# Chapter 3: Supply & Demand - Shana M. McDermott, · PDF fileChapter 3: Supply & Demand Price (\$) Quantity ... about the ENTIRE DEMAND schedule or curve. ... What happens when the...

Feb 08, 2018

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• Chapter 3: Supply & Demand

Price (\$)

Quantity (Units)

Supply

Demand

P*

Q*

1

• Value, Prices, & Markets

Prices communicate information about the value of a good or service.

Prices arise from the interaction of supply and demand in a market economy.

Supply and Demand, and thus prices, coordinate the production and distribution of goods and services in the economy.

2

• Competitive Markets

Definition: A competitive market is a market in which there are many buyers and sellers of the same good or service.

A completely competitive market is one where no one individual or firm can make a noticeable impact on the price.

3

• Supply & Demand

Supply & Demand: A simple model that describes how competitive markets work, and how prices are determined.

The Elements of the Model:

Supply and Demand Curves

What Factors Cause the Curves to Shift

Equilibrium Price and Changes in Equilibrium

4

• Other Things Equal

When analyzing the relationship between the price and quantity demanded other variables must be kept constant.

Ceteris paribus (all else equal)

5

• The Demand Schedule

The Demand Schedule is a Table which shows how much consumers will want to buy at each price.

Price (\$ per ticket)

Quantity demanded (tickets)

350 5,000

300 6,000

250 8,000

200 11,000

150 15,000

100 20,000

6

• The Demand Curve

The Demand Curve is a Graph of the Demand Schedule which shows how much consumers will want to buy at each price.

7

• The LAW of DEMAND

The Law of Demand says that a higher price for a good, other things constant, means people will demand a smaller quantity of the good.

8

• Individual vs. Market Demand

For each price level sum the individual quantity demanded to get the market quantity demanded at that price level.

9

• Individual vs. Market Demand

For each price level sum the individual quantity demanded to get the market quantity demanded at that price level.

10

• Demand vs. Quantity Demanded

When we talk about Demand we are talking about the ENTIRE DEMAND schedule or curve.

When we talk about Quantity Demanded we are talking about a SPECIFIC POINT on the demand curve the quantity on the demand curve at SPECIFIC PRICE.

11

• Movement Along vs. Shift

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 goods price.

from point A to

point B: increase in

quantity demanded

reflects a

movement along

the demand curve

it is the result of a

fall in the price of

the good.

from point A to

point C: increase in

quantity demanded

reflects a shift of

the demand curve

It is the result of an increase in the quantity demanded at any given price.

12

• Movement Along vs. Shift

Causes of a Movement Along

Causes of a Shift

Change in Price Changes in the Prices of Other Goods

Changes in Incomes

Changes in Tastes & Preferences

Changes in Expectations

13

• Shifts in Demand

A change in quantity demanded at any given price represents a shift in the demand curve.

an increase

in demand,

means a

rightward shift of

the demand

A decrease in

demand means

a leftward shift of

the demand

curve.

Price

Quantity

D1 D2

Increase

D3

Decrease

14

• Change in Prices of Other 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. Ex.: muffins and donuts.

Complements: Two goods are complements if a fall in the price of one good makes people more willing to buy the other good. Ex: PB&J, Computers/Monitors

15

• Changes in Income

Normal Goods: When a rise in income increases the demand for a goodthe normal casewe 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. Ex: instant noodles.

16

• Changes in Tastes or Expectations

Tastes & Preferences are constantly changing with Fads, Fashions, Needs and Wants. Can you think of any examples?

Expectations: Consumers choose not only which products to buy but also when to buy them.

17

• Shifts in Demand

Suppose Tom Brady announces retirement and that the next game is his last game! What happens at the next game?

18

• Check Understanding Question A

What would be the effect of a sharp increase in the price of squash balls on the demand for squash racquets? Why?

Price

Quantity

D1 D2

Decrease

If the price of a compliment good rises, then demand decreases for the good in question and the demand curve shifts left.

19

• Check Understanding Question B

What would be the effect of a sharp increase in the price of Pepsi on the demand for Coke? Why?

Price

Quantity

D1

If the price of a substitute good rises, then demand increases for the good in question and the demand curve shifts right.

D2

Increase

20

• Check Understanding Question C

As Larissas income goes up, she buys less instant noodles. What kind of a good is instant noodles for Larissa?

Price

Quantity

D1 D2

Decrease

Goods for which demand decreases if your income rises are called inferior goods. In this case, instant noodles are an inferior good.

21

• Check Understanding Question D

Following David Beckham and Sting, more men start to follow the fashion of wearing skirts. What would the effect of this change in tastes be on the demand for skirts?

Price

Quantity

D1

If tastes change in favor of a certain good, then demand increases for the good.

D2

Increase

22

• Supply

Producers or Firms must make a decision about how much of a good or service to sell in the market place.

Quantity Supplied: The actual amount of a good or service that people are willing to sell at some specific price.

23

• The Supply Schedule

The Supply Schedule is a Table which shows how much of good or service will be supplied at different prices.

Supply Schedule for Tickets

Price (\$ per ticket)

Quantity Supplied (tickets)

350 8,800

300 8,500

250 8,000

200 7,000

150 5,000

100 2,000 24

• The Supply Curve

The Supply Curve is a Graph of the Supply Schedule which shows how much sellers will want to sell at each price.

25

• Law of supply holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

26

• Individual vs. Market Supply

Price (DVDs) Firm 1 Firm 2 Market Supply

A \$0.50 2 0 2

B \$1.00 3 1 4

C \$1.50 4 2 6

D \$2.00 5 3 8

27

• Supply vs. Quantity Supplied

When we talk about Supply we are talking about the ENTIRE SUPPLY schedule or curve.

When we talk about Quantity Supplied we are talking about a SPECIFIC POINT on the supply curve the quantity on the supply curve at a SPECIFIC PRICE.

28

• Movement Along vs. Shift

Causes of a Movement Along

Causes of a Supply Shift

Change in Price Changes in Input Prices

Changes in Technology

Changes in Expectations

29

• Movement Along vs. Shift

A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that goods price.

from point A to point

B: decrease in

quantity supplied

reflects a movement

along the supply

curve

it is the result of a

fall in the price of the

good.

from point A to point

C: decrease in

quantity supplied

reflects a shift of the

supply curve

It is the result of an decrease in the quantity supplied at any given price.

30

• Shifts in Supply

A change in quantity supplied at any given price represents a shift in the supply curve.

an increase

in supply,

means a

rightward shift of

the supply curve.

A decrease in

supply means a

leftward shift of

the supply curve.

Price

Quantity

S3

Decrease

S2

Increase

S1

31

• Change in Input Prices

Why might input prices matter?

If the price of inputs rises, your costs go up, therefore you want to supply fewer goods at each price supply decreases (shifts left)

If the price of inputs falls, your costs go down, therefore you are willing to supply more goods at each price supply increases (shifts right)

32

• Changes in Technology

A change in technology doesnt necessarily mean just changes in electronics. Changes in technology can simply be changes in how things are done.

If a change in technology improves

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