Chapter 3 Demand and Supply. Slide 3-2 Introduction Newly-minted Ph.D. economists have faced a difficult job market for academic positions in recent years.

Chapter 3

Demand and Supply

Slide 3-2

Introduction

Newly-minted Ph.D. economists have faced a difficult job market for academic

positions in recent years. This is because two factors have

simultaneously increased the supply of economics instructors and decreased

the demand for their services.

Slide 3-3

Learning Objectives

Explain the law of demand

Discuss the difference between money prices and relative prices

Distinguish between a change in demand and a change in quantity demanded

Slide 3-4

Learning Objectives

Explain the law of supply

Distinguish between changes in supply and changes in quantity supplied

Understand how supply and demand interact to determine equilibrium price and quantity

Slide 3-5

The Law of Demand

The Demand Schedule

Shifts in Demand

Chapter Outline

Slide 3-6

Chapter Outline

The Law of Supply

The Supply Schedule

Shifts in Supply

Putting Demand and Supply Together

Slide 3-7

Did You Know That...

Even though overall prices trend steadily upwards, some prices hold steady or decline?

The average price of a desktop personal computer has fallen by almost 50 percent?

Demand and supply can explain most of relative price changes?

Slide 3-8

Markets

Markets

– Arrangements that individuals have for exchanging with one another

– Represent the interaction of buyers and sellers

Slide 3-9

Markets

Markets

– Markets for gasoline

– Markets for labor

– Stock market

– Market for Super Bowl tickets

– Compact disk market

Slide 3-10

Markets

Markets

– Markets set the prices we pay and receive

Slide 3-11

The Law of Demand

Demand

– Quantities of specific goods or services that individuals, taken singly or as a group, will purchase at various possible prices, other things being constant

Slide 3-12

The Law of Demand

Law of Demand

– Quantity demanded is inversely related to price, all things equal

Slide 3-13

The Law of Demand

What are we holding constant?

– Income

– Price of other goods

– Many other factors

Slide 3-14

The Law of Demand

Relative prices versus money prices

– Relative Price• The price of a commodity in terms of another

commodity

– Money Price• Price we observe today in today’s dollars

(absolute, nominal price)

Slide 3-15

Money Price versus Relative Price

Money Price Relative Price

Price Last Year Price This Year Price Last Year Price This Year

DVDs $20 $28

Videocassettes $10 $16

$20

$10= 2.0

$10

$20= 0.5

$28

$16= 1.75

$16= 0.57

$28

Table 3-1

Slide 3-16

Example: Price per Constant-Quality Unit

Many products, for which you pay one price, contain many features.

The right to return an item for a refund may be one feature that is included in the price.

Some retailers now are finding ways to unbundle these various features, by offering consumers the option of paying extra if they wish to use them.

Slide 3-17

The Demand Schedule

The demand schedule is a table relating prices to quantity demanded.

We must consider:

– The time dimension

– Constant-quality units

Slide 3-18

The Individual Demand Schedule

Figure 3-1, Panel (a)

Slide 3-19

The Individual Demand Curve

Figure 3-1, Panel (b)

Slide 3-20

The Horizontal Summationof Two Demand Schedules


Slide 3-21

The Horizontal Summationof Two Demand Schedules

Figure 3-2, Panels (b), (c), (d)

Slide 3-22

The Market DemandSchedule for Rewritable CD’s


Slide 3-23

The Market DemandCurve for Rewritable CD’s


Slide 3-24

Policy Example: Preventing Traffic Jams

Expressways in Japan are subject to tolls.

Increased toll rates in recent years have resulted in lower traffic volume.

Slide 3-25

Shifts in Demand

Scenario

– The federal government gives every student registered in college a rewritable CD drive to use with a personal computer.

Slide 3-26

A Shift in the Demand Curve

D1

Quantity of Rewritable CDs Demanded(millions of constant-quality units per year)

Pric

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ewrit

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CD

($)

2 4 6 80

1

2

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10 12 14

Suppose the federal government gives every student a rewritable CD drive.

D2

Increase in Demand

Figure 3-4

Slide 3-27


D1


Pric

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CD

($)

2 4 6 80

1

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D2

D3

Suppose universities prohibit the use of personal computers.

Decrease in Demand

Figure 3-4

Slide 3-28


D1


Pric

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CD

($)

2 4 6 80

1

2

3

4

5

10 12 14

D2

When demand increases the quantity demanded will be greater at each price

a

c

b

d

Figure 3-4

Slide 3-29

Shifts in Demand

Determinants of demand

– Income

– Tastes and preferences

– The price of related goods• Complements• Substitutes

Slide 3-30

Shifts in Demand

Determinants of demand

– Expectations• Future prices• Income• Product availability

– Market size (number of buyers)

Slide 3-31

Shifts in Demand

The Determinants of DemandIncome: Normal Good

D1

Q/Units

D2D3

Price

Decrease in incomedecreases demand

Increase in incomeincreases demand

Slide 3-32

Shifts in Demand

The Determinants of DemandIncome: Inferior Good

D1

Q/Units

Decrease in incomeincreases demand

Increase in incomedecreases demand

Price

D2D3

Slide 3-33

Shifts in Demand

The Determinants of DemandIncome: Tastes and Preferences

D1

Q/Units

Price

Sport Utility Vehicle• Increase in demand

D2

Smoking• Decrease in demand

D3

Slide 3-34

Shifts in Demand

The Determinants of DemandPrice of Related Goods: Substitutes

D1

Q/Butter

Butter and Margarine• Price of both = $2/lb.• Price of margarine

increases to $3/lb.

• Demand for butter increases

D2

Price

Slide 3-35

Shifts in Demand

The Determinants of DemandPrice of Related Goods: Complements

D1

Q/Speakers

Speakers and Amplifiers• Decrease the relative

price of amplifiers• Demand for speakers

increases

D2D3

Speakers and Amplifiers• Increase the relative

price of amplifiers• Demand for speakers

decreases

Price

Slide 3-36

Shifts in Demand

The Determinants of DemandExpectations

D1

Q/Units

A higher income or expectations of a higher future price will increase demand

D2D3

A lower income or expectations of a lower future price will decrease demand

Price

Slide 3-37

Shifts in Demand

The Determinants of DemandPopulation

D1

Q/Units

Increase in the population increases demand

D2D3

Decrease in population decreases demand

Price

Slide 3-38

Shifts in Demand

Changes in demand versus changes in quantity demanded

– A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand.

– This is a shift of the whole curve.

Slide 3-39

Shifts in Demand

Changes in demand versus changes in quantity demanded

– A change in a good’s own price leads to a change in quantity demanded.

– This is a movement along the same curve.

Slide 3-40

Movement Along a Given Demand Curve


Pric

e of

Rew

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Ds(

$)

2 4 6 80

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Figure 3-5

Slide 3-41

A change in the price changes the quantity of a good demanded



Pric

e of

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Ds(

$)

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D

Figure 3-5

Slide 3-42

D

A change in the price changes the quantity

of a good demanded



Pric

e of

Rew

ritab

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Ds(

$)

2 4 6 80

1

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Figure 3-5

Slide 3-43



Pric

e of

Rew

ritab

le C

Ds(

$)

2 4 6 80

1

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10 12

D

Figure 3-5

A change in the price changes the quantity

of a good demanded

Slide 3-44

Example:Higher Honey Prices

Honey prices more than doubled between 2000 and 2003.

Many food manufacturers switched to other flavorings as a substitute.

This shows that an increase in the price of honey led to an increase in the demand for a substitute good.

Slide 3-45

The Law of Supply

Supply

– The amount of a product or service that firms are willing to sell at alternative prices

Slide 3-46

The Law of Supply

Law of Supply

– The price of a product or service and the quantity supplied are directly related

Slide 3-47

The Supply Schedule

The supply schedule is a table relating prices to quantity supplied.

Slide 3-48

The Individual Producer’s Supply Schedule


Slide 3-49

The Individual Producer’s Supply Curve


Slide 3-50

Horizontal Summationof Supply Curves


Slide 3-51

Horizontal Summationof Supply Curves

Figure 3-7, Panels (b), (c), (d)

Slide 3-52

The Market Supply Schedulefor Rewritable CDs


Slide 3-53

The Market Supply Curvefor Rewritable CDs


Slide 3-54

Shifts in Supply

Scenario

– A new method of manufacturing rewritable CDs reduces the cost of production by 50 percent.

Slide 3-55

A Shift in the Supply Curve

If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve


Pric

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ewrit

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CD

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2 4 6 80

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S1

Figure 3-9

Slide 3-56


If costs decrease, supply increases


Pric

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CD

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2 4 6 80

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S2

S1

Figure 3-9

Slide 3-57


If costs increase, supply decreases


Pric

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2 4 6 80

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S3

S2

S1

Figure 3-9

Slide 3-58



Pric

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CD

($)

2 4 6 80

1

2

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10 12 14

S1

When supply increases the quantity supplied will be greater at each price

Figure 3-9

Slide 3-59


S1


Pric

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CD

($)

2 4 6 80

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S2

a

cWhen supply increases the quantity supplied will be greater at each price

Figure 3-9

Slide 3-60


S1


Pric

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CD

($)

2 4 6 80

1

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a

b

d

c

S2

When supply increases the quantity supplied will be greater at each price

Figure 3-9

Slide 3-61



Pric

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CD

($)

2 4 6 80

1

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10 12 14

S1

a

c

S3

b

dWhen supply decreases the quantity supplied will be less at each price

Figure 3-9

Slide 3-62

Policy Example:The Supply of New Housing

Environmental regulations in California add to the costs of new housing construction.

These higher costs serve to reduce the supply of new housing.

Slide 3-63

Shifts in Supply

Determinants of supply

– Cost of inputs

– Technology and productivity

– Taxes and subsidies

– Price expectations

– Number of firms in industry

Slide 3-64

Shifts in Supply

The Determinants of SupplyCost of Inputs

S1

Q/Units

Decrease in cost increases supply

S2Increase in costdecreases supply

S3

Price

Slide 3-65

Shifts in Supply

The Determinants of SupplyTechnology and Productivity

S1

Q/Units

Improvements in technology or increases in productivity increase supply

S2

Decreases in productivity decrease supply

S3

Price

Slide 3-66

Shifts in Supply

The Determinants of SupplyTaxes and Subsidies

S1

Q/Units

Decreases in taxes or increases in subsidies increase supply

S2

Increases in taxes or decreases in subsidies decrease supply

S3

Price

Slide 3-67

Shifts in Supply

The Determinants of SupplyPrice Expectations

S1

Q/Units

Expectations of lower future prices increase supply

S2Expectations of higher future prices decrease supply

S3

Price

Slide 3-68

Shifts in Supply

The Determinants of SupplyNumber of Firms in Industry

S1

Q/Units

Increase in the number of firms increases supply

S2Decrease in the number of firms decreases supply

S3

Price

Slide 3-69

Shifts in Supply

Changes in supply versus changes in quantity supplied

– A change in one or more of the non-price determinants will lead to a change in supply.

– This is a shift of the whole curve.

Slide 3-70

Shifts in Supply

Changes in supply versus changes in quantity supplied

– A change in a good’s own price leads to a change in quantity supplied.

– This is a movement along the same curve.

Slide 3-71

Putting Demandand Supply Together


Slide 3-72


Quantity of Rewritable CDs(millions of constant-quality units per year)

Pric

e pe

r R

ewrit

able

CD

($)

2 4 6 80

1

2

3

4

5

10 12

S

D

A B

Excess quantity demanded at price $1

Shortage• At P = $1: Qs (A) = 2 < Qd (B) = 10• All prices below $3 Qd > Qs

• Price will be pushed up


Slide 3-73



Pric

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CD

($)

2 4 6 80

1

2

3

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10 12

S

D

D

Excess quantity supplied at price $5

Surplus• At P = $5: Qd (D) = 2 < Qs (C) = 10• All prices above $3 Qd < Qs

• Price will be pushed down


Slide 3-74



Pric

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CD

($)

2 4 6 80

1

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3

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S

D

D

Excess quantity supplied at price $5

A B

Excess quantity demanded at price $1

EquilibriumMarket clearing, or equilibrium price

E


Slide 3-75


Equilibrium

– The situation when quantity supplied equals quantity demanded at a particular price

Slide 3-76


Shortages

– The situation when quantity demanded is greater than quantity supplied

– Exists at any price below the equilibrium price

– Is not the same as scarcity

Slide 3-77


Surpluses

– The situation when quantity supplied is greater than quantity demanded

– Exists at any price above the equilibrium price

Slide 3-78Figure 3-11

Should Shortages in the Ticket Market Be Solved by Scalpers?

Quantity of Super Bowl Tickets

Pric

e pe

r T

icke

t

Q1 Q2

P1

P2

S

DExcess quantity

demanded (shortage at

price P1)

Slide 3-79

Example:Rail Transport Prices and Logjams

A recent increase in the amount of grains ready for market led to a shortage of freight space on trains used for shipping.

In response, freight rates rose.

Both the quantity of grain to be shipped declined a bit, and the amount of rail cars available rose, eliminating the shortage.

Slide 3-80

More students have pursued academic careers in economics, increasing the supply of instructors.

The demand for all college professors has declined, as private colleges have lost endowment income and state universities have experienced funding cutbacks.

The simultaneous increase in supply and decrease in demand has lowered salaries for economics instructors.

Issues and Applications: Your Economics Instructor’s Salary

May Be Lagging

Slide 3-81

Issues and Applications: Your Economics Instructor’s Salary

May Be Lagging

Figure 3-12

Slide 3-82

Summary Discussion of Learning Objectives

The law of demand says that prices and quantity demanded are inversely related.

Relative prices must be distinguished from money, since people respond to changes in relative prices.

Slide 3-83

Summary Discussionof Learning Objectives

A change in quantity demanded versus a change in demand– A change in quantity demanded is a

movement along the same demand curve

– A change in demand is a shift of the whole demand curve

The law of supply states that price and quantity supplied are directly related.

Slide 3-84


A change in quantity supplied versus a change in supply

– A change in quantity supplied is a movement along the same supply curve

– A change in supply is a shift of the whole supply curve

Slide 3-85


Determining market price and equilibrium quantity– The demand and supply curves intersect

at the equilibrium point.

– Shortages exist when the price of a good is below the market price.

– Surpluses exist if the price of the good is greater than the market price.

End of Chapter 3Demand and Supply

Chapter 3 Demand and Supply. Slide 3-2 Introduction Newly-minted Ph.D. economists have faced a difficult job market for academic positions in recent years.

Documents

demand schedulesfigure

supplyputting demand

average price

equilibrium price

income price

relative price changes

law of supplydistinguish

law of demanddiscuss