Chapter 3: Demand, Supply, and Price © 2014 Pearson Education Canada Inc.

Chapter Outline/Learning Objectives Section Learning Objectives After studying this chapter, you will be able to 3.1Demand 1.list the factors that determine the quantity demanded of a good. 2.distinguish between a shift of the demand curve and a movement along the demand curve. 3.2Supply 3.list the factors that determine the quantity supplied of a good. 4.distinguish between a shift of the supply curve and a movement along the supply curve. 3.3The Determination of Price 5.explain the forces that drive market price to equilibrium, and how equilibrium price is affected by changes in demand and supply. Chapter 3, Slide © 2014 Pearson Education Canada Inc. 3

3.1Demand Quantity Demanded The total amount that consumers desire to purchase in some time period is called the quantity demanded of a product. Quantity bought (or exchanged) refers to actual purchases. Quantity demanded is a flow, as opposed to a stock. EXTENSIONS IN THEORY 3-1 The Distinction Between Stocks and Flows Chapter 3, Slide © 2014 Pearson Education Canada Inc. 4

Quantity Demanded and Price A basic hypothesis is that—ceteris paribus—the price of a product and the quantity demanded are negatively related. Why? There are usually several products that can satisfy any given want or desire. A reduction in the price of a product means that the specific desire can now be satisfied more cheaply by buying more of that product. Chapter 3, Slide © 2014 Pearson Education Canada Inc. 5

Demand Schedules and Demand Curves Fig.3-1 The Demand for Apples Demand ScheduleDemand Curve Chapter 3, Slide © 2014 Pearson Education Canada Inc. Reference Point Price ($ per bushel) Quantity Demanded U $ V4085 W6065 X8050 Y

Determinants of Demand 1. Consumer preferences If tastes change, demand changes 2. Consumer incomes Normal Products: buy more when income rises, less when income falls Inferior Products: buy more when income falls, less when income rises © 2014 Pearson Education Canada Inc. LO5 7

Determinants of Demand 3. Prices of Related Products: Products are related if a change in the price of one product causes a change in demand for the other product Two types of related products: Substitutes Complements © 2014 Pearson Education Canada Inc. LO5 8

Determinants of Demand 3. Prices of Related Products Substitute Product similar products that can be substituted for each other increase in price of one product causes increased demand for the related product © 2014 Pearson Education Canada Inc. LO5 9

Determinants of Demand 3. Prices of Related Products Complementary Product tend to be bought together Increase in price of one product causes a decrease in demand for related product © 2014 Pearson Education Canada Inc. LO5 10

Determinants of Demand 4. Expectations of future prices, income, availability If prices or incomes expected to rise, consumers buy more If goods expected to be scarcer, buy more now 5. Population size, income, and age distribution Increases in population or incomes cause increase in demand Changes in age distribution affect demand © 2014 Pearson Education Canada Inc. LO5 11

A change in variables other than price will shift the demand curve to a new position. average household income prices of other products distribution of income or population expectations about the future Fig. 3-2 An Increase in the Demand for Apples Chapter 3, Slide © 2014 Pearson Education Canada Inc. 12

Fig. 3-3 Shifts in the Demand Curve A rightward shift indicates an increase in demand. A leftward shift indicates a decrease in demand. Chapter 3, Slide © 2014 Pearson Education Canada Inc. 13

Fig. 3-4 Shifts of and Movements Along the Demand Curve A change in demand is a change in quantity demanded at every price—a shift of the entire curve. A change in quantity demanded refers to a movement from one point on a demand curve to another point, either on the same demand curve or on a new one. © 2014 Pearson Education Canada Inc. Chapter 3, Slide 14

Self Test Market for pretzels: What might have happened to the price of a complementary product, like beer, to cause the demand for pretzels to change? What might have happened to the price of a substitute product, like nuts? PriceDemand (D 1 )Demand (D 2 ) $ © 2014 Pearson Education Canada Inc. LO

Demand Concepts Review Which of the following would cause a movement along the demand curve for ski-lift tickets, other things being equal? A) a change in tastes in favour of skiing B) an increase in population C) an increase in price as the supply curve for lift tickets shifts to the left D) a rise in the price of ski boots and skis E) a rise in average household income 16 © 2014 Pearson Education Canada Inc.

17 © 2014 Pearson Education Canada Inc. If the price of tea falls and as a consequence the demand for sugar rises, then tea and sugar are A) substitute goods. B) complementary goods. C) independent goods. D) neutral goods. E) luxury goods.

3.2Supply Quantity Supply The amount of a product that firms desire to sell in some time period is called the quantity supplied of that product. Quantity supplied is the amount that firms are willing to offer for sale and not necessarily the quantity actually sold. Quantity supplied is a flow as opposed to a stock. Chapter 3, Slide © 2014 Pearson Education Canada Inc. 18

Quantity Supplied and Price A basic hypothesis is that—ceteris paribus—the price of the product and the quantity supplied are positively related. Why? Producers are interested in making profits. If the price of a particular product rises, then the production and sale of this product is more profitable. © 2014 Pearson Education Canada Inc. Chapter 3, Slide 19

Supply ScheduleSupply Curve Fig. 3-5The Supply of Apples © 2014 Pearson Education Canada Inc. Chapter 3, Slide Reference Point Price ($ per bushel) Quantity Supplied u $ 2020 v4045 w6065 x80 y

A change in supply is a change in the quantity that will be supplied at every price—a shift of the entire curve. A change in quantity supplied refers to a movement from one point on a supply curve to another point, either on the same supply curve or on a new one. Fig. 3-6 An Increase in the Supply of Apples © 2014 Pearson Education Canada Inc. Chapter 3, Slide 21

Determinants of Supply 1.Prices of Productive Resources If the price of a productive resource increases, firms will supply less 2. Business Taxes If business taxes rise, firms will supply less 3. Technology An improvement in technology leads to a fall in the cost of production and an increase in supply © 2014 Pearson Education Canada Inc. LO6 22

Determinants of Supply 4. Prices of Substitutes in Production An increase in the price of one product will cause a drop in the supply of products that are substitutes in production 5. Future Expectation of Suppliers Lower expected future prices will lead to an increase in supply 6. Number of Suppliers A decrease in the number of suppliers will reduce market supply © 2014 Pearson Education Canada Inc. LO6 23

Concept Check: Supply Refer to Figure 3-2. A shift of the supply curve from S to S1 could be caused by A) an increase in the price of energy-efficient light bulbs. B) a decrease in the price of energy-efficient light bulbs. C) a decrease in the price of glass, a major input in the production of energy-efficient light bulbs. D) a change in consumers' preferences away from ordinary light bulbs toward energy-efficient light bulbs. E) an expectation that new government regulations will ban the use of energy-efficient light bulbs. 24 © 2014 Pearson Education Canada Inc.

25 © 2014 Pearson Education Canada Inc. In which statement is the term "supply" used correctly? (1)An increase in the price of leather will cause a decrease in the supply of leather. (2)An increase in the price of leather will cause a decrease in the supply of leather boots. A) not enough information to tell B) the second statement only C) the first statement only D) both statements E) neither statement

3.3The Determination of Price The Concept of a Market A market may be defined as any situation in which buyers and sellers negotiate the transaction of some goods or services. Markets may differ in the degree of competition among various buyers and sellers. In a perfectly competitive market buyers and sellers are price takers. © 2014 Pearson Education Canada Inc. Chapter 3, Slide 26

Graphical Analysis of a Market At the equilibrium price, every buyer finds a seller and every seller finds a buyer—the market “clears.” Fig. 3-7 Determination of Equilibrium Price © 2014 Pearson Education Canada Inc. Chapter 3, Slide 27

Changes in Market Prices The four “laws” of supply and demand: 1. An increase in demand causes an increase in both the equilibrium price and equilibrium quantity. 2. A decrease in demand causes a decrease in both equilibrium price and equilibrium quantity. © 2014 Pearson Education Canada Inc. Fig. 3-8(i) Shifts in the Demand Curve Chapter 3, Slide 28

Changes in Market Prices 3.An increase in supply causes a decrease in the equilibrium price and an increase in the equilibrium quantity. 4.A decrease in supply causes an increase in the equilibrium price and a decrease in the equilibrium quantity. © 2014 Pearson Education Canada Inc. Fig. 3-8(ii) Shifts in the Supply Curve Chapter 3, Slide 29

PriceDemandSupplySurplus/Shortage $ © 2014 Pearson Education Canada Inc. 30

PriceDemandSupply 1Supply 2 $ Equilibrium P&Q ? Supply increases by 50% - new equilibrium? © 2014 Pearson Education Canada Inc. 31

What effect will the following changes have upon (i) the demand for, (ii) the price, and (iii) the quantity traded of commercially brewed beer? - A new medical report praising the healthy effects of drinking beer - A new medical report praising the healthy effects of drinking beer - A big decrease in the price of home-brewing kits - A big decrease in the price of home-brewing kits - A rapid increase in population growth - A rapid increase in population growth - Talk of a possible future strike of brewery workers - Talk of a possible future strike of brewery workers © 2014 Pearson Education Canada Inc. 32

a. Day-care services More mothers with small children are returning to the labour force; gov’t introduces subsidies for day-care operators b. Marijuana The gov’t severely increases penalties for buying and for selling c.Compact discs New processing method reduces cost of producing CDs; consumers are switching to high digital downloads d. Organic vegetables Vegetarianism increases due to medical report; tighter regulations on definition of organically grown products introduced © 2014 Pearson Education Canada Inc. 33

Self-Test What impact will the following events have on the price of wine? a)A poor harvest in the grape industry results in a big decrease in the supply of grapes b)The number of wineries increases c)The sales tax on wine increases d)The introduction of a new fermentation method reduces the time needed for the wine to ferment e)The gov’t introduces a subsidy for each bottle of wine produced domestically © 2014 Pearson Education Canada Inc. LO6 34

Three conditions must be satisfied in order for price determination in a market to be well described by the demand-and-supply model: 1.Large number of consumers; each one small relative to the size of the market. 2.Large number of producers; each one small relative to the size of the market. 3.Producers must be selling 'homogeneous' versions of the product. APPLYING ECONOMIC CONCEPTS 3-1 Why Apples But Not iPhones? © 2014 Pearson Education Canada Inc. Chapter 3, Slide 35

Relative Prices and Inflation The absolute price of a product is the amount of money that must be spent to acquire one unit of that product. A relative price is the price of one good in terms of another. Demand and supply curves are drawn in terms of relative prices rather than absolute prices. © 2014 Pearson Education Canada Inc. EXTENSIONS IN THEORY 3-2 The Algebra of Market Equilibrium Chapter 3, Slide 36

37 © 2014 Pearson Education Canada Inc. Quantity Demanded (millions) Quantity Supplied (millions) Price ($)Year 1Year 2 Year 1Year The table below displays hypothetical demand and supply schedules for the market for overnight parcel deliveries in Canada.

38 © 2014 Pearson Education Canada Inc. 1.The equilibrium price and quantity for overnight parcel delivery in Year 1 is ________ and ________ million parcels. 2. If the price of overnight parcel delivery in Year 2 is $10, how many parcels will actually be delivered? 3. Which of the following statements describes a likely event in the market for overnight parcel delivery? From Year 1 to Year 2, A) there was a decrease in consumers' income. B) there was an improvement in technology for tracking overnight parcels. C) the price of regular parcel delivery decreased. D) there was a rise in the price of jet fuel. E) the number of suppliers of overnight parcel delivery service increased.