Transcript Ch 3: Demand and Supply.

Ch. 3: Demand and Supply
Objectives
 Determinants of demand and supply
 Use demand and supply to understand how
markets determine prices and quantities
 Use demand and supply to make predictions
about changes in prices and quantities
Markets and Prices
• Market
– any arrangement that enables buyers and sellers to
get information and do business with each other.
• Competitive market
– a market that has many buyers and many sellers
– no single buyer or seller can influence the price.
• Money price of a good
– the amount of money needed to buy it.
• Relative price of a good
– the ratio of its money price to the money price of the
next best alternative good
– the opportunity cost of the good expressed in units of
the other good.
Demand
• Quantity demanded of a good or service
– the amount that consumers plan to buy during a
particular time period at a particular price.
• The Law of Demand
– Other things remaining the same, the higher
the price of a good, the smaller is the quantity
demanded.
– The law of demand results from
• a substitution effect
• an income effect
Demand
Demand
– the entire relationship between the price of
the good and quantity demanded of the good.
Demand curve
– shows the relationship between the QD of a
good and its price, ceteris parabus
Demand
• This figure shows a
demand curve for
gasoline
• A rise in the price,
ceteris paribus,
brings a decrease in
the QD and a
movement along
the demand curve.
Price
D
# gallons per week
Demand
A D-curve is also
– Willingness-to-pay
curve.
– Willingness to pay
measures marginal
benefit.
Price
D
# gallons per week
Demand
• A Change in Demand
 The quantity of the good that people plan to
buy changes at each and every price, so
there is a new demand curve.
 When demand increases,
• QD increases at each and every price
• the demand curve shifts rightward.
 When demand decreases,
• QD decreases at each and every price
• the demand curve shifts leftward.
Demand
Change in Demand vs. Change in Quantity Demanded
Factors that change demand
1. Prices of related goods
 substitute in consumption
 complement in consumption
2. Income
 Normal good
 Inferior good
 Luxury good
3. Expected future prices
4. Population
5. Taxes on buyers
6. Consumer preferences
If the price of Coca-Cola increases, the
demand for Coca-cola would:
ge
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ch
an
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ef
t
33%
Sh
i
Sh
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igh
t
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No
t
1. Shift right
2. Shift left
3. Not change
If the price of Pepsi increases, the demand
curve for Coca-cola will
ge
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an
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t
33%
Sh
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Sh
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33%
No
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1. Shift right
2. Shift left
3. Not change
Which of the following would decrease the
demand for bread?
1. Higher incomes if
bread is an inferior
good
2. The expectation
that bread prices
will fall next week
3. Higher prices for
peanut butter.
4. All of the above.
e.
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25% 25% 25% 25%
If people receive new information leading them to
believe that the price of gasoline will rise sharply
next week, the demand for gasoline this week will:
33%
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33%
No
t
1. Increase and shift
right.
2. Decrease and shift
left.
3. Not change.
Supply
Quantity supplied (QS) of a good or service
• the amount that producers plan to sell during a given
time period at a particular price.
The Law of Supply
• Other things remaining the same, the higher the price
of a good, the greater is the quantity supplied.
 results from tendency for the marginal cost of
producing a good or service to increase as the
quantity produced increases (more later)
 Producers are willing to supply only if they at least
cover their marginal cost of production.
Supply
– Supply
• the entire relationship between the quantity
supplied and the price of a good.
– Supply curve
• shows relationship between QS and price of a
good, ceteris paribus.
Supply Curve
•A supply curve for
gasoline.
•A rise in the price,
ceteris paribus,
brings an increase
in QS and a
movement along
the supply curve.
$ per gallon
S
Gallons per day
Supply
–A supply curve is
also a minimumsupply-price curve.
–The greater the
quantity produced,
the higher is the price
that producers must
be offered to be
willing to produce
that quantity.
S
Gallons per day
Supply
• A Change in Supply
 occurs when the quantity of the good that
producers plan to sell changes at each and
every price, so there is a new supply curve.
 When supply increases,
• QS increases at each and every price
• supply curve shifts rightward.
 When supply decreases,
• QS decreases at each and every price
• supply curve shifts leftward.
Factors that change supply.
1. Prices of inputs
2. Prices of related goods produced
 Substitutes in production
 Complements in production
3.
4.
5.
6.
Expected future prices
Number of sellers
Taxes on Sellers
Technology
Supply
Change in supply vs. change in quantity supplied
If off-shore drilling for oil is allowed in the U.S., the
supply curve for oil will:
33%
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cr
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s..
.
33%
No
t
1. Increase and shift
right
2. Decrease and shift
left
3. Not change.
If oil producers believe that oil prices will rise
sharply next, the supply of oil this week will:
1. Increase and shift
right
2. Decrease and shift
left
3. Not change.
33%
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If oil producers believe that oil prices will rise
sharply next, the supply of oil this week will:
1. Increase and shift
right
2. Decrease and shift
left
3. Not change.
33%
cr
In
se
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an
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.
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If the price of chicken wings increases, the supply
of chicken legs will:
1. Increase and shift
right
2. Decrease and shift
left
3. Not change.
33%
cr
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Market Equilibrium
Equilibrium
 situation in which opposing forces balance
each other.
 occurs when the price balances the plans of
buyers and sellers.
Equilibrium price
 price at which the quantity demanded equals
the quantity supplied.
Equilibrium quantity
 quantity bought and sold at the equilibrium
price.
Market Equilibrium
Price Adjustments
If P>Pequil:
– a surplus forces the price
down.
If P<Pequil:
– a shortage forces the
price up.
At the equilibrium price,
– QS=QD
– and the price doesn’t
change.
S
D
.
bo
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.
;a
Be
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Be
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;b
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be
Ab
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;
ab
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;
Ab
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el
ow
.
ov
e.
A shortage occurs whenever price is _____ the
equilibrium price and a surplus occurs whenever
price is _____ the equilibrium price.
1. Above; above.
25% 25% 25% 25%
2. Above; below.
3. Below; below.
4. Below; above.
If the price of gasoline is above the equilibrium
price, we should find
1. Excess demand
and a shortage
2. Excess supply and
a shortage
3. Excess demand
and a surplus
4. Excess supply and
a surplus
y.
..
es
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.. .
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.. .
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..
25% 25% 25% 25%
Predicting Changes in Price and Quantity
Illustrate Effect on Equilibrium Price and Quantity if:
a. Demand increases
b. Supply increases
c. Demand and supply simultaneously increase.
Practice with Supply/Demand to:
a. Predict effect of “shock” to market.
b. Understand the type of “shock” that might have
caused an observed change in P & Q.
As the price of gasoline increases, we
should expect the demand for hybrid (high
gas mileage cars) to _____ and the supply
of hybrids to _____.
1.
2.
3.
4.
25% 25%
Rise; rise.
Rise; not change.
Not change; rise.
Not change; fall
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ise
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ise
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ise
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As the price of gasoline increases, we
should expect the equilibrium price of hybrid
cars to ____ and the equilibrium quantity of
hybrid cars to _____
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t
Rise; rise.
Rise; not change.
Not change; rise.
Not change; fall
Ri
1.
2.
3.
4.
Which of the following could explain the
simultaneous decrease in the price of iphones and an increase in the number sold
per month?
ab
y.
..
Bo
th
of
th
e
th
l
er
m
on
Lo
w
st
s
co
er
33%
...
33%
of
. ..
33%
Lo
w
1. Lower costs of
production for the iphone.
2. Lower monthly service
charges for the plan
purchased with iphones.
3. Both of the above.
Price controls
1. A price ceiling is a maximum allowable
price.
• Results in a continuing shortage if ceiling is
BELOW equilibrium price.
2. A price floor is a minimum allowable price.
 Results in a continuing surplus if floor is ABOVE
equilibrium price.
Suppose that the equilibrium price of gasoline is
$3.50 per gallon. Which of the following would lead
to a shortage of gasoline?
25%
1.
2.
3.
4.
25%
25%
25%
A price ceiling at $4
A price ceiling at $3
A price floor at $3
A price floor at $4
A price ceilin... A price ceilin... A price floor ... A price floor ...
Suppose that there is a price floor of $3 per bushel
for corn and the current equilibrium price is $3. If
there is an increase in demand for corn resulting
from increased ethanol production, this will lead to:
33%
ho
r. .
.
as
th
er
A
su
r
pl
u
ge
rta
sh
o
A
33%
s
33%
Ne
i
1. A shortage
2. A surplus
3. Neither a shortage or
surplus, but higher
corn prices.
Suppose that there is a price ceiling of $3 per
bushel for corn and the current equilibrium price is
$3. If there is an increase in fuel prices making it
more costly to grow corn, this will lead to:
33%
ho
r. .
.
as
th
er
A
su
r
pl
u
ge
rta
sh
o
A
33%
s
33%
Ne
i
1. A shortage
2. A surplus
3. Neither a shortage or
surplus, but higher
corn prices.