Transcript No Slide Title

ECON 151 – PRINCIPLES OF MACROECONOMICS
Chapter 3:
Demand and Supply
Materials include content from Pearson Addison-Wesley which has been modified
by the instructor and displayed with permission of the publisher. All rights reserved.
Markets
• Markets
– Arrangements that individuals have for
exchanging with one another
– Represent the interaction of buyers and
sellers
2
Markets
• Markets
– Markets for gasoline
– Markets for labor
– Stock market
– Market for Super Bowl tickets
– Compact disk market
3
Markets
• Markets
– Markets set the prices we pay and receive in
a free, competitive environment
4
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
5
The Law of Demand
• Law of Demand
– Quantity demanded is inversely related to
price, all things equal
6
The Law of Demand
• What are we holding constant?
– Income
– Price of other goods
– Many other factors
7
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)
8
The Demand Schedule
• The demand schedule is a table relating
prices to quantity demanded.
• We must consider:
– The time dimension
– Constant-quality units
9
The Individual Demand
Schedule
10
Figure 3-1, Panel (a)
The Individual Demand Curve
11
Figure 3-1, Panel (b)
The Horizontal Summation
of Two Demand Schedules
12
Figure 3-2, Panel (a)
The Horizontal Summation
of Two Demand Schedules
13
Figure 3-2, Panels (b), (c), (d)
The Market Demand
Schedule for Rewritable CD’s
14
Figure 3-3, Panel (a)
The Market Demand
Curve for Rewritable CD’s
15
Figure 3-3, Panel (b)
Price per Rewritable CD ($)
A Shift in the Demand Curve
5
Suppose the federal
government gives every
student a rewritable CD
drive.
4
3
Increase in
Demand
2
1
D1
0
D2
2
4
6
8
10
12
14
Quantity of Rewritable CDs Demanded
(millions of constant-quality units per year)
16
Figure 3-4
Price per Rewritable CD ($)
A Shift in the Demand Curve
5
Decrease in Demand
Suppose universities
prohibit the use of
personal computers.
4
3
2
D2
1
D3
0
D1
2
4
6
8
10
12
14
Quantity of Rewritable CDs Demanded
(millions of constant-quality units per year)
17
Figure 3-4
Price per Rewritable CD ($)
A Shift in the Demand Curve
When demand increases
the quantity demanded will
be greater at each price
5
4
3
2
b
a
d
c
1
D1
0
D2
2
4
6
8
10
12
14
Quantity of Rewritable CDs Demanded
(millions of constant-quality units per year)
18
Figure 3-4
Shifts in Demand
• Determinants of demand
– Income
• Normal goods
• Inferior goods
– Tastes and preferences
– The price of related goods
• Complements
• Substitutes
19
Shifts in Demand
• Determinants of demand
– Expectations
• Income
• Future prices
– Market size (number of buyers)
20
Shifts in Demand
The Determinants of Demand
Income: Normal Good
Price
Increase in income
increases demand
Decrease in income
decreases demand
D3
D1
D2
Q/Units
21
Shifts in Demand
The Determinants of Demand
Income: Inferior Good
Price
Decrease in income
increases demand
Increase in income
decreases demand
D3
D1
D2
Q/Units
22
Shifts in Demand
The Determinants of Demand
Income: Tastes and Preferences
Price
Sport Utility Vehicle
• Increase in demand
Smoking
• Decrease in demand
D3
D1
D2
Q/Units
23
Shifts in Demand
The Determinants of Demand
Price of Related Goods: Substitutes
Price
Butter and Margarine
• Price of both = $2/lb.
• Price of margarine increases
to $3/lb.
• Demand for butter increases
D1
D2
Q/Butter
24
Shifts in Demand
The Determinants of Demand
Price of Related Goods: Complements
Price
Speakers and Amplifiers
• Decrease the relative
price of amplifiers
• Demand for speakers
increases
Speakers and Amplifiers
• Increase the relative
price of amplifiers
• Demand for speakers
decreases
D3
D1
D2
Q/Speakers
25
Shifts in Demand
The Determinants of Demand
Expectations
Price
A higher income or
expectations of a higher
future price will increase
demand
A lower income or
expectations of a lower
future price will decrease
demand
D3
D1
D2
Q/Units
26
Shifts in Demand
The Determinants of Demand
Population
Price
Increase in the
population increases
demand
Decrease in population
decreases demand
D3
D1
D2
Q/Units
27
Shifts in Demand
• Changes in demand versus changes in
quantity demanded
– A change in one or more of the non-price
determinants (income, tastes, etc.) will lead to
a change in demand.
– This is a shift of the whole curve.
28
Shifts in Demand
• Changes in demand versus changes in
quantity demanded
– A change in a good’s own price leads to a
change in quantity demanded.
– This is a movement along the same curve.
29
Price of Rewritable CDs($)
Movement Along
a Given Demand Curve
5
4
3
A change in the price
changes the quantity
of a good demanded
2
1
D
0
Figure 3-5
2
4
6
8
10
12
Quantity of Rewritable CDs Demanded
(millions of constant-quality units per year)
30
The Law of Supply
• Supply
– The amount of a product or service that firms
are willing to sell at alternative prices
31
The Law of Supply
• Law of Supply
– The price of a product or service and the
quantity supplied are directly related
32
The Supply Schedule
• The supply schedule is a table relating
prices to quantity supplied.
33
The Individual Producer’s
Supply Schedule
34
Figure 3-6, Panel (a)
The Individual Producer’s
Supply Curve
35
Figure 3-6, Panel (b)
Horizontal Summation
of Supply Curves
36
Figure 3-7, Panel (a)
Horizontal Summation
of Supply Curves
37
Figure 3-7, Panels (b), (c), (d)
The Market Supply Schedule
for Rewritable CDs
38
Figure 3-8, Panel (a)
The Market Supply Curve
for Rewritable CDs
39
Figure 3-8, Panel (b)
Shifts in Supply
• In general, non-price changes that lead to
higher profits lead to an increase in
supply.
• In general, non-price changes that lead to
lower profits lead to a decrease in supply.
40
Shifts in Supply
• Determinants of supply
– Cost of inputs
– Technology and productivity
– Taxes and subsidies
– Price expectations
– Number of firms in industry
41
Shifts in Supply
The Determinants of Supply
Cost of Inputs
Price
Increase in cost
decreases supply
S3
S1
S2
Decrease in cost
increases supply
Q/Units
42
Shifts in Supply
The Determinants of Supply
Technology and Productivity
Price
S3
S1
S2
Decreases in productivity
decrease supply
Improvements in technology or
increases in productivity
increase supply
Q/Units
43
Shifts in Supply
The Determinants of Supply
Taxes and Subsidies
Price
S3
S1
S2
Increases in taxes or
decreases in subsidies
decrease supply
Decreases in taxes or
increases in subsidies
increase supply
Q/Units
44
Shifts in Supply
The Determinants of Supply
Price Expectations
Price
Expectations of higher
future prices decrease
supply
S3
S1
S2
Expectations of lower
future prices increase
supply
Q/Units
45
Shifts in Supply
The Determinants of Supply
Number of Firms in Industry
Price
Decrease in the
number of firms
decreases supply
S3
S1
S2
Increase in the
number of firms
increases supply
Q/Units
46
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.
47
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.
48
Putting Demand
and Supply Together
49
Figure 3-10, Panel (a)
Price per Rewritable CD($)
Putting Demand
and Supply Together
S
5
4
Shortage
• At P = $1: Qs (A) = 2 < Qd (B) = 10
• All prices below $3 Qd > Qs
• Price will be pushed up
3
2
A
1
B
D
Excess quantity demanded at price $1
0
2
4
6
8
10
12
Quantity of Rewritable CDs
(millions of constant-quality units per year)
50
Figure 3-10, Panel (b)
Putting Demand
and Supply Together
Price per Rewritable CD($)
Excess quantity supplied at price $5
5
S
D
4
Surplus
• At P = $5: Qd (D) = 2 < Qs (C) = 10
• All prices above $3 Qd < Qs
• Price will be pushed down
3
2
1
D
0
Figure 3-10, Panel (b)
2
4
6
8
10
12
Quantity of Rewritable CDs
(millions of constant-quality units per year)
51
Putting Demand
and Supply Together
Price per Rewritable CD($)
Excess quantity supplied at price $5
5
S
D
4
E
3
Equilibrium
Market clearing,
or equilibrium price
2
1
A
B
D
Excess quantity demanded at price $1
0
Figure 3-10, Panel (b)
2
4
6
8
10
12
Quantity of Rewritable CDs
(millions of constant-quality units per year)
52
Putting Demand
and Supply Together
• Equilibrium
– The situation when quantity supplied equals
quantity demanded at a
particular price
53
Putting Demand
and Supply Together
• 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
54
Putting Demand
and Supply Together
• Surpluses
– The situation when quantity supplied is
greater than quantity demanded
– Exists at any price above the equilibrium price
55
Should Shortages in the Ticket Market
Be Solved by Scalpers?
Price per Ticket
S
P2
P1
Excess quantity
demanded
(shortage at
price P1)
Q1
Figure 3-11
D
Q2
Quantity of Super Bowl Tickets
56
ECON 151 – PRINCIPLES OF MACROECONOMICS
Chapter 3:
Demand and Supply
Materials include content from Pearson Addison-Wesley which has been modified
by the instructor and displayed with permission of the publisher. All rights reserved.