Transcript Chapter 3

Chapter 3
Demand,
Supply, and
Price
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In this chapter you will learn how to
1. Explain what determines “quantity demanded,” the amount of
some product that consumers want to purchase.
2. Describe the difference between a shift in a demand curve and
a movement along a demand curve.
3. Explain what determines “quantity supplied,” the amount of
some product that producers want to sell.
4. Describe the difference between a shift in a supply curve and a
movement along a supply curve.
5. Describe the forces that drive market price to equilibrium, and
how equilibrium price is affected by changes in demand and
supply.
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Demand
What is “Quantity Demanded”?
The 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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Quantity Demanded and Price
A basic hypothesis is that — ceteris paribus — the price of a
product and the quantity demanded are negatively related.
Ceteris paribus (other things equal) implies that all factors
other than the price of the good do not change.
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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Demand Schedules and Demand
Curves
A demand schedule is a table that shows the relationship
between quantity demanded and the price of a commodity,
other things being equal.
A demand curve is the graphical representation of the
relationship between quantity demanded and the price of a
commodity, other things being equal.
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Figure 3.1 The Demand for
Carrots
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Figure 3.2 An Increase in the
Demand for Carrots
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Factors that Shift the Demand
Curve
1. average income
2. prices of other goods -- substitutes or complements
3. taste
4. distribution of income
5. population
6. expectations about the future
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Figure 3.3 Shifts in the Demand
Curve
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Figure 3.4 Shifts of and Movements
along the Demand Curve
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Supply
What is “Quantity Supplied”?
The amount of a commodity that producers wish to sell in
some time period is called quantity supplied.
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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Quantity Supplied and Price
Another basic economic 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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Figure 3.5 The Supply of Carrots
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Figure 3.6 An increase in the
Supply of Carrots
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Factors that Shift the Supply Curve
1. prices of inputs
2. technology
3. government taxes or subsidies
4. price of other products
5. expectations about the future
6. number of suppliers
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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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Figure 3.7 Determination of the
Equilibrium Price of Carrots
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Changes in Market Prices
The four “laws” of supply and demand:
1. An increase in demand causes an increase in both
equilibrium price and equilibrium quantity.
2. A decrease in demand causes a decrease in both
equilibrium price and equilibrium quantity.
3. An increase in supply causes a decrease in the
equilibrium price and an increase in the equilibrium
quantity.
4. A decrease in supply causes an increase in the equilibrium
price and a decrease in the equilibrium quantity.
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Figure 3.8 The Four “Laws” of
Demand and Supply
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Changes in Supply
LESSONS FROM HISTORY 3.1
Hurricanes, Droughts, and Economics
EXTENSIONS IN THEORY 3.2
The Algebra of Market Equilibrium
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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.
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