve

(b) caused by a change in a determinant of supply (i.e., by something other than the price

of this good)

Example: Suppose because of a decrease in the price of microchips used to make

computers, there is an increase in the supply of computers. The quantity supplied is now

greater at every price of computers as shown in this revised supply schedule. Since the

supply schedule has changed, we say there has been a “change in supply.” See the

following graph to see how to illustrate this increase in the supply of computers.

Previous	New

Price	Quantity Supplied	Quantity Supplied

$450	20,000 computers per month	25,000 computers per month

$500	25,000 computers per month	30,000 computers per month

$550	30,000 computers per month	35,000 computers per month

$600	35,000 computers per month	40,000 computers per month

Note: To show an increase (decrease) in supply, shift the supply curve horizontally to the

right (left). Do not think of the curve as shifting up or down. [A useful exception to this

rule can be shifting the supply curve up by the amount of the tax when the government

levies an excise tax on suppliers.]

7. The “A, B, C” of a Change in Supply and a Change in Quantity Supplied

It is important to know the difference between a change in supply and a change in quantity

supplied. Here are three steps that work every time when some event makes producers

want to make more or less of a good.

(A) Do producers want to make more or less of the good as a result of the event that has

taken place? (This answer comes from common sense.)

(B) Was it the price of the good that changed or one of its determinants of supply? If it was

the price of this good that changed, we have a change in quantity supplied. If anything

else changed, we have a change in supply.

(C) How do we show the changes in (A) and (B) on the graph? If we have a change in

quantity supplied, we move along the existing supply curve. If we have a change in

supply, we shift the supply curve.

Example: Suppose the price of lumber rises while the price of new houses is unchanged. (Note: Lumber is a key resource used in the production of a new house.)

For Lumber:

(A) Lumber producers will make more lumber now than before the price of lumber rose.

(B) Because it was the price of lumber that changed, we have a change in the quantity

supplied of lumber.

(C) To show an increase in the quantity supplied of lumber, we move up along the existing

supply curve of lumber.

For New Houses:

(A) House producers will want to make less houses now than before the price of lumber rose.

(B) Because it was not the price of new houses that changed, we have a change in the supply

of new houses.

(C) To show a decrease in the supply of new houses, we shift the supply curve for new

houses to the left.