1 © 2010 South-Western, a part of Cengage Learning Chapter 3 Market Demand and Supply Microeconomics for Today Irvin B. Tucker

© 2010 South-Western, a part of Cengage Learning 2 Why is this chapter important? It introduces basic supply and demand analysis It introduces basic supply and demand analysis

© 2010 South-Western, a part of Cengage Learning 3 What is demand? Demand represents the choice making behavior of buyers Demand represents the choice making behavior of buyers

© 2010 South-Western, a part of Cengage Learning 4 What does “ceteris paribus” mean? All else remains the same All else remains the same

© 2010 South-Western, a part of Cengage Learning 5 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 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

© 2010 South-Western, a part of Cengage Learning 6 What is a demand schedule? Shows the quantities of a good or service that people are willing and able to buy at different prices Shows the quantities of a good or service that people are willing and able to buy at different prices

© 2010 South-Western, a part of Cengage Learning 7 Demand schedule

© 2010 South-Western, a part of Cengage Learning 8 What is a demand curve? Depicts the relationship between price and quantity demanded Depicts the relationship between price and quantity demanded

© 2010 South-Western, a part of Cengage Learning 9 $20 $15 $10 $ A B C D Individual’s Demand Curve for DVDs P Q

© 2010 South-Western, a part of Cengage Learning 10 Why do demand curves have a negative slope? At a higher price buyers will buy fewer units, and at a lower price they will buy more units At a higher price buyers will buy fewer units, and at a lower price they will buy more units

© 2010 South-Western, a part of Cengage Learning 11 What is market demand? The summation of the individual demand schedules in a market The summation of the individual demand schedules in a market

© 2010 South-Western, a part of Cengage Learning 12 Market demand schedule

© 2010 South-Western, a part of Cengage Learning 13 $20 $15 $10 $ P Q Fred’s Demand Curve D1D1

© 2010 South-Western, a part of Cengage Learning 14 $20 $15 $10 $ P Q Mary’s Demand Curve D2D2

© 2010 South-Western, a part of Cengage Learning 15 $20 $15 $10 $ P Q Market Demand Curve D3D3 12

© 2010 South-Western, a part of Cengage Learning 16 IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND

© 2010 South-Western, a part of Cengage Learning 17 When price changes, what happens? The curve does not shift - there is a change in the quantity demanded The curve does not shift - there is a change in the quantity demanded

© 2010 South-Western, a part of Cengage Learning 18 Change in Price Change in Quantity Demanded

© 2010 South-Western, a part of Cengage Learning 19 Price decreases Downward movement along the demand curve Increase in quantity demanded

© 2010 South-Western, a part of Cengage Learning 20 $20 $15 $10 $ A B A change in price causes a change in the quantity demanded D P Q 50

© 2010 South-Western, a part of Cengage Learning 21 Price increases Upward movement along the demand curve Decrease in quantity demanded

© 2010 South-Western, a part of Cengage Learning 22 When something changes other than price, what happens? The whole curve shifts,there is a change in demand The whole curve shifts,there is a change in demand

© 2010 South-Western, a part of Cengage Learning 23 Change in nonprice determinant Change in demand

© 2010 South-Western, a part of Cengage Learning 24 Change in a Nonprice determinant Leftward or rightward shift in the demand curve Decrease or increase in demand

© 2010 South-Western, a part of Cengage Learning 25 $20 $15 $10 $ D1D1 D2D2 P 50 When the ceteris paribus assumption is relaxed, the whole curve can shift Q B A

© 2010 South-Western, a part of Cengage Learning 26 What can cause a demand curve to shift? A change in: Number of buyers in the market Number of buyers in the market Tastes and preferences Tastes and preferences Income Income Expectations Expectations Prices of related goods Prices of related goods

© 2010 South-Western, a part of Cengage Learning 27 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 Changes in nonprice determinants can produce only a shift in a demand curve and not a movement along the demand curve

© 2010 South-Western, a part of Cengage Learning 28 Terminology for changes in price and nonprice determinants of demand

© 2010 South-Western, a part of Cengage Learning 29 Two types of change illustrated

© 2010 South-Western, a part of Cengage Learning 30 What is a normal good? Any good for which there is a direct relationship between changes in income and its demand curve Any good for which there is a direct relationship between changes in income and its demand curve

© 2010 South-Western, a part of Cengage Learning 31 What is an inferior good? Any good for which there is an inverse relationship between changes in income and its demand curve Any good for which there is an inverse relationship between changes in income and its demand curve

© 2010 South-Western, a part of Cengage Learning 32 What are substitute goods? Goods that compete with one another for consumer purchases Goods that compete with one another for consumer purchases

© 2010 South-Western, a part of Cengage Learning 33 What happens when the price increases for a good that has a substitute? The demand curve for the substitute good increases The demand curve for the substitute good increases

© 2010 South-Western, a part of Cengage Learning 34 What happens when the price decreases for a good that has a substitute? The demand curve for the substitute good decreases The demand curve for the substitute good decreases

© 2010 South-Western, a part of Cengage Learning 35 What does a direct relationship between price and quantity mean? The two move in the same direction The two move in the same direction

© 2010 South-Western, a part of Cengage Learning 36 What are complementary goods? Goods that are jointly consumed with another good Goods that are jointly consumed with another good

© 2010 South-Western, a part of Cengage Learning 37 What happens when the price increases for a good that has a complement? The demand curve for the substitute good decreases The demand curve for the substitute good decreases

© 2010 South-Western, a part of Cengage Learning 38 What happens when the price decreases for a good that has a complement? The demand curve for the substitute good increases The demand curve for the substitute good increases

© 2010 South-Western, a part of Cengage Learning 39 What does an inverse relationship between price & quantity mean? It means that the two move in opposite directions It means that the two move in opposite directions

© 2010 South-Western, a part of Cengage Learning 40 What is supply? Supply represents the choice making behavior of sellers Supply represents the choice making behavior of sellers

© 2010 South-Western, a part of Cengage Learning 41 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 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

© 2010 South-Western, a part of Cengage Learning 42 Supply schedule

© 2010 South-Western, a part of Cengage Learning 43 $20 $15 $10 $ D C An Individual Seller’s Supply Curve for DVDs P Q B A

© 2010 South-Western, a part of Cengage Learning 44 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 Only at a higher price will it be profitable for sellers to incur the higher opportunity cost associated with supplying a larger quantity

© 2010 South-Western, a part of Cengage Learning 45 What is market supply? The horizontal summation of all the quantities supplied at various prices that might prevail in the market The horizontal summation of all the quantities supplied at various prices that might prevail in the market

© 2010 South-Western, a part of Cengage Learning 46 Market supply schedule

© 2010 South-Western, a part of Cengage Learning 47 $25 $20 $15 $10 10 P Q 1520 Entertain City Supply Curve S1S1 25

© 2010 South-Western, a part of Cengage Learning 48 $25 $20 $15 $10 20 P Q 2530 High Vibes Supply Curve S2S2 35

© 2010 South-Western, a part of Cengage Learning 49 $25 $20 $15 $10 40 P Q 4555 Market Supply Curve 60 S total

© 2010 South-Western, a part of Cengage Learning 50 IMPORTANT - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY

© 2010 South-Western, a part of Cengage Learning 51 When price changes, what happens? The curve does not shift - there is a change in the quantity supplied The curve does not shift - there is a change in the quantity supplied

© 2010 South-Western, a part of Cengage Learning 52 Change in Price Change in Quantity Supplied

© 2010 South-Western, a part of Cengage Learning 53 $20 $15 $10 $ A Supply Curve A change in price causes a change in the quantity supplied P Q B

© 2010 South-Western, a part of Cengage Learning 54 When something changes other than price, what happens? The whole curve shifts - there is a change in supply The whole curve shifts - there is a change in supply

© 2010 South-Western, a part of Cengage Learning 55 Change in nonprice determinant Change in supply

© 2010 South-Western, a part of Cengage Learning 56 $20 $15 $10 $ S1S1 S2S2 Shift in the Supply Curve P Q

© 2010 South-Western, a part of Cengage Learning 57 What can cause a supply curve to shift? A change in: Number of sellers in the market Number of sellers in the market Technology Technology Resource prices Resource prices Taxes and subsidies Taxes and subsidies Expectations of producers Expectations of producers Prices of other goods the firm could produce Prices of other goods the firm could produce

© 2010 South-Western, a part of Cengage Learning 58 What is the conclusion? Changes in nonprice determinants can produce only a shift in a supply curve and not a movement along the supply curve Changes in nonprice determinants can produce only a shift in a supply curve and not a movement along the supply curve

© 2010 South-Western, a part of Cengage Learning 59 Terminology for changes in price and nonprice determinants of supply

© 2010 South-Western, a part of Cengage Learning 60 Two types of change illustrated

© 2010 South-Western, a part of Cengage Learning 61 What is a market? Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged Any arrangement in which buyers and sellers interact to determine the price and quantity of goods and services exchanged

© 2010 South-Western, a part of Cengage Learning 62 What is the equilibrium price? The price towards which the economy tends The price towards which the economy tends

© 2010 South-Western, a part of Cengage Learning 63 Where is the equilibrium price? At the price where the quantity demanded and the quantity supplied are equal At the price where the quantity demanded and the quantity supplied are equal

© 2010 South-Western, a part of Cengage Learning 64 Demand, supply, and equilibrium

© 2010 South-Western, a part of Cengage Learning 65 $90 $60 $ D S Supply & Demand for Tennis Shoes P Q Surplus Shortage $120

© 2010 South-Western, a part of Cengage Learning 66 What is the price system? A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices A mechanism that uses the forces of supply and demand to create an equilibrium through rising and falling prices

© 2010 South-Western, a part of Cengage Learning 67 END