Chapter 3 Market Demand and Supply Lecture Slides Survey of Economics Irvin B. Tucker © 2016 south- western, a part of Cengage Learning xx

Why is this chapter important? It introduces basic supply and demand analysis © 2016 south- western, a part of Cengage Learning

What is demand? Demand represents the choice making behavior of buyers © 2016 south- western, a part of Cengage Learning

What does “ceteris paribus” mean? All else remains the same

What is the law of demand? There is an inverse relationship between the price of a good and the quantity buyers are willing to purchase in a defined time period, ceteris paribus © 2016 south- western, a part of Cengage Learning

What is a demand curve? A curve that shows the quantities of a good or service that people are willing and able to buy at different prices © 2016 south- western, a part of Cengage Learning

Quantity Demanded (per year) Exhibit 3-1 An Individual Demand Curve for Blu-rays Quantity Demanded (per year) Price per Blu-ray Point A $20 4 B 15 6 C 10 10 D 5 16

Exhibit 3-1 Individual’s Demand Curve for Blu-rays 20 B 15 Price per Blu-ray (dollars) C 10 D 5 Demand Curve 0 4 8 12 16 20 Quantity of Blu-rays (per year) © 2016 south- western, a part of Cengage Learning

Why do demand curves have a negative slope? As the price per unit of a good or service falls, buyers can afford to buy more units per period of time. © 2016 south- western, a part of Cengage Learning

The summation of the individual demand schedules in a market What is market demand? The summation of the individual demand schedules in a market © 2016 south- western, a part of Cengage Learning

Exhibit 3-2 The Market Demand Curve for Blu-rays + Fred’s Demand Curve Mary’s Demand Curve = Market Demand Curve Price Price Price $20 $20 $20 D1 D2 DTOTAL 5 5 5 2 5 1 7 3 12 Quantity (per year) Quantity (per year) Quantity (per year) © 2016 south- western, a part of Cengage Learning

Important ! KNOW THE DIFFERENCE BETWEEN A “CHANGE IN THE QUANTITY DEMANDED” AND A “CHANGE IN DEMAND” © 2016 south- western, a part of Cengage Learning

When price changes, what happens? The curve does not shift and there is a “change in the quantity demanded” © 2016 south- western, a part of Cengage Learning

Decrease in quantity demanded Increase in quantity demanded Upward movement along the demand curve Downward movement along the demand curve Price Increases Price decreases © 2016 south- western, a part of Cengage Learning

Price per Blu-ray (dollars) Quantity of Blu-rays (millions per year) Exhibit 3-3(a) A change in price causes a change in the quantity demanded 20 A 15 Price per Blu-ray (dollars) B 10 D 5 10 20 30 40 50 Quantity of Blu-rays (millions per year) © 2016 south- western, a part of Cengage Learning

When a variable other than price changes, what happens? The whole demand curve shifts, stated as “there is a change in demand” © 2016 south- western, a part of Cengage Learning

Decrease or increase in demand Change in a nonprice determinant Leftward or rightward shift in the demand curve Change in a nonprice determinant © 2016 south- western, a part of Cengage Learning

Price per Blu-ray (dollars) Quantity of Blu-rays (millions per year) Exhibit 3-3(b) When the ceteris paribus assumption is relaxed, the whole curve can shift 20 A B 15 Price per Blu-ray (dollars) 10 D2 5 D1 10 20 30 40 50 Quantity of Blu-rays (millions per year) © 2016 south- western, a part of Cengage Learning

What is the conclusion? Changes in nonprice determinants can produce only a shift in a demand curve and not a movement along the demand curve © 2016 south- western, a part of Cengage Learning

Exhibit 3-4 Terminology for changes in price and nonprice determinants of demand Price Incease © 2016 south- western, a part of Cengage Learning 20

Exhibit 3-4 Two types of Demand Changes Illustrated Change in Nonprice Determinant Causes Change in Nonprice Determinant Causes Price per unit INCREASE IN DEMAND DECREASE IN DEMAND Movement Along Demand Curve Change in Price Causes D3 D1 D2 Quantity of good or service per unit of time © 2016 south- western, a part of Cengage Learning

A shift in a demand curve is caused by a change in: Number of buyers in the market Tastes and preferences Income Expectations of buyers Prices of related goods © 2016 south- western, a part of Cengage Learning

A decline in the birthrate reduces the demand for baby clothes. Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve Nonprice Determinant of Demand Relationship to Changes in Demand Curve Shift in the Demand Curve Examples P 1. Number of buyers Direct Immigration from Mexico increases the demand for Mexican food products in grocery stores. D1 D2 Q P A decline in the birthrate reduces the demand for baby clothes. D2 D1 Q © 2016 south- western, a part of Cengage Learning

Tastes and preferences Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve Nonprice Determinant of Demand Relationship to Changes in Demand Curve Shift in the Demand Curve Examples P 2. Tastes and preferences Direct For no apparent reason, consumers want Beanie Babies and demand increases. D1 D2 Q P After a while, the fad dies and demand declines. D2 D1 Q © 2016 south- western, a part of Cengage Learning

Consumers’ incomes increase, and the demand for steaks increases. Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve Nonprice Determinant of Demand Relationship to Changes in Demand Curve Shift in the Demand Curve Examples P 3. Income a. Normal goods Direct Consumers’ incomes increase, and the demand for steaks increases. D1 D2 Q P A decline in income decreases the demand for air travel. D2 D1 Q © 2016 south- western, a part of Cengage Learning

Consumers’ incomes increase, and the demand for hamburger decreases. Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve Nonprice Determinant of Demand Relationship to Changes in Demand Curve Shift in the Demand Curve Examples P b. Inferior goods Inverse Consumers’ incomes increase, and the demand for hamburger decreases. D2 D1 Q P A decline in income increases the demand for bus service. D1 D2 Q © 2016 south- western, a part of Cengage Learning

Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve Nonprice Determinant of Demand Relationship to Changes in Demand Curve Shift in the Demand Curve Examples Expectations of buyers P 4. Direct Consumers’ expect that gasoline will be in short supply next month and prices will rise sharply. Consequently, consumers fill the tanks in their cars this month, and there is an increase in demand for gasoline. D1 D2 Q P Months later consumers expect the price of gasoline to fall soon, and the demand for gasoline decreases. D1 D2 Q © 2016 south- western, a part of Cengage Learning

A reduction in the price of tea decreases the demand for coffee. Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve Nonprice Determinant of Demand Relationship to Changes in Demand Curve Shift in the Demand Curve Examples P 5. Prices of related goods Direct A reduction in the price of tea decreases the demand for coffee. a. Substitute goods D1 D2 Q P An increase in the price of airfares causes higher demand for bus transportation. D1 D2 Q © 2016 south- western, a part of Cengage Learning

A higher price for peanut butter decreases the demand for jelly. Exhibit 3-5 Summary of the Impact of Changes in Nonprice Determinants of Demand on the Demand Curve Nonprice Determinant of Demand Relationship to Changes in Demand Curve Shift in the Demand Curve Examples Complementary goods P b. Inverse A decline in the price of cellular service increases the demand for cell phones. D1 D2 Q P A higher price for peanut butter decreases the demand for jelly. D2 D1 Q © 2016 south- western, a part of Cengage Learning

What is a normal good? Any good for which there is a direct relationship between changes in income and its demand curve © 2016 south- western, a part of Cengage Learning

What does a direct relationship between price and quantity mean? The two variables move in the same direction © 2016 south- western, a part of Cengage Learning

What is an inferior good? Any good for which there is an inverse relationship between changes in income and its demand curve © 2016 south- western, a part of Cengage Learning

What does an inverse relationship between price & quantity mean? It means that the two variables move in opposite directions © 2016 south- western, a part of Cengage Learning

What are substitute goods? Goods that “compete” with one another for consumer purchases © 2016 south- western, a part of Cengage Learning

The demand curve for the substitute good increases What happens when the price increases for a good that has a substitute? The demand curve for the substitute good increases © 2016 south- western, a part of Cengage Learning

The demand curve for the substitute good decreases What happens when the price decreases for a good that has a substitute? The demand curve for the substitute good decreases © 2016 south- western, a part of Cengage Learning

What are complementary goods? Goods that are “jointly consumed” with another good © 2016 south- western, a part of Cengage Learning

The demand curve for the complementary good decreases What happens when the price increases for a good that has a complement? The demand curve for the complementary good decreases © 2016 south- western, a part of Cengage Learning

The demand curve for the complementary good increases What happens when the price decreases for a good that has a complement? The demand curve for the complementary good increases © 2016 south- western, a part of Cengage Learning

The demand curve for the complementary good decreases What happens when the price increases for a good that has a complement? The demand curve for the complementary good decreases 40 © 2016 south- western, a part of Cengage Learning

Supply represents the choice making behavior of sellers What is supply? Supply represents the choice making behavior of sellers © 2016 south- western, a part of Cengage Learning

What is the law of supply? There is a direct relationship between the price of a good and the quantity sellers are willing to offer for sale in a defined time period, ceteris paribus © 2016 south- western, a part of Cengage Learning

Quantity Supplied (thousands per year) Exhibit 3-6 An Individual Supply Curve for Blu-rays An Individual Seller’s Demand Schedule for Blu-rays Price per Blu-ray Point Quantity Supplied (thousands per year) A $20 50 B 15 45 C 10 35 D 5 20 © 2016 south- western, a part of Cengage Learning

Exhibit 3-6 An Individual Seller’s Supply Curve for Blu-rays 20 B 15 Price per Blue-ray (dollars) C 10 D 5 50 10 20 30 40 Quantity of Blu-rays (thousands per year) © 2016 south- western, a part of Cengage Learning

Why do supply curves have a positive slope? Only at a higher price will it be profitable for sellers to incur the higher opportunity cost associated with supplying a larger quantity © 2016 south- western, a part of Cengage Learning

What is market supply? The horizontal summation of all the quantities supplied at various prices that might prevail in the market © 2016 south- western, a part of Cengage Learning

Exhibit 3-7 The Market Supply Curve for Blu-rays Entertain City Supply Curve + = High Vibes Supply Curve Market Supply Curve Price S1 Price S2 Price STOTAL $25 $25 $25 15 15 15 15 25 25 35 40 60 Quantity (thousands per year) Quantity (thousands per year) Quantity (thousands per year) © 2016 south- western, a part of Cengage Learning

IMPORTANT ! KNOW THE DIFFERENCE BETWEEN A “CHANGE IN THE QUANTITY SUPPLIED” AND A “CHANGE IN SUPPLY” © 2016 south- western, a part of Cengage Learning

When price changes, what happens? The curve does not shift and there is a “change in the quantity supplied” © 2016 south- western, a part of Cengage Learning

Increase in quantity supplied Decrease in quantity supplied Downward movement along the supply curve Upward movement along the supply curve Price Decreases Price increases 50 © 2016 south- western, a part of Cengage Learning

S B A Exhibit 3-8(a) Supply Curve 20 15 10 5 10 20 30 40 A change in price causes a change in the quantity supplied 20 15 Price per Blu-ray (dollars) B 10 A 5 10 20 30 40 Quantity of Blu-rays (thousands per year) © 2016 south- western, a part of Cengage Learning

When a variable other than price changes, what happens? The whole curve shifts and there is a “change in supply” © 2016 south- western, a part of Cengage Learning

Decrease or increase in supply Change in nonprice determinant Leftward or rightward shift in the supply curve Change in nonprice determinant © 2016 south- western, a part of Cengage Learning

S1 S2 Exhibit 3-8(b) Increase in Supply 20 A B 15 10 5 10 20 30 40 Price per Blu-ray (dollars) 15 10 5 10 20 30 40 Quantity of Blu-rays (thousands per year) © 2016 south- western, a part of Cengage Learning

What is the conclusion? Changes in nonprice determinants can produce only a shift in a supply curve and not a movement along the demand curve © 2016 south- western, a part of Cengage Learning

Exhibit 3-9 Terminology for changes in price and nonprice determinants of supply 55 © 2016 south- western, a part of Cengage Learning

Exhibit 3-9 Two types of Supply Changes Illustrated DECREASE IN SUPPLY Change in Price Causes INCREASE IN SUPPLY Price per unit Movement Along Supply Curve Change in Nonprice Determinant Causes Change in Nonprice Determinant Causes Quantity of good or service per unit of time © 2016 south- western, a part of Cengage Learning

A shift in a supply curve is caused by a change in: Number of sellers in the market Technology Resource prices Taxes and subsidies Expectations of producers Prices of other goods and services the firm could produce © 2016 south- western, a part of Cengage Learning

Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve Nonprice Determinant of Supply Relationship to Changes in Supply Curve Shift in the Supply Curve Examples P 1. Number of sellers Direct S1 The United States lowers trade restrictions on foreign textiles, and the supply of textiles in the United States increases. S2 Q P S2 S1 A severe drought destroys the orange crop, and the supply of oranges decreases. Q © 2016 south- western, a part of Cengage Learning xx

Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve Nonprice Determinant of Supply Relationship to Changes in Supply Curve Shift in the Supply Curve Examples P 2. Technology Direct S1 New methods of producing automobiles reduce production costs, and the supply of automobiles increases. S2 Q P S2 S1 Technology is destroyed in war, and production costs increase; the result is a decrease in the supply of good X. Q © 2016 south- western, a part of Cengage Learning

Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve Nonprice Determinant of Supply Relationship to Changes in Supply Curve Shift in the Supply Curve Examples P 3. Resource prices Inverse S1 S2 A decline in the price of computer chips increases the supply of computers. Q P S2 S1 An increase in the cost of farm equipment decreases the supply of soybeans. Q © 2016 south- western, a part of Cengage Learning

Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve Nonprice Determinant of Supply Relationship to Changes in Supply Curve Shift in the Supply Curve Examples P 4. Taxes and subsidies Inverse and direct S2 S1 An increase in the per-pack on cigarettes reduces the supply of cigarettes. Q P S1 A government payment to dairy farmers based on the number of gallons produced increases the supply of milk. S2 Q © 2016 south- western, a part of Cengage Learning

Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve Nonprice Determinant of Supply Relationship to Changes in Supply Curve Shift in the Supply Curve Examples Expectations P 5. Inverse S2 Oil companies anticipate a substantial rise in future oil prices, and this expectation causes these companies to decrease their current supply of oil. S1 Q P Farmers expect the future price of wheat to decline, so they increases the present supply of wheat. S1 S2 Q © 2016 south- western, a part of Cengage Learning

Exhibit 3-10 Summary of the Impact of Changes in Nonprice Determinants of Supply on the Supply Curve Nonprice Determinant of Supply Relationship to Changes in Supply Curve Shift in the Supply Curve Examples P 6. Prices of other goods and services Inverse S2 S1 A rise in brand-name drugs causes drug companies to decrease the supply of generic drugs. Q P S1 A decline in the price of tomatoes causes farmers to increase the supply of cucumbers. S2 Q © 2016 south- western, a part of Cengage Learning

What is a market? Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged © 2016 south- western, a part of Cengage Learning

Where is the equilibrium price? At the price where the quantity demanded and the quantity supplied are equal © 2016 south- western, a part of Cengage Learning

Exhibit 3-11Demand, Supply, and Equilibrium for Sneakers (pairs per year) 66 © 2016 south- western, a part of Cengage Learning

Exhibit 3-12 The Supply & Demand for Sneakers 120 S 90 Surplus E Price per pair (dollars) 60 Shortage 30 D 20 50 80 Quantity of Sneakers (thousands of pairs per year) © 2016 south- western, a part of Cengage Learning

What is the price system? A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices © 2016 south- western, a part of Cengage Learning

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