Mini-Unit Demand and Supply And other crap I missed

Introduction Copyright © 2008 Pearson Addison Wesley. All rights reserved.3-2 They are small, thin and lightweight… Some are not aware of their existence, while others allocate a lot of time and effort in obtaining them. What are they? They are sports trading cards. Most can be purchased for a few dollars or less, but many cost much more—up to thousands of dollars each! In this chapter you will learn why the prices of different sports trading cards can vary so widely.

Supply and Demand 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? Copyright © 2008 Pearson Addison Wesley. All rights reserved.3-3

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 Copyright © 2008 Pearson Addison Wesley. All rights reserved.3-4

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 Copyright © 2008 Pearson Addison Wesley. All rights reserved.3-5

The Law of Demand Law of Demand ◦ Quantity demanded is inversely related to price, holding other factors constant.  Price  Q d   Price  Q d  Copyright © 2008 Pearson Addison Wesley. All rights reserved.3-6

The Law of Demand (cont'd) What are we holding constant? ◦ Income ◦ Tastes and preferences ◦ Price of other goods ◦ Many other factors  If any of these change, then the demand schedule will shift. Copyright © 2008 Pearson Addison Wesley. All rights reserved.3-7

The Demand Schedule The demand schedule ◦ Table relating prices to quantity demanded Demand Curve ◦ A graphical representation of the demand schedule ◦ Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal Copyright © 2008 Pearson Addison Wesley. All rights reserved.3-8

Figure 3-1 The Individual Demand Schedule and the Individual Demand Curve, Panel (a) Copyright © 2008 Pearson Addison Wesley. All rights reserved.3-9 CombinationPrice per Starbucks coffee Quantity of Starbucks Coffees consumed/year A$510 B$420 C$330 D$240 E$150

Figure 3-1 The Individual Demand Schedule and the Individual Demand Curve, Panel (b) Copyright © 2008 Pearson Addison Wesley. All rights reserved Number of coffees per year Price per coffee

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 Copyright © 2008 Pearson Addison Wesley. All rights reserved

Figure 3-2 The Horizontal Summation of Two Demand Curves, Panel (a) Copyright © 2008 Pearson Addison Wesley. All rights reserved Combinati on Price per Starbucks coffee Quantity of Starbucks Coffees consumed/y ear (me) Quantity of Starbucks Coffees consumed/y ear (wife) Total Quantity consumed A$ B$ C$ D$ E$

Figure 3-2 The Horizontal Summation of Two Demand Curves, Panels (b), (c), (d) Copyright © 2008 Pearson Addison Wesley. All rights reserved

Figure 3-3 The Market Demand Schedule for Flash Memory Pen Drives, Panel (a) Copyright © 2008 Pearson Addison Wesley. All rights reserved CombinationPrice per Starbucks coffee Quantity of Starbucks Coffees consumed/year in millions (total population) A$52 B$44 C$36 D$28 E$110

Figure 3-3 The Market Demand Schedule for Flash Memory Pen Drives, Panel (b) Copyright © 2008 Pearson Addison Wesley. All rights reserved Number of coffees per year Price per coffee

Shifts in Demand Scenario ◦ Imagine a news story runs on all networks claiming that Starbucks coffee is the only safe coffee shop open and all others have health care issues  If some factor other than price changes, we can show its effect by moving the entire demand curve, shifting the curve left or right. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Figure 3-4 A Shift in the Demand Curve Copyright © 2008 Pearson Addison Wesley. All rights reserved Suppose the news runs a story on other unsafe coffee shops Suppose Starbucks has major health code violations Number of coffees per year Price per coffee

Shifts in Demand Determinants of demand ◦ Income ◦ Tastes and preferences ◦ The prices of related goods  Substitutes  Complements Copyright © 2008 Pearson Addison Wesley. All rights reserved

Shifts in Demand (cont'd) 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. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Shifts in Demand (cont'd) Complements ◦ Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Shifts in Demand (cont'd) Determinants of demand ◦ Expectations  Future prices  Income  Product availability ◦ Market size (number of buyers) Copyright © 2008 Pearson Addison Wesley. All rights reserved

Normal and Inferior Goods & Income 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 Copyright © 2008 Pearson Addison Wesley. All rights reserved

Shifts in Demand (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Demand Income: Normal Good D1D1 Q/Units D2D2 D3D3 Price Decrease in income decreases demand Increase in income increases demand

Shifts in Demand (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Demand Income: Inferior Good D1D1 Q/Units Decrease in income increases demand Increase in income decreases demand Price D2D2 D3D3

Shifts in Demand (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Demand Tastes and Preferences D1D1 Q/Units Price Hybrid vehicles Increase in demand D2D2 SUVs Decrease in demand D3D3

Shifts in Demand (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Demand Price of Related Goods: Substitutes D1D1 Q/Butter Butter and Margarine Price of both = $2/lb Price of margarine increases to $3/lb Demand for butter increases D2D2 Price

Shifts in Demand (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Demand Price of Related Goods: Complements D1D1 Q/Speakers Speakers and Amplifiers Decrease the relative price of amplifiers Demand for speakers increases D2D2 D3D3 Speakers and Amplifiers Increase the relative price of amplifiers Demand for speakers decreases Price

Shifts in Demand (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Demand Expectations: Income, Future Prices D1D1 Q/Units A higher income or expectations of a higher future price will increase demand D2D2 D3D3 A lower income or expectations of a lower future price will decrease demand Price

Shifts in Demand (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Demand Market Size (Number of Buyers) D1D1 Q/Units Increase in the number of buyers increases demand D2D2 D3D3 Decrease in the number of buyers decreases demand Price

Shifts in Demand (cont'd) 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. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Shifts in Demand (cont'd) 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 ∆Q d. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Figure 3-5 Movement Along a Given Demand Curve Copyright © 2008 Pearson Addison Wesley. All rights reserved A change in the price changes the quantity of a good demanded, movement along the curve Number of coffees per year Price per coffee

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 Copyright © 2008 Pearson Addison Wesley. All rights reserved

The Law of Supply (cont'd) Law of Supply ◦ The price of a product or service and the quantity supplied are directly related.  P  Q s   P  Q s  Copyright © 2008 Pearson Addison Wesley. All rights reserved

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 Copyright © 2008 Pearson Addison Wesley. All rights reserved

Figure 3-6 The Individual Producer’s Supply Schedule and Supply Curve for Starbucks Coffee Copyright © 2008 Pearson Addison Wesley. All rights reserved CombinationPrice of Starbucks Coffee Quantity of Starbucks Coffee Supplied F$555 G440 H335 I225 J120

Figure 3-6 The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives, Panel (b) Copyright © 2008 Pearson Addison Wesley. All rights reserved Number of coffees per year Price per coffee

Figure 3-7 Horizontal Summation of Supply Curves, Panel (a) Copyright © 2008 Pearson Addison Wesley. All rights reserved Price per cup of Starbucks coffee Starbucks #501Starbucks #233Combined Quantity Supplied per year $

Figure 3-7 Horizontal Summation of Supply Curves, Panels (b), (c), (d) Copyright © 2008 Pearson Addison Wesley. All rights reserved Number of coffees per year Price per coffee Number of coffees per year Price per coffee Number of coffees per year Price per coffee

Figure 3-8 The Market Supply Schedule and the Market Supply Curve for Starbucks Coffee Copyright © 2008 Pearson Addison Wesley. All rights reserved PriceQuantity of Starbucks Coffee Supplies $510 $48 $36 $24 $12

Figure 3-8 The Market Supply Schedule and the Market Supply Curve for Flash Memory Pen Drives, Panel (b) Copyright © 2008 Pearson Addison Wesley. All rights reserved Number of coffees per year Price per coffee

Shifts in Supply Scenario ◦ A new method of manufacturing flash memory pen drives reduces the cost of production dramatically. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Figure 3-9 A Shift in the Supply Curve Copyright © 2008 Pearson Addison Wesley. All rights reserved If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve If costs decrease, supply increases If costs increase, supply decreases Number of coffees per year Price per coffee

Figure 3-9 A Shift in the Supply Curve (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved S1S1 Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) Price per Flash Memory Pen Drive ($) S2S2 a c When supply increases the quantity supplied will be greater at each price Number of coffees per year Price per coffee

Figure 3-9 A Shift in the Supply Curve (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved S1S1 Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) a b d c S2S2 When supply increases the quantity supplied will be greater at each price Price per Flash Memory Pen Drive ($) Number of coffees per year Price per coffee

Figure 3-9 A Shift in the Supply Curve (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) S1S1 a c S3S3 b d When supply decreases the quantity supplied will be less at each price Price per Flash Memory Pen Drive ($) Number of coffees per year Price per coffee

Shifts in Supply (cont'd) Determinants of supply ◦ Cost of inputs ◦ Technology and productivity ◦ Taxes and subsidies ◦ Price expectations ◦ Number of firms in industry Copyright © 2008 Pearson Addison Wesley. All rights reserved

Shifts in Supply (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Supply Cost of Inputs S1S1 Q/Units Decrease in cost increases supply S2S2 Increase in cost decreases supply S3S3 Price

Shifts in Supply (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Supply Technology and Productivity S1S1 Q/Units Improvements in technology or increases in productivity increase supply S2S2 Decreases in productivity decrease supply S3S3 Price

Shifts in Supply (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Supply Taxes and Subsidies S1S1 Q/Units Decreases in taxes or increases in subsidies increase supply S2S2 Increases in taxes or decreases in subsidies decrease supply S3S3 Price

Policy Example: Import Restrictions Reduce the Supply of Cement U.S. cement manufacturers produce more than 80 million metric tons of cement per year. The rest of the cement supplied—15 to 20 million metric tons—is imported, much of it from Mexico. During the 1990s the U.S. government began imposing an import duty on Mexican cement. The continuation of this tariff during the 2000s caused Mexican producers to limit sales to the United States at any given price, reducing the U.S. supply of cement. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Shifts in Supply Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Supply Price Expectations* S1S1 Q/Units Expectations of increase in price increases supply S2S2 Expectations of lower prices decrease supply S3S3 Price Expectations of higher future prices decrease supply Expectations of lower future prices increase supply

Shifts in Supply (cont'd) Copyright © 2008 Pearson Addison Wesley. All rights reserved The Determinants of Supply Number of Firms in Industry S1S1 Q/Units Increase in the number of firms increases supply S2S2 Decrease in the number of firms decreases supply S3S3 Price

Shifts in Supply (cont'd) 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. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Shifts in Supply (cont'd) 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 ∆Q s. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Putting Demand and Supply Together 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 Copyright © 2008 Pearson Addison Wesley. All rights reserved

Figure 3-10 Putting Demand and Supply Together, Panel (a) Copyright © 2008 Pearson Addison Wesley. All rights reserved Price of Coffee Quantity Supplied in millions Quantity demanded in millions DifferenceCondition $51028 millionExcess quantity (surplus) 4844 millionExcess quantity (surplus) 3660Market clearing (equilibrium) millionExcess demand (shortage) millionExcess demand (shortage)

Figure 3-10 Putting Demand and Supply Together, Panel (b) Copyright © 2008 Pearson Addison Wesley. All rights reserved Number of coffees per year Price per coffee

Putting Demand and Supply Together (cont'd) Equilibrium ◦ The situation when quantity supplied equals quantity demanded at a particular price Copyright © 2008 Pearson Addison Wesley. All rights reserved

Putting Demand and Supply Together (cont'd) Shortages ◦ The situation when quantity demanded is greater than quantity supplied  Q d > Q s ◦ Exist at any price below the market clearing price Copyright © 2008 Pearson Addison Wesley. All rights reserved

Putting Demand and Supply Together (cont'd) Surpluses ◦ The situation when quantity supplied is greater than quantity demanded  Q d < Q s ◦ Exist at any price above the market clearing price Copyright © 2008 Pearson Addison Wesley. All rights reserved

Policy Example: Should Shortages in the Ticket Market Be Solved by Scalpers? If you’ve ever tried to get tickets to the big game you know all about “shortages.” Since the quantity of tickets is fixed, the price can go pretty high. Enter the scalper. Copyright © 2008 Pearson Addison Wesley. All rights reserved

Figure 3-11 Shortages of Super Bowl Tickets Copyright © 2008 Pearson Addison Wesley. All rights reserved

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.) You can buy a “Shoeless” Joe Jackson card for up to $9,000! Copyright © 2008 Pearson Addison Wesley. All rights reserved

Table 3-2 Baseball Cards with the Highest Market Clearing Prices Copyright © 2008 Pearson Addison Wesley. All rights reserved