Transcript Chapter 3
Macroeconomics ECON 2301 Spring 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapter 3 Chapter 3: Supply & Demand Markets 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. Examples: • • • • Automobile market Health care market Labor market Stock market The Law of Demand Demand how much of a good or service people will purchase at any price during a specified time period, other things being constant (ceteris paribus) The Law of Demand Law of Demand Quantity demanded is inversely related to price, holding other factors constant. • Price # Qd $ • Price $ Qd # The Demand Schedule The demand schedule Table relating prices to quantity demanded We must consider • Time dimension • Constant-quality units Demand Curve A graphical representation of the demand schedule Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal Figure 3-1 The Individual Demand Schedule and the Individual Demand Curve, Panel (b) The Law of Demand (cont'd) What are we holding constant? Income Tastes and preferences Price of other goods Expectations Many other factors Shifts in Demand Scenario Imagine the federal government gives every student registered in a college, university, or technical school in the United States a notebook computer. • If some factor other than price changes, we can show its effect by moving the entire demand curve, shifting the curve left or right. 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 Determinants of Demand Ceteris-Paribus Conditions Determinants of the relationship between price and quantity that are unchanged along a curve Changes in these factors cause a curve to shift Shifts in Demand Determinants of market demand Income • Normal goods • Inferior goods The prices of related goods • Substitutes • Complements Tastes and preferences (including demographics!) Expectations Number of buyers Normal and Inferior Goods Normal Goods Goods for which demand rises as income rises, most goods are normal goods Inferior Goods Goods for which demand falls as income rises Shifts in Demand (cont'd) Substitutes Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. Margarine & butter markets: Pm down Qd of margarine up D for butter down Shifts in Demand (cont'd) Complements Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other. Ppc down Qd of pc up D for printers up Shifts in Demand (cont'd) Changes in demand versus changes in quantity demanded A change in a good’s own price leads to a change in quantity demanded. This is a movement along the same curve. A change in any determinant OTHER THAN PRICE shifts the D curve, and we call this a change in demand. This is not the same as a change in Qd from a change in the price of the good. The Law of Supply Supply Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal The amount of a product or service that firms are willing to sell at alternative prices The Law of Supply (cont'd) Law of Supply The price of a product or service and the quantity supplied are directly related. • P # Qs # • P $ Qs $ The Supply Schedule The supply schedule is a table relating prices to quantity supplied at each price. Supply Curve A graphical representation of the supply schedule Positively sloped line showing direct relationship between price and quantity supplied, all else equal Figure 3-8 Market Supply Schedule &Market Supply Curve for Flash Memory Pen Drives, Panel (b) Shifts in Supply (cont'd) Determinants of supply Cost of inputs Technology and productivity Taxes and subsidies Price expectations (AND other expectations) Number of firms in industry 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 (shifts left) If costs decrease, supply increases 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. A change in a good’s own price leads to a change in quantity supplied. This is a movement along the same curve. Figure 3-10 Putting Demand and Supply Together, Panel (b) 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 Putting D & S Together (cont'd) Shortage The situation when quantity demanded is greater than quantity supplied • Qd > Qs A shortage exists at any price below the market clearing price Putting D & S Together (cont'd) Surplus The situation when quantity supplied is greater than quantity demanded • Qd < Qs A surplus will exist at any price above the market clearing price Assignments to be completed before class February 5: Read Chapter 4 & also read Problems 4-1, 4-3 through 4-8, and 4-11.