Transcript Chapter 17 - McGraw Hill Higher Education - McGraw

Chapter 17
DEMAND, SUPPLY, AND EQUILIBRIUM
Chapter 17
Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
Learning Objectives
After this chapter, you should be able to:
1.
2.
3.
4.
5.
6.
7.
8.
Define and differentiate individual demand and market demand.
Distinguish between changes in demand and changes in quantity
demanded.
List and discuss the causes of the changes in demand.
Define and differentiate individual supply and market supply.
Distinguish between changes in supply and changes in quantity
supplied.
List and discuss the causes of the changes in supply.
Draw graphs of supply and demand curves.
Identify equilibrium price and quantity.
17-2
Individual Demand and Market Demand
 Individual demand is the schedule of quantities that
a person would purchase at various prices.
 Market demand is the schedule of quantities that
everyone in the market would buy at various prices.
17-3
What is the market?
 The market is where people buy and sell.
 Local markets:
•

Regional:
•

Gasoline, groceries
Automobiles
National or international:
•
•
Computers
eBay has created a global market for goods that previously had
purely local markets.
17-4
Changes in Demand
A change in demand: a change (or shift) in the entire
demand schedule.
Price QD(1)
$30
4
$25
9
$20
14
$15
18
$10
23
$ 5
26
QD(2)
5
11
18
28
38
50
17-5
Increases in Demand
An increase in demand is an increase in the quantity
people are willing to purchase at all prices.
Price QD(1)
$30
4
$25
9
$20
14
$15
18
$10
23
$ 5
26
QD(2)
5
11
18
28
38
50
The demand
curve shifts to the
right.
17-6
Changes in Quantity Demanded and Changes in
Demand
E and F are on the same line, there can be no change in demand only a price
change that led to a change in quantity demanded.
Move from point E to point F  a change in quantity demanded
17-7
Increase in Demand
F to G is an increase in demand because people are willing to buy more
at all prices on G’s curve which is to the right of F’s curve
Move from point F to point G  an increase in demand
17-8
Practice Problems: A Change in What?
 From H to G?
 From H to E?
 From F to G?
17-9
What Causes Changes in Demand?
 Changes in income
 Changes in the prices of related goods and services
 Changes in tastes and preferences
 Changes in price expectations
 Changes in population
17-10
Changes in Income
 The demand for NORMAL goods varies directly
with income.

When income goes up people buy more, therefore demand
goes up.
 The demand for INFERIOR goods varies inversely
with income.

When income goes up people buy less, therefore demand goes
down.
17-11
Changes in the Price of Related Goods
and Services
 Substitute goods
o Hot dogs and hamburgers
o Direct relationship: price of hamburgers up, price of
hot dogs up.
o As p hamburgers up  increased demand for hot dogs
 increases p of hot dogs
 Complementary goods
o Hot dogs and buns
o Inverse relationship: p hot dogs up  decrease in
quantity demanded of hot dogs  decrease in demand
for hot dog buns  lower price of hot dog buns
17-12
Price
Price of hamburger goes up . . . People buy less hamburger
and more hot dogs. This increases the demand for hot dogs
which drives the price of hot dogs up
S
Hot Dogs
D2
D1
Quantity
17-13
The price of hot dogs goes up . . . People buy less. If
people buy less hot dogs, they will also buy less hot dog
buns. If people buy less hot dog buns, this decreases
the demand for buns and lowers the price
S1
Price
Hot Dog Buns
D2
D1
Quantity
17-14
Changes in Price Expectations
 If people expect the price of something to rise, they
rush out to stock up before it does.

This increases the demand.
 If people expect the price of something to fall, they
will hold off buying it.

This decreases the demand.
17-15
Changes in Taste and Preferences
 Taste and preferences tend to change over time.
 Energy-efficient cars and less-fattening foods
 Designer clothing and brand-name sneakers
 Fewer people are smoking (has been helped by a campaign to
reduce smoking).
17-16
Changes in Population
 As the nation’s population increases, the demand for
particular goods and services increase.


General growth increases the demand for food, housing, autos,
etc.
Immigration leads to population growth.
 The changing age distribution affects demand.
 In the next three decades there will be a higher demand for
retirement homes, nursing homes, wheelchairs, bifocal glasses,
etc.
17-17
Questions for Thought and Discussion
 The rapid growth of the Chinese economy has raised
the average income of its citizens.


How would you expect that this has impacted the demand for
food in worldwide markets?
Try drawing a Supply and Demand model to illustrate this
outcome.
 If some gas stations on a state highway have a
contract that only permits price changes on Fridays,
why might there be long lines at these gas stations on
Thursdays?
17-18
Individual and Market Supply
17-19
Hypothetical Supply of American Cars, 2025
17-20
Changes in Supply and Changes in Quantity
Supplied
 Change in quantity supplied: movement along a
supply curve due to a change in price.
 A change in supply: a change in the entire supply
schedule.
 An increase in supply is an increase in the quantity
producers are willing to supply at all prices.
17-21
Changes in Quantity Supplied
F and G are on the same line, there can be no change in supply only a price
change led to a change in quantity supplied.
Move from point F to point G  a change in quantity supplied
17-22
Increase in Supply
F to E is an increase in supply because producers are willing to supply
more at all prices on E’s curve which is to the right of F’s curve
Move from point F to point E  an increase in supply
17-23
What Causes Changes in Supply?
 Changes in the cost of production
 Technological advances
 Prices of other goods
 Change in the number of suppliers
 Changes in taxes
 Changes in price expectations
 Random causes
17-24
Practice Problems: A Change in What?
 From G to F?
 From H to E?
 From E to G?
17-25
Questions for Thought and Discussion
 The shift to ethanol as a form of fuel (to alleviate global
warming) has led some farmers to sell their feed corn to
energy companies.
 How would you expect that this would impact the supply
of feed corn in the global market for food?
 How would the decreased availability of feed corn affect
the price of meat?
 Try graphing these outcomes.
17-26
Graphing Demand and Supply Curves
Sample Demand Schedule
Price
$ 13
$ 12
$ 11
$ 10
$ 9
$8
QD
1
2
4
8
15
20
17-27
Graphing Demand and Supply Curves
Sample Supply
Schedule
Price
$ 13
$ 12
$ 11
$ 10
$ 9
$8
QS
23
20
15
8
3
1
17-28
Graphing Equilibrium
Sample D and S Schedules
Price
QD
QS
$ 13
1
23
$ 12
2
20
$ 11
4
15
$ 10
8
8
$ 9
15
3
$ 8
26
1
Equilibrium: where the demand & supply curves cross;
Q* = 8, P* = $10
17-29
Above Equilibrium
Above P*, surpluses
P
P
P
Price tends toward equilibrium. If
price is above equilibrium, sellers
will lower prices until the price
declines to the equilibrium price.
17-30
Below Equilibrium
Below P*, shortages
Price tends toward equilibrium. If
price is below equilibrium, buyers
will bid prices up until the price
rises to the equilibrium price.
P
P
P
17-31
Application: Why Can’t I Sell My House?
 You can sell virtually any good or service for which
there is a demand.

As long as people are willing and able to pay for that good or
service, you can sell it.
 If you want to sell some good or service pretty
quickly and you get no bites, what do you do?

You lower the price.
 What do you do if there is still no one willing and
able to pay your price?

You keep lowering it until you make a sale!
17-32
Simultaneous Shifts in Demand and Supply:
What Happens to Equilibrium?
 D goes up and S goes up
 What happens to P* and
Q*?
17-33
Simultaneous Shifts:
 What happens to equilibrium if D shifts more than S?
 What happens to equilibrium if S shifts more than D?
17-34