Supply and Demand 3 ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 1

Buyers: demand side of the market Consumers purchase _______ &_________ Firms buy ___________ Sellers: supply side of the market Firms that produce and sell goods and services Resource owners who sell their ____________ to firms Workers “________” their labor Resource owners ______ raw materials and capital ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 2 Competitive Markets

Interaction of buyers and sellers Through the forces of ________ & _________ Determines __________ prices and output Competitive market Large number of buyers and sellers Similar products No single buyer or ________ can influence the market price Price takers ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Competitive Markets

Wants versus needs _______: ignores scarcity and the fact that choices may change with circumstances and __________ Law of demand The quantity of a good or service demanded varies ___________ with its __________, ceteris paribus Other things being equal When the price (P) of a good or service falls, the ____________ _______________ (Q D ) increases ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 Demand

Individual demand schedule Relationship between the _________ of the good and the __________ demanded A list of alternative possibilities Individual demand curve Graphical representation Shows the _________ relationship between price and quantity demanded ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5 Demand

Elizabeth’s Demand Schedule for Coffee ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 EXHIBIT 3.1

Elizabeth’s Demand Curve Elizabeth’s Demand Curve for Coffee ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 EXHIBIT 3.2 Quantity of Coffee (pounds per year) Price of Coffee (per pound) 0 $

Market demand curve The __________________ summation of individual demand curves Change in quantity demanded A change in a good’s own price leads to a change in quantity ____________ Move along a given demand curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 Demand

Creating a Market Demand Curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 EXHIBIT 3.3 a. Creating a Market Demand Schedule for Coffee

D Peter Creating a Market Demand Curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 EXHIBIT 3.3 b. Creating a Market Demand Curve for Coffee Quantity of Coffee (pounds per year) Price (per pound) $ Peter D Lois Quantity of Coffee (pounds per year) $ Lois DQDQ Quantity of Coffee (pounds per year) 0 2,9704,960 $ Rest of Quahog DMDM Quantity of Coffee (pounds per year) 0 3,0005,000 $ Market Demand

Market Demand Curve A Market Demand Curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 EXHIBIT 3.4 a. Market Demand Schedule for Coffeeb. Market Demand Curve for Coffee Quantity of Coffee (pounds per year) Price (per pound) 0 $

Change in demand A change in one of the determinants of demand shifts the __________ demand curve Prices of related goods; Income Number of buyers; Tastes; Expectations Increase in demand Shifts the demand curve to the _____ Decrease in demand Shifts the demand curve to the _____ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 Shifts in Demand

Demand Shifts ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 EXHIBIT 3.5 Price Quantity 0 D1D1 D3D3 D2D2 Decrease in Demand Increase in Demand

1.Prices of related goods ______________: goods for which one could be used in place of the other An increase in the price of one of the goods Increase in the ________ for the other good ______________: goods that “go together” Often consumed and used simultaneously An increase in the price of one good _________ in the demand for the other good ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 Shifts in Demand

2.Income Normal good A good for which: Demand ___________ if income increases & Demand __________ if income decreases Inferior good A good for which: Demand decreases if income ___________ & Demand increases if income ____________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Shifts in Demand

3.Number of buyers Demand varies with the size of the potential consumer _______________ 4.Consumers’ preferences and information Demand varies with changes in people’s tastes or preferences Changes in preferences lead to changes in demand Changes in ___________ can also impact consumers’ demand ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Shifts in Demand

5.Expectations Expected higher future prices Purchase more of the good ________ Expected lower future prices Purchase ________ of the good now ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17 Shifts in Demand

Change in the price of the good Change in ___________ demanded Movement along the __________ curve Change in the determinants of demand Change in __________ _______ of the demand curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 Demand

Law of supply The quantity of a good or service supplied varies directly (_____________) with its price, ceteris paribus Other things being equal The higher the ________ (P) of a good or service, the greater the __________ supplied (Q S ) Individual supply schedule Relationship between the price of the good and the ___________ supplied ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Supply

Individual supply curve ______________ representation Shows the direct _______________ between price and quantity supplied Market supply curve Horizontal summation of the _______ curves for individual firms Amount of goods and services that suppliers are willing and able to supply at __________ prices ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 Supply

Juan’s Supply Curve An Individual Supply Curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 EXHIBIT 3.6 a. Juan’s Supply Schedule for Coffeeb. Juan’s Supply Curve for Coffee Quantity of Coffee (pounds per year) Price of Coffee (per pound) 0 $

A Market Supply Curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 EXHIBIT 3.7 Market Supply Curve a. Market Supply Schedule for Coffeeb. Market Supply Curve for Coffee Quantity of Coffee (thousands of pounds per year) Price of Coffee (per pound) 0 $

Change in quantity supplied A change in a good’s own price leads to a __________ in quantity supplied Move along a given supply curve Change in supply A change in one of the determinants of supply shifts the entire supply curve Input prices; Prices of related products Expectations; Number of suppliers; ______________ ____________; Taxes and subsidies; Weather ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Supply

Increase in supply Shifts the supply curve to the ______ Decrease in supply Shifts the supply curve to the ______ Shifts in supply Anything that affects the _______ of production will influence supply and the position of the supply curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 Shifts in Supply

Supply Shifts ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 EXHIBIT 3.8 Price Quantity 0 S1S1 Decrease in Supply Increase in Supply S2S2 S3S3

1.Input prices Higher input prices The costs of production __________ Supply curve shifts to the left (decrease in supply) Lower input prices The costs of production _________ Supply curve shifts to the right (increase in supply) ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Shifts in Supply

2.Prices of related goods Substitutes in production: both goods can be produced using the same resources The supply of a good increases if the price of one of its ____________ in production falls Complements in production: producing one good enables production of the other An increase in the price of a good: increase in the supply of its ______________ in production ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 Shifts in Supply

Substitutes and Complements in Production ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 EXHIBIT 3.9 Substitutes in Production a. Market for Wheatb. Market for Cotton Price of wheat Quantity of wheat 0 Supply P1P1 P2P2 Q2Q2 Q1Q1 Price of corn Quantity of corn 0 S1S1 S2S2

Substitutes and Complements in Production ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 EXHIBIT 3.9 Complements in Production a. Market for Cattleb. Market for Leather Price of cattle Quantity of cattle 0 Supply P2P2 P1P1 Q1Q1 Q2Q2 Price of leather Quantity of leather 0 S1S1 S2S2

3.Expectations Expected higher price in the future: supply _________ now Expected lower price in the future: supply _________ now 4.Number of suppliers An increase in the number of suppliers leads to an increase in supply _____________ shift in the supply curve ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 Shifts in Supply

During the global recession of 2007–2009, oil demand dropped substantially. Early in 2009, as oil prices bottomed out, a situation known as contango developed, in which a large gap developed between oil prices trading on the daily spot market and future dated oil contracts. Traders bought oil on the spot market and parked it in tankers until the prices went back up. Floating storage worldwide peaked in April with nearly 90 million barrels sitting in oil tankers waiting to be sold. ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 Shifts in Supply

5.Technology Technological change can _______ the firm’s costs of production through productivity advances Spend less on _________ and produce the same level of output Supply more of the good at each and every ______ Supply curve shifts to the ______ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Shifts in Supply

6.Government / Government regulations New ____________: decrease the supply _______________: shift the supply curve to the right Taxes: supply shifts to the __________ Subsidies Lower a firm’s costs Supply shifts to the _________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 Shifts in Supply

7.Weather Can sometimes dramatically affect the supply of certain _____________ Agricultural products and transportation services Drought or freezing ___________ Shift the ________ curves for many crops to the left Exceptionally ______ weather Shift a supply curve to the right ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 Shifts in Supply

Change in the price of the good Change in ____________ supplied ____________ along the supply curve Change in the determinants of supply Change in ________ Shift of the supply _________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 Supply

Market equilibrium The point at which the market supply and market demand curves ___________ Equilibrium price _______________ quantity Quantity demanded equals the quantity supplied ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36 Market Equilibrium Price and Quantity

Market Equilibrium ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 EXHIBIT 3.10 Equilibrium Price of Coffee (per pound) $ Quantity of Coffee (thousands of pounds) Demand Supply Equilibrium priceEquilibrium quantity

Surplus: quantity supplied exceeds quantity demanded Excess quantity supplied Market price is ________ equilibrium price Shortage: quantity demanded exceeds quantity supplied _______ quantity demanded Market price is _______ equilibrium price ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 Market Equilibrium Price and Quantity

SupplyDemand Markets in Temporary Disequilibrium ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 EXHIBIT 3.11 a. Excess Quantity Suppliedb. Excess Quantity Demanded Price of Coffee (per pound) $ Quantity of Coffee (thousands of pounds) Supply Quantity demanded Quantity supplied 4,000 Pound Surplus Demand Price of Coffee (per pound) $ Quantity of Coffee (thousands of pounds) Quantity supplied 5,000 Pound Shortage Quantity demanded

A shift in the demand curve Changes both the _____________ price and quantity Assuming the supply curve ___________ changed An increase in demand (shift to the right) Both equilibrium quantity & price ______ A decrease in demand (shift to the left) Both equilibrium quantity and price __________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 A Change in Demand

An Increase in Demand ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 EXHIBIT 3.12 Price of coffee Quantity of coffee 0 Supply P2P2 P1P1 D1D1 E1E1 Q1Q1 D2D2 Q2Q2 E2E2 Q3Q3

A shift in the supply curve Changes both the equilibrium price and __________ ___________ the demand curve hasn’t changed An increase in supply A lower equilibrium price and a ________ equilibrium quantity A decrease in supply A higher equilibrium price and a _______ equilibrium quantity ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 42 A Change in Supply

A Decrease in Supply ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 EXHIBIT 3.13 Price of coffee Quantity of coffee 0 S1S1 P2P2 P1P1 Demand Q3Q3 S2S2 Q1Q1 E1E1 Q2Q2 E2E2

Supply and demand move at the same time Predict the change in one variable (price or quantity) Unable to predict the direction of the effect on the other variable with any certainty _____________ change: Cannot be determined without additional information about the size of the relative shifts in supply and demand An increase in supply and a decrease in demand Decrease in the equilibrium price Impact on equilibrium quantity is indeterminate The increase in supply ___________ the equilibrium quantity The decrease in __________ decreases it ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 44 Changes in both Supply and Demand

A small increase in supply and a large decrease in demand Decrease in the equilibrium _______ Decrease in the equilibrium ___________ A large increase in supply and a small decrease in demand Decrease in the equilibrium _______ Increase in the equilibrium ___________ ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45 Changes in both Supply and Demand

Shifts in Supply and Demand ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 EXHIBIT 3.14 Price of coffee Quantity of coffee 0 S1S1 P1P1 P2P2 D1D1 S2S2 Q1Q1 E1E1 a. A Small Increase in Supply and a Large Decrease in Demand D2D2 Q2Q2 E2E2

Shifts in Supply and Demand ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 EXHIBIT 3.14 Price of coffee Quantity of coffee 0 S1S1 P1P1 P2P2 D1D1 S2S2 Q1Q1 E1E1 b. A Large Increase in Supply and a Small Decrease in Demand D2D2 Q2Q2 E2E2

An increase in demand and supply Increase in the equilibrium quantity Indeterminate change in the equilibrium price _______ if the increase in demand is large _______ if the increase in supply is large ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 48 Changes in both Supply and Demand

An Increase in the Demand and Supply of HD Televisions ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 EXHIBIT 3.15 Price of HD Televisions Quantity of HD Televisions 0 S1S1 P1P1 P2P2 D1D1 S2S2 Q1Q1 E1E1 D2D2 Q2Q2 E2E2

The Impact of Supply and Demand Shifts on Price and Quantity ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 EXHIBIT 3.16

Supply and demand ______________ of the market system Determine the ________ of goods and services Determine _____ our scarce resources are allocated The market system Provides a way for millions of producers and consumers to allocate scarce resources through market prices ©2014 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51 Supply, Demand, and the Market Economy