Transcript Demand and Supply

Chapter 3
Demand
and Supply
Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
Did You Know That...
• No new oil refineries have been built in the
U.S. since 1976?
• Recently, however, Hyperion, a Dallas-based
company, announced its intention to build a
new refinery at Elk Pont, South Dakota.
• By using demand and supply you can
develop a better understanding of why we
sometimes see large increases in the price
of gasoline.
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Copyright © 2010 Pearson Addison-Wesley. All rights reserved.
Did You Know That… (cont’d)
• Markets
– Arrangements that individuals have for
exchanging with one another
– Represent the interaction of buyers and
sellers for goods and services
– Markets set the prices we pay and receive.
•
•
•
•
Automobile market
Health care market
Labor market
Stock market
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Demand
• A schedule showing how much of a good or
service people will purchase at any price
during a specified time period, other things
being constant
• Law of Demand
– Quantity demanded is inversely related to price,
holding other factors constant.
• Price #
Qd $
• Price $
Qd #
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Figure 3-1 The Individual Demand Schedule
and the Individual Demand Curve, Panel (b)
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Demand (cont’d)
• Market Demand
– The demand of all consumers in the
marketplace for a particular good or service
• What are we holding constant?
– Income
– Tastes and preferences
– Price of other goods
– Many other factors
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Shifts in Demand
• Scenario
– Imagine the federal government
gives every student registered in a
college, university, or technical
school in the United States a laptop
with a slot for secure digital cards.
• If some factor other than price
changes, we can show its effect by
moving the entire demand curve,
shifting the curve left or right.
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Figure 3-4 A Shift in the Demand
Curve
Suppose universities
prohibit the use of
notebook computers
Suppose the federal
government gives
every student a
notebook computer
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Shifts in Demand
• Factors that shift the demand curve
– Income (normal vs. inferior goods)
– Tastes and preferences
– The prices of related goods
• Substitutes (a higher price of one good leads to a
higher demand of another good)
• Complements (a higher price of one good leads to a
lower demand of another good)
– Expectations of income, future prices etc.
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Changes in demand versus
changes in quantity demanded
A change in the price
changes the quantity
of a good demanded=
movement along the curve
Change in demand =
Shifting the demand curve
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The Law of Supply
• Supply
– The amount of a product or service that firms
are willing to sell at alternative prices
• Law of Supply
– The price of a product or service
and the quantity supplied are
directly related.
•P#
Qs #
•P$
Qs $
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Figure 3-8 The Market Supply Schedule
and the Market Supply Curve for Secure
Digital Cards, Panel (b)
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Shifts in Supply
• Scenario
– A new method of manufacturing SD cards
significantly reduces the cost of production.
– What will producers of SD cards do?
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Figure 3-9 A Shift in the Supply
Curve
If some other factor than
price changes, the only
way we can show its
effect is by moving the
entire supply curve
If costs increase,
supply decreases
If costs decrease,
supply increases
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Shifts in Supply (cont'd)
• Determinants of supply
– Cost of inputs
– Technology and productivity
(same as lower cost)
– Taxes and subsidies
– Price expectations
– Number of firms in industry
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Shifts in Supply (cont'd)
The Determinants of Supply
Cost of Inputs
Price
Increase in cost
decreases supply
S3
S1
S2
Decrease in cost
increases supply
Q/Units
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Shifts in Supply (cont'd)
The Determinants of Supply
Technology and Productivity
Price
Decreases in productivity
decrease supply
S3
S1
S2
Improvements in technology or
increases in productivity
increase supply
Q/Units
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3-17
Shifts in Supply (cont'd)
• Changes in supply versus changes in
quantity supplied
– A change in one or more of the non-price
determinants will lead to a change in supply.
• This is a shift of the whole curve.
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Changes in supply versus changes in
quantity supplied
A change in a good’s own price leads to a
change in quantity supplied. This is a
movement along the same curve.
Factors other than its own price shift the
supply curve
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Putting Demand and Supply
Together
• Putting demand and supply together
• Equilibrium (Market Clearing) Price
– The price that clears the market
– The price at which quantity demanded equals
quantity supplied
– The price where the demand curve intersects the
supply curve
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Figure 3-10 Putting Demand and
Supply Together, Panel (b)
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Putting Demand
and Supply Together (cont'd)
• Shortages
– The situation when quantity demanded
is greater than quantity supplied
• Qd > Qs
– Exist at any price below the
equilibrium price
• Surpluses
– The situation when quantity supplied is
greater than quantity demanded
• Qd < Qs
– Exist at any price above the
equilibrium price
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3-22
Policy Example: Should Shortages in the
Ticket Market Be Solved by Scalpers?
• If you’ve ever tried to get tickets to the big
game you know all about “shortages.”
• Since the quantity of tickets is fixed, the
price can go pretty high.
• Enter the scalper.
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Myth #3: Businesses charge
whatever they want to.
• Is life unfair?
• The answer to most questions with a freely
determined market price is: Supply and
demand
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