2. Apple and the Demand for iPods
Learning Objectives
3.1
Discuss the variables that influence demand.
3.2
Discuss the variables that influence supply.
3.3
Use a graph to illustrate market equilibrium.
3.4
Use demand and supply graphs to predict changes in prices and quantities.
By early 2007, over 100 million iPods had been sold and more than two billion songs had been downloaded from iTunes. Clearly the strategy of selling an expensive digital music player and selling the music cheaply has been very successful for Apple. But how long will the iPod’s dominance last?

3. Where Prices Come From: The Interaction of Demand and Supply
Perfectly competitive market A market in which there are many buyers and sellers, all the products are identical, and there are no barriers to new sellers entering the market.

4. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Demand Schedules and Demand Curves
Demand schedule A table showing the relationship between the price of a product and the quantity of the product demanded.
Quantity demanded The amount of a good or service that a consumer is willing and able to purchase at a given price.
Demand curve A curve that shows the relationship between the price of a product and the quantity of the product demanded.
Market demand The demand by all the consumers of a given good or service.

5. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Demand Schedules and Demand Curves
FIGURE 3-1
A Demand Schedule and Demand Curve

6. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
The Law of Demand
Law of demand The rule that, holding everything else constant, when the price of a product falls, the quantity demanded of the product will increase, and when the price of a product rises, the quantity demanded of the product will decrease.

7. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
What Explains the Law of Demand?
Substitution effect The change in the quantity demanded of a good that results from a change in price, making the good more or less expensive relative to other goods that are substitutes.
Income effect The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumers’ purchasing power.

8. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Holding Everything Else Constant: The Ceteris Paribus Condition
Ceteris paribus (“all else equal”) The requirement that when analyzing the relationship between two variables—such as price and quantity demanded—other variables must be held constant.
A shift of a demand curve is an increase or decrease in demand. A movement along a demand curve is an increase or decrease in the quantity demanded.

9. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Holding Everything Else Constant: The Ceteris Paribus Condition
FIGURE 3-2
Shifting the Demand Curve

10. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
Many variables other than price can influence market demand.
Income
Normal good A good for which the demand increases as income rises and decreases as income falls.
Inferior good A good for which the demand increases as income falls and decreases as income rises.

11. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
Price of related goods
Substitutes Goods and services that can be used for the same purpose.
Complements Goods and services that are used together.
Tastes
Consumers can be influenced by an advertising campaign for a product.

12. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
Population and demographics
Demographics The characteristics of a population with respect to age, race, and gender.
Expected Future Prices
Consumers choose not only which products to buy but also when to buy them.

13. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
TABLE 3-1
Variables That Shift Market Demand Curves

14. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
Variables That Shift Market Demand
TABLE 3-1
Variables That Shift Market Demand Curves (continued)

15. Why Supermarkets Need to Understand Substitutes and Complements
Learning Objective 3.1
Making the Connection
Why Supermarkets Need to Understand Substitutes and Complements
COFFEE
FROZEN PIZZA
HOT DOGS
ICE CREAM
POTATO CHIPS
REGULAR CEREAL
SPAGHETTI SAUCE
YOGURT
Varieties in Five Chicago Supermarkets
391
337
128
421
285
242
194
288
Varieties Introduced in a 2-Year Period
113
109 47
129 93
114 70
107
Varieties Removed in a 2-Year Period
135 86 32
118 77 75 36 51

16. Companies Respond to a Growing Hispanic Population
Learning Objective 3.1
Making the Connection
Companies Respond to a Growing Hispanic Population
As the demand for goods purchased by Hispanic households increases, more can be sold at every price. Not surprisingly, companies have responded by devoting more resources to serving this demographic group.
You can download Spanish music from iTunes. Apple is one of many companies responding to a growing Hispanic population.

17. The Demand Side of the Market
Learning Objective 3.1
The Demand Side of the Market
A Change in Demand versus a Change in Quantity Demanded
FIGURE 3-3
A Change in Demand versus a Change in the Quantity Demanded

18. Apple Forecasts the Demand for iPhones and other Consumer Electronics
Learning Objective 3.1
Making the Connection
Apple Forecasts the Demand for iPhones and other Consumer Electronics
To decide which products to develop, firms need to forecast the demand for those products.
Time will tell whether Apple’s forecast of a large demand for the iPhone will turn out to be correct.
Will Apple’s iPhone match the success of its iPod?

19. The Supply Side of the Market
Learning Objective 3.2
The Supply Side of the Market
Quantity supplied The amount of a good or service that a firm is willing and able to supply at a given price.
Supply Schedules and Supply Curves
Supply schedule A table that shows the relationship between the price of a product and the quantity of the product supplied.
Supply curve A curve that shows the relationship between the price of a product and the quantity of the product supplied.

20. The Supply Side of the Market
Learning Objective 3.2
The Supply Side of the Market
Supply Schedules and Supply Curves
FIGURE 3-4
Supply Schedule and Supply Curve

21. The Supply Side of the Market
Learning Objective 3.2
The Supply Side of the Market
The Law of Supply
Law of supply The rule that, holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

22. The Supply Side of the Market
Learning Objective 3.2
The Supply Side of the Market
The Law of Supply
FIGURE 3-5
Shifting the Supply Curve

23. The Supply Side of the Market
Learning Objective 3.2
The Supply Side of the Market
Variables That Shift Supply
The following are the most important variables that shift supply:
• Prices of inputs
• Technological change
Technological change A positive or negative change in the ability of a firm to produce a given level of output with a given quantity of inputs.
Prices of substitutes in production
Number of firms in the market
Expected future prices

24. The Supply Side of the Market
Learning Objective 3.2
The Supply Side of the Market
Variables That Shift Supply
TABLE 3-2
Variables That Shift Market Supply Curves

25. The Supply Side of the Market
Learning Objective 3.2
The Supply Side of the Market
Variables That Shift Supply
TABLE 3-2
Variables That Shift Market Supply Curves (continued)

26. The Supply Side of the Market
Learning Objective 3.2
The Supply Side of the Market
A Change in Supply versus a Change in Quantity Supplied
FIGURE 3-6
A Change in Supply versus a Change in the Quantity Supplied

27. Market Equilibrium: Putting Demand and Supply Together
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply Together
FIGURE 3-7
Market Equilibrium

28. Market Equilibrium: Putting Demand and Supply Together
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply Together
Market equilibrium A situation in which quantity demanded equals quantity supplied.
Competitive market equilibrium A market equilibrium with many buyers and many sellers.

29. Market Equilibrium: Putting Demand and Supply Together
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply Together
How Markets Eliminate Surpluses and Shortages
Surplus A situation in which the quantity supplied is greater than the quantity demanded.
Shortage A situation in which the quantity demanded is greater than the quantity supplied.

30. Market Equilibrium: Putting Demand and Supply Together
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply Together
How Markets Eliminate Surpluses and Shortages
FIGURE 3-8
The Effect of Surpluses and Shortages on the Market Price

31. Market Equilibrium: Putting Demand and Supply Together
Learning Objective 3.3
Market Equilibrium: Putting Demand and Supply Together
Demand and Supply Both Count
Always keep in mind that it is the interaction of demand and supply that determines the equilibrium price.
Neither consumers nor firms can dictate what the equilibrium price will be.
No firm can sell anything at any price unless it can find a willing buyer, and no consumer can buy anything at any price without finding a willing seller.

32. Solved Problem 3-3 Learning Objective 3.3
Demand and Supply Both Count: A Tale of Two Letters

33. The Effect of Demand and Supply Shifts on Equilibrium
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Supply on Equilibrium
FIGURE 3-9
The Effect of an Increase in Supply on Equilibrium

34. The Falling Price of LCD Televisions
Learning Objective 3.4
Making the Connection
The Falling Price of LCD Televisions

35. The Effect of Demand and Supply Shifts on Equilibrium
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Demand on Equilibrium
FIGURE 3-10
The Effect of an Increase in Demand on Equilibrium

36. The Effect of Demand and Supply Shifts on Equilibrium
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Demand and Supply over Time
FIGURE 3-11
Shifts in Demand and Supply over Time

37. The Effect of Demand and Supply Shifts on Equilibrium
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Demand and Supply over Time
TABLE 3-3
How Shifts in Demand and Supply Affect Equilibrium Price (P) and Quantity (Q)
SUPPLY CURVE UNCHANGED
SUPPLY CURVE SHIFTS TO THE RIGHT
SUPPLY CURVE SHIFTS TO THE LEFT
DEMAND CURVE UNCHANGED
Q unchanged P unchanged
Q increases P decreases
Q decreases P increases
DEMAND CURVE SHIFTS TO THE RIGHT
Q increases P increases
Q increases P increases or decreases
Q increases or decreases P increases
DEMAND CURVE SHIFTS TO THE LEFT
Q decreases P decreases
Q increases or decreases P decreases
Q decreases P decreases or increases

38. Solved Problem 3-4 Learning Objective 3.4
High Demand and Low Prices in the Lobster Market?
Supply and demand for lobster both increase during the summer, but the increase in supply is greater than the increase in demand, therefore, equilibrium price falls.

39. The Effect of Demand and Supply Shifts on Equilibrium
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
Shifts in a Curve versus Movements along a Curve
When analyzing markets using demand and supply curves, it is important to remember that when a shift in a demand or supply curve causes a change in equilibrium price, the change in price does not cause a further shift in demand or supply.

40. The Effect of Demand and Supply Shifts on Equilibrium
Learning Objective 3.4
The Effect of Demand and Supply Shifts on Equilibrium
Shifts in a Curve versus Movements along a Curve
Don’t Let This Happen to YOU! Remember: A Change in a Good’s Price Does Not Cause the Demand or Supply Curve to Shift

41. How Does the iPhone Help Apple and AT&T?
An Inside
LOOK
Apple Coup: How Steve Jobs Played Hardball in iPhone Birth

42. K e y T e r m s Ceteris paribus (“all else equal”)
Competitive market equilibrium
Complements
Demand curve
Demand schedule
Demographics
Income effect
Inferior good
Law of demand
Law of supply
Market demand
Market equilibrium
Normal good
Perfectly competitive market
Quantity demanded
Quantity supplied
Shortage
Substitutes
Substitution effect
Supply curve
Supply schedule
Surplus
Technological change