Ch 3 S and D notes

7/31/2019 Ch 3 S and D notes

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C H A P T E R3

Supply and DemandSupply and Demand

In this chapter,In this chapter,

look for the answers to these questionlook for the answers to these question

What factors affect buyers demand for goods?

What factors affect sellers supply of goods?

How do supply and demand determine the price ofa ood and the uantit sold?

How do changes in the factors that affect demand

good?

Markets and Competition

A market is a group of buyers and sellers of a

particular product.

compe ve mar e s one w many uyers

and sellers, each has a negligible effect on price.

In a perfectly competitive market:

All goods exactly the same

Buyers & sellers so numerous that no one can

affect market price each is a price taker

2

We assume markets are perfectly competitive.Demand

Demand

The quantity demanded of any good is the

amount of the good that buyers are willing and

able to purchase.

Law of demand: the claim that the uantit

demanded of a good falls when the price of the

good rises, other things equal

THE MARKET FORCES OF SUPPLY AND DEMAND 4

The Demand Schedule

Demand schedule:

a table that shows the

r ce

of

lattes

uant t

of lattes

demanderelationship between the

price of a good and the

$0.00 16

1.00 14quantity demanded

Exam le:

2.00 12

3.00 10

Helens demand for lattes. 4.00 8

5.00 6

6.00 4o ce a e en s

preferences obey the

THE MARKET FORCES OF SUPPLY AND DEMAND

.


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Helens Demand Schedule & Curve

Price of

Lattes

r ce

of

lattes

uan y

of lattes

demanded

$5.00

.

$0.00 16

1.00 14

$3.00$4.00 2.00 12

3.00 10

$2.00 4.00 8

5.00 6

$0.00

.

Quantity

6.00 4


0 5 10 15 of Lattes

Market Demand versus Individual Demand

The quantity demanded in the market is the sum of thquantities demanded by all buyers at each price.

uppose e en an en are e on y wo uyers nthe Latte market. (Qd= quantity demanded)

16

Helens Qd

8

Kens Qd

+ = 24

Market Qd

$0.00

Price

12

14

6

7

+ = 18

+ = 21

2.00

1.00

8 4+

+

=

=

124.00

.

4 2+

+

=

=

66.00

.

The Market Demand Curve for Lattes

P PQd

(Market)

$5.00

.$0.00 24

1.00 21

$3.00

$4.00 2.00 18

3.00 15

$2.004.00 12

5.00 9

$0.00

.

Q

.


The Market Demand Curve

When the price is $2.00,Catherine will demand 4ice-cream cones.

When the price is $2.00,Nicholas will demand 3ice-cream cones.

e mar et eman at$2.00 will be 7 ice-creamcones.

Price of Ice-Cream Cone



Catherines Demand Nicholass Demand Market Demand+ =

2 00 2.00. . .

1.00 1.001.00

4 37

8 5

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

When the price is $1.00,Catherine will demand 8

When the price is $1.00,Nicholaswill demand5

The market demand at$1.00, will be 13 ice-

2007 Thomson South-W

ice-cream cones.

ice-cream cones. cream cones.

The market demand curve is the horizontal sum of the individual demandcurves!

Movement along the Demand Curve

Change in Quantity Demanded

Movement along the demand curve.

Caused by a change in the price of the

product.

Changes in Quantity Demanded

Price of I ce-Cream

A tax on sellers of icecream cones raises th

Cones price of ice-cream

cones and results in aBmovement a ong t edemand curve.

.

A1.00

0Quantity of I ce-Cream Con84


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Demand Curve Shifters

The demand curve shows how price affects

quantity demanded, other things being equal.

These other things are non-price

determinants of demand i.e., thin s that

determine buyers demand for a good, otherthan the goods price).

Changes in them shift the Dcurve


Shifts in the Demand Curve

Price of

Ice-Cream

Increasein demand

Decreasein demand

Demand

Demandcurve, D1

curve, D2

Quantity of

Ice-Cream Cones

,

0

Demand Curve Shifters: # of Buyers

Increase in # of buyers

increases quantity demanded at each price,

shifts Dcurve to the right.


Demand Curve Shifters: # of Buyers

P Suppose the number

of bu ers increases.

$5.00

. .

Then, at each P,

Qdwill increase

$3.00

$4.00 (by 5 in this example

$2.00

$0.00

.

Q


0 5 10 15 20 25 30

Demand Curve Shifters: Income

Demand for a normal good is positively related

to income.

Increase in income causes

increase in uantity demanded at each rice,shifts Dcurve to the right.

related to income. An increase in income shifts

Dcurves for inferior oods to the left.


Consumer Income Normal Good


$3.00

2.50

An increase

in income...

2.00Increasein demand

1.50

1.00

0.50 D2

21 3 4 5 6 7 8 9 10 1211I ce-Crea

Con0

1


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Inferior goods examples


Consumer Income Inferior GoodPrice of Ice-Cream Cone

.

2.50 An increase

2.00

1.50Decrease

n ncome...

1.00

n eman

0.50

QuantityD1

D2

21 3 4 5 6 7 8 9 10 1211ce- rea

Con0

Demand Curve Shifters: Prices of

Two goods are substitutes if

Related Goods

an increase in the price of one

causes an increase in demand for the other.

Example: pizza and hamburgers.

An increase in the price of pizza

ncreases eman or am urgers,

shifting hamburger demand curve to the right.

Other examples: Coke and Pepsi,

laptops and desktop computers,


s an mus c own oa s

Demand Curve Shifters: Prices of

Two goods are complements if

Related Good

an increase in the price of one

causes a fall in demand for the other.

Example: computers and software.

If price of computers rises, people buy fewer

computers, an t ere ore ess so tware.

Software demand curve shifts left.

Other examples: college tuition and textbooks,

bagels and cream cheese, eggs and bacon


Demand Curve Shifters: Tastes

Anything that causes a shift in tastes towarda

good will increase demand for that good

and shift its Dcurve to the right.

The Atkins diet became popular in the 90s,

caused an increase in demand for e s,

shifted the egg demand curve to the right.


Demand Curve Shifters: Expectations

Expectations affect consumers buying

decisions.

Examples:

,

their demand for meals at expensive

.

If the economy sours and people worry about

,

autos may fall now.



5/13

Summary: Variables That Influence Buyers

Variable A change in this variable

along the Dcurve

o uyers s s e curve

Income shifts the Dcurve

Price ofrelated goods shifts the Dcurve

Tastes shifts the Dcurve


A C T I V E L E A R N I N GA C T I V E L E A R N I N G 11

eman urveeman urveDraw a demand curve for music downloads.

What happens to it in each of

the following scenarios? Why?

A. The price of iPodsfalls

B. The price of music

downloads falls

C. The price of CDs falls


. r ce o o s a s. r ce o o s a s

Price ofMusic downloadsMusic downloads

musicdown-loads

complements.

A fall in rice of

complements.

A fall in rice of

P1

iPods shifts the

demand curve for

iPods shifts the

demand curve for

music downloads

to the right.

music downloads

to the right.

Q2 Quantity of

D1D2

Q1

26

music downloads


. r ce o mus c own oa s a s. r ce o mus c own oa s a s

Price ofThe curve

does not shift.

The curve

does not shift.musicdown-loads

ove own a ong

curve to a point with

lower P hi her Q.

ove own a ong

curve to a point with

lower P hi her Q.P1

, ., .

P2

Quantity of

D1

Q1 Q2music downloads


. r ce o s a s. r ce o s a s

CDs andCDs andPrice ofmusic downloads

are substitutes.

music downloads

are substitutes.

musicdown-loads

P1

A fall in price of CDs

shifts demand for

A fall in price of CDs

shifts demand for

to the left.to the left.

Q1 Quantity of

D1D2

Q2

28

music downloads

Supply


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Supply

The quantity supplied of any good is the

amount that sellers are willing and able to sell.

Law of supply: the claim that the quantity

su lied of a ood rises when the rice of the

good rises, other things equal


The Supply Schedule

Supply schedule:

A table that shows the

Price

of

Quantity

of lattes

relationship between the

price of a good and the$0.00 0

1.00 3quant ty supp e .

Exam le:2.00 6

3.00 9

Starbucks supply of lattes.

4.00 12

5.00 15o ce a ar uc s

supply schedule obeys the6.00 18


.

Starbucks Supply Schedule & Curve

Price

of

Quantity

of lattesP

$5.00

.

$0.00 0

1.00 3

$3.00

$4.002.00 6

3.00 9

$2.00 4.00 12

5.00 15

$0.00

.6.00 18

Q


Market Supply versus Individual Supply

e quant ty supp e n t e mar et s t e sum othe quantities supplied by all sellers at each price.

uppose tar uc s an are t e on y twosellers in this market. (Qs= quantity supplied)

0

Starbucks

0

UCC

+ = 0

Market Qs

$0.00

Price

6

3

4

2

+ = 10

+ = 5

2.00

1.00

12 8+

+

=

=

204.00

.

18 12+

+

=

=

306.00

.

The Market Supply Curve

P

P(Market)

$5.00

..

1.00 5

2.00 10

$3.00

$4.00

.

3.00 15

4.00 20

$2.00 5.00 25

6.00 30

$0.00

1.00

Q


0 5 10 15 20 25 30 35


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Change in Quantity Supplied

Price of Ice-S

Cone

C$3.00

A rise in the priceof ice cream

1.00A

movement alongthe supply curve.

Quantit of

1 5

Ice-Cream

Cones0

Supply Curve Shifters

The supply curve shows how price affects

quantity supplied, other things being equal.

These other things are non-price

determinants of su l .

Changes in them shift the Scurve


Shifts in the Supply CurvePrice of

Ice-Cream

Cone

Supply curve, S3Supply

Decreasein supply

curve, S1Supply

curve, S2

Increasein supply

Quantity of

Ice-Cream Cones0

Supply Curve Shifters: Input Prices

Examples of input prices:

wages, prices of raw materials.

A fall in input prices makes production

,

so firms supply a larger quantity at each price,

.


Supply Curve Shifters: Input Prices

P Suppose the

$5.00

. .

At each price,

the quantity of

$3.00

$4.00 Lattes supplied

will increase

$2.00

(by 5 in this

example).

$0.00

1.00

Q


0 5 10 15 20 25 30 35

Supply Curve Shifters: Technology

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 in ut rices

shifts Scurve to the right.



8/13

Supply Curve Shifters: # of Sellers

An increase in the number of sellers increases

e quan y supp e a eac pr ce,

shifts Scurve to the right.


Supply Curve Shifters: Expectations

Example:

ven s n e e as ea o expec a ons o

higher oil prices.

,

supply now, save some inventory to sell later atthe hi her rice. .

Scurve shifts left.

*n genera , se ers may a us supp y w en e r

expectations of future prices change.*


Summary: Variables that Influence Sellers

Variable A change in this variable

Price causes a movementalong the Scurve

Input Prices shifts the Scurve

Technology shifts the Scurve

# of Sellers shifts the Scurve

xpec a ons s s e curve



upp y urveupp y urve

Draw a supply curve for tax

return preparation software.

What happens to it in each

A. Retailers cut the price of.

B. A technological advance

produced at lower cost.

C. Professional tax return re arers raise theprice of the services they provide.


. a n pr ce o ax re urn so ware. a n pr ce o ax re urn so ware

Price of

Scurve does

not shift.

Scurve does

not shift.

tax returnsoftware

S1

Move down

along the curve

Move down

along the curveP1

and lower Q.

and lower Q.P2

Quantity of taxQ1Q2

46

return software


. a n cos o pro uc ng e so ware. a n cos o pro uc ng e so ware

Price ofcurve s s

to the right:

curve s s

to the right:tax returnsoftware

S1 S2

a eac pr ce,

Qincreases.

a eac pr ce,

Qincreases.P1

Quantity of taxQ1 Q2return software


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. ro ess ona preparers ra se e r pr ce. ro ess ona preparers ra se e r pr ce

Price of

This shifts the

demand curve for

This shifts the

demand curve for

tax returnsoftware

S1

tax preparation

software, not the

tax preparation

software, not the

..

Quantity of tax

48

return software

Supply and Demand Together

Supply and Demand Together

P

$5.00

$6.00 D Squ r um:

P has reached

$4.00

quantity supplied

equals

$2.00

.quantity demanded

$0.00

$1.00

Q


0 5 10 15 20 25 30 35

Equilibrium price:

P

e pr ce a equa es quan y supp ewith quantity demanded

D S

$5.00

$6.00 P QD QS

$0 24 0

$4.00 1 21 5

2 18 10

$2.00

.3 15 15

4 12 20

$0.00

$1.00

Q

5 9 25

6 6 30


0 5 10 15 20 25 30 35

Equilibrium quantity:

P

e quan y supp e an quan y eman eat the equilibrium price

D S

$5.00

$6.00 P QD QS

$0 24 0

$4.00 1 21 5

2 18 10

$2.00

.3 15 15

4 12 20

$0.00

$1.00

Q

5 9 25

6 6 30


0 5 10 15 20 25 30 35

Excess demand



10/13

Shortage (a.k.a. excess demand):

P

quantity supplied

$5.00

$6.00 D S Example:If P = $1,

$4.00 QD = 21 lattes

and

$2.00

.QS = 5 lattes

resulting in a

$0.00

$1.00

Q

shortage of 16 lattes

Shortage


0 5 10 15 20 25 30 35


P

quantity supplied

$5.00

$6.00 D S ac ng a s or age,sellers raise the price,

$4.00

and QSto rise,

$2.00

. shortage.

$0.00

$1.00

Q

Shortage


0 5 10 15 20 25 30 35


P

quantity supplied

$5.00

$6.00 D S ac ng a s ortage,sellers raise the price,

$4.00

and QSto rise.

$2.00

. r ces con nue o r seuntil market reachesequilibrium.

$0.00

$1.00

Q

Shortage


0 5 10 15 20 25 30 35


Surplus (a.k.a. excess supply):

P

quantity demanded

$5.00

$6.00 D SSurplus

If P = $5,

$4.00 QD = 9 lattes

$2.00

.

QS = 25 lattes

resultin in a

$0.00

$1.00

Q

surplus of 16 lattes


0 5 10 15 20 25 30 35

Surplus (a.k.a. excess supply):

P

quantity demanded

$5.00

$6.00 D S ac ng a surp us,sellers try to increasesales b cuttin rice.

Surplus

$4.00

This causesQDto rise and QS to fall

$2.00

.

which reduces thesur lus.

$0.00

$1.00

Q

.


0 5 10 15 20 25 30 35


11/13


12/13

EXAMPLE 2: A Shift in Supply

P

S S

EVENT: New technologyreduces cost ofroducin h brid cars.

STEP 1:

Scurve shifts

because event affectscost of production.STEP 2: P1

PDcurve does notshift, becausebecause event

reduces cost, D1STEP 3:

is not one of the

factors that affect

makes production

more profitable atQ

Q1 Q2

price to falland quantity to rise.

66

demand. .

EXAMPLE 3: A Shift in Both Supply

P

S S

EVENTS:

price of gas rises AND

P

production costs

STEP 1:

P1Both curves shift.STEP 2:

D1D2

Both shift to the right.

STEP 3:

QQ1 Q2

r ses, u e econ Pis ambiguous:

If demand increases morethan supply, Prises.

EXAMPLE 3: A Shift in Both Supply

P

S S

EVENTS:price of gas rises AND

production costs

STEP 3, cont.P1

PBut if supply

D1D2

than demand,

P falls.Q

Q1 Q2


What Happens to Price andQuantity When Supply or Demand

Shifts?


s n supp y an emans n supp y an eman

Use the three-step method to analyze the effects of

each event on the equilibrium price and quantity of

music downloads.Event A: A fall in the price of CDs

reduction in the royalties they must pay

for each song they sell.

Event C: Events A and B both occur.


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. a n pr ce o s. a n pr ce o s

The market for

P

S1

music downloads1. Dcurve shifts

2. Dshifts left P1

P2.

fall.

D1D2

72

Q1Q2


. a n cos o roya es. a n cos o roya es

The market for

P

S1 S

music downloads1. Scurve shifts

P12. Sshifts right

of sellers costs)

P2

. ,

Qrises.

D1Q

Q1 Q2


. a n pr ce o s. a n pr ce o s ananfall in cost of royaltiesfall in cost of royalties

STEPS

1. Both curves shift (see parts A & B).

2. Dshifts left, Sshifts right.

3. Punambiguously falls.

The fall in demand reduces Q,

the increase in supply increases Q.

74

TEN PRINCIPLES OF ECONOMIC

2007 Thomson South-Western

CONCLUSION:

One of the Ten Principles from Chapter 1:

ar e s are usua y a goo way

to organize economic activity. In market economies, prices adjust to balance

supply and demand. These equilibrium prices

are the signals that guide economic decisions

and thereby allocate scarce resources.

76

Ch 3 S and D notes

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