Macroeconomics ECON 2301 Spring 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapter 3

Chapter 3: Supply & Demand

Markets 4 Markets ÜArrangements that individuals have for exchanging with one another ÜRepresent the interaction of buyers and sellers for goods and services ÜMarkets set the prices we pay and receive. Examples: Automobile market Health care market Labor market Stock market

The Law of Demand 4 Demand Ühow much of a good or service people will purchase at any price during a specified time period, other things being constant (ceteris paribus)

The Law of Demand 4 Law of Demand ÜQuantity demanded is inversely related to price, holding other factors constant. Price  Q d  Price  Q d 

The Demand Schedule 4 The demand schedule ÜTable relating prices to quantity demanded ÜWe must consider Time dimension Constant-quality units 4 Demand Curve ÜA graphical representation of the demand schedule ÜNegatively sloped line showing inverse relationship between price and quantity demanded, all else equal

Figure 3-1 The Individual Demand Schedule and the Individual Demand Curve, Panel (b)

The Law of Demand (cont'd) 4 What are we holding constant? ÜIncome ÜTastes and preferences ÜPrice of other goods ÜExpectations ÜMany other factors

Shifts in Demand 4 Scenario ÜImagine 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.

Figure 3-4 A Shift in the Demand Curve Suppose the federal government gives every student a notebook computer Suppose universities prohibit the use of notebook computers

Determinants of Demand 4 Ceteris-Paribus Conditions ÜDeterminants of the relationship between price and quantity that are unchanged along a curve ÜChanges in these factors cause a curve to shift

Shifts in Demand 4 Determinants of market demand ÜIncome Normal goods Inferior goods ÜThe prices of related goods Substitutes Complements ÜTastes and preferences (including demographics!) ÜExpectations ÜNumber of buyers

Normal and Inferior Goods 4 Normal Goods ÜGoods for which demand rises as income rises, most goods are normal goods 4 Inferior Goods ÜGoods for which demand falls as income rises

Shifts in Demand (cont'd) 4 Substitutes ÜTwo 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. ÜMargarine & butter markets: P m down  Q d of margarine up  D for butter down

Shifts in Demand (cont'd) 4 Complements ÜTwo goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other. P pc down  Q d of pc up  D for printers up

Shifts in Demand (cont'd) 4 Changes in demand versus changes in quantity demanded ÜA change in a good’s own price leads to a change in quantity demanded. This is a movement along the same curve. ÜA change in any determinant OTHER THAN PRICE shifts the D curve, and we call this a change in demand. This is not the same as a change in Q d from a change in the price of the good.

The Law of Supply 4 Supply ÜSchedule showing relationship between price and quantity supplied for a specified time period, other things being equal ÜThe amount of a product or service that firms are willing to sell at alternative prices

The Law of Supply (cont'd) 4 Law of Supply ÜThe price of a product or service and the quantity supplied are directly related. P  Q s  P  Q s 

The Supply Schedule 4 The supply schedule is a table relating prices to quantity supplied at each price. 4 Supply Curve ÜA graphical representation of the supply schedule ÜPositively sloped line showing direct relationship between price and quantity supplied, all else equal

Figure 3-8 Market Supply Schedule &Market Supply Curve for Flash Memory Pen Drives, Panel (b)

Shifts in Supply (cont'd) 4 Determinants of supply ÜCost of inputs ÜTechnology and productivity ÜTaxes and subsidies ÜPrice expectations (AND other expectations) ÜNumber of firms in industry

Figure 3-9 A Shift in the Supply Curve 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 (shifts left)

Shifts in Supply (cont'd) 4 Changes in supply versus changes in quantity supplied ÜA 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. Ü A change in a good’s own price leads to a change in quantity supplied. This is a movement along the same curve.

Figure 3-10 Putting Demand and Supply Together, Panel (b)

Putting Demand and Supply Together 4 Equilibrium (Market Clearing) Price ÜThe price that clears the market ÜThe price at which quantity demanded equals quantity supplied ÜThe price where the demand curve intersects the supply curve

Putting D & S Together (cont'd) 4 Shortage ÜThe situation when quantity demanded is greater than quantity supplied Q d > Q s ÜA shortage exists at any price below the market clearing price

Putting D & S Together (cont'd) 4 Surplus ÜThe situation when quantity supplied is greater than quantity demanded Q d < Q s ÜA surplus will exist at any price above the market clearing price

Assignments to be completed before class February 5: 4 Read Chapter 4 & also read Problems 4-1, 4-3 through 4-8, and 4-11.