Chapter 3: Demand and Supply ECON 152 – PRINCIPLES OF MICROECONOMICS Chapter 3: Demand and Supply Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.

Markets Markets Arrangements that individuals have for exchanging with one another Represent the interaction of buyers and sellers

Markets Markets Markets for gasoline Markets for labor Stock market Market for Super Bowl tickets Compact disk market

Markets Markets Markets set the prices we pay and receive in a free, competitive environment

The Law of Demand Demand Quantities of specific goods or services that individuals, taken singly or as a group, will purchase at various possible prices, other things being constant

The Law of Demand Law of Demand Quantity demanded is inversely related to price, holding other factors constant. Price # Qd $ Price $ Qd #

The Law of Demand What are we holding constant? Income Price of other goods Many other factors

The Law of Demand Relative prices versus money prices Relative Price The price of a commodity in terms of another commodity Money Price Price we observe today in today’s dollars (absolute, nominal price)

The Demand Schedule The demand schedule is a table relating prices to quantity demanded. We must consider: The time dimension Constant-quality units

The Individual Demand Schedule

The Individual Demand Curve

The Horizontal Summation of Two Demand Schedules

The Horizontal Summation of Two Demand Schedules

The Market Demand Schedule for Secure Digital Cards

The Market Demand Curve for Secure Digital Cards

A Shift in the Demand Curve 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

A Shift in the Demand Curve

Shifts in Demand Determinants of demand Income Tastes and preferences Normal goods Inferior goods Tastes and preferences The price of related goods Complements Substitutes

Shifts in Demand Determinants of demand Expectations Income Future prices Market size (number of buyers)

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

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

Shifts in Demand Price D3 D2 D1 Q/Units The Determinants of Demand Income: Tastes and Preferences Price D3 D2 Hybrid vehicles • Increase in demand SUVs • Decrease in demand D1 Q/Units

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

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

The Determinants of Demand Shifts in Demand The Determinants of Demand Expectations 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

The Determinants of Demand Shifts in Demand The Determinants of Demand Population Price D3 D2 Increase in the population increases demand Decrease in population decreases demand D1 Q/Units

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.

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.

Movement Along a Given Demand Curve

The Law of Supply Supply The amount of a product or service that firms are willing to sell at alternative prices

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 $

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

The Individual Producer’s Supply Schedule

The Individual Producer’s Supply Curve

Horizontal Summation of Supply Curves

Horizontal Summation of Supply Curves

The Market Supply Schedule for Secure Digital Cards

The Market Supply Curve for Secure Digital Cards

Shifts in Supply In general, non-price changes that lead to higher profits lead to an increase in supply. In general, non-price changes that lead to lower profits lead to a decrease in supply.

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

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

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

The Determinants of Supply Shifts in Supply 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

The Determinants of Supply Shifts in Supply 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

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

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. 73

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. 74

Putting Demand and Supply Together

Putting Demand and Supply Together

Putting Demand and Supply Together Equilibrium The situation when quantity supplied equals quantity demanded at a particular price There tends to be no movement of the price of the quantity away from this point unless demand or supply changes. Equilibrium is a stable point – any point that is not equilibrium is unstable and will not persist.

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

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 ECON 152 – PRINCIPLES OF MICROECONOMICS Chapter 3: Demand and Supply Materials include content from Pearson Addison-Wesley which has been modified by the instructor and displayed with permission of the publisher. All rights reserved.