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

2. Chapter 3: Supply & Demand

3. Learning Objectives Explain the law of demand
Discuss the difference between money prices and relative prices
Distinguish between changes in demand and changes in quantity demanded
Explain the law of supply
Distinguish between changes in supply and changes in quantity supplied
Understand how supply and demand interact to determine equilibrium price and quantity 3

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

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

6. The Law of Demand
Law of Demand: Quantity demanded is inversely related to price, holding other factors constant.
Price # Qd $
Price $ Qd #

7. The Demand Schedule The demand schedule
Table relating prices to quantity demanded
We must consider
Time dimension
Constant-quality units
Demand Curve: A graphical representation of the demand schedule
Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal

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

9. The Law of Demand (cont'd)
What are we holding constant?
Tastes and preferences
Income
Price of other goods
Expectations
Demographics
Many other factors

10. Shifts in Demand (cont'd)
The Determinants of Demand
Tastes and Preferences
Price
SUVs
• Decrease in demand D3
Hybrid vehicles
• Increase in demand D2 D1
Q/Units

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

12. Shifts in Demand Determinants of market demand Income Normal goods
Inferior goods
The prices of related goods
Substitutes
Complements
Tastes and preferences (including demographics!)
Expectations
Number of buyers

13. Normal and Inferior Goods
Normal Goods: Goods for which demand rises as income rises, most goods are normal goods
Inferior Goods: Goods for which demand falls as income rises

14. Shifts in Demand (cont'd)
The Determinants of Demand
Income: Normal Good
Price D3 D2
Increase in income
increases demand
Decrease in income
decreases demand D1
Q/Units

15. Shifts in Demand (cont'd)
The Determinants of Demand
Income: Inferior Good
Price D3 D2
Decrease in income
increases demand
Increase in income
decreases demand D1
Q/Units

16. Shifts in Demand (cont'd)
Substitutes: Two 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.
Margarine & butter markets:
Pm down  Qd of margarine up  D for butter down

17. Shifts in Demand (cont'd)
The Determinants of Demand
Price of Related Goods: Substitutes
Price
Butter & Margarine
• Price of both = $2/lb
• Price of margarine increases to $3/lb
• Demand for butter increases D2 D1
Q/Butter

18. Shifts in Demand (cont'd)
Complements: Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other.
Example: Ppc down  Qd of pc up  D for printers up

19. Shifts in Demand (cont'd)
The Determinants of Demand
Price of Related Goods: Complements
Price
Speakers and Amplifiers
• Decrease the relative price of amplifiers
• Demand for speakers increases D3 D2
Speakers and Amplifiers
• Increase the relative price of amplifiers
• Demand for speakers decreases D1
Q/Speakers

20. Announcement: Revised Office Hours
Mondays & Wednesdays
10:00 a.m. – 12:00 noon
4:00 – 5:00 p.m.
and by appointment

21. Shifts in Demand (cont'd)
Expectations of:
Future prices
Income
Product availability
Demographics
Market size (number of buyers)
Age
Ethnicity

22. Shifts in Demand (cont'd)
The Determinants of Demand
Expectations: Income, Future Prices
Price
A higher income or expectations of a higher future price will increase demand D3 D2
A lower income or expectations of a lower future price will decrease demand D1
Q/Units

23. Shifts in Demand (cont'd)
The Determinants of Demand
Market Size (Number of Buyers)
Price
Increase in the number of buyers increases demand D3 D2
Decrease in the number of buyers decreases demand D1
Q/Units

24. Bonus Extra Credit Opportunity
Attend the presentation, “Is America Going Socialist,” given by guest speaker, Dr. Daniel Mitchell of the CATO Institute, Thursday, September 17, 4:30-5:30 p.m.
Sign in with me.
Send a word summary of the economic issues before class, Sept. 28, to
4 points possible

25. The Demand Schedule (cont’d)
Individual versus market demand curves
Market Demand: The demand of all consumers in the marketplace for a particular good or service
Equals the summation at each price of the quantity demanded by each individual

26. Figure 3-2 The Horizontal Summation of Two Demand Curves, Panel (a)

27. Figure 3-2 The Horizontal Summation of Two Demand Curves, Panels (b), (c), (d)

28. Figure 3-3 The Market Demand Schedule for Secure Digital Cards, Panel (a)

29. Figure 3-3 The Market Demand Schedule for Secure Digital Cards, Panel (b)

30. Demand (cont’d) Relative prices and money prices
Relative Price: The price of a commodity in terms of another commodity
Money Price: Price we observe today in today’s dollars (absolute, or nominal price)

31. E-Commerce Example: Quality Adjusting the Price of Broadband Service
In most U.S. areas, broadband Internet service is priced at about $15 per month compared to France, where price is about $36 per month.
U.S. providers, however, typically offer broadband speeds of less than 0.77 megabit per second compared to 20 megabits per second in France.
Thus, the U.S. speed-adjusted price is nearly 10 times higher than in France.

32. Extra Credit Opportunity #3
Watch or read a transcript of Pres. Obama’s televised Sept. 9 address on health care reform.
Before class starts, Wednesday, September 16: a 50-word summary of the economic issues involved. My address is
4 points possible

33. Shifts in Demand Scenario
Imagine 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.

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

35. Shifts in Demand (cont'd)
Changes in demand versus changes in quantity demanded
A change in a good’s own price leads to a change in quantity demanded. This is a movement along the same curve.
A 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 Qd from a change in the price of the good.

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

37. The Law of Supply (cont'd)
Law of Supply: The price of a product or service and the quantity supplied are directly related.
P # Qs #
P $ Qs $

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

39. Figure 3-6 The Individual Producer’s Supply Schedule and Supply Curve for Secure Digital Cards, Panel (a)

40. Figure 3-6 The Individual Producer’s Supply Schedule and Supply Curve for Secure Digital Cards, Panel (b)

41. Figure 3-7 Horizontal Summation of Supply Curves, Panel (a)

42. Figure 3-7 Horizontal Summation of Supply Curves, Panels (b), (c), (d)

43. Shifts in Supply Changes in supply versus changes in quantity supplied
A 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.
A change in a good’s own price leads to a change in quantity supplied. This is a movement along the same curve. 73

44. Shifts in Supply (cont'd)
Determinants of supply
Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations (AND other expectations)
Number of firms in industry

45. 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 increase, supply decreases.
If costs decrease, supply increases.

46. Figure 3-9 A Shift in the Supply Curve (cont’d)5 S2 S1 a 4 b
Price per Flash Memory Pen Drive ($) c 3
When supply increases the quantity supplied will be greater at each price. d 2 1 2 4 6 8 10 12 14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)

47. Figure 3-9 A Shift in the Supply Curve (cont’d)5 S1 b a 4
When supply decreases the quantity supplied will be less at each price.
Price per Flash Memory Pen Drive ($) d c 3 2 1 2 4 6 8 10 12 14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)

48. Shifts in Supply (cont'd)
Determinants of supply
Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations
Number of firms in industry

49. Shifts in Supply (cont'd)
The Determinants of Supply
Cost of Inputs
Price S3 S2 S1
Increase in cost
decreases supply
Decrease in cost increases supply.
Q/Units

50. Shifts in Supply (cont'd)
The Determinants of Supply
Technology and Productivity
Price S3 S2 S1
Decreases in productivity decrease supply.
Improvements in technology or increases in productivity increase supply.
Q/Units

51. Shifts in Supply (cont'd)
The Determinants of Supply
Taxes and Subsidies
Price S3 S2 S1
Increases in taxes or decreases in subsidies decrease supply.
Decreases in taxes or increases in subsidies increase supply.
Q/Units

52. Shifts in Supply (cont'd)
The Determinants of Supply
Price Expectations
Price S3 S2 S1
Expectations of higher future prices decrease supply.
Expectations of lower future prices increase supply.
Q/Units

53. Shifts in Supply (cont'd)
The Determinants of Supply
Number of Firms in Industry
Price S3 S1 S2
Decrease in the number of firms decreases supply.
Increase in the number of firms increases supply.
Q/Units

54. Shifts in Supply (cont'd)
Changes in supply versus changes in quantity supplied
A 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.
A change in a good’s own price leads to a change in quantity supplied.
This is a movement along the same curve.
∆S is not the same as ∆Qs. 73

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

56. Figure 3-10 Putting Demand and Supply Together, Panel (a)

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

58. Putting D & S Together (cont'd)
Shortage: The situation when quantity demanded is greater than quantity supplied
Qd > Qs
A shortage exists at any price below the market clearing price

59. Policy Example: Should Shortages in the Ticket Market Be Solved by Scalpers?
If you’ve ever tried to get tickets to the big game you know all about “shortages.”
Since the quantity of tickets is fixed, the price can go pretty high.
Enter the scalper.

60. Figure 3-11 Shortages of Super Bowl Tickets

61. Bonus Extra Credit Opportunity
Attend the presentation, “Is America Going Socialist,” given by guest speaker, Dr. Daniel Mitchell of the CATO Institute, Thursday, September 17, 4:00-5:00 p.m.
Sign in with me.
Send a word summary of the economic issues before class, Sept. 28, to
4 points possible

62. Announcement: Revised Office Hours
Mondays & Wednesdays
10:00 a.m. – 12:00 noon
4:00 – 5:00 p.m.
and by appointment

63. Putting D & S Together (cont'd)
Surplus: The situation when quantity supplied is greater than quantity demanded
Qd < Qs
A surplus will exist at any price above the market clearing price
Examples:
Sugar & cotton price supports
Minimum wage

64. Summary Discussion of Learning Objectives (cont'd)
Determining market price and equilibrium quantity
The demand and supply curves intersect at the market clearing, or equilibrium point.
Surpluses exist if the price of the good is greater than the market equilibrium price.
Shortages exist when the price of a good is below the market equilibrium price.

65. Assignments to be completed before class September 21:
Read Chapter 4 & also read the following end-of-chapter questions:
14th edition: Problems 4-1, 4-3 through 4-8, and 4-11.
15th edition: Problems 4-2, 4-3, 4-4, 4-7, 4-9, and 4-14.