Transcript A Change in What? - McGraw Hill Higher Education

Chapter 5
Demand, Supply, and Equilibrium
McGraw-Hill/Irwin
©2009 The McGraw-Hill Companies, All Rights Reserved
Learning Objectives
 In this chapter, you will find out everything you always
wanted to know about:
1.
2.
3.
4.
5.
6.
Individual and market demand.
Changes in demand.
Individual and market supply.
Changes in supply.
Graphing supply and demand curves.
Finding equilibrium price and quantity.
©2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.
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Demand Defined
 Demand is the schedule of quantities of a good or
service that people are willing and able to purchase at
various prices.
• Law of demand: When the price of a good is lowered, more of it is
demanded; When price is raised, less is demanded.
• There is an implicit assumption that there is no change in any other
factors.
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Individual and Market Demand
 The law of demand holds for both individuals and
markets.
 Individual demand is the schedule of quantities that a
person would purchase at various prices.
 Market demand is the schedule of quantities that
everyone in the market would buy at various prices.
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What is the market?
 The market is where people buy and sell.
• Local markets:
• Gasoline, groceries
• Regional:
• Automobiles
• National or international:
• Computers
• eBay has created a global market for goods that previously had
purely local markets.
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Changes in Demand
 A change in demand: a change in the entire demand
schedule.
Price QD(1)
$30
4
$25
9
$20
14
$15
18
$10
23
$ 5
26
QD(2)
5
11
18
28
38
50
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An Increase in Demand
An increase in demand is an increase in the quantity
people are willing to purchase at all prices.
Price QD(1) QD(2)
$30
4
5
$25
9
11
$20
14
18
$15
18
28
$10
23
38
$ 5
26
50
The demand curve
shifts to the right.
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Change in Quantity Demanded
A and B are on the same line, so they are on the same schedule.
If they are on the same schedule, there can be no change in
demand.
A price change led to a change in quantity demanded.
C
A
B
D1
D2
Move from point A to point B  a change in quantity demanded
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A Change in What?
An increase in demand because people are willing
to buy more at all prices on G’s curve which is to the
right of F’s curve
E
G
I
F
H
Move from point F to point G  an increase in demand
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A Change in What?
A decrease in demand because people are willing to
buy less at all prices on H’s curve which is to the left
of G’s curve
E
G
I
F
H
Move from point G to point H  a decrease in demand
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A Change in What?
As long as we remain on the same curve, there is no
change in demand. A change in quantity demanded.
E
G
I
F
H
Move from point H to point I  a change in quantity in demanded
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From J to K is…?
As long as we remain on the same curve, there is no
change in demand. A change in quantity demanded.
L
J
G
K
M
N
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From K to L is…?
An increase in demand because L’s demand curve is
entirely to the right of K’s curve
L
J
K
G
M
N
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From L to M is…?
A decrease in demand because M’s demand curve is
entirely to the left of L’s curve.
L
J
G
K
M
N
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What Causes Changes in Demand?
 Changes in income
 Changes in the prices of related goods and services
 Changes in tastes and preferences
 Changes in price expectations
 Changes in population
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Changes in Income
 The demand for NORMAL goods varies directly with
income.
• When income goes up people buy more, therefore demand
goes up.
 The demand for INFERIOR goods varies inversely
with income.
• When income goes up people buy less, therefore demand
goes down.
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Changes in the Price of Related Goods
and Services
 Substitute goods
• Hot dogs and hamburgers; tuna and salmon
• Direct relationship: price of hamburgers up, price of hot
dogs up. Why?
• As p hamburgers up  increased demand for hot dogs 
increases p of hot dogs
 Complementary goods
• Hot dogs and buns; videos and DVD players; gasoline and
cars
• Inverse relationship: p hot dogs up  decrease in quantity
demanded of hot dogs  decrease in demand for hot dog
buns  lower price of hot dog buns
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Price
Price of hamburger goes up . . . People buy less hamburger
and more hot dogs. This increases the demand for hot dogs
which drives the price of hot dogs up
S
Hot Dogs
D2
D1
Quantity
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The price of hot dogs goes up . . . People buy less. If
people buy less hot dogs, they will also buy less hot dog
buns. If people buy less hot dog buns, this decreases
the demand for buns and lowers the price
Price
Hot Dog Buns
S1
D2
D1
Quantity
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Changes in Taste and Preferences
 Taste and preferences tend to change over time.
• Smaller cars and less-fattening foods
• Designer clothing and brand-name sneakers
• Less people are smoking (has been helped by a campaign to
reduce smoking).
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Changes in Price Expectations
 If people expect the price of something to rise, they
rush out to stock up before it does.
• This increases the demand.
 If people expect the price of something to fall, they will
hold off buying it.
• This decreases the demand.
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Changes in Population
 As the nation’s population increases, the demand for
particular goods and services increase.
• General growth increases the demand for food, housing,
autos, etc.
 The changing age distribution affects demand.
• In the next three decades there will be a higher demand for
retirement homes, nursing homes, wheelchairs, bifocal
glasses, etc.
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Questions for Thought and Discussion
 The rapid growth of the Chinese economy has
raised the average income of its citizens.
• How would you expect that this has impacted the demand
for food in worldwide markets?
• Try drawing this outcome.
 If some gas stations on a state highway have a
contract that only permits price changes on Fridays,
why might there be long lines at these gas stations
on Thursdays?
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Supply Defined
 Supply is a schedule of quantities of a good or service
that people are willing to sell at various prices.
• As prices rise people are willing to sell more.
• Thus, there is a positive or direct relationship between price
and quantity.
• Price rises . . . quantity supplied rises
• Prices declines . . . quantity supplied declines
• We’re assuming there is no change in any of the factors that
influence supply.
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Individual and Market Supply
Hypothetical Supply of American Cars, 2009 (in thousands)
Ford
Daimler
Chrysler
JapaneseOwned Firms
Price
GM
$20,000
5311
2356
1245
535
9,447
18,000
4617
1984
991
384
7,976
16,000
4002
1584
762
270
6,618
14,000
3623
1216
601
208
5,648
12,000
3190
996
491
181
4,858
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Total
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Hypothetical Supply of American Cars, 2009
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A move from E to F is…?
A change in quantity supplied
G
F
E
H
I
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A move from F to G is…?
An increase in supply
G
F
E
H
I
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A move from G to H is…?
An increase in supply
G
F
E
H
I
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A move from L to M is…?
A decrease in supply
M
L
N
J
K
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What Causes Changes in Supply?
 Changes in the cost of production
• When costs rise, S decreases.
 Technological advances (increase S)
 Prices of other goods
 Change in the number of suppliers
• New suppliers increase S; shutdowns decrease S.
 Changes in taxes
• Tax increases reduce S; tax decrease raise S.
 Changes in price expectations
 Random causes, e.g. Hurricane Katrina
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Questions for Thought and Discussion
 The shift to ethanol as a form of fuel (to alleviate
global warming) has led some farmers to sell their
feed corn to energy companies.
 How would you expect that this would impact the
supply of feed corn in the global market for food?
 How would the decreased availability of feed corn
affect the price of meat?
 Try graphing these outcomes.
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Graphing Demand and Supply Curves
Sample Demand Schedule
Price
$ 10
$ 9
$ 8
$ 7
$ 6
QD
1
2
4
7
12
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Graphing Demand and Supply Curves
Sample Supply Schedule
Price
$ 10
$ 9
$ 8
$ 7
$ 6
QS
14
12
9
5
1
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Graphing Equilibrium
Sample D and S Schedules
Price
QD
QS
$ 10
1
14
$ 9
2
12
$ 8
4
9
$ 7
7
5
$ 6
12
1
Equilibrium: where the demand & supply curves cross;
Q* = 6, P* = $7.20
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Above Equilibrium
Above P*, surpluses
Price tends toward
equilibrium. If
price is above
equilibrium, sellers
will lower prices
until the price
declines to the
equilibrium price.
P
P
P
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Below Equilibrium
Below P*, shortages
Price tends toward
equilibrium. If price
is below
equilibrium, buyers
will bid prices up
until the price rises P
to the equilibrium
P
price.
P
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Application: Why Can’t I Sell My House?
 You can sell virtually any good or service for which
there is a demand.
• As long as people are willing and able to pay for that good or
service, you can sell it.
 If you want to sell some good or service pretty quickly
and you get no bites, what do you do?
• You lower the price.
 What do you do if there is still no one willing and able
to pay your price?
• You keep lowering it until you make a sale!
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