Transcript Chapter_3_Micro_13e_class_slidesx

Chapter 3
Supply, Demand, 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
The Law of Demand:
The inverse relationship between price
and quantity demanded; when price rises,
quantity demanded falls
Quantity demanded is a number; it’s how
many units of a good you bought
Picture of this relationship:
Why is the demand curve downward
sloping?
Diminishing Marginal Utility
– The marginal benefit you receive from an item falls as
you gain more of the item
– The only way to get you to buy more is to lower the
price
How do consumers react to price
changes?
(1) When the price of one good falls, people
substitute away from relatively more expensive
goods to the relatively cheaper goods
Called the substitution effect
(2) When the price of one good falls, real
consumer income rises so people buy more (it’s
like getting a raise)
Called the income effect
Both of these also cause the demand curve to
be downward sloping
The demand curve represents your
willingness to pay (your maximum
price), not how much you actually
paid
What if the actual price is lower than
your willingness to pay?
In economics, we call this difference
consumer surplus (CS)
Graphically, CS is the area below demand,
out to quantity, and down to price
Graph of CS:
Changes in Demand
Versus Changes in
Quantity Demanded
Demand is the relationship
between two variables: price
and quantity demanded
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
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:
The price and demand for one
good can be intimately tied to
demand for another good
(1) Substitute goods-used in place of each
other
An increase (decrease) in demand for the
first good will decrease (increase) demand
for the second good
An increase (decrease) in price for the first
good will increase (decrease) demand for
the second good
(1) Substitute goods
Example: (A)__________, (B)__________
If consumers’ preferences changed so that
they wanted more (A)______________, the
(demand/quantity demanded) for
(A)_______________ would (rise/fall),
causing the demand curve to shift (right/left)
and they would purchase (more/less)
(A)_______________. The
(demand/quantity demanded) for
(B)____________ would (rise/fall), causing
the demand curve to shift (right/left).
(1) Substitute goods
Example: (A)__________, (B)__________
If the price of (A)_________ rose, the
(demand/quantity demanded) of
(A)____________ would (rise/fall) and
consumers would purchase (more/less)
(A)_______________. The
(demand/quantity demanded) for
(B)____________ would (rise/fall), causing
the demand curve to shift (right/left).
Graphs:
(2) Complement goods-usually consumed
at the same time
An increase (decrease) in demand for the
first good will increase (decrease) demand
for the second good
An increase (decrease) in price for the first
good will decrease (increase) demand for
the second good
(2) Complement goods
Example: (A)__________, (B)__________
If consumers’ preferences changed so that
they wanted more (A)______________, the
(demand/quantity demanded) for
(A)______________ would (rise/fall),
causing the demand curve to shift (right/left)
and they would purchase (more/less)
(A)_______________. The
(demand/quantity demanded) for
(B)_____________ would (rise/fall), causing
the demand curve to shift (right/left).
(2) Complement goods
Example: (A)__________, (B)__________
If the price of (A)_____________ rose, the
(demand/quantity demanded) of
(A)_____________ would (rise/fall) and
consumers would purchase (more/less)
(A)________________. The
(demand/quantity demanded) for
(B)_____________ would (rise/fall), causing
the demand curve to shift (right/left).
Graphs:
Producer Choice and the
Law of Supply
Goal: Explain and Predict Firm
Behavior
The Law of Supply:
– The positive relationship between price and
quantity supplied; when price rises, quantity
supplied rises
– Quantity supplied is a number; it’s how many
units of a good you made
Graph:
Why is the supply curve upward
sloping?
At a higher price, a product is usually more
profitable so a firm has a stronger
incentive to make more.
What if the actual price is higher
than your minimum price?
In economics, we call this difference
producer surplus (PS)
Graphically, PS is the area above supply,
out to quantity, and up to price
Graph of PS:
Changes in Supply
Versus Changes in
Quantity Supplied
Price is not the only factor that
determines how much a firm
makes
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
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:
How Market Prices are
Determined: Supply and
Demand Interact
Graph:
Key points:
– (1) Excess supply and excess demand are
NOT unique points
– (2) Equilibrium IS a unique point
How Markets Respond to
Changes in Supply and
Demand
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)
Graph:
What if supply and demand shift
at the same time?
Suppose supply and demand both
increase
Graphs:
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