Transcript Chapter_03_Macro_15ex

Macro Chapter 3
Demand, Supply, and the
Market Process
7 Learning Goals
1) Investigate and describe consumer behavior
2) Distinguish a change in demand from a
change in quantity demanded
3) Investigate and describe firm behavior
4) Distinguish a change in supply from a change
in quantity supplied
5) Build a market model and illustrate how
equilibrium is reached
6) Demonstrate how markets respond to changes
in demand and supply
7) Recognize how prices and the invisible hand
principle create market order
Consumer Choice and
the Law of Demand
Please note:
Chapter heading: Consumer Choice and the
Law of Demand
– Skip 2 sections: Consumer Surplus; Responsiveness
of Quantity Demanded to Price Changes: Elastic and
Inelastic Demand Curves
Goal: Explain and Predict Consumer
Behavior
Let’s go to the mall
Class Activity: When you go to the store
to buy something, what’s the most
important factor that determines how much
you buy of something? Why?
Transmitter Question next
Q3.1 Did you say price was the most
important?
1. Yes
2. No, something else was
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2.
Relationships:
The Law of Demand:
The inverse relationship between price
and quantity demanded; when price rises,
quantity demanded falls; when price falls,
quantity demanded rises
Quantity demanded is a number; it’s how
many units of a good you bought
Ways to express Law of Demand:
1. Words (see notes you just wrote)
Ways to express Law of Demand:
1. Words (see notes you just wrote)
2. Table (Demand Schedule)
Cell phone
service price
Cell phone
subscribers
(monthly bill)
(millions)
$ 143
$ 92
$ 73
$ 58
$ 46
$ 41
2.1
7.6
16.0
33.7
55.3
69.2
Ways to express Law of Demand:
1. Words (see notes you just wrote)
2. Table
3. Math equation
P = 10 – Q
Q = f (Px, Py, M)
Q = ln Px + ln Py + ln M
Ways to express Law of Demand:
1.
2.
3.
4.
Words (see notes you just wrote)
Table
Math equation
Picture
We usually draw a picture of this
relationship
Graph:
Transmitter Question next
Q3.2 In economics, the demand for a good refers to
the amount of the good people
1. would like to have if the good were free.
2. are willing to buy at various prices.
3. need to achieve a minimum standard of living.
4. will buy at alternative income levels.
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4.
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Changes in Demand
Versus Changes in
Quantity Demanded
Other variables besides price
determine what you buy
Changes:
(1) When price changes, quantity demanded
changes but demand does NOT change
– This is movement along a demand curve
(2) When something else changes, demand
changes (i.e., the relationship changes)
– This is movement of the entire curve
Typical “something else” changes:
Income
Number of consumers
Prices of related goods (substitutes and
complements)
Expectations
Demographics
Tastes and preferences
Another way to think about the
difference between demand and
quantity demanded
Why is the consumer buying more (or
less)?
If price is the reason, then quantity
demanded changes; move along the
demand curve
If any variable besides price is the reason,
then demand changes; shift the demand
curve
Graphs:
2 Transmitter Questions next
Q3.3 When economists say the quantity demanded
of a product has increased, they mean the
1. demand curve has shifted to the left.
2. demand curve has shifted to the right.
3. price of the product has fallen, and
consequently, consumers are buying more of it.
4. price of the product has risen, and
consequently, consumers are buying less of it.
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1.
2.
3.
4.
Q3.4 When economists say the demand for a
product has decreased, they mean
1. the demand curve has shifted to the left.
2. the product price has increased, and as a
consequence, consumers are buying less of the
product.
3. consumers are now willing and able to buy more
of this product at each possible price.
4. the demand curve has shifted to the right.
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1.
2.
3.
4.
Producer Choice and the
Law of Supply
Please note:
Chapter heading: Producer Choice and the Law
of Supply
– Skip 2 sections: Producer Surplus; Responsiveness
of Quantity Supplied to Price Changes: Elastic and
Inelastic Supply Curves
Video: Catch Me If You Can
Class Activity: Economics Is Everywhere
2.16
In the movie Catch Me If You Can, Leonardo
DiCaprio winds up in a hotel room (in the 1960s)
with a woman he discovers is a very high-priced
call girl. She says, “You can have me for the
night- just say the right price.” He says “$300,”
and she throws a card at him and says, “Go
fish!” He then says $500, getting the same
answer, then $600, with the same result. He
finally says $1,000, and she agrees. As with
most activities, this transaction, too, has an
upward-sloping supply curve.
Q: Is $600 the opportunity cost of the call girl’s
time? Is $1,000? What does this story tell you
about her opportunity cost?
Goal: Explain and Predict Firm
Behavior
The Law of Supply:
– The positive relationship between price and
quantity supplied; when price rises, quantity
supplied rises; when price falls, quantity
supplied falls
– Quantity supplied is a number; it’s how many
units of a good you made
Ways to express Law of Supply:
1. Words (see notes you just wrote)
Ways to express Law of Supply:
1. Words (see notes you just wrote)
2. Table
Cell phone
service price
(monthly bill)
$
$
$
$
$
$
60
73
80
91
107
120
Cell phone
service
supplied to
market
(millions)
5.0
11.0
15.1
18.2
21.0
22.5
Ways to express Law of Supply:
1. Words (see notes you just wrote)
2. Table
3. Math equation
P=5+q
Q = f (Px, P inputs, Tech)
Q = ln Px + ln P inputs + P tech
Ways to express Law of Supply:
1.
2.
3.
4.
Words (see notes you just wrote)
Table
Math equation
Picture
We usually draw a picture of this
relationship
Graph:
Class Activity: Why is the firm willing to
produce more when the price rises? (Hint:
don’t forget about ceteris paribus)
Transmitter Question next
Q3.5 According to the law of supply,
1. more of a good is desired by consumers as the
price falls.
2. less of a good is desired by consumers as the
price rises.
3. more of a good will be offered by suppliers as
the price rises.
4. less of a good will be offered by suppliers as the
price rises.
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1.
2.
3.
4.
Changes in Supply
Versus Changes in
Quantity Supplied
Other variables determine how
much firms are willing to make
Changes:
(1) When price changes, quantity supplied
changes but supply does NOT change
– This is movement along a supply curve
(2) When something else changes, supply
changes (i.e., the relationship changes)
– This is movement of the entire curve
Typical “something else” changes:
Resource prices
Technology
Nature
Political
Taxes
Another way to think about the
difference between supply and quantity
supplied
Why is the firm producing more (or less)?
If price is the reason, then quantity
supplied changes; move along the supply
curve
If any variable besides price is the reason,
then supply changes; shift the supply
curve
Graphs:
2 Transmitter Questions next
Q3.6 Ceteris paribus, an increase in the price of a
good will cause the
1.
2.
3.
4.
quantity demanded of the good to increase.
quantity supplied of the good to increase.
supply of the good to increase.
supply of the good to decrease.
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4.
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Q3.7 When economists say the supply of a
product has increased, they mean the
1. supply curve has shifted to the right.
2. price of the product has risen, and consequently,
suppliers are producing more of it.
3. supply curve has shifted to the left.
4. amount of the product that consumers are willing
to purchase at various prices has increased.
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2.
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4.
How Market Prices are
Determined: Demand
and Supply Interact
Graph:
Key points:
– (1) Excess supply and excess demand are NOT
unique points
– (2) Equilibrium IS a unique point
Class Activity: Start with a market in a surplus.
How would you solve the surplus problem
without changing price? Then start with a
market in a shortage. How would you solve the
shortage without changing price?
Video:
Transmitter question next
Q3.8 (MA) Which of the following statements are true?
1. With a shortage, quantity demanded exceeds quantity
supplied and price will be pushed up
2. With a shortage, quantity supplied exceeds quantity
demanded and price will be pushed up
3. With a shortage, quantity demanded exceeds quantity
supplied and price will be pushed down
4. With a surplus, quantity supplied exceeds quantity
demanded and price will be pushed up
5. With a surplus, quantity demanded exceeds quantity
supplied and price will be pushed down
6. With a surplus, quantity supplied exceeds quantity
demanded and price will be pushed down
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How Markets Respond to
Changes in Demand and
Supply
This is called supply and demand
analysis
You don’t have to use graphs but it’s
helpful
Use this 3 step procedure:
– (1) Identify the change
– (2) Determine if Supply or Demand is
affected and how
– (3) Draw and read graph (or reason through
the change)
Class Activity: Economics Is Everywhere
3.2
One of the students in my class is a saxophone player.
Like all reed-instrument players, he buys a lot of reeds
for his instrument. In 2001, bamboo trees in a large part
of the world were infected with a virus that destroyed
much of the bamboo crop. This change shifted the
supply curve of bamboo to the left. This shift raised the
price of bamboo, which is the major input into making
reeds. As a result of this increase in the input price, the
supply curve of reeds shifted leftward, too. The student
noticed that the price of reeds skyrocketed. Being a
smart young fellow, he wisely decreased the amount of
reeds he demanded each month because they now were
more expensive. He moved leftward along his demand
curve for reeds.
Q: As anyone who lives in a warm climate knows,
bamboo is a weed that grows quite rapidly. How long do
you think it will be until the original equilibrium in this
market is restored?
Graph: Decrease in Supply
2 Transmitter Questions Next
Q3.9 If there is a decrease in demand for laptop
computers, we would expect
1. both the price and quantity sold to increase.
2. both the price and quantity sold to decrease.
3. the price to decrease and the quantity sold to
increase.
4. the price to increase and the quantity sold to
decrease.
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1.
2.
3.
4.
Q3.10 Which of the following would reduce the price
of DVD players and increase the quantity sold?
1.
2.
3.
4.
an increase in the demand for DVD players
a decrease in the demand for DVD players
a decrease in the supply of DVD players
an increase in the supply of DVD players
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4.
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“Homework” assignment
Graph (or reason through) the following
scenarios:
1) Increase in demand
2) Decrease in demand
3) Increase in supply
4) Decrease in supply
The magnitude of the shift doesn’t matter
What if supply and demand shift
at the same time?
Suppose supply and demand both
decrease
Talk with a neighbor for this question
Transmitter Question Next
Q3.11 (PMA) If there is a simultaneously an increase
in demand and an increase in supply, we would
expect
1. An increase in equilibrium price and an increase
in equilibrium quantity
2. A decrease in equilibrium price and an increase
in equilibrium quantity
3. An increase in equilibrium price and a decrease
in equilibrium quantity
4. A decrease in equilibrium price and a decrease
in equilibrium quantity
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3.
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“Homework” assignment
Graph (or reason through) the following
scenarios:
1) Increase in demand, increase in supply
2) Increase in demand, decrease in supply
3) Decrease in demand, increase in supply
4) Decrease in demand, decrease in supply
For each one, you will have 3 scenarios:
a) Demand shift greater than supply shift
b) Demand shift less than supply shift
c) Demand shift equal to supply shift
Class Activity: Why do you think that the
amount of goods on the shelves of stores
in Tallahassee is about equal to the
amount of goods that consumers want to
buy?
Video:
Invisible Hand Principle
Adam Smith- An Inquiry into the Nature
and Causes of the Wealth of Nations
Invisible Hand Principle
Adam Smith- An Inquiry into the Nature
and Causes of the Wealth of Nations
Personal self-interest directed by market
prices is a powerful force promoting
economic progress
“Every individual is continually exerting himself to
find out the most advantageous employment for
whatever [income] he can command. It is his own
advantage, indeed, and not that of the society
which he has in view. But the study of his own
advantage naturally, or rather necessarily, leads
him to prefer that employment which is most
advantageous to society…He intends only his own
gain, and he is in this, as in many other cases, led
by an invisible hand to promote an end which was
not part of his intention. By pursuing his own
interest he frequently promotes that of the society
more effectually than when he really intends to
promote it.”
Many outcomes are the result of
human action but not human design
Examples:
Who invented nouns and adverbs?
Seating in HCB 101
High fives, handshakes, and the “man-hug”
Transmitter Question next
Q3.12 Adam Smith's invisible hand principle stresses
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2.
3.
4.
that benevolence is a powerful motivator that encourages
individuals to engage in productive economic activity.
the tendency of the competitive market process to direct
self-interested individuals into activities that enhance the
economic welfare of society.
the potential of government regulation as a means of
bringing the self interest of individuals into harmony with
the economic welfare of society.
the tendency of self-interested individuals to pursue
activities that benefit themselves but harm the overall
economic welfare of society.
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7 Learning Goals
1) Investigate and describe consumer behavior
2) Distinguish a change in demand from a
change in quantity demanded
3) Investigate and describe firm behavior
4) Distinguish a change in supply from a change
in quantity supplied
5) Build a market model and illustrate how
equilibrium is reached
6) Demonstrate how markets respond to changes
in demand and supply
7) Recognize how prices and the invisible hand
principle create market order