Transcript Chpt2 - Iona

Chapter 2
Supply and
Demand:
The Basics
Introduction to Economics (Combined
Version) 5th Edition
The Demand Curve
 A demand curve shows
the quantity of a good
demanded at various
prices.
 Examples:
 At a price of $2.00 per
pound, buyers are willing
and able to purchase 2
billion pounds of chicken
per year (point A).
 At a price of $1.00 per
pound, they will purchase 3
billion pounds (point B).
Introduction to Economics (Combined Version) 5th Edition
Change in the Quantity Demanded
 All conditions—other than
price—that affect demand are
considered to be constant
under the “other things being
equal” clause of the law of
demand.
 As long as these other
conditions do not change, the
only two variables at work are
quantity demanded (on the
horizontal axis) and price (on
the vertical axis).
 The effect of a change in price
on quantity demanded is
shown by a movement along
the demand curve.
Introduction to Economics (Combined Version) 5th Edition
Change in Demand
 Conditions other than price
of chicken that affect
demand for chicken include
prices of other goods and
consumer incomes and
tastes.
 Example:
 Suppose the price of chicken
remains constant at $2 per
pound while the price of beef
(a substitute) increases.
 The demand for chicken will
increase, shown by a shift in
the demand curve from D1 to
D2 .
Introduction to Economics (Combined Version) 5th Edition
Change in Consumer Income
 Suppose an increase in
consumer income causes
the demand curve for
chicken to shift from D1
to D2 , as shown. This
indicates that chicken
is__.




an inferior good
a normal good
a substitute
a complement
Introduction to Economics (Combined Version) 5th Edition
The Supply Curve
 A supply curve shows the
quantity of a good
producers will supply at
any given price, other
things being equal.
 Examples:
 If the price of chicken is $2,
producers will supply $2
billion pounds per year.
 If the price is $3, they will
supply $3 billion pounds
per year.
Introduction to Economics (Combined Version) 5th Edition
The Supply Curve and the PPF
• The production possibility frontier provides one explanation of why the supply
curve has a positive slope.
• As the quantity of chicken produced increases, the opportunity cost of
producing it increases, as shown by the increasing slope of the PPF.
Introduction to Economics (Combined Version) 5th Edition
A Change in Supply
 Conditions other than price of
chicken that affect the supply
of chicken include technology,
input prices, prices of other
goods, and expectations.
 Example:
 Suppose the price of chicken
feed increases. The supply curve
will shift upward S1 to S3 .
 Suppose new organic farming
methods lower the cost of
producing chicken. The supply
curve will shift downward S1 to
S2 .
Introduction to Economics (Combined Version) 5th Edition
Equilibrium
 When the plans of
buyers and sellers
mesh when they are
tested in the market
place, the market is in
equilibrium.
 If the price is too high,
there will be a
surplus.
 If the price is too low,
there will be a
shortage.
Introduction to Economics (Combined Version) 5th Edition
A Change in Equilibrium
 Which diagram best represents the effect of an increase in the cost of corn
used as feed for beef cattle on the market for beef?
 An increase in the price of an input will shift the supply curve as shown in
the right-hand diagram.
Introduction to Economics (Combined Version) 5th Edition
Bonus Case Study: Supply and Demand
for Olive Oil
 No meal in Southern Europe is
complete without a basket of
bread and a dish of olive oil.
 In the spring of 2013, olive oil
prices spiked dramatically.
 For a complete slideshow
presentation of the supply and
demand for olive oil, follow
this link or visit Ed Dolan’s
Econ Blog for February 5, 2013.
Bread and Olive Oil
Photo by Ewan Munro
http://commons.wikimedia.org/wiki/File:Murano,_Mayfair,_London
_%285210809193%29.jpg
Introduction to Economics (Combined
Version) 5th Edition