Transcript Chapter_three_lecture

Chapter 3:
Demand, Supply,
and Price
© 2014 Pearson Education Canada Inc.
Chapter Outline/Learning Objectives
Section
Learning Objectives
After studying this chapter, you will be able to
3.1 Demand
1.
list the factors that determine the quantity
demanded of a good.
2.
distinguish between a shift of the demand curve
and a movement along the demand curve.
3.
list the factors that determine the quantity supplied
of a good.
4.
distinguish between a shift of the supply curve and
a movement along the supply curve.
5.
explain the forces that drive market price to
equilibrium, and how equilibrium price is affected
by changes in demand and supply.
3.2 Supply
3.3 The Determination
of Price
© 2014 Pearson Education Canada Inc.
Chapter 3, Slide 3
3.1
Demand
Quantity Demanded
The total amount that consumers desire to purchase in some time
period is called the quantity demanded of a product.
Quantity bought (or exchanged) refers to actual purchases.
Quantity demanded is a flow, as opposed to a stock.
EXTENSIONS IN THEORY 3-1
The Distinction Between Stocks and Flows
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Chapter 3, Slide 4
Quantity Demanded and Price
A basic hypothesis is that—ceteris paribus—the price of a product
and the quantity demanded are negatively related.
Why? There are usually several products that can satisfy any given
want or desire.
A reduction in the price of a product means that the specific desire
can now be satisfied more cheaply by buying more of that product.
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Chapter 3, Slide 5
Demand Schedules and Demand Curves
Fig.3-1
Demand Schedule
Demand Curve
Reference
Point
Price
($ per bushel)
Quantity
Demanded
U
$
20
110
V
40
85
W
60
65
X
80
50
Y
100
40
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The Demand for Apples
Chapter 3, Slide 6
Determinants of Demand
LO5
1. Consumer preferences
• If tastes change, demand changes
2. Consumer incomes
• Normal Products: buy more when income rises, less
when income falls
• Inferior Products: buy more when income falls, less
when income rises
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Determinants of Demand
LO5
3. Prices of Related Products:
• Products are related if a change in the price of one
product causes a change in demand for the other
product
• Two types of related products:
• Substitutes
• Complements
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Determinants of Demand
LO5
3. Prices of Related Products
• Substitute Product
• similar products that can be substituted for each other
• increase in price of one product causes increased demand
for the related product
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Determinants of Demand
LO5
3. Prices of Related Products
• Complementary Product
• tend to be bought together
• Increase in price of one product causes a decrease in
demand for related product
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Determinants of Demand
LO5
4. Expectations of future prices, income, availability
• If prices or incomes expected to rise, consumers
buy more
• If goods expected to be scarcer, buy more now
5. Population size, income, and age distribution
• Increases in population or incomes cause increase
in demand
• Changes in age distribution affect demand
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A change in variables other than price will shift the demand curve to
a new position.
Fig. 3-2 An Increase in the Demand for
• average
Apples
household
income
• prices of
other products
• distribution
of income
or population
• expectations
about the future
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Chapter 3, Slide12
Fig. 3-3
Shifts in the Demand Curve
A rightward shift indicates an increase in demand.
A leftward shift indicates a decrease in demand.
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Chapter 3, Slide13
Fig. 3-4
Shifts of and Movements Along the Demand Curve
A change in demand is a
change in quantity demanded
at every price—a shift of
the entire curve.
A change in quantity
demanded refers to a
movement from one point
on a demand curve to
another point, either on
the same demand curve or
on a new one.
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Chapter 3, Slide14
Self Test
LO5
Price
Demand (D1)
Demand (D2)
$2.00
3.00
4.00
10 000
9 600
9 200
11 000
10 600
10 200
Market for pretzels:
• What might have happened to the price of a complementary
product, like beer, to cause the demand for pretzels to change?
• What might have happened to the price of a substitute product, like
nuts?
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2- 15
Demand Concepts Review
Which of the following would cause a movement along the demand
curve for ski-lift tickets, other things being equal?
A) a change in tastes in favour of skiing
B) an increase in population
C) an increase in price as the supply curve for lift tickets shifts to the
left
D) a rise in the price of ski boots and skis
E) a rise in average household income
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If the price of tea falls and as a consequence the demand for sugar rises,
then tea and sugar are
A) substitute goods.
B) complementary goods.
C) independent goods.
D) neutral goods.
E) luxury goods.
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3.2
Supply
Quantity Supply
The amount of a product that firms desire to sell in some time period
is called the quantity supplied of that product.
Quantity supplied is the amount that firms are willing to offer for sale
and not necessarily the quantity actually sold.
Quantity supplied is a flow as opposed to a stock.
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Chapter 3, Slide 18
Quantity Supplied and Price
A basic hypothesis is that—ceteris paribus—the price of the product
and the quantity supplied are positively related.
Why? Producers are interested in making profits. If the price of a
particular product rises, then the production and sale of this product
is more profitable.
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Chapter 3, Slide 19
Fig. 3-5
The Supply of Apples
Supply Schedule
Supply Curve
Reference
Point
Price
($ per bushel)
Quantity
Supplied
u
$
20
20
v
40
45
w
60
65
x
80
80
y
100
95
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Chapter 3, Slide 20
A change in supply is a
change in the quantity
that will be supplied at
every price—a shift of
the entire curve.
Fig. 3-6 An Increase in the
Supply of Apples
A change in quantity
supplied refers to a
movement from one
point on a supply curve
to another point, either
on the same supply curve
or on a new one.
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Chapter 3, Slide 21
Determinants of Supply
LO6
1. Prices of Productive Resources
• If the price of a productive resource increases,
firms will supply less
2. Business Taxes
• If business taxes rise, firms will supply less
3. Technology
• An improvement in technology leads to a fall in the
cost of production and an increase in supply
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Determinants of Supply
LO6
4. Prices of Substitutes in Production
• An increase in the price of one product will cause
a drop in the supply of products that are
substitutes in production
5. Future Expectation of Suppliers
• Lower expected future prices will lead to an
increase in supply
6. Number of Suppliers
• A decrease in the number of suppliers will reduce
market supply
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Concept Check: Supply
Refer to Figure 3-2. A shift of the supply curve from S
to S1 could be caused by
A) an increase in the price of energy-efficient light
bulbs.
B) a decrease in the price of energy-efficient light
bulbs.
C) a decrease in the price of glass, a major input in
the production of energy-efficient light bulbs.
D) a change in consumers' preferences away from
ordinary light bulbs toward energy-efficient light
bulbs.
E) an expectation that new government regulations
will ban the use of energy-efficient light bulbs.
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In which statement is the term "supply" used correctly?
(1) An increase in the price of leather will cause a decrease in the supply
of leather.
(2) An increase in the price of leather will cause a decrease in the supply
of leather boots.
A) not enough information to tell
B) the second statement only
C) the first statement only
D) both statements
E) neither statement
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3.3
The Determination of Price
The Concept of a Market
A market may be defined as any situation in which buyers and sellers
negotiate the transaction of some goods or services.
Markets may differ in the degree of competition among various
buyers and sellers.
In a perfectly competitive market buyers and sellers are price takers.
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Chapter 3, Slide 26
Graphical Analysis of a Market
At the equilibrium price, every buyer finds a seller and every seller
finds a buyer—the market “clears.”
Fig. 3-7 Determination of Equilibrium Price
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Chapter 3, Slide 27
Changes in Market Prices
The four “laws” of supply
and demand:
Fig. 3-8(i) Shifts in the Demand Curve
1. An increase in demand
causes an increase in
both the equilibrium
price and equilibrium
quantity.
2. A decrease in demand
causes a decrease in
both equilibrium
price and equilibrium
quantity.
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Chapter 3, Slide 28
Changes in Market Prices
3. An increase in supply
causes a decrease in
the equilibrium price
and an increase in the
equilibrium quantity.
Fig. 3-8(ii) Shifts in the Supply Curve
4. A decrease in supply
causes an increase in
the equilibrium price
and a decrease in the
equilibrium quantity.
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Chapter 3, Slide 29
Price
$2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
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Demand
60
58
56
54
52
50
48
46
44
Supply
30
33
36
39
42
45
48
51
54
Surplus/Shortage
30
Price
Demand
Supply 1
$4.00
4.25
4.50
140
130
120
60
70
80
4.75
5.00
5.25
5.50
110
100
90
80
90
100
110
120
Supply 2
Equilibrium P&Q ?
Supply increases by 50% - new equilibrium?
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What effect will the following changes have
upon (i) the demand for, (ii) the price, and (iii)
the quantity traded of commercially brewed
beer?
- A new medical report praising the healthy
effects of drinking beer
- A big decrease in the price of home-brewing
kits
- A rapid increase in population growth
- Talk of a possible future strike of brewery
workers
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a. Day-care services
More mothers with small children are returning to the
labour force; gov’t introduces subsidies for day-care
operators
b. Marijuana
The gov’t severely increases penalties for buying and for
selling
c.Compact discs
New processing method reduces cost of producing CDs;
consumers are switching to high digital downloads
d. Organic vegetables
Vegetarianism increases due to medical report; tighter
regulations on definition of organically grown
products introduced
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LO6
Self-Test
What impact will the following events have on the price of
wine?
a) A poor harvest in the grape industry results in a big
decrease in the supply of grapes
b) The number of wineries increases
c) The sales tax on wine increases
d) The introduction of a new fermentation method
reduces the time needed for the wine to ferment
e) The gov’t introduces a subsidy for each bottle of wine
produced domestically
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APPLYING ECONOMIC CONCEPTS 3-1
Why Apples But Not iPhones?
Three conditions must be satisfied in order for price determination
in a market to be well described by the demand-and-supply model:
1. Large number of consumers; each one small relative to the size
of the market.
2. Large number of producers; each one small relative to the size
of the market.
3. Producers must be selling 'homogeneous' versions of the
product.
© 2014 Pearson Education Canada Inc.
Chapter 3, Slide 35
EXTENSIONS IN THEORY 3-2
The Algebra of Market Equilibrium
Relative Prices and Inflation
The absolute price of a product is the amount of money that must be
spent to acquire one unit of that product.
A relative price is the price of one good in terms of another.
Demand and supply curves are drawn in terms of relative prices
rather than absolute prices.
© 2014 Pearson Education Canada Inc.
Chapter 3, Slide 36
The table below displays hypothetical demand and supply schedules for the market
for overnight parcel deliveries in Canada.
Quantity
Demanded
(millions)
Price ($) Year 1
Quantity
Supplied
(millions)
Year 2
Year 1
Year 2
30
80
95
140
125
26
90
105
135
120
22
100
115
130
115
18
110
125
125
110
14
120
135
120
105
10
130
145
115
100
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1. The equilibrium price and quantity for overnight parcel delivery in Year 1 is
________ and ________ million parcels.
2. If the price of overnight parcel delivery in Year 2 is $10, how many parcels
will actually be delivered?
3. Which of the following statements describes a likely event in the market for
overnight parcel delivery? From Year 1 to Year 2,
A) there was a decrease in consumers' income.
B) there was an improvement in technology for tracking overnight parcels.
C) the price of regular parcel delivery decreased.
D) there was a rise in the price of jet fuel.
E) the number of suppliers of overnight parcel delivery service increased.
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