1. SAYRE | MORRIS Seventh Edition Demand and Supply: an Introduction CHAPTER 2 2-1© 2012 McGraw-Hill Ryerson Limited

2. Demand and Supply: an Introduction Learning Objectives: 1.Explain the concept of demand 2.Explain the concept of supply 3.Explain the term market 4.Understand the concept of equilibrium CHAPTER 2 2-2© 2012 McGraw-Hill Ryerson Limited

3. Demand and Supply: an Introduction Learning Objectives: 5.Understand causes and effects of a change in demand 6.Understand causes and effects of a change in supply 7.Understand why demand and supply determine price and quantity traded CHAPTER 2 2-3© 2012 McGraw-Hill Ryerson Limited

4. Demand the quantities that consumers are willing and able to buy over a period of time at various prices 2-4© 2012 McGraw-Hill Ryerson Limited LO1

5. Demand the quantities that consumers are willing and able to buy over a period of time at various prices must be willing to purchase it AND must have ability to pay for it 2-5© 2012 McGraw-Hill Ryerson Limited LO1

6. Demand the quantities that consumers are willing and able to buy over a period of time at various prices measures quantities in a specific time period, e.g. a week / month / year 2-6© 2012 McGraw-Hill Ryerson Limited LO1

7. Demand the quantities that consumers are willing and able to buy over a period of time at various prices shows relationship between quantity & price price is the most important determinant “ceteris paribus” – all else remains the same 2-7© 2012 McGraw-Hill Ryerson Limited LO1

8. Demand Demand Schedule A table showing the various quantities demanded at different prices Demand Curve A graphic representation of a demand schedule 2-8© 2012 McGraw-Hill Ryerson Limited LO1

9. Demand Schedule Price Per CaseQuantity Demanded (cases per month) $177 186 195 204 213 222 2-9© 2012 McGraw-Hill Ryerson Limited LO1

10. Demand Curve PriceQuantity $177 186 195 204 213 222 Price Quantity $19 6 3 7 $18 $17 4 5 2 1 2-10© 2012 McGraw-Hill Ryerson Limited LO1

11. Demand Curve Price Quantity $19 6 3 7 $18 $17 4 5 2 1 Demand curve 2-11© 2012 McGraw-Hill Ryerson Limited LO1

12. Demand Curve Price Quantity $19 6 3 7 $18 $17 4 5 2 1 PriceQuantity $177 186 195 204 213 222 A B 2-12© 2012 McGraw-Hill Ryerson Limited LO1

13. Demand Curve Price Quantity $19 6 3 7 $18 $17 4 5 2 1 A B - as price increases, quantity demanded decreases - movement is along an existing demand line - as price increases, quantity demanded decreases - movement is along an existing demand line 2-13© 2012 McGraw-Hill Ryerson Limited LO1

14. Why the Demand Curve Slopes Downward 1.Income effect The effect of a price change on real income, and therefore on quantity demanded Real income is measured in terms of the goods and services it will buy Real income will increase if prices fall 2-14© 2012 McGraw-Hill Ryerson Limited LO1

15. Why the Demand Curve Slopes Downward 2.Substitution effect The substitution of one product for another as a result of a change in their relative prices 2-15© 2012 McGraw-Hill Ryerson Limited LO1

16. Market Demand The total demand for a product or service from all consumers 2-16© 2012 McGraw-Hill Ryerson Limited LO1

17. Market Demand Schedule Quantity demanded (cases/month) $/caseTomikoAbdiJanMarket demand $18649 $19547 $20446 $21333 $22231 19 16 14 9 6 + + = 2-17© 2012 McGraw-Hill Ryerson Limited LO1

18. P Q0 2 4 6 8 10 12 14 16 18 20 D TOMIKO 18 19 20 22 21 D JAN D ABDI D MARKET Market Demand Schedule Market demand is the horizontal summation of all individual demands. 2-18© 2012 McGraw-Hill Ryerson Limited LO1

19. Self-Test The table shows the weekly demand for soy milk by three people in a very small market. a)Calculate market demand at each price. Quantity demanded by: PriceAlBoColeMarket $4.00100 3.50110 3.00111 2.50211 2.00221 2-19© 2012 McGraw-Hill Ryerson Limited LO1

20. Self-Test The table shows the weekly demand for soy milk by three people in a very small market. a)Calculate market demand at each price. Quantity demanded by: PriceAlBoColeMarket $4.00100 3.50110 3.00111 2.50211 2.00221 1 ++ = 2 3 4 5 2-20© 2012 McGraw-Hill Ryerson Limited LO1

21. Supply the quantities that producers are willing and able to supply over a period of time at various prices 2-21© 2012 McGraw-Hill Ryerson Limited LO2

22. Supply Supply Schedule A table showing the various quantities supplied per period of time at different prices Supply Curve A graphic representation of the supply schedule 2-22© 2012 McGraw-Hill Ryerson Limited LO2

23. Supply Schedule Price Per CaseQuantity Supplied (cases per month) $182 193 204 215 226 2-23© 2012 McGraw-Hill Ryerson Limited LO2

24. Supply Curve PriceQuantity $182 193 204 215 226 Price Quantity $20 6 3 7 $19 $18 4 5 2 1 2-24© 2012 McGraw-Hill Ryerson Limited LO2

25. Supply Curve Price Quantity $20 6 3 7 $19 $18 4 5 2 1 Supply curve 2-25© 2012 McGraw-Hill Ryerson Limited LO2

26. Supply Curve Price Quantity $20 6 3 7 $19 $18 4 5 2 1 - as price increases, quantity supplied (Q s ) increases - movement is along an existing supply line - as price increases, quantity supplied (Q s ) increases - movement is along an existing supply line A B 2-26© 2012 McGraw-Hill Ryerson Limited LO2

27. Why the Supply Curve Slopes Upward Suppliers are motivated by profit Higher price means more profit, more suppliers are willing to produce the product Costs rise as more is produced, so higher prices required to supply more 2-27© 2012 McGraw-Hill Ryerson Limited LO2

28. Market Supply Curve Total supply from all producers of a product Horizontal summation of each individual producer’s supply curve Assumptions: producers are all making a similar product consumers have no preference as to which supplier or product they use © 2012 McGraw-Hill Ryerson Limited LO2 2-28

29. Market Supply Schedule Quantity supplied (cases/month) $/caseBobbieOther Brewers Market Supply $18268 $193912 $2041216 $2151520 $2261824 + = 2-29© 2012 McGraw-Hill Ryerson Limited LO2

30. P Q0 2 4 6 8 10 12 14 16 18 20 S BOBBI 18 19 20 22 21 S OTHER + S MARKET = Market Supply Curve Market supply is the total quantity of all producers at each price. © 2012 McGraw-Hill Ryerson Limited LO2 2-30

31. Market Equilibrium Market A mechanism that allows buyers and sellers to exchange products or services Equilibrium The point where quantity demanded equals quantity supplied There is neither a shortage nor a surplus Q D = Q S 2-31© 2012 McGraw-Hill Ryerson Limited LO3. LO4

32. Market Equilibrium Surplus the amount by which quantity supplied is greater than quantity demanded occurs at prices above equilibrium Shortage the amount by which quantity supplied is less than quantity demanded occurs at prices below equilibrium 2-32© 2012 McGraw-Hill Ryerson Limited LO4

33. Market Equilibrium Quantity supplied (cases/month) $/caseMarket Supply Market Demand Shortage/ Surplus $18822 $191218 $2016 $21209 $22246 -14 _ = - 6 0 +11 +18 2-33© 2012 McGraw-Hill Ryerson Limited LO4

34. Market Equilibrium 2-34 Demand Supply P Q $20 16 The market is in equilibrium when Q S = Q D LO4 © 2012 McGraw-Hill Ryerson Limited

35. Shortage 2-35 Demand Supply P Q $20 16 At a price lower than equilibrium, Q S < Q D there is a shortage At a price lower than equilibrium, Q S < Q D there is a shortage $18 8 22 (Q D ) (Q S ) shortage LO4 © 2012 McGraw-Hill Ryerson Limited

36. Surplus 2-36 Demand Supply P Q $20 16 At a price higher than equilibrium, Q S > Q D there is a surplus At a price higher than equilibrium, Q S > Q D there is a surplus $22 6 24 (Q S ) (Q D ) surplus LO4 © 2012 McGraw-Hill Ryerson Limited

37. Self-Test The table shows demand and supply for a product. Calculate the surplus or shortage at each price. PriceDemandSupplySurplus/ Shortage $2.006030 2.505636 3.005242 3.5048 4.004454 2-37© 2012 McGraw-Hill Ryerson Limited LO4

38. Self-Test The table shows demand and supply for a product. Calculate the surplus or shortage at each price. PriceDemandSupplySurplus/ Shortage $2.006030 2.505636 3.005242 3.5048 4.004454 - 30 - 20 - 10 0 + 10 2-38© 2012 McGraw-Hill Ryerson Limited LO4

39. Market Adjustments When there is a Surplus: producers drop the price to sell excess stock as price drops: - quantity demanded increases - quantity supplied falls market moves back to equilibrium price, quantity 2-39© 2012 McGraw-Hill Ryerson Limited LO4

40. Market Adjustment - Surplus 2-40 Demand Supply P Q $20 16 $22 6 24 (Q S ) (Q D ) surplus LO4 © 2012 McGraw-Hill Ryerson Limited

41. Market Adjustment - Surplus 2-41 Demand Supply P Q $20 16 - Sellers drop price to sell excess - Buyers buy more at lower price - Sellers supply less at lower price - Back to equilibrium - Sellers drop price to sell excess - Buyers buy more at lower price - Sellers supply less at lower price - Back to equilibrium $22 6 24 (Q S ) (Q D ) surplus LO4 © 2012 McGraw-Hill Ryerson Limited

42. Market Adjustments When there is a Shortage: buyers bid up the price as price rises: - quantity demanded decreases - quantity supplied increases market moves back to equilibrium price, quantity 2-42© 2012 McGraw-Hill Ryerson Limited LO4

43. Increase in Demand D1D1 D2D2 14 $20 20 Price Quantity -more quantity is demanded at each price - caused by a factor other than price -more quantity is demanded at each price - caused by a factor other than price 2-43 LO5 © 2012 McGraw-Hill Ryerson Limited

44. Determinants of Demand 1. Consumer preferences If tastes change, demand changes 2. Consumer incomes Normal Products: buy more when income rises, less when income falls Inferior Products: buy more when income falls, less when income rises 2-44© 2012 McGraw-Hill Ryerson Limited LO5

45. Determinants of Demand 3. Prices of Related Products: Products are related if a change in the price of one product causes a change in demand for the other product Two types of related products: Substitutes Complements 2-45© 2012 McGraw-Hill Ryerson Limited LO5

46. Determinants of Demand 3. Prices of Related Products Substitute Product similar products that can be substituted for each other increase in price of one product causes increased demand for the related product 2-46© 2012 McGraw-Hill Ryerson Limited LO5

47. Determinants of Demand 3. Prices of Related Products Complementary Product tend to be bought together Increase in price of one product causes a decrease in demand for related product 2-47© 2012 McGraw-Hill Ryerson Limited LO5

48. Determinants of Demand 4. Expectations of future prices, income, availability If prices or incomes expected to rise, consumers buy more If goods expected to be scarcer, buy more now 5. Population size, income, and age distribution Increases in population or incomes cause increase in demand Changes in age distribution affect demand 2-48© 2012 McGraw-Hill Ryerson Limited LO5

49. Self Test Market for pretzels: What might have happened to the price of a complementary product, like beer, to cause the demand for pretzels to change? What might have happened to the price of a substitute product, like nuts? PriceDemand (D 1 )Demand (D 2 ) $2.0010 00011 000 3.00 9 60010 600 4.00 9 20010 200 2-49© 2012 McGraw-Hill Ryerson Limited LO5

50. Self Test Market for pretzels: What might have happened to the price of a complementary product, like beer, to cause the demand for pretzels to change? What might have happened to the price of a substitute product, like nuts? PriceDemand (D 1 )Demand (D 2 ) $2.0010 00011 000 3.00 9 60010 600 4.00 9 20010 200 Price of beer fell Price of nuts rose 2-50© 2012 McGraw-Hill Ryerson Limited LO5

51. Adjustment to an Increase in Demand 2-51 1420 D2D2 S D1D1 $22 $20 18 When demand increases, a shortage is created and price rises shortage LO5 © 2012 McGraw-Hill Ryerson Limited

52. Adjustment to a Decrease in Demand 2-52 814 D1D1 S D2D2 $20 $18 10 When demand decreases, a surplus is created and price drops LO5 © 2012 McGraw-Hill Ryerson Limited

53. Self-Test What effect will the following changes have upon (i) the demand for, (ii) the price, and (iii) the quantity traded of commercially brewed beer? a.A new medical report praising the healthy effects of drinking beer b.A big decrease in the price of home-brewing kits c.A rapid increase in population growth d.Talk of a possible future strike of brewery workers e.A possible future recession 2-53© 2012 McGraw-Hill Ryerson Limited LO5

54. Self-Test What effect will the following changes have upon (i) the demand for, (ii) the price, and (iii) the quantity traded of commercially brewed beer? a.A new medical report praising the healthy effects of drinking beer b.A big decrease in the price of home-brewing kits c.A rapid increase in population growth d.Talk of a possible future strike of brewery workers e.A possible future recession D P Q 2-54© 2012 McGraw-Hill Ryerson Limited LO5

55. Determinants of Supply 1.Prices of Productive Resources If the price of a productive resource increases, firms will supply less 2. Business Taxes If business taxes rise, firms will supply less 3. Technology An improvement in technology leads to a fall in the cost of production and an increase in supply © 2012 McGraw-Hill Ryerson Limited LO6 2-55

56. Determinants of Supply 4. Prices of Substitutes in Production An increase in the price of one product will cause a drop in the supply of products that are substitutes in production 5. Future Expectation of Suppliers Lower expected future prices will lead to an increase in supply 6. Number of Suppliers A decrease in the number of suppliers will reduce market supply © 2012 McGraw-Hill Ryerson Limited LO6 2-56

57. Effects of an Increase in Supply Chapter 2-57 D S1S1 S2S2 1614 $20 $18 20 When supply increases, a surplus is created and price falls LO6 © 2012 McGraw-Hill Ryerson Limited

58. Effects of a Decrease In Supply Chapter 2-58 D S2S2 S1S1 1412 $22 $20 When supply decreases, a shortage is created and price rises LO6 © 2012 McGraw-Hill Ryerson Limited

59. Self-Test a.What are equilibrium price and quantity? b.Supply increases by 50% - what are the new equilibrium price and quantity? PriceDemandSupply 1Supply 2 $4.0014060 4.2513070 4.5012080 4.7511090 5.00100 5.2590110 5.5080120 2-59 LO6 © 2012 McGraw-Hill Ryerson Limited

60. Self-Test a.What are equilibrium price and quantity? b.Supply increases by 50% - what are the new equilibrium price and quantity? PriceDemandSupply 1Supply 2 $4.0014060 4.2513070 4.5012080 4.7511090 5.00100 5.2590110 5.5080120 2-60 90 105 120 135 150 165 180 LO6 © 2012 McGraw-Hill Ryerson Limited

61. Self-Test 7 a)A poor harvest in the grape industry results in a big decrease in the supply of grapes b)The number of wineries increases c)The sales tax on wine increases d)The introduction of a new fermentation method reduces the time needed for the wine to ferment e)The gov’t introduces a subsidy for each bottle of wine produced domestically f)The gov’t introduces a quota limiting the amount of foreign-made wine entering Canada © 2012 McGraw-Hill Ryerson Limited LO6 2-61

62. Self-Test 7 a)A poor harvest in the grape industry results in a big decrease in the supply of grapes b)The number of wineries increases c)The sales tax on wine increases d)The introduction of a new fermentation method reduces the time needed for the wine to ferment e)The gov’t introduces a subsidy for each bottle of wine produced domestically f)The gov’t introduces a quota limiting the amount of foreign-made wine entering Canada S P Q © 2012 McGraw-Hill Ryerson Limited LO6 2-62

63. Key Concepts to Remember: The concept of demand vs quantity demanded The concept of supply vs quantity supplied The term “market” The concept of equilibrium price and quantity The determinants of demand and supply The effects of a change in demand or a change in supply Why demand and supply determine price, not the reverse CHAPTER 2 SUMMARY 2-63© 2012 McGraw-Hill Ryerson Limited