1. Chapter 3 Supply and Demand: In Introduction

2. Basic Economic Questions to Answer What: variety and quantity How: technology For whom: distribution

3. To answer the questions: Economic Systems: –Centrally Planned Economy –Free Market Economy –Mixed Economy

4. Market Economy the allocation for resources is determined by supply and demand Demand: the buying force Supply: the selling force

5. Demand: the definition The quantity of a good or service consumers ’ are willing and able to buy at various prices willingness and ability to buy –willingness: need - necessity –want – desire –ability: purchasing power

6. Demand: the model Variables: prices, quantity demanded Assumption: other things equal Hypothesis: (the law of demand) –Other things equal, a higher price leads to a smaller quantity demanded and a lower price results in a larger quantity demanded Forecast / test / accept – the law

7. Demand: key points Demand is a relationship between quantity demanded and product price Qd = f (P) –quantity demanded is a function of price –quantity demanded is determined by price The law of demand: –Qd and P are negatively related Demand Curve: downward sloping Market demand: the sum of individual demand

8. Demand Curve: Change in Qd and The Law of Demand Other things equal, higher price for a good leads people to demand a smaller quantity of the good.

9. Assumption: Other Things Equal the other things: factors affecting D –--price of related goods complements vs. substitutes –--income: normal vs. inferior –--preference –--expectations (prices, income, … ) –--population –--others

10. Qd vs. D Qd: a number, a corresponding point on the curve Change in Qd: movement along a curve, caused by change in price only D: a relationship, a curve Change in D: a shift of the entire curve, caused by change in other things

11. An Increase in Demand

12. Movement Along the Demand Curve vs. Shift of the Demand Curve

13. Shifts of the Demand Curve

14. Supply: the definition The quantity of a good or service producers are willing and able to sell at various prices willingness and ability to sell willingness: profitability ability: production capacity

15. Supply: the model Variables: prices, quantity supplied Assumption: other things equal Hypothesis: (the law of supply) –Other things equal, a higher price leads to a larger quantity supplied and a lower price results in a smaller quantity supplied Forecast / test / accept  the law

16. Supply: Key Points Supply is a relationship between price and quantity supplied Q s = f (P) –Quantity supplied is a function of price –quantity supplied is determined by price The Law of Supply: Q s and P are positively related Supply Curve: upward sloping Market supply: the sum of individual supply

17. The Supply Curve: change in Qs and the law of supply

18. Assumption: Other Things Equal the other things: factors affecting S --prices of inputs goods used to produce other goods --price of related goods goods that use the same resources --technology --expectations --others

19. Q s vs. S Q s : a number, a corresponding point on the curve Change in Q s : movement along a curve, caused by change in price only S: a relationship, a curve Change in S: a shift of the entire curve, caused by change in other things

20. Movement Along the Supply Curve vs. Shift of the Supply Curve

21. A Decrease in Supply

22. Shifts of the Supply Curve

23. The Market: Equilibrium Change in D and impacts on P e and Q e Change in S and impacts on P e and Q e

24. Market Equilibrium

25. Surplus

26. Shortage

27. Equilibrium and Shifts of the Demand Curve

28. Equilibrium and Shifts of the Supply Curve

29. Simultaneous Shifts of the Demand and Supply Curves

30. Effects of the “War on Drugs”

31. Change in D & S --price of related goods complements vs. substitutes --income: normal vs. inferior --preference --expectations (prices, income, …) --population --others --prices of inputs (goods used to produce other goods) --price of related goods (goods that use the same resources) --technology --expectations --others