Transcript Changes in Supply and Changes in Quantity Supplied

Demand, Supply and
Equilibrium
Chapter 05
McGraw-Hill/Irwin
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning Objectives

After this chapter, you should be able to:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Define and differentiate individual demand and market
demand
Distinguish between changes in demand and changes in
quantity demanded
List and discuss the causes of 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 changes in supply
Draw graphs of supply and demand curves
Identify equilibrium price and quantity
Explain why people have trouble selling their homes
5-2
Individual Demand and Market Demand

The law of demand holds for both individuals and
markets.

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.
5-3
What is the market?

The market is where people buy and sell.
•
•
•
Local markets:
 Gasoline, groceries
Regional:
 Automobiles
National or international:
 Computers
 eBay has created a global market for goods that
previously had purely local markets.
5-4
Changes in Demand
 A change in demand: a change 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
5-5
Increases in Demand
An increase in demand is an increase in the quantity
people are willing to purchase at all prices.
Price QD(1) QD(2)
$30
4
5
$25
9
11
$20
14
18
$15
18
28
$10
23
38
$ 5
26
50
The demand curve
shifts to the right.
5-6
Changes in Quantity Demanded and
Changes in Demand
E and F are on the same line, so they are on the same schedule.
If they are on the same schedule, there can be no change in
demand.
A price change led to a change in quantity demanded.
Move from point E to point F  a change in quantity demanded
5-7
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
5-8
Practice Problems: A Change in What?



From H to G?
From H to E?
From F to G?
5-9
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
5-10
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.
5-11
Changes in the Price of Related Goods
and Services

Substitute goods
 Hot dogs and hamburgers; tuna and salmon
 Direct relationship: price of hamburgers up, price of hot
dogs up. Why?
 As p hamburgers up  increased demand for hot dogs
 increases p of hot dogs

Complementary goods
 Hot dogs and buns; DVDs and DVD players; airfare
and hotel rooms
 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
5-12
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
5-13
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
5-14
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).
5-15
Changes in Price Expectations

If people expect the price of something to rise, they
rush out to stock up before it does.
•

If people expect the price of something to fall, they will
hold off buying it.
•

This increases the demand.
This decreases the demand.
Closely related is the introduction of or expiration of a
tax credit.
•
Did “Cash for Clunkers” increase the demand for new cars in
the summer of 2009?
5-16
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.
5-17
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 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?
5-18
Individual and Market Supply
5-19
Hypothetical Supply of American Cars, 2025
5-20
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.
5-21
Changes in Quantity Supplied
F and G are on the same line, so they are on the same schedule.
If they are on the same schedule, there can be no change in supply.
A price change led to a change in quantity supplied.
Move from point F to point G  a change in quantity supplied
5-22
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
5-23
Practice Problems: A Change in What?



From G to F?
From H to E?
From E to G?
5-24
What Causes Changes in Supply?

Changes in the cost of production
•



Technological advances (increase S)
Prices of other goods
Change in the number of suppliers
•


New suppliers increase S; shutdowns decrease S.
Changes in taxes
•

When costs rise, S decreases.
Tax increases reduce S; tax decrease raise S.
Changes in price expectations
Random causes, e.g. Hurricane Katrina in 2005
5-25
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.
5-26
Graphing Demand and Supply Curves
Sample Demand Schedule
Price
$ 13
$ 12
$ 11
$ 10
$ 9
$8
QD
1
2
4
8
15
20
5-27
Graphing Demand and Supply Curves
Sample Supply Schedule
Price
$ 13
$ 12
$ 11
$ 10
$ 9
$8
QS
23
20
15
8
3
1
5-28
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
5-29
Above Equilibrium
Above P*, surpluses
Price tends toward
equilibrium. If
price is above
equilibrium, sellers
will lower prices
until the price
declines to the
equilibrium price.
P
P
P
5-30
Below Equilibrium
Below P*, shortages
Price tends toward
equilibrium. If price
is below
equilibrium, buyers
will bid prices up
until the price rises P
to the equilibrium
P
price.
P
5-31
Application: Why Can’t I Sell My House?

You can sell virtually any good or service for which
there is a demand.
•

If you want to sell some good or service pretty quickly
and you get no bites, what do you do?
•

As long as people are willing and able to pay for that good or
service, you can sell it.
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!
5-32
Simultaneous Shifts in Demand and Supply:
What Happens to Equilibrium?


D goes up and S goes
up
What happens to P* and
Q*?
5-33
Simultaneous Shifts: Which Curve Shifts
More and then What Happens to
Equilibrium?
5-34