1. SUPPLY & DEMAND 3 CHAPTER CHAPTER 3 SLIDE 1 SLIDES CREATED BY ERIC CHIANG

2.  Describe the nature and purpose of markets.  Describe the law of demand and demand curves.  Describe the determinants of demand and how they change demand.  Explain the difference between a change in demand and a change in quantity demanded.  Describe the law of supply and supply curves. CHAPTER 3 SLIDE 2 CHAPTER OBJECTIVES 

3.  Describe the determinants of supply and how they change supply.  Describe the difference between a change in supply and a change in quantity supplied.  Determine market equilibrium price and output.  Predict how changes to supply and demand affect equilibrium price and output. CHAPTER 3 SLIDE 3

4. MARKETS AN INSTITUTION THAT BRINGS BUYERS AND SELLERS TOGETHER. CHAPTER 3 SLIDE 4

5. THE PRICE SYSTEM Prices send signals in free-market economies: BUYERS SELLERS CHAPTER 3 SLIDE 5 What to buy? How much? What to sell? How much? Method?

6. PRICE SYSTEM MARKET ECONOMIES USE PRICES TO ALLOCATE RESOURCES, GOODS, AND SERVICES CHAPTER 3 SLIDE 6

7. DEMAND THE MAXIMUM AMOUNT OF A PRODUCT THAT BUYERS ARE WILLING TO PURCHASE OVER SOME TIME PERIOD AT VARIOUS PRICES (CETERIS PARIBUS) CHAPTER 3 SLIDE 7

8. DEMAND CURVE 0 5 D 20 CHAPTER 3 SLIDE 8 PRICE ($) QUANTITY 40 60 80 100 10152025 PriceQuantity $1000 805 6010 4015 20

9. LAW OF DEMAND CHAPTER 3 SLIDE 9 PRICE  QUANTITY DEMANDED  PRICE  QUANTITY DEMANDED  HOLDING ALL OTHER RELEVANT FACTORS CONSTANT AS PRICE INCREASES, QUANTITY DEMANDED FALLS AS PRICE DECREASES, QUANTITY DEMANDED RISES

10. CONSUMERS CAN AFFORD MORE GOODS WHEN PRICES ARE LOWER CHAPTER 3 SLIDE 10

11. MARKET DEMAND CURVE CHAPTER 3 SLIDE 11  Market demand: horizontal summation of all individual demand curves  Horizontal summation: Market demand and supply curves are found by adding together how many units of the product will be purchased/supplied at each price.

12. PRICE BETTY ABE MARKET $1200 0 0 100 0 10 10 80 5 15 20 60 10 20 30 40 15 25 40 20 20 30 50 CHAPTER 3 SLIDE 12 20 100 80 120 60 40 1020304050 D Abe D Betty D Market BETTY’S DEMAND CURVE ABE’S DEMAND CURVE MARKET DEMAND CURVE + + = = PRICE ($) QUANTITY (GAMES)

13. DETERMINANTS OF DEMAND CHAPTER 3 SLIDE 13  Nonprice factors affect demand, and are held constant when drawing a demand curve. They include:  Tastes and preferences  Income  Prices of related goods: substitutes and complements  Number of buyers  Expectations about future prices

14. CHAPTER 3 SLIDE 14 DEMAND WILL INCREASE FOR PRODUCTS THAT COME INTO FASHION [AND VICE VERSA] TASTES AND PREFERENCES

15. CHAPTER 3 SLIDE 15 DEMAND DECREASES AS INCOMES RISE INFERIOR GOODS DEMAND INCREASES AS INCOMES RISE NORMAL GOODS

16. PRICE OF SUBSTITUTES CHAPTER 3 SLIDE 16 PRICE INCREASE OF GOOD A WILL INCREASE DEMAND FOR GOOD B

17. CHAPTER 3 SLIDE 17 + PRICE OF COMPLEMENTS GOODS THAT ARE TYPICALLY CONSUMED TOGETHER. IF THE PRICE OF A COMPLEMENT DECREASES, THE DEMAND FOR THE ORIGINAL GOOD INCREASES [AND VICE VERSA] GAS PRICE INCREASES ARE BAD FOR AUTO SALES

18. CHAPTER 3 SLIDE 18 NUMBER OF BUYERS AS MORE CONSUMERS ENTER A MARKET, DEMAND INCREASES AS AVERAGE LIFESPANS RISE, DEMAND FOR PHARMACEUTICALS INCREASES.

19. CHAPTER 3 SLIDE 19 A CHANGE IN CONSUMERS’ EXPECTATIONS ABOUT:  FUTURE PRICES  GOOD’S AVAILABILITY  THEIR OWN INCOMES EXPECTATIONS HOUSING PRICES EXPECTED TO RISE

20. CHANGE IN DEMAND CHAPTER 3 SLIDE 20 Occurs when one or more of the determinants of demand changes; it shifts the entire demand curve. A “change in demand” is NOT the same as a “change in quantity demanded.”

21. D0D0 D1D1 80 40 20 40 D0D0 80 20 40 CHANGE IN DEMAND CHANGE IN QUANTITY DEMAND VS. CHAPTER 3 SLIDE 21 QUANTITY (GAMES) PRICE ($)

22. ALFRED MARSHALL (1842 – 1924) CHAPTER 3 SLIDE 22 Father of modern supply/demand analysis Was John Maynard Keynes’s teacher Noted that supply and demand go together like the blades of a scissors that cross at equilibrium

23. CHAPTER 3 SLIDE 23 SUPPLY THE MAXIMUM AMOUNT OF A PRODUCT THAT SELLERS ARE WILLING AND ABLE TO PROVIDE OVER SOME TIME PERIOD AT VARIOUS PRICES [CETERIS PARIBUS]

24. SUPPLY CURVE 0 10 S 20 CHAPTER 3 SLIDE 24 PRICE ($) QUANTITY 40 60 80 100 20304050 PriceQuantity $2010 4020 6030 8040 10050

25. CHAPTER 3 SLIDE 25 LAW OF SUPPLY PRICE AND QUANTITY SUPPLIED ARE POSITIVELY RELATED. AS PRICES RISE, PROVIDERS WANT TO SELL MORE TO MAXIMIZE PROFITS EXAMPLE: AS ETHANOL DEMAND PUSHES THE PRICE OF CORN HIGHER, PRODUCTION OF CORN INCREASES

26. CHAPTER 3 SLIDE 26 MARKET SUPPLY CURVE EXAMPLE: 10 HOME BUILDERS EACH BUILD 100 HOUSES WHEN PRICE EQUALS $200,000, THEN MARKET SUPPLY = 1,000 HORIZONTAL SUMMATION OF ALL INDIVIDUAL SUPPLY CURVES

27. DETERMINANTS OF SUPPLY CHAPTER 3 SLIDE 27  Nonprice factors that affect supply. These include:  Production Technology  Costs of Resources  Prices of Other Commodities  Expectations  Number of Sellers  Taxes and Subsidies

28. CHAPTER 3 SLIDE 28 PRODUCTION TECHNOLOGY SUPPLY INCREASES WHEN TECHNOLOGY IMPROVEMENTS LOWER THE COST OF PRODUCTION

29. CHAPTER 3 SLIDE 29 COSTS OF RESOURCES SUPPLY INCREASES IF THE COSTS OF RESOURCES USED DECREASE [AND VICE VERSA] IF SOYBEAN PRICES DECREASE, THE SUPPLY OF SOYMILK AND TOFU INCREASES

30. CHAPTER 3 SLIDE 30 PRICES OF OTHER GOODS AND COMMODITIES AN INCREASE IN THE PROFITABILITY OF ELECTRIC CARS WILL DECREASE THE SUPPLY OF GAS CARS

31. CHAPTER 3 SLIDE 31 EXPECTATIONS IF THE PRICE OF GOLD IS EXPECTED TO RISE IN THE FUTURE, PEOPLE HOLD ON TO THEIR GOLD NOW, RESTRICTING SUPPLY AN EXPECTATION OF A FUTURE RISE IN PRICES DECREASES SUPPLY NOW

32. CHAPTER 3 SLIDE 32 AS MORE PRODUCERS ENTER A MARKET, SUPPLY INCREASES [AND VICE VERSA] NUMBER OF SELLERS AS MORE FIRMS PRODUCE SURFBOARDS, SUPPLY INCREASES

33. CHAPTER 3 SLIDE 33 TAXES AND SUBSIDIES TAXES AND SUBSIDIES AFFECT COSTS AND THEREFORE SUPPLY. A 10% YACHT TAX REDUCED THE SUPPLY OF YACHTS

34. CHAPTER 3 SLIDE 34 EFFECT OF SUBSIDIES WHEN SUBSIDIES ON SOLAR AND WIND ENERGY EXPIRE, SUPPLY DECREASES

35. PRICE ($) S0S0 S1S1 S0S0 80 40 80 4020 CHANGE IN SUPPLY CHANGE IN QUANTITY SUPPLIED VS. CHAPTER 3 SLIDE 35 40 20 QUANTITY (GAMES)

36. MARKET EQUILIBRIUM CHAPTER 3 SLIDE 36  Occurs when quantity supplied equals quantity demanded (Qs = Qd)  Equilibrium price: the price at which Qs = Qd  Equilibrium Quantity: the output at which Qs = Qd

37. WHEN PRICES ARE TOO HIGH 0 D CHAPTER 3 SLIDE 37 PRICE ($) QUANTITY 4 5 101520 At P = $5.00, Q d = 10 and Q s = 20 A surplus of 10 units results. Producers are encouraged to reduce price until Q d = Q s = 15 Equilibrium price = $4.00 At P = $5.00, Q d = 10 and Q s = 20 A surplus of 10 units results. Producers are encouraged to reduce price until Q d = Q s = 15 Equilibrium price = $4.00 S Surplus

38. WHEN PRICES ARE TOO LOW 0 D CHAPTER 3 SLIDE 38 PRICE ($) QUANTITY 4 3 101520 S Shortage At P = $3.00, Q d = 20 and Q s = 10 A shortage of 10 units results. Producers are encouraged to raise price until Q d = Q s = 15 Equilibrium price = $4.00 At P = $3.00, Q d = 20 and Q s = 10 A shortage of 10 units results. Producers are encouraged to raise price until Q d = Q s = 15 Equilibrium price = $4.00

39. DEMAND SHIFTS AND MARKET EQUILIBRIUM CHAPTER 3 SLIDE 39 0 D0D0 PRICE ($) QUANTITY OF ENERGY DRINKS P0P0 P1P1 Q0Q0 Q1Q1 S0S0 D1D1 An increase in demand… Causes the equilibrium to change to a higher P and Q

40. DEMAND SHIFTS AND MARKET EQUILIBRIUM CHAPTER 3 SLIDE 40 0 D0D0 PRICE ($) QUANTITY OF ENERGY DRINKS P0P0 P1P1 Q0Q0 Q1Q1 S0S0 D1D1 An decrease in demand… Causes the equilibrium to change to a lower P and Q

41. SUPPLY SHIFTS AND MARKET EQUILIBRIUM CHAPTER 3 SLIDE 41 0 D0D0 PRICE ($) QUANTITY OF ENERGY DRINKS P0P0 P1P1 Q0Q0 Q1Q1 S0S0 S1S1 An increase in supply… Causes the equilibrium to change to a lower P and a higher Q

42. SUPPLY SHIFTS AND MARKET EQUILIBRIUM CHAPTER 3 SLIDE 42 0 D0D0 PRICE ($) QUANTITY OF ENERGY DRINKS P0P0 P1P1 Q0Q0 Q1Q1 S0S0 S1S1 An decrease in supply… Causes the equilibrium to change to a higher P and a lower Q

43. WHEN BOTH CURVES SHIFT CHAPTER 3 SLIDE 43 0 D0D0 PRICE ($) QUANTITY OF ENERGY DRINKS P0P0 Q0Q0 Q1Q1 S0S0 S1S1 D1D1 If demand and supply both increase, the equilibrium quantity rises, but the equilibrium price depends on the relative magnitude of the shifts.

44. REVIEW OF SHIFTS CHAPTER 3 SLIDE 44

45. KEY CONCEPTS CHAPTER 3 SLIDE 45 Markets Price system Willingness-to-pay Demand Law of demand Demand curve Demand schedule Horizontal summation Determinants of demand Normal good Inferior good Substitute goods Complementary goods Change in demand Change in quantity demanded Supply Law of supply Supply curve Determinants of supply Change in supply Change in quantity supplied Equilibrium Equilibrium price Equilibrium quantity Surplus Shortage

46. QUESTION: WHICH OF THE FOLLOWING WOULD NOT SHIFT THE DEMAND FOR ORANGE JUICE? B C A CONSUMER INCOMES RISE PRICE OF APPLE JUICE, A SUBSTITUTE, FALLS NEW RESEARCH SHOWING THE BENEFITS OF ORANGE JUICE D E LEVEL OF GOVERNMENT SUBSIDIES TO FARMERS RISE AN OVERALL RISE IN THE POPULATION CHAPTER 1 SLIDE 46

47. PRACTICE QUESTION WHAT HAPPENS TO DEMAND FOR IPADS IF PRICE OF MONTHLY DATA PLANS FALLS? CHAPTER 3 SLIDE 47

48. WHAT HAPPENS TO DEMAND FOR HOUSES IF MORE PEOPLE BELIEVE THE MARKET HAS BOTTOMED OUT? PRACTICE QUESTION CHAPTER 3 SLIDE 48

49. QUESTION: MEMORY CHIPS, A KEY COMPONENT IN PORTABLE HARD DRIVES, HAVE FALLEN IN PRICE. WHAT HAPPENS TO THE SUPPLY OF PORTABLE HARD DRIVES? B C A SUPPLY DOES NOT CHANGE SUPPLY SHIFTS TO THE RIGHT SUPPLY SHIFTS TO THE LEFT D SUPPLY INITIALLY SHIFTS TO THE RIGHT, AND THEN TO THE LEFT CHAPTER 2 SLIDE 49

50. PRACTICE QUESTION WHAT HAPPENS TO THE EQUILIBRIUM PRICE AND QUANTITY OF INFERIOR GOODS WHEN INCOMES FALL? CHAPTER 3 SLIDE 50

51. PRACTICE QUESTION THE POPULARITY OF COSTA RICA AS A TRAVEL DESTINATION INCREASES. WHAT HAPPENS TO THE PRICES AND QUANTITY OF TOURIST FACILITIES? CHAPTER 3 SLIDE 51

52. QUESTION: AS AIRLINES INCREASE THE NUMBER OF PREMIUM SEATS FOR SALE (ALL ELSE EQUAL), WHAT HAPPENS TO EQUILIBRIUM PRICE AND QUANTITY FOR PREMIUM SEAT TICKETS? B C A PRICE INCREASES, QUANTITY INCREASES PRICE DECREASES, QUANTITY INCREASES PRICE INCREASES, QUANTITY DECREASES D PRICE DECREASES; QUANTITY DECREASES CHAPTER 2 SLIDE 52

53. CHAPTER 3 SLIDE 53 THE END OF SLIDES CREATED BY ERIC CHIANG 3 CHAPTER