1. Steven Landsburg University of Rochester Chapter 1 Supply, Demand, and Equilibrium © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Price Theory

2. KEYWORDS Chapter 1 Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

3. Words to Know demand demand curve econometrics economic incidence equilibrium point excise tax fall in demand fall in supply law of demand law of supply legal incidence price to demanders price to suppliers quantity demanded quantity supplied rise in demand rise in supply sales tax satisfied supply Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

4. Introduction Telling is not learning. –discover supply and demand Economic consequences –poor weather conditions –substitute goods and services –taxation Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

5. Introduction Interplay of supply and demand Supply and demand analysis –Consumers –Producers –Responsiveness of prices and quantities to variety of changes in economic environment Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

6. DEMAND Section 1.1 Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

7. Law of Demand When price of a good goes up, people buy less of good Downward sloping demand curve Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

8. Demand –A family of numbers that lists the quantity demanded corresponding to each possible price –Refers to the curve itself Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

9. Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

10. Quantity Demanded –Amount of a good consume at a given price –Change in price means a change in quantity demanded Movement along the demand curve Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

11. Demand Curve Graph illustrating demand –Price on the vertical axis –Quantity demanded on the horizontal axis Representation of the demand schedule Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

12. Changes in Demand Price change does not lead to change in demand Purchasing rule changes lead to demand changes –Entire curve shifts Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

13. Shifting Demand Fall in Demand –Decision made by demanders to a buy a smaller quantity at each given price –Leftward shift of demand curve Rise in Demand –Decision made by demanders to a buy a larger quantity at each given price –Rightward shift of demand curve Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

14. Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

15. Sales Tax Example Impose tax on consumers –Paid directly to the government Less desirable to buy the taxed good or service at every given price Demand shifts left and downward Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

16. Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

17. Market Demand Quantity associated with a given price is the total number of that good or service that the group members would demand Slopes downward (similar to the individual demand curve) Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

18. Shape of the Demand Curve Steeply-sloped demand curve –Small change in price leads to small change in quantity demanded Flat demand curve –Small change in price leads to large change in the quantity demanded Important to producer of good or service Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

19. Econometrics Statistical techniques used by economist to resolve questions about slopes of various demand curves Based on direct observations in marketplace –Ex. Demand for murder –Ex. Demand for reckless driving Wide scope of economics –Allows for other investigations as well Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

20. SUPPLY Section 1.2 Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

21. Law of Supply When the price of a good goes up, the quantity supplied goes up Leads to a upward sloping supply curve Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

22. Supply –Family of numbers giving the quantities supplied at each price –Changes in anything other than price changes supply Shifts entire curve Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

23. Quantity Supplied –Amount of a good that suppliers will provide at a given price –Changes if the price changes Movement along the curve Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

24. Changes in Supply Rise in Supply –Increase in quantities that supplier will provide at each price –Rightward shift of supply Fall in Supply –Decrease in quantities that supplier will provide at each price –Leftward shift of supply Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

25. Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

26. Excise Tax Example Impose a tax on producers –Paid directly to the government Less desirable to produce the taxed good or service at every given price Supply shifts left and upward Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

27. Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

28. EQUILIBRIUM Section 1.3 Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

29. Equilibrium Actual price determined by interaction between demanders and suppliers –Demanders cannot purchase more than suppliers willing to sell them –Suppliers cannot sell more than demanders willing to buy Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

30. Equilibrium Point Point where supply and demand curves intersect –Price where quantity demanded equals quantity supplied Demanders and suppliers satisfied –Able to behave as one wants to, taking market prices as given Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

31. Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

32. Changes in the Equilibrium Point Never look at price and quantity Look at effect change has on demand curve and supply curve Common mistakes arise as look at equilibrium –Supply, demand, and equilibrium misused at times –Check validity of information Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

33. Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

34. Effect of Sales Tax Sales tax of x¢ per item causes equilibrium price to fall by some amount less than x¢ per item Price to suppliers not same as price to demanders (price plus sales tax) Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

35. Effect of Excise Tax Excise tax of x¢ per item causes the equilibrium price to rise by some amount less than x¢ per item Price to suppliers (price minus excise tax) not same as price to demanders Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

36. Comparing Two Taxes Economic Incidence – the division of a tax burden according to who actually pays the tax Legal Incidence – the division of a tax burden according to who is required under the law to pay the tax The economic incidence of a tax independent of its legal incidence Ex. Social Security tax Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.

37. Landsburg, Price Theory, 8th edition © 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.