1. Macro Chapter 3 Demand, Supply, and the Market Process

3. 7 Learning Goals 1) 1)Investigate and describe consumer behavior 2) 2)Distinguish a change in demand from a change in quantity demanded 3) 3)Investigate and describe firm behavior 4) 4)Distinguish a change in supply from a change in quantity supplied 5) 5)Build a market model and illustrate how equilibrium is reached 6) 6)Demonstrate how markets respond to changes in demand and supply 7) 7)Recognize how prices and the invisible hand principle create market order

4. Consumer Choice and the Law of Demand

5. Please note: Chapter heading: Consumer Choice and the Law of Demand –Skip 2 sections: Consumer Surplus; Responsiveness of Quantity Demanded to Price Changes: Elastic and Inelastic Demand Curves

6. Goal: Explain and Predict Consumer Behavior Let’s go to the mall

8. Class Activity: When you go to the store to buy something, what’s the most important factor that determines how much you buy of something? Why?

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10. Q3.1 Did you say price was the most important? 1.Yes 2.No, something else was

11. Relationships:

12. The Law of Demand: The inverse relationship between price and quantity demanded; when price rises, quantity demanded falls; when price falls, quantity demanded rises Quantity demanded is a number; it’s how many units of a good you bought

13. Ways to express Law of Demand: 1.Words (see notes you just wrote)

14. Ways to express Law of Demand: 1.Words (see notes you just wrote) 2.Table (Demand Schedule) Cell phone service price (monthly bill) Cell phone subscribers (millions) $ 143 2.1 $ 92 7.6 $ 73 16.0 $ 58 33.7 $ 46 55.3 $ 41 69.2

15. Ways to express Law of Demand: 1.Words (see notes you just wrote) 2.Table 3.Math equation P = 10 – Q Q = f (Px, Py, M) Q = ln Px + ln Py + ln M

16. Ways to express Law of Demand: 1.Words (see notes you just wrote) 2.Table 3.Math equation 4.Picture

17. We usually draw a picture of this relationship Graph:

18. Transmitter Question next

19. Q3.2 In economics, the demand for a good refers to the amount of the good people 1.would like to have if the good were free. 2.are willing to buy at various prices. 3.need to achieve a minimum standard of living. 4.will buy at alternative income levels. 45

21. Changes in Demand Versus Changes in Quantity Demanded

22. Other variables besides price determine what you buy Changes: (1) When price changes, quantity demanded changes but demand does NOT change –This is movement along a demand curve (2) When something else changes, demand changes (i.e., the relationship changes) –This is movement of the entire curve

23. Typical “something else” changes: Income Number of consumers Prices of related goods (substitutes and complements) ExpectationsDemographics Tastes and preferences

24. Another way to think about the difference between demand and quantity demanded Why is the consumer buying more (or less)? If price is the reason, then quantity demanded changes; move along the demand curve If any variable besides price is the reason, then demand changes; shift the demand curve

25. Graphs:

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28. Q3.3 When economists say the quantity demanded of a product has increased, they mean the 1.demand curve has shifted to the left. 2.demand curve has shifted to the right. 3.price of the product has fallen, and consequently, consumers are buying more of it. 4.price of the product has risen, and consequently, consumers are buying less of it. 45

29. Q3.4 When economists say the demand for a product has decreased, they mean 1.the demand curve has shifted to the left. 2.the product price has increased, and as a consequence, consumers are buying less of the product. 3.consumers are now willing and able to buy more of this product at each possible price. 4.the demand curve has shifted to the right. 45

33. Producer Choice and the Law of Supply

34. Please note: Chapter heading: Producer Choice and the Law of Supply –Skip 2 sections: Producer Surplus; Responsiveness of Quantity Supplied to Price Changes: Elastic and Inelastic Supply Curves

35. Video: Catch Me If You Can

37. Class Activity: Economics Is Everywhere 2.16

38. In the movie Catch Me If You Can, Leonardo DiCaprio winds up in a hotel room (in the 1960s) with a woman he discovers is a very high-priced call girl. She says, “You can have me for the night- just say the right price.” He says “$300,” and she throws a card at him and says, “Go fish!” He then says $500, getting the same answer, then $600, with the same result. He finally says $1,000, and she agrees. As with most activities, this transaction, too, has an upward-sloping supply curve. Q: Is $600 the opportunity cost of the call girl’s time? Is $1,000? What does this story tell you about her opportunity cost?

39. Goal: Explain and Predict Firm Behavior The Law of Supply: –The positive relationship between price and quantity supplied; when price rises, quantity supplied rises; when price falls, quantity supplied falls –Quantity supplied is a number; it’s how many units of a good you made

40. Ways to express Law of Supply: 1.Words (see notes you just wrote)

41. Ways to express Law of Supply: 1.Words (see notes you just wrote) 2.Table Cell phone service price (monthly bill) Cell phone service supplied to market (millions) $ 60 5.0 $ 7311.0 $ 80 15.1 $ 91 18.2 $ 107 21.0 $ 120 22.5

42. Ways to express Law of Supply: 1.Words (see notes you just wrote) 2.Table 3.Math equation P = 5 + q Q = f (Px, P inputs, Tech) Q = ln Px + ln P inputs + P tech

43. Ways to express Law of Supply: 1.Words (see notes you just wrote) 2.Table 3.Math equation 4.Picture

44. We usually draw a picture of this relationship Graph:

45. Class Activity: Why is the firm willing to produce more when the price rises? (Hint: don’t forget about ceteris paribus)

46. Transmitter Question next

47. Q3.5 According to the law of supply, 1.more of a good is desired by consumers as the price falls. 2.less of a good is desired by consumers as the price rises. 3.more of a good will be offered by suppliers as the price rises. 4.less of a good will be offered by suppliers as the price rises. 45

49. Changes in Supply Versus Changes in Quantity Supplied

50. Other variables determine how much firms are willing to make Changes: (1) When price changes, quantity supplied changes but supply does NOT change –This is movement along a supply curve (2) When something else changes, supply changes (i.e., the relationship changes) –This is movement of the entire curve

51. Typical “something else” changes: Resource prices TechnologyNaturePoliticalTaxes

52. Another way to think about the difference between supply and quantity supplied Why is the firm producing more (or less)? If price is the reason, then quantity supplied changes; move along the supply curve If any variable besides price is the reason, then supply changes; shift the supply curve

53. Graphs:

54. 2 Transmitter Questions next

55. Q3.6 Ceteris paribus, an increase in the price of a good will cause the 1.quantity demanded of the good to increase. 2.quantity supplied of the good to increase. 3.supply of the good to increase. 4.supply of the good to decrease. 45

56. Q3.7 When economists say the supply of a product has increased, they mean the 1.supply curve has shifted to the right. 2.price of the product has risen, and consequently, suppliers are producing more of it. 3.supply curve has shifted to the left. 4.amount of the product that consumers are willing to purchase at various prices has increased. 45

59. How Market Prices are Determined: Demand and Supply Interact

60. Graph:

61. Key points: –(1) Excess supply and excess demand are NOT unique points –(2) Equilibrium IS a unique point Class Activity: Start with a market in a surplus. How would you solve the surplus problem without changing price? Then start with a market in a shortage. How would you solve the shortage without changing price? Video:

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64. Q3.8 (MA) Which of the following statements are true? 1.With a shortage, quantity demanded exceeds quantity supplied and price will be pushed up 2.With a shortage, quantity supplied exceeds quantity demanded and price will be pushed up 3.With a shortage, quantity demanded exceeds quantity supplied and price will be pushed down 4.With a surplus, quantity supplied exceeds quantity demanded and price will be pushed up 5.With a surplus, quantity demanded exceeds quantity supplied and price will be pushed down 6.With a surplus, quantity supplied exceeds quantity demanded and price will be pushed down 60

66. How Markets Respond to Changes in Demand and Supply

67. This is called supply and demand analysis You don’t have to use graphs but it’s helpful Use this 3 step procedure: –(1) Identify the change –(2) Determine if Supply or Demand is affected and how –(3) Draw and read graph (or reason through the change)

68. Class Activity: Economics Is Everywhere 3.2

69. One of the students in my class is a saxophone player. Like all reed-instrument players, he buys a lot of reeds for his instrument. In 2001, bamboo trees in a large part of the world were infected with a virus that destroyed much of the bamboo crop. This change shifted the supply curve of bamboo to the left. This shift raised the price of bamboo, which is the major input into making reeds. As a result of this increase in the input price, the supply curve of reeds shifted leftward, too. The student noticed that the price of reeds skyrocketed. Being a smart young fellow, he wisely decreased the amount of reeds he demanded each month because they now were more expensive. He moved leftward along his demand curve for reeds. Q: As anyone who lives in a warm climate knows, bamboo is a weed that grows quite rapidly. How long do you think it will be until the original equilibrium in this market is restored?

71. Graph: Decrease in Supply

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73. Q3.9 If there is a decrease in demand for laptop computers, we would expect 1.both the price and quantity sold to increase. 2.both the price and quantity sold to decrease. 3.the price to decrease and the quantity sold to increase. 4.the price to increase and the quantity sold to decrease. 45

74. Q3.10 Which of the following would reduce the price of DVD players and increase the quantity sold? 1.an increase in the demand for DVD players 2.a decrease in the demand for DVD players 3.a decrease in the supply of DVD players 4.an increase in the supply of DVD players 45

75. “Homework” assignment Graph (or reason through) the following scenarios: 1)Increase in demand 2)Decrease in demand 3)Increase in supply 4)Decrease in supply The magnitude of the shift doesn’t matter

76. What if supply and demand shift at the same time? Suppose supply and demand both decrease

78. Talk with a neighbor for this question Transmitter Question Next

79. Q3.11 (PMA) If there is a simultaneously an increase in demand and an increase in supply, we would expect 1.An increase in equilibrium price and an increase in equilibrium quantity 2.A decrease in equilibrium price and an increase in equilibrium quantity 3.An increase in equilibrium price and a decrease in equilibrium quantity 4.A decrease in equilibrium price and a decrease in equilibrium quantity 45

80. “Homework” assignment Graph (or reason through) the following scenarios: 1)Increase in demand, increase in supply 2)Increase in demand, decrease in supply 3)Decrease in demand, increase in supply 4)Decrease in demand, decrease in supply For each one, you will have 3 scenarios: a)Demand shift greater than supply shift b)Demand shift less than supply shift c)Demand shift equal to supply shift

81. Class Activity: Why do you think that the amount of goods on the shelves of stores in Tallahassee is about equal to the amount of goods that consumers want to buy? Video:

83. Invisible Hand Principle Adam Smith- An Inquiry into the Nature and Causes of the Wealth of Nations

84. Invisible Hand Principle Adam Smith- An Inquiry into the Nature and Causes of the Wealth of Nations Personal self-interest directed by market prices is a powerful force promoting economic progress

85. “Every individual is continually exerting himself to find out the most advantageous employment for whatever [income] he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society…He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.” “Every individual is continually exerting himself to find out the most advantageous employment for whatever [income] he can command. It is his own advantage, indeed, and not that of the society which he has in view. But the study of his own advantage naturally, or rather necessarily, leads him to prefer that employment which is most advantageous to society…He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was not part of his intention. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.”

86. Many outcomes are the result of human action but not human design Examples: Who invented nouns and adverbs? Seating in HCB 101 High fives, handshakes, and the “man-hug”

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88. Q3.12 Adam Smith's invisible hand principle stresses 1.that benevolence is a powerful motivator that encourages individuals to engage in productive economic activity. 2.the tendency of the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society. 3.the potential of government regulation as a means of bringing the self interest of individuals into harmony with the economic welfare of society. 4.the tendency of self-interested individuals to pursue activities that benefit themselves but harm the overall economic welfare of society. 45

90. 7 Learning Goals 1) 1)Investigate and describe consumer behavior 2) 2)Distinguish a change in demand from a change in quantity demanded 3) 3)Investigate and describe firm behavior 4) 4)Distinguish a change in supply from a change in quantity supplied 5) 5)Build a market model and illustrate how equilibrium is reached 6) 6)Demonstrate how markets respond to changes in demand and supply 7) 7)Recognize how prices and the invisible hand principle create market order