DemandSupply Demand and Supply Why do roses cost more on Valentine’s Day? Why do TV ads cost more during the Super Bowl ($4.0 million for 30 sec.) than during Nick at Nite reruns? Why do hotel rooms in Sun Valley, Idaho cost more in the winter than in the summer? Why do surgeons earn more than butchers? Why do pro basketball players earn more than pro hockey players? Why do economics majors earn more than most other majors? Why are some of you going to major in economics in college? The answer to these and other economics questions boil down to the workings of supply and demand – the subject of this chapter. “Econ, Econ”

$54321 specifiedtime period … a specified time period … other things being equal P QDQDQDQD Price decreases; QD increases Consumers “willingness to buy” $5$4$3$2$1 D Quantity Demanded QD – how much will be purchased at a specific price [& date].

1.Income Effect When things are expensive, money buys less When things are cheap, money buys more 2.Substitution Effect When apples are expensive and their substitutes (pears) are relatively cheap, I buy fewer apples and more pears 3.Diminishing Marginal Utility Each additional unit of an item purchased gives less marginal utility (happy points) than the previous unit. Therefore, the only way I will buy more is if the price is lower. Ex. When I’m hungry, I typically will buy 2 breakfast tacos. The reason I don’t buy a third taco is because the marginal utility of the third taco is less than the price of the taco. But, if the price of the taco is less than the marginal utility of the taco, then I will buy the third tacoD P1P1P1P1 P2P2P2P2 QD 1

QD 2 QD 1 PriceQD Inverse relationshi p $ D Reasons For Downsloping “D” Curve Income Effect 1. Income Effect –current buyers buy more. Substitution Effect 2. Substitution Effect– new buyers now purchase. Diminishing MarginalUtility 3. Diminishing Marginal Utility - because buyers of successive units receive less marginal utility, they will buy more only when the price is lowered. Change in QD Price change 1. Price change Movement 2. Movement [up/down the demand curve] Point to point 3. Point to point [along the curve] “D” “whole curve”.“all prices” “D” refers to the “whole curve”. [“all prices”] “QD”“point on the curve” “QD” refers to a “point on the curve” “particular price.” based on a “particular price.” $ iPhone

P icture of Law of Demand

Elasticity of D Elastic - QD very responsive to price Inelastic chg in price has little impact on QD Elasticity of D – the way price affects QD. Elastic - QD that is very responsive to price. Inelastic - a chg in price has little impact on QD. Elastic (flexible) Demand 1.Substitutes 1.Substitutes (butter) 2.Luxury 2.Luxury (mink coat) 3.Expensive 3.Expensive (car) 4.Has durability 4.Has durability (refrigerator) 5.Lasts a long time 5.Lasts a long time (gas-guzzling car) Inelastic (inflexible) Demand 1.No substitutes 1.No substitutes (milk) 2.Necessity 2.Necessity (insulin) 3.Inexpensive 3.Inexpensive (safety pin) 4.No durability 4.No durability (pencil) 5.Lasts only a short time 5.Lasts only a short time (bread)

Elastic or Inelastic (Total Receipts Test) Total Receipts Test 20 x $2 = $40.00 Total Receipts Test 20 x $2 = $ $2 $1 Inelastic Elastic 30 x $1 = $ x $1 = $50

Quantity Demanded vs. Demand Quantity Demanded [QD] is triggered by a price chg. people will purchase at a specific price The quantities of a good or service that people will purchase at a specific price at a given time. Demand [D] is triggered by “TIMER” [non-price]. purchasers will buy at different prices A schedule of the total quantities of a good or service that purchasers will buy at different prices at a given time. Demandbunch of QD’s strung together Demand is a bunch of QD’s strung together.

“Demand Shifters” [TIMER] 1. Taste [direct] 2. Income [normal-direct] [inferior-inverse] 3. Market Size [number of consumers-direct] 4. Expectations [of consumers about future *price-direct, about future availability-inverse, or about future income–direct. about future availability-inverse, or about future income–direct. 5. Related Good *Prices [substitutes-direct] [complements-inverse] Change in “D” [curve] Non price change[“TIMER”] 1. Non price change [“TIMER”] Whole “D” curve shifts 2. Whole “D” curve shifts [There is a change in “QD” but it is not caused by a change in “price.” QD-”single price”D-”all prices” [QD-”single price”; D-”all prices”] Complement [ inverse ] Substitute [ Direct ] Butter Bread Bagels P D3D3D3D3 D1D1D1D1 D2D2D2D2 QD 3 QD 1 QD 2 D1D1D1D1 D2D2D2D2 P P1P1P1P1 QD 1 P2P2P2P2 D1D1D1D1 D2D2D2D2 D P QD 2

Tdirect Tastes [direct] I Incomes directinverse -Normal [direct] & Inferior[inverse] Mdirect Market Size(# of consumers) [direct] E Expectations of consumers about direct [future price-direct; future directinverse income [ direct ]; and availability [inverse] R Related Good Price Changes directinverse [substitutes-direct; complements-inverse] Helmets “ TIMER ”

“Increase in S” Decrease in “QS” [caused by a “decrease in price”] Increase in “QS” [caused by an “increase in price”] 1. Price change 2. Movement 3. P oint to p oin t [“ Snap shot of 1 pt in time ] Change in “S” [RATNEST] 1. Non-price 2. Whole curve 3. Shift [“Time passes”] What could cause an “increase in supply?”Increasenumber of producers What could cause an “increase in supply?” 4. Increase in number of producers Decreaseresource costIncreasetechnology 1. Decrease in resource cost [wages/raw materials] 5. Increase in technology Decreasealternative output“X”Increasesubsidies 2. Decrease in the price of an alternative output for “X” 6. Increase in subsidies Producer expectationsprice decreaseDecreasetaxes 3. Producer expectations of a price decrease 7. Decrease in taxes P1P1P1P1 P2P2P2P2 QS1 P1P1P1P1 P2P2P2P2 S S S1S1S1S1 S2S2S2S2 S1S1S1S1 S2S2S2S2 P P “Decrease in S” QS2

Quantity Supplied vs. Supply Quantity Supplied [QS] is triggered by a price change. QSproducers are willing & able to supply on a given time. QS means quantity of a good/service that producers are willing & able to supply on a given time. Supply [S]: [triggered by “RATNEST”] producers will supply at different prices Supply not an amountbehavior A schedule of the total quantities of a good or service that producers will supply at different prices at a given time. Supply is not an amount but a behavior. Supplybunch of QS’sstrung together Supply is a bunch of QS’s strung together. Price can not cause a change in “S” [shift] Price can only cause a change in “QS” [movement].

Consumers and Producers Feel Differently About High & Low prices Consumers and Producers Feel Differently About High & Low prices Producers supply more at the higher price because the opportunity cost increases if they don’t. Consumers consume less at the higher price because they now have less money to spend. Producers supply less at the lower prices because the opportunity cost decreases if they don’t. Consumers consume more at the lower price because they now have more money to spend. I was going to buy a Honda but this car is $4,000 cheaper. I’m saving money at the lower price. I normally eat one, but at this low price, I’m having two.

. QS 2 Direct Reasons For Upsloping “S” Curve There is increasing opportunity cost if you don’t produce. 1. There is increasing opportunity cost if you don’t produce. 2. Current producers produce more [overtime/more shifts] 3. New producers are attracted to the market. “S” refers to the “whole supply curve” and refers to what producers will supply at “different prices”. producers will supply at “different prices”. “QS” refers to a “point on the curve” and refers to what producers will supply at a “particular price”. producers will supply at a “particular price”. Change in “QS” 1. Price change 2. Movement (up/down “S” curve) 3. Point to point (along “S” curve) S QS 1 QS 1 P2P2P2P2 P1P1P1P1 increasesincreases Price increases; QS increases decreasesdecreases Price decreases; QS decreases Producers want the highest price possible. More of you would supply your labor for $12 than if labor were getting just $6 an hour.

Elastic Supply Elastic Supply – a small increase/decrease in price causes significant change in QS. Elastic supply is very responsive to price changes. Elastic (Flexible) SupplyInelastic (Inflexible) Supply 1.Can be made quickly1. Cannot be made quickly 2.Little expense (few2. Great Expense (large capital capital resources required) resources required) UnskilledSkilled 3. Unskilled workers3. Skilled workers 4. Long time4. Short time 5. Don’t need scarce 5. Scarcity of natural resources natural resources T-shirts Examples: T-shirts, hats, Examples: Gold, diamonds, computers shot glasses, and postersand computers

Inelastic Inelastic Supply - regardless of price, producers are unwilling/unable to increase/decrease QS. (QS is inflexible and unresponsive to price changes) Elastic supply horizontal vertical Elastic supply results in a more horizontal line & inelastic supply results in a more vertical line Elastic supplyvery responsive inelastic unresponsive Elastic supply is very responsive to price & inelastic supply is unresponsive to price.

Quantity Supplied “responsiveness”“flatness” Think of “responsiveness” as “flatness”.

R inverseR esource C ost [ wages & raw materials ] [ inverse ] A inverseA lternative O utput price changes [ inverse ] T directT echnology [ direct ] N directN umber of S uppliers [ direct ] E inverseE xpectation(Suppliers) about future price [ inverse ] S directS ubsidies [ direct ] T inverse T axes [ inverse ] Bigger supply of games “Take this money.” Decr in “S” of broccoli down Up Supply Shifters [“RATNEST”]

Individual Supply Can Increase or Decrease Quantity Supplied (bushels per week) Price (per bushel) PQsQs $ Individual Supply P Q S1S1S1S1 S2S2S2S2 S3S3S3S Change in Supply [“RATNEST”] 1. Decrease in resource cost 2. Alt. output price decrease 3. Technological change 4. Increase in # of suppliers 5. Producer exp. of price decrease 6. Increase in subsidies 7. Decrease in taxes 1. Increase in resource cost 2. Alt. output price increase 3. Technological decrease 4. Decrease in # of suppliers 5. Producer exp. of price increase 6. Decrease in subsidies 7. Increase in taxes “S” is a whole bunch of QS’s strung together.

Four Possibilities D1D1D1D1 D1D1D1D1 S A B C D Increase in supply of gas Slide Rule After introduction of calculator S D1D1D1D1 D2D2D2D2[TIMER][RATNEST] “D” for flag after 9/11 “Increase in Demand” “Decrease in Demand” “Increase in Supply” “Decrease in Suppy” D ecrease in “S” of gas D P Q D P Q S QP P S Q D S1S1S1S1 D S1S1S1S1 S2S2S2S2 $1.85 $1.00 Q 1 Q 2 Q 1 Q 2 Q 2 Q 1 $1.85 S1S1S1S1 $1.00 P2P2P2P2 P1P1P1P1 P1P1P1P1 P2P2P2P2 Q 1 Q 2 Q 2 Q 1 After “Looking For Nemo”

MARKET DEMAND & SUPPLY MARKET DEMAND & SUPPLY 7 S Q o $5 4$ PQDQD $5 $4$3 $2 $1 2,000 4,0007,000 11,000 16,000 $5 $4$3 $2 $1 12,000 10,0007,000 4,000 1,000 D P QSQS Price of Corn Quantity of Corn CORN MARKET CORN MARKET Market Clearing Equilibrium

Apple’s iPod Video ___7. Increase in the price of Apple’s iPod Video on the Microsoft’s Zune market for Microsoft’s Zune. tealemon ___8. Increase in the price of tea on the market for lemon. taxesSUVs ___9. Increase in business taxes on the market for SUVs. Consumers expect cell phones ___10. Consumers expect a shortage of cell phones. “TIMER”[D] or “RATNEST”[S] incomecamcorders ___1. Increase in income on the market for camcorders. # of consumers ___2. Increase in # of consumers on market for computers. Producer expectations ___3. Producer expectations about a price increase. Consumer expectations ___4. Consumer expectations about a price increase. producers ___5. Increase in # of producers on market for digital cameras. resource cost ___6. Increase in resource cost on the market for bagels. A A D A C D A B D A

incomeMicrosoft’s Zune is anormal good 1.An increase in income if Microsoft’s Zune is a normal good would: a. increase D, increase P, & increase Q.b. increase D, increase P, & decrease Q. c. increase S, increase P, & increase Q.d. decrease D, increase P, & increase Q. decrease in the price of resources 2. A decrease in the price of resources used to produce laptops will: a. increase S, increase P, & increase Q.b. increase D, increase P, & increase Q. c. decrease S, decrease P, & decrease Q.d. do none of the above buttersubstitutemargarine 3. Decrease in price of butter on the market for the substitute margarine: a. increase D, increase P, & decrease Q.b. decrease D, decrease P, & increase Q. c. decrease D, increase P, & decrease Q.d. do none of the above improvement in technology 4. An improvement in technology used to produce DVDs will: a. decrease S, increase P, & decrease Q.b. decrease S, increase P, & increase Q. c. increase S, decrease P, & increase Q.d. decrease D, decrease P, & decrease Q. decrease in the number of consumers 5. A decrease in the number of consumers for Fuzzy Wuzzies: a. decrease S, decrease P, & decrease Q.b. increase D, increase P, & increase Q. c. decrease D, decrease P, & decrease Q.d. decrease D, decrease P, & increase Q. Effect of Changes in “D” or “S” on Price and Quantity E1E1E1E1 E2E2E2E2 E1E1E1E1 E2E2E2E2 E1E1E1E1 E2E2E2E2 E2E2E2E2 E1E1E1E1

taste 6. A decrease in taste for Fuzzy Wuzzies would: a. increase D, increase P, & increase Q.b. decrease D, increase P, & decrease Q. c. increase S, increase P, & increase Q.d. decrease D, decrease P, & decrease Q. number of firms 7. A reduction in the number of firms producing laptops: a. increase S, increase P, & increase Q.b. increase D, increase P, & increase Q. c. decrease S, increase P, & decrease Q.d. decrease S, decrease P, decrease Q. complement 8. An increase in the price of pancakes, a complement for syrup would: a. increase D, increase P, & decrease Q.b. decrease D, decrease P, & increase Q. c. decrease D, decrease P, & decrease Q.d. do none of the above income 9. A decrease in income upon the market for spam would: a. decrease S, increase P, & decrease Q.b. decrease S, increase P, & increase Q. c. increase D, decrease P, & increase Q.d. increase D, increase P, & increase Q. Consumer expectations 10. Consumer expectations that the price of PSP will increase by 50% in the future will: a. decrease S, decrease P, & decrease Q.b. increase D, increase P, & increase Q. c. decrease D, decrease P, & decrease Q.d. decrease D, decrease P, & increase Q. Effect of Changes in “D” or “S” on Price and Quantity

C A C A C B D B d. increase in price of computers c. decrease in # of consumers