Transcript Decisions & Effects - Long Beach Unified School District

Ch. 3: Supply and Demand:
Theory
James R. Russell, Ph.D., Professor of Economics & Management, Oral Roberts University
©2005 Thomson Business & Professional Publishing, A Division of Thomson Learning
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Demand


Demand: (1) the willingness and ability of
buyers to purchase different quantities of a
good (2) at different prices (3) during a
specific period of time.
Law of Demand: as the price of a good
rises, quantity demanded of that good falls,
as the price of a good falls, quantity
demanded of that good rises, ceteris
paribus.
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Four Ways to Represent
The Law Of Demand




In Words: “As price
rises, quantity
demanded falls”
In Symbols: PQd
In a Demand
Schedule
As a Demand Curve
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Exhibit 1: Demand Schedule
and Demand Curve
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Prices
Absolute Price: the price of a
good in money terms.
 Relative Price: the price of a
good in terms of another good.

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Why Quantity Demanded
Goes Down As Price Goes Up
1.
2.
People substitute lower-priced goods
for higher-priced goods.
The Law of Diminishing Marginal
Utility: for a given time period, the
marginal (additional) utility or
satisfaction gained by consuming
equal successive units of a good will
decline as the amount consumed
increases.
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Exhibit 2: Deriving a Market
Demand Schedule and a
Market Demand Curve
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Change in Quantity Demanded
versus a Change in Demand


Change in Quantity Demanded: a
movement from one point to another
point on the same demand curve
caused by a change in the price of
the good.
Change in Demand: a shift in the
demand curve
– Increase in demand: a shift to the right
– Decrease in demand: as shift to the left
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Exhibit 3: Shifts in the Demand Curve
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Causes of Change in the
Demand Curve
Income
 Preferences
 Prices of Related Goods
 Number of Buyers
 Expectations of Future Price

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Income Induced Changes in
Demand



Normal Good: a good the demand
for which rises (falls) as income rises
(falls).
Inferior Good: a good the demand
for which rises (falls) as income falls
(rises).
Neutral Good: a good the demand
for which does not change as income
rises or falls.
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Preferences and Related
Goods



Preferences: affect the amount of a good
they are willing to buy at a particular price
(Ex: favorite food, favorite author)
Substitutes: the demand for product X
increases as the price for substitute Y
increases, and the demand for product X falls
as the price for Y falls, (Ex:Coke and Pepsi).
Complements: the price of product A falls
as the demand for product B rises, and the
price of product A rises as the demand for
product B falls, (Ex: Ketchup and Hot Dog
Buns).
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Exhibit 4: Substitutes and
Complements
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Number of Buyers and
Expectation of Future Price
Number of Buyers: More
Buyers, More Demand; Fewer
Buyers, Less Demand.
 Price Expectations:

– Expect higher price tomorrow, buy
more today, increase in demand.
– Expect lower price tomorrow, buy
less today, decrease in demand.
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Exhibit 5: A Change in Demand versus a
Change in Quantity Demanded
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Self-Test




As Sandi’s income rises, her demand for
popcorn rises. As Mark’s income falls, his
demand for prepaid telephone cards rises.
What kinds of goods are popcorn and
telephone cards for the people who demand
each?
Why are demand curves downward sloping?
Give an example that illustrates how to
derive a market demand curve.
What factors can change demand? What
factors can change quantity demanded?
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Supply


Supply: The (1) willingness and ability
of sellers to produce and offer to sell
different quantities of a good (2) at
different prices (3) during a specific
period of time.
Law of Supply: As the price of a good
rises, the quantity supplied of the good
rises; and as the price of a good falls,
the quantity supplied of the good falls.
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Exhibit 6: A Supply Curve
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Exhibit 7: Supply Curves When There
is No Time to Produce More or
No More Can Be Produced
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Why Most Supply Curves
Slope Upwards?
Most supply curves
slope upward because
costs rise when more
of a good is
produced.
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Market Supply Curve


Market Supply
Curve: represents
the price-quantity
combinations for all
sellers of a particular
good.
Individual supply
Curve: represents
the price-quantity
combinations for a
single seller
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Exhibit 8: Deriving a Market Supply Schedule
and a Market Supply Curve
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Factors Which Can Shift
the Supply Curve
Prices of Relevant Resources
 Technology
 Number of Sellers
 Expectations of Future Price
 Taxes and Subsidies
 Government Restrictions

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Changes in Quantity Supplied
versus Changes in Supply
Changes in Quantity Supplied:
a movement along the supply curve.
 Changes in Supply: a shift in the
supply curve.

– Increase in supply: a shift to the right.
– Decrease in supply: a shift to the left.
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Exhibit 10: A Change in Supply versus
a Change in Quantity Supplied
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Self-Test


What would the supply curve of houses in
your city look like in the next 10 hours? In
three months?
What happens to the supply curve if each of
the following occurs?
– There is a decrease in the number of sellers.
– A per-unit tax is placed on the production of a
good.
– The price of a relevant resource falls.

“If the price of apples rises, the supply of
apples will rise.” True or false? Explain.
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Exhibit 11: Supply and Demand at Work
at an Auction
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Market Language



If quantity supplied is greater than the quantity
demanded, the good has a surplus or excess
supply.
If quantity demanded is greater than quantity
supplied, a shortage or excess demand
exists.
The price at which quantity demanded equals
quantity supplied is the equilibrium price, or
the market-clearing price.
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More Market Language




Equilibrium Quantity: the quantity that
corresponds to the equilibrium price.
Disequilibrium Price: any price at which
quantity demanded is not equal to quantity
supplied.
Disequilibrium: a market that is exhibiting
either a surplus or a shortage is in
disequilibrium.
Equilibrium. A market in which quantity
demanded equals quantity supplied is in
equilibrium.
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Exhibit 12: Moving to
Equilibrium
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Exhibit 13: A Summary Exhibit of a
Market (Supply and Demand)
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Exhibit 14: Moving to Equilibrium in
Terms of Maximum and
Minimum Prices
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Equilibrium In Terms of
Consumers’ and Producers’
Surplus



Consumers’ Surplus: the difference
between the maximum price a buyer would
be willing and able to pay for a good or
service and the price actually paid.
Producers’ Surplus: the difference
between the price sellers receive for a good
and the minimum or lowest price they
would have sold the good.
Total Surplus = Consumers’ Surplus +
Producers’ Surplus
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Exhibit 15: Consumers’ and Producers’
Surplus
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Exhibit 16: Equilibrium, Consumers’
Surplus, and Producers’
Surplus
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Exhibit 17: Equilibrium Price and Quantity
Effects of Supply Curve Shifts
and Demand Curve Shifts
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What Can Change Equilibrium
Price and Quantity?




Demand rises and supply is constant:
Equilibrium price rises, Equilibrium quantity
rises.
Demand falls, supply is constant: Equilibrium
price falls, Equilibrium quantity falls.
Supply rises, demand is constant: Equilibrium
price falls, Equilibrium quantity rises.
Supply falls, demand is constant: Equilibrium
price rises, Equilibrium quantity falls.
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What Can Change Equilibrium
Price and Quantity?




Demand rises and supply falls by an equal
amount: Equilibrium rises, Equilibrium quantity
is constant.
Demand falls and supply rises by an equal
amount: Equilibrium price falls, Equilibrium
quantity is constant.
Demand rises by a greater amount than supply
falls: Equilibrium price and quantity rise.
Demand rises by a lesser amount than supply
falls: Equilibrium price rises, Equilibrium
quantity falls.
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Self-Test



When a person goes to the grocery store to buy
food, there is no auctioneer calling out prices
for bread, milk, and other items. Therefore,
supply and demand cannot be operative. Do
you agree or disagree? Explain.
The price of a given quality personal computer
is lower today than it was five years ago. Is
this necessarily the result of a lower demand
for computers? Explain.
If the price paid is $40 and consumers’ surplus
is $6, then what is the maximum buying price?
If the minimum selling price is $30 and
producers’ surplus is $4, then what is the price
received by the seller?
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Self-Test

What is the effect on equilibrium price and
quantity of the following:
– A decrease in demand that is greater than the
increase in supply
– An increase in supply
– A decrease in supply that is greater than the
increase in demand
– A decrease in demand

At equilibrium quantity, what is the relationship
between “maximum buying price” and the
“minimum selling price?”
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Price Controls (Price
Ceiling)


Price Ceiling: a government mandated
maximum price above which legal trades
cannot be made.
Price Ceilings may cause:
1)
2)
3)
4)
5)
Shortages
Fewer Exchanges
Non-price Rationing Devices
Buying and Selling at a Prohibited Price
Tie in Sales
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Exhibit 18: A Price Ceiling
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Price Controls (Price
Floor)


Price Floor: a government mandated
minimum price below which legal
trades cannot be made.
Price floors can cause:
– Surpluses
– Fewer Exchanges.
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Exhibit 19: A Price Floor
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Self-Test



Do buyers prefer lower prices to higher
prices?
When there are long-lasting shortages,
there are long lines of people waiting to buy
goods. It follows that the shortages cause
the long lines.” Do you agree or disagree?
Explain you answer.
Who might argue for a Price Ceiling? A
Price Floor?
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Coming Up (Ch. 4): Supply and
Demand: Practice
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