Chapter 3 - Demand and Supply Learning Objectives Explain the law of demand Distinguish between changes in demand and changes in quantity demanded Explain the law of supply Distinguish between changes in supply and changes in quantity supplied Understand how supply and demand interact to determine equilibrium price and quantity Chapter 3 - Demand and Supply 3

Chapter 3 - Demand and Supply Did You Know That... The average price of an apartment-sized condominium has often exceeded the average price of a standalone house? The relative physical size of items does not determine the prices at which people exchange them for? By using demand and supply you can develop a better understanding of why relative size of an item typically has little to do with the price at which it sells? Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Markets Markets Arrangements that individuals have for exchanging with one another Represent the interaction of buyers and sellers for goods and services Markets set the prices we pay and receive. Automobile market Health care market Labor market Stock market Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Law of Demand Demand A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Law of Demand Law of Demand Quantity demanded is inversely related to price, holding other factors constant. Price # Qd $ Price $ Qd # Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Law of Demand What are we holding constant? Income Tastes and preferences Price of other goods Many other factors Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Demand Schedule The demand schedule Table relating prices to quantity demanded We must consider Time dimension Constant-quality units Demand Curve A graphical representation of the demand schedule Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal Chapter 3 - Demand and Supply

The Individual Demand Schedule and the Individual Demand Curve Chapter 3 - Demand and Supply

The Individual Demand Schedule and the Individual Demand Curve Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Demand Schedule Individual versus market demand curves Market Demand The demand of all consumers in the marketplace for a particular good or service Summation at each price of the quantity demanded by each individual Chapter 3 - Demand and Supply

The Horizontal Summation of Two Demand Curves Chapter 3 - Demand and Supply

The Horizontal Summation of Two Demand Curves Chapter 3 - Demand and Supply

The Market Demand Schedule for Flash Memory Pen Drives Chapter 3 - Demand and Supply

The Market Demand Schedule for Flash Memory Pen Drives Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Demand Scenario Imagine the federal government gives every student registered in a college, university, or technical school in the United States a notebook computer. If some factor other than price changes, we can show its effect by moving the entire demand curve, shifting the curve left or right. Chapter 3 - Demand and Supply

A Shift in the Demand Curve Suppose universities prohibit the use of notebook computers Suppose the federal government gives every student a notebook computer Chapter 3 - Demand and Supply

Determinants of Demand Ceteris-Paribus Conditions Determinants of the relationship between price and quantity that are unchanged along a curve Changes in these factors cause a curve to shift Chapter 3 - Demand and Supply

Normal and Inferior Goods Normal Goods Goods for which demand rises as income rises, most goods are normal goods Inferior Goods Goods for which demand falls as income rises Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Demand Determinants of demand Income Tastes and preferences The prices of related goods Substitutes Complements Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Demand Substitutes Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Demand Complements Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other. Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Demand Determinants of demand Expectations Future prices Income Product availability Market size (number of buyers) Chapter 3 - Demand and Supply

Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand Income: Normal Good Price D3 D2 Increase in income increases demand Decrease in income decreases demand D1 Q/Units Chapter 3 - Demand and Supply

Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand Income: Inferior Good Price D3 D2 Decrease in income increases demand Increase in income decreases demand D1 Q/Units Chapter 3 - Demand and Supply

Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand Tastes and Preferences Price SUVs • Decrease in demand D3 Hybrid vehicles • Increase in demand D2 D1 Q/Units Chapter 3 - Demand and Supply

Shifts in Demand Price D2 D1 Q/Butter The Determinants of Demand Price of Related Goods: Substitutes Price Butter and Margarine • Price of both = $2/lb • Price of margarine increases to $3/lb • Demand for butter increases D2 D1 Q/Butter Chapter 3 - Demand and Supply

Shifts in Demand Price D3 D2 D1 Q/Speakers The Determinants of Demand Price of Related Goods: Complements Price Speakers and Amplifiers • Decrease the relative price of amplifiers • Demand for speakers increases D3 D2 Speakers and Amplifiers • Increase the relative price of amplifiers • Demand for speakers decreases D1 Q/Speakers Chapter 3 - Demand and Supply

Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand Expectations: Income, Future Prices Price D3 D2 A higher income or expectations of a higher future price will increase demand A lower income or expectations of a lower future price will decrease demand D1 Q/Units Chapter 3 - Demand and Supply

Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand Market Size (Number of Buyers) Price D3 D2 Increase in the number of buyers increases demand Decrease in the number of buyers decreases demand D1 Q/Units Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Demand Changes in demand versus changes in quantity demanded A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand. This is a shift of the whole curve. Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Demand Changes in demand versus changes in quantity demanded A change in a good’s own price leads to a change in quantity demanded. This is a movement along the same curve. ∆D is not the same as ∆Qd. Chapter 3 - Demand and Supply

Movement Along a Given Demand Curve A change in the price changes the quantity of a good demanded, movement along the curve Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Law of Supply Supply Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal The amount of a product or service that firms are willing to sell at alternative prices Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Law of Supply Law of Supply The price of a product or service and the quantity supplied are directly related. P # Qs # P $ Qs $ Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Supply Schedule The supply schedule is a table relating prices to quantity supplied at each price. Supply Curve A graphical representation of the supply schedule Positively sloped line showing direct relationship between price and quantity supplied, all else equal Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives Chapter 3 - Demand and Supply

Horizontal Summation of Supply Curves Chapter 3 - Demand and Supply

Horizontal Summation of Supply Curves Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Market Supply Schedule and the Market Supply Curve for Flash Memory Pen Drives Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply The Market Supply Schedule and the Market Supply Curve for Flash Memory Pen Drives Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Supply Scenario A new method of manufacturing flash memory pen drives reduces the cost of production dramatically. Chapter 3 - Demand and Supply

A Shift in the Supply Curve If costs increase, supply decreases If costs decrease, supply increases If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve Chapter 3 - Demand and Supply

A Shift in the Supply Curve 5 S2 S1 a 4 Price per Flash Memory Pen Drive ($) c 3 When supply increases the quantity supplied will be greater at each price 2 1 2 4 6 8 10 12 14 Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) Chapter 3 - Demand and Supply

A Shift in the Supply Curve 5 S2 S1 a 4 b Price per Flash Memory Pen Drive ($) c 3 When supply increases the quantity supplied will be greater at each price d 2 1 2 4 6 8 10 12 14 Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) Chapter 3 - Demand and Supply

A Shift in the Supply Curve 5 S1 b a 4 When supply decreases the quantity supplied will be less at each price Price per Flash Memory Pen Drive ($) d c 3 2 1 2 4 6 8 10 12 14 Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Supply Determinants of supply Cost of inputs Technology and productivity Taxes and subsidies Price expectations Number of firms in industry Chapter 3 - Demand and Supply

Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply Cost of Inputs Price S3 S2 S1 Increase in cost decreases supply Decrease in cost increases supply Q/Units Chapter 3 - Demand and Supply

Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply Technology and Productivity Price S3 S2 S1 Decreases in productivity decrease supply Improvements in technology or increases in productivity increase supply Q/Units Chapter 3 - Demand and Supply

Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply Taxes and Subsidies Price S3 S2 S1 Increases in taxes or decreases in subsidies decrease supply Decreases in taxes or increases in subsidies increase supply Q/Units Chapter 3 - Demand and Supply

Shifts in Supply Price S3 S2 S1 Q/Units The Determinants of Supply Price Expectations Price S3 S2 S1 Expectations of higher future prices decrease supply Expectations of lower future prices increase supply Q/Units Chapter 3 - Demand and Supply

Shifts in Supply Price S3 S1 S2 Q/Units The Determinants of Supply Number of Firms in Industry Price S3 S1 S2 Decrease in the number of firms decreases supply Increase in the number of firms increases supply Q/Units Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Shifts in Supply Changes in supply versus changes in quantity supplied A change in one or more of the non-price determinants will lead to a change in supply. This is a shift of the whole curve. Chapter 3 - Demand and Supply 73

Chapter 3 - Demand and Supply Shifts in Supply Changes in supply versus changes in quantity supplied A change in a good’s own price leads to a change in quantity supplied. This is a movement along the same curve. ∆S is not the same as ∆Qs. Chapter 3 - Demand and Supply 74

Putting Demand and Supply Together Equilibrium (Market Clearing) Price The price that clears the market The price at which quantity demanded equals quantity supplied The price where the demand curve intersects the supply curve Chapter 3 - Demand and Supply

Putting Demand and Supply Together Chapter 3 - Demand and Supply

Putting Demand and Supply Together Chapter 3 - Demand and Supply

Putting Demand and Supply Together Equilibrium The situation when quantity supplied equals quantity demanded at a particular price Chapter 3 - Demand and Supply

Putting Demand and Supply Together Shortages The situation when quantity demanded is greater than quantity supplied Qd > Qs Exist at any price below the market clearing price Chapter 3 - Demand and Supply

Putting Demand and Supply Together Surpluses The situation when quantity supplied is greater than quantity demanded Qd < Qs Exist at any price above the market clearing price Chapter 3 - Demand and Supply

Chapter 3 - Demand and Supply Policy Example: Should Shortages in the Ticket Market Be Solved by Scalpers? If you’ve ever tried to get tickets to a big game you know all about “shortages.” Since the quantity of tickets is fixed, the price can go pretty high. Enter the scalper. Chapter 3 - Demand and Supply

Shortages of Super Bowl Tickets Chapter 3 - Demand and Supply

Issues and Applications: The Market Clearing Prices of Baseball Cards Various companies, such as Topps and Upper Deck, print sports trading cards that provide photos and stats on pro athletes. Why are some of the market clearing prices so high? The answer has to do with demand and supply. (A relatively low supply helps explain the relatively high market clearing price.) Chapter 3 - Demand and Supply

Baseball Cards with the Highest Market Clearing Prices Chapter 3 - Demand and Supply

Summary Discussion of Learning Objectives The law of demand says that prices and quantity demanded are inversely related. At a higher price people buy less, at a lower price people buy more. Chapter 3 - Demand and Supply

Summary Discussion of Learning Objectives A change in quantity demanded versus a change in demand A change in quantity demanded is a movement along the same demand curve. A change in demand is a shift of the whole demand curve. Chapter 3 - Demand and Supply

Summary Discussion of Learning Objectives The law of supply states that price and quantity supplied are directly related. At a high price firms offer more; at a low price firms offer less. A change in quantity supplied versus a change in supply A change in quantity supplied is a movement along the same supply curve. A change in supply is a shift of the whole supply curve. Chapter 3 - Demand and Supply

Summary Discussion of Learning Objectives Determining market price and equilibrium quantity The demand and supply curves intersect at the market clearing, or equilibrium point. Surpluses exist if the price of the good is greater than the market price. Shortages exist when the price of a good is below the market price. Chapter 3 - Demand and Supply