Transcript AP Macroeconomics Chapter 3

Demand and Supply
 Institutions
or mechanisms that bring together
buyers (demanders) and seller (suppliers) of
particular goods, services, or resources.
A schedule or a curve that shows the various amounts
of a product that consumers are “willing and able” to
purchase at each of a series of possible prices during a
specified period of time.
Demand schedule – table
Demand curve – graph
sloping downward
Price
Quantity Demanded

Price
Quantity Demanded


1.
2.
All else equal, as price falls, the quantity demanded
rises, and as price rises, the quantity demanded falls.
There is a negative or inverse relationship.
Consistent with common sense.
Diminishing marginal utility: successive units
of a particular product yield less & less
satisfaction
INCOME EFFECT


A lower price increases the
purchasing power of a
buyer’s money income,
enabling the buyer to
purchase more of the
product than they could buy
before.
Higher prices has the
opposite effect.
SUBSTITUTION EFFECT


At a lower price buyers
have the incentive to
substitute what is now a
less expensive product for
similar products that are
now relatively more
expensive.
The product whose price
has fallen is not “a better
deal” relative to the other
products.

This will include the quantities
demanded by all consumers at each of
the various possible prices.
 You
can have a market demand schedule
and a market demand curve.
Determinants of
demand:
Factors that can and do affect
purchases
When these determinants
change the demand
curve will “SHIFT” to
either the right or left.




A shift in the demand
curve is called a change
in demand
A change in quantity
demanded is just a
movement from one
point to another point
caused by a change in
Price only.
A
B
 Preferences
(Taste)
A favorable change in
consumer tastes for a
product ---- a change
that makes the product
more desirable --means that more of it
will be demanded at
each price.
 Income



For most products, a rise
in income causes an
increase in demand --Normal Good
Rising income can cause
the demand of some
goods to behave
inversely---Inferior
Goods
Neutral goods do not
change with a change in
income.
Normal goods
Inferior goods
Neutral Goods
Prices of Related Goods



A change in the price of a
related good may either
increase or decrease the
demand for a product
Substitutes - Similar goods;
when the price of one & the
demand for the other move
in the same direction
Complements - goods that
are consumed together;
when the price of one good
& the demand for the other
good move in opposite
substitutes
complements
Expectations




Changes in consumer
expectations may shift
demand
Freezing weather destroys
much of Florida’s citrus
crop
Workers fearful of losing
their jobs may reduce
their demand for vacation
time.
1st round draft picks may
splurge on houses & cars
Number of Buyers




An increase in the number
of buyers in a market
increases demand
A decrease in the number
of buyers in a market
decreases demand
Increase in life expectancy
has increased the demand
for medical care;
retirement communities,
and nursing homes
Baby boomers, etc.
Change in Demand is
a shift of the entire
demand curve to the
right (increase) or to
the left (decrease).
 Occurs when there is
a response to one of
the determinants
(pipen).
Change in Quantity
Demanded is a
movement along the
curve due to a
change in the price of
the good demanded.
A
schedule or curve showing the amounts of a
product that producers are willing and able to
make available for sale at each of a series of
possible prices during a specific period.
 Supply schedule is the table of a individual
producer.
 Law of supply: as price rises, the quantity
supplied rises; as price falls, the quantity
supplied falls.

Graphical representation of the law of
supply.
Price
Quantity Supplied
Resource Prices
Price of the resources used
to make the product
Higher Resource price
raises production costs &
the firm will supply LESS.
Lower resource price
decreases production
costs & the firm will
supply MORE.
Prices of OTHER
goods
Some suppliers can
easily switch
production lines to
make other similar
goods that may have
found a better price.
Technology
Improvements in technology
enable firms to produce
goods with fewer
resources.
Recent improvements in the
fuel efficiency of aircraft
engines have reduced the
cost of providing
passenger air service.
Taxes and Subsidies
Increase in a tax will
increase production
costs and reduce supply.
If gov’t subsidizes the
production of a good, it
in effect lowers the
producers’ costs &
increases supply.
Expectations
Changes in expectations
about the future price of
a product may affect the
producer’s current
willingness to supply that
product.
Number of Sellers
As more firms enter an
industry, the greater the
market supply.
Conversely, the smaller the
number of firms in the
industry, the less the
market supply.
Canada & U.S. have imposed
restrictions on haddock fishing
to replenish dwindling numbers.
Change in Supply
A change in the entire
schedule and a shift of
the entire curve.
Caused by a change in
Rotten – the
determinants of supply
Change in Quantity
Supplied
A movement from one
point to another point on
the curve.
Caused by a change in the
price of the product.
 The
place where supply and demand are
equal.
 Graphically, where the supply & demand
curves intersect.
 Surplus
or excess supply: The amount by
which the quantity supplied of a product
exceeds the quantity demanded at a specific
Demand
price.
Supply
Surplus
Qs > Qd = surplus
 Shortage
or excess demand: The amount
by which the quantity demanded of a
product exceeds the quantity supplied at
a particular price.
Qd > Qs = shortage
Shortage
Price
Supply
$6
$5
Equilibrium Price is
sometimes referred
as market-clearing
price.
$4
Equilibrium
--------------------------$3
price
$2
$1
0
Equilibrium quantity
2
3
4
5
6
7
8
Bushels of corn (thousands)
9
Demand
 The
ability of the competitive forces of
supply and demand to establish a price
at which selling and buying decisions are
consistent.
Changes in Demand

Suppose that supply is constant


and demand increases



Raises equilibrium price and
quantity

Suppose supply is constant &
demand decreases

decreases equilibrium price and
decreases quantity

Changes in Supply
Suppose that demand is
constant & supply increases
Lower equilibrium price; greater
quantity
Suppose that demand is
constant & supply decreases
Higher price; less quantity
Change in
Supply
Change in
Demand
Effect on
Effect on
Equilibrium Equilibrium
Price
Quantity
Increase
Decrease
Decrease
Indeterminate
Decrease
Increase
Increase
Indeterminate
Increase
Increase
Indeterminate
Increase
Decrease
Decrease
Indeterminate
Decrease