Transcript Where Prices Come From: The Interaction of Demand and Supply

Chapter
3
Where Prices Come From:
The Interaction of Demand
and Supply
Prepared by:
Fernando & Yvonn Quijano
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
Apple and the Demand
for iPods
Learning Objectives
3.1 Discuss the variables that influence
demand.
3.2
Discuss the variables that influence
supply.
3.3 Use a graph to illustrate market
equilibrium.
3.4 Use demand and supply graphs to
predict changes in prices and
quantities.
By early 2007, over 100 million
iPods had been sold and more
than two billion songs had been
downloaded from iTunes.
Clearly the strategy of selling an
expensive digital music player
and selling the music cheaply
has been very successful for
Apple. But how long will the
iPod’s dominance last?
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Where Prices Come From: The Interaction of
Demand and Supply
Perfectly competitive market A
market in which there are many buyers
and sellers, all the products are
identical, and there are no barriers to
new sellers entering the market.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Demand Schedules and Demand Curves
Demand schedule A table showing the relationship
between the price of a product and the quantity of the
product demanded.
Quantity demanded The amount of a good or service that
a consumer is willing and able to purchase at a given price.
Demand curve A curve that shows the relationship between
the price of a product and the quantity of the product
demanded.
Market demand The demand by all the consumers of a
given good or service.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Demand Schedules and Demand Curves
FIGURE 3-1
A Demand Schedule
and Demand Curve
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
The Law of Demand
Law of demand The rule that, holding
everything else constant, when the price of
a product falls, the quantity demanded of
the product will increase, and when the
price of a product rises, the quantity
demanded of the product will decrease.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
What Explains the Law of Demand?
Substitution effect The change in the
quantity demanded of a good that results
from a change in price, making the good
more or less expensive relative to other
goods that are substitutes.
Income effect The change in the quantity
demanded of a good that results from the
effect of a change in the good’s price on
consumers’ purchasing power.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Holding Everything Else Constant:
The Ceteris Paribus Condition
Ceteris paribus (“all else equal”) The
requirement that when analyzing the
relationship between two variables—such
as price and quantity demanded—other
variables must be held constant.
A shift of a demand curve is an increase or
decrease in demand. A movement along a
demand curve is an increase or decrease
in the quantity demanded.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Holding Everything Else Constant:
The Ceteris Paribus Condition
FIGURE 3-2
Shifting the
Demand Curve
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
Many variables other than price can influence
market demand.
• Income
Normal good A good for which the
demand increases as income rises and
decreases as income falls.
Inferior good A good for which the
demand increases as income falls and
decreases as income rises.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
• Price of related goods
Substitutes Goods and services that
can be used for the same purpose.
Complements Goods and services that
are used together.
• Tastes
Consumers can be influenced by an
advertising campaign for a product.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
• Population and demographics
Demographics The characteristics
of a population with respect to age,
race, and gender.
• Expected Future Prices
Consumers choose not only which
products to buy but also when to buy
them.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
TABLE 3-1
Variables That Shift Market Demand Curves
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
TABLE 3-1
Variables That Shift Market Demand Curves (continued)
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
Making Why Supermarkets Need to Understand
the
Substitutes and Complements
Connection
FROZEN
PIZZA
COFFEE
HOT
DOGS
ICE
CREAM
POTATO
CHIPS
REGULAR
CEREAL
SPAGHETTI
SAUCE
YOGURT
Varieties in Five
Chicago Supermarkets
391
337
128
421
285
242
194
288
Varieties Introduced
in a 2-Year Period
113
109
47
129
93
114
70
107
Varieties Removed
in a 2-Year Period
135
86
32
118
77
75
36
51
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
Making Companies Respond to a Growing
the
Hispanic Population
Connection
As the demand for goods
purchased by Hispanic households
increases, more can be sold at
every price. Not surprisingly,
companies have responded by
devoting more resources to serving
this demographic group.
You can download Spanish music
from iTunes. Apple is one of many
companies responding to a growing
Hispanic population.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
The Demand Side of the Market
A Change in Demand versus a Change in Quantity Demanded
FIGURE 3-3
A Change in Demand
versus a Change in the
Quantity Demanded
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.1
Making Apple Forecasts the Demand for iPhones
the
and other Consumer Electronics
Connection
To decide which products to
develop, firms need to forecast the
demand for those products.
Time will tell whether Apple’s
forecast of a large demand for the
iPhone will turn out to be correct.
Will Apple’s iPhone match the
success of its iPod?
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.2
The Supply Side of the Market
Quantity supplied The amount of a good or service
that a firm is willing and able to supply at a given
price.
Supply Schedules and Supply Curves
Supply schedule A table that shows the relationship
between the price of a product and the quantity of the
product supplied.
Supply curve A curve that shows the relationship
between the price of a product and the quantity of the
product supplied.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.2
The Supply Side of the Market
Supply Schedules and Supply Curves
FIGURE 3-4
Supply Schedule and
Supply Curve
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.2
The Supply Side of the Market
The Law of Supply
Law of supply The rule that, holding
everything else constant, increases in
price cause increases in the quantity
supplied, and decreases in price cause
decreases in the quantity supplied.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.2
The Supply Side of the Market
The Law of Supply
FIGURE 3-5
Shifting the Supply Curve
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.2
The Supply Side of the Market
Variables That Shift Supply
The following are the most important variables that shift supply:
•
•
Prices of inputs
Technological change
Technological change A positive or negative
change in the ability of a firm to produce a
given level of output with a given quantity of
inputs.
•
•
•
Prices of substitutes in production
Number of firms in the market
Expected future prices
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.2
The Supply Side of the Market
Variables That Shift Supply
TABLE 3-2
Variables That Shift Market Supply Curves
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.2
The Supply Side of the Market
Variables That Shift Supply
TABLE 3-2
Variables That Shift Market Supply Curves (continued)
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.2
The Supply Side of the Market
A Change in Supply versus a Change in Quantity Supplied
FIGURE 3-6
A Change in Supply
versus a Change in the
Quantity Supplied
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply
Together
FIGURE 3-7
Market Equilibrium
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply
Together
Market equilibrium A situation
in which quantity demanded
equals quantity supplied.
Competitive market
equilibrium A market
equilibrium with many buyers
and many sellers.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply
Together
How Markets Eliminate Surpluses and Shortages
Surplus A situation in which the
quantity supplied is greater than the
quantity demanded.
Shortage A situation in which the
quantity demanded is greater than
the quantity supplied.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply
Together
How Markets Eliminate Surpluses and Shortages
FIGURE 3-8
The Effect of
Surpluses and
Shortages on the
Market Price
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply
Together
Demand and Supply Both Count
Always keep in mind that it is the interaction of demand
and supply that determines the equilibrium price.
Neither consumers nor firms can dictate what the
equilibrium price will be.
No firm can sell anything at any price unless it can find
a willing buyer, and no consumer can buy anything at
any price without finding a willing seller.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.3
Solved Problem
3-3
Demand and Supply Both
Count: A Tale of Two Letters
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Supply on Equilibrium
FIGURE 3-9
The Effect of an Increase
in Supply on Equilibrium
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.4
Making
the
The Falling Price of LCD Televisions
Connection
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Demand on Equilibrium
FIGURE 3-10
The Effect of an Increase
in Demand on Equilibrium
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Demand and Supply over Time
FIGURE 3-11
Shifts in Demand and
Supply over Time
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Demand and Supply over Time
TABLE 3-3
How Shifts in Demand and Supply Affect
Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE
UNCHANGED
SUPPLY CURVE
SHIFTS TO THE RIGHT
SUPPLY CURVE
SHIFTS TO THE LEFT
Q unchanged
P unchanged
Q increases
P decreases
Q decreases
P increases
DEMAND CURVE
SHIFTS TO THE RIGHT Q increases
P increases
Q increases
P increases or
decreases
Q increases or
decreases
P increases
DEMAND CURVE
SHIFTS TO THE LEFT
Q increases or
decreases
P decreases
Q decreases
P decreases or
increases
DEMAND CURVE
UNCHANGED
Q decreases
P decreases
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.4
Solved Problem
3-4
High Demand and Low Prices
in the Lobster Market?
Supply and demand for lobster both increase during the summer, but the increase in
supply is greater than the increase in demand, therefore, equilibrium price falls.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
Shifts in a Curve versus Movements along a Curve
When analyzing markets using demand
and supply curves, it is important to
remember that when a shift in a demand
or supply curve causes a change in
equilibrium price, the change in price
does not cause a further shift in demand
or supply.
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
Shifts in a Curve versus Movements along a Curve
Don’t Let This Happen to YOU!
Remember: A Change in a Good’s Price Does Not
Cause the Demand or Supply Curve to Shift
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
An Inside LOOK
How Does the iPhone Help Apple and
AT&T?
Apple Coup: How Steve Jobs Played Hardball in iPhone Birth
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Chapter 3: Where Prices Come From: The Interaction of Demand and Supply
Key Terms
Ceteris paribus (“all else equal”)
Competitive market equilibrium
Complements
Demand curve
Demand schedule
Demographics
Income effect
Inferior good
Law of demand
Law of supply
Market demand
Market equilibrium
Normal good
Perfectly competitive market
Quantity demanded
Quantity supplied
Shortage
Substitutes
Substitution effect
Supply curve
Supply schedule
Surplus
Technological change
© 2008 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien, 2e.
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