1. © 2011 Thomson South-Western

2. A market is a group of buyers and sellers of a particular good or service.A market is a group of buyers and sellers of a particular good or service. The buyers as a group determine demand for a productThe buyers as a group determine demand for a product The sellers as a group determine supply of a productThe sellers as a group determine supply of a product RECAP: What Is a Market?

3. © 2011 Thomson South-Western RECAP: What Is a “Competitive Market”? A competitive market is a market in which:A competitive market is a market in which: there are many buyers and many sellers so that;there are many buyers and many sellers so that; each has a negligible impact on the market price.each has a negligible impact on the market price. (no one is able to control the price)

4. © 2011 Thomson South-Western RECAP: What Is “Perfect Competition”? We begin by assuming we have perfect competition:We begin by assuming we have perfect competition: Products are the sameProducts are the same Numerous buyers and sellers so that each has no influence over priceNumerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takersBuyers and Sellers are price takers (no one controls the price)

5. © 2011 Thomson South-Western RECAP: DEMAND Quantity demanded is the amount of a good that buyers are willing and able to purchase.Quantity demanded is the amount of a good that buyers are willing and able to purchase. Law of DemandLaw of Demand –The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises.

6. © 2011 Thomson South-Western Figure 1 Nicholas’s Demand Schedule and Demand Curve Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1234567891011 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price... 2....increases quantity of cones demanded.

7. © 2011 Thomson South-Western RECAP: Shifts in the Demand Curve vs. Movements along the Demand Curve Shift in the demand curveShift in the demand curve When an outside factor changes the demand for a productWhen an outside factor changes the demand for a product Blizzard increases the demand for snow shovelsBlizzard increases the demand for snow shovels Movement along the demand curveMovement along the demand curve Caused by a change in the price of the productCaused by a change in the price of the product

8. © 2011 Thomson South-Western 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A tax on sellers of ice- cream cones raises the price of ice-cream cones and results in a movement along the demand curve. A B 8 1.00 $2.00 4 Changes in Quantity Demanded

9. © 2011 Thomson South-Western Shifts in the Demand Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve,D 3 Demand curve,D 1 Demand curve,D 2 0

10. © 2011 Thomson South-Western RECAP: Variables That Influence Buyers

11. © 2011 Thomson South-Western SUPPLY Quantity supplied is the amount of a good that sellers are willing and able to sell.Quantity supplied is the amount of a good that sellers are willing and able to sell. Law of SupplyLaw of Supply –The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises.

12. © 2011 Thomson South-Western The Supply Curve: The Relationship between Price and Quantity Supplied Supply ScheduleSupply Schedule The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

13. © 2011 Thomson South-Western Ben’s Supply Schedule

14. © 2011 Thomson South-Western The Supply Curve: The Relationship between Price and Quantity Supplied Supply CurveSupply Curve The supply curve is the graph of the relationship between the price of a good and the quantity supplied.The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

15. © 2011 Thomson South-Western Figure 5 Ben’s Supply Schedule and Supply Curve Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1234567891011 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price... 2.... increases quantity of cones supplied.

16. © 2011 Thomson South-Western Market Supply versus Individual Supply Market supply refers to the sum of all individual supplies for all sellers of a particular good or service.Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

17. © 2011 Thomson South-Western Shifts in the Supply Curve vs. Movements along the Supply Curve Shift in the supply curveShift in the supply curve When an outside factor changes the cost of making a productWhen an outside factor changes the cost of making a product Innovations in production of hard drives makes computers cheaper, shifts the supply curve for computersInnovations in production of hard drives makes computers cheaper, shifts the supply curve for computers Movement along the supply curveMovement along the supply curve Caused by a change in the price of the productCaused by a change in the price of the product

18. © 2011 Thomson South-Western 1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. Change in Quantity Supplied

19. © 2011 Thomson South-Western Figure 7 Shifts in the Supply Curve Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

20. © 2011 Thomson South-Western What factors shift the supply curve? Input PricesInput Prices If iPhone screens became more expensive, what would happen to the supply of iPhones?If iPhone screens became more expensive, what would happen to the supply of iPhones? TechnologyTechnology If a new invention increases the pace of producing Xboxes, what will happen to their supply?If a new invention increases the pace of producing Xboxes, what will happen to their supply? ExpectationsExpectations If a company producing paper believes that in a year there will be no more demand for paper, how will they adjust their supply?If a company producing paper believes that in a year there will be no more demand for paper, how will they adjust their supply? Number of sellersNumber of sellers If Boston sets a limit on the number of food trucks allowed in the city, how will that affect the supply of food trucks?If Boston sets a limit on the number of food trucks allowed in the city, how will that affect the supply of food trucks?

21. © 2011 Thomson South-Western Table 2: Variables That Influence Sellers

22. © 2011 Thomson South-Western A C T I V E L E A R N I N G 2: Supply curve Draw a supply curve for tax return preparation software. What happens to it in each of the following scenarios? A.Retailers cut the price of the software. B.A technological advance allows the software to be produced at lower cost. C.Three new companies come out with a new tax return preparation software.

23. © 2011 Thomson South-Western A C T I V E L E A R N I N G 2: A. Fall in price of tax return software The S curve does not shift. Move down along the curve to a lower P and lower Q. The S curve does not shift. Move down along the curve to a lower P and lower Q. Price of tax return software Quantity of tax return software S1S1 P1P1 Q1Q1 Q2Q2 P2P2

24. © 2011 Thomson South-Western A C T I V E L E A R N I N G 2: B. Fall in cost of producing the software The S curve shifts to the right: at each price, Q increases. The S curve shifts to the right: at each price, Q increases. Price of tax return software Quantity of tax return software S1S1 P1P1 Q1Q1 S2S2 Q2Q2

25. © 2011 Thomson South-Western A C T I V E L E A R N I N G 2: C. Three new firms enter the market The S curve shifts to the right: at each price, Q increases. The S curve shifts to the right: at each price, Q increases. Price of tax return software Quantity of tax return software S1S1 P1P1 Q1Q1 S2S2 Q2Q2

26. © 2011 Thomson South-Western SUPPLY AND DEMAND TOGETHER Price of Ice-Cream Cone 0123456789101112 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium! Supply Demand $2.00

27. © 2011 Thomson South-Western SUPPLY AND DEMAND TOGETHER Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

28. © 2011 Thomson South-Western SUPPLY AND DEMAND TOGETHER Equilibrium PriceEquilibrium Price –The price that balances quantity supplied and quantity demanded. –On a graph, it is the price at which the supply and demand curves intersect. Equilibrium QuantityEquilibrium Quantity –The quantity supplied and the quantity demanded at the equilibrium price. –On a graph it is the quantity at which the supply and demand curves intersect.

29. © 2011 Thomson South-Western Price of Ice-Cream Cone 0123456789101112 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

30. © 2011 Thomson South-Western At $2.00, the quantity demanded is equal to the quantity supplied! SUPPLY AND DEMAND TOGETHER Demand ScheduleSupply Schedule

31. © 2011 Thomson South-Western WHAT HAPPENS WHEN MARKETS ARE NOT IN EQUILLIBRIUM? Price of Ice-Cream Cone 0 Supply Demand (a) Excess Supply Quantity demanded Quantity supplied Surplus Quantity of Ice-Cream Cones 4 $2.50 10 7

32. © 2011 Thomson South-Western What happens when markets are not in equilibrium? SurplusSurplus When price > equilibrium price, thenWhen price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus.There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium.Suppliers will lower the price to increase sales, thereby moving toward equilibrium.

33. © 2011 Thomson South-Western Figure 9 Markets Not in Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Demand (b) Excess Demand Quantity supplied Quantity demanded 1.50 10 4 Shortage

34. © 2011 Thomson South-Western ShortageShortage When price < equilibrium price, thenWhen price < equilibrium price, then quantity demanded > the quantity supplied. There is excess demand or a shortage.There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium. What happens when markets are not in equilibrium?

35. © 2011 Thomson South-Western How do we get to Equilibrium? Law of supply and demandLaw of supply and demand The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.The claim that the price of any good adjusts to bring the quantity supplied and the quantity demanded for that good into balance.

36. © 2011 Thomson South-Western Figure 10 How an Increase in Demand Affects the Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Initial equilibrium D D 3....and a higher quantity sold. 2.... resulting in a higher price... 1. Hot weather increases the demand for ice cream... 2.00 7 New equilibrium $2.50 10

37. © 2011 Thomson South-Western Figure 11 How a Decrease in Supply Affects the Equilibrium Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Demand New equilibrium Initial equilibrium S1S1 S2S2 2.... resulting in a higher price of ice cream... 1. An increase in the price of sugar reduces the supply of ice cream... 3....and a lower quantity sold. 2.00 7 $2.50 4

38. © 2011 Thomson South-Western Table 3: Three Steps for Analyzing Changes in Equilibrium

39. © 2011 Thomson South-Western Three Steps to Analyzing Changes in Equilibrium Shifts in Curves versus Movements along CurvesShifts in Curves versus Movements along Curves A shift in the supply curve is called a change in supply.A shift in the supply curve is called a change in supply. A movement along a fixed supply curve is called a change in quantity supplied.A movement along a fixed supply curve is called a change in quantity supplied. A shift in the demand curve is called a change in demand.A shift in the demand curve is called a change in demand. A movement along a fixed demand curve is called a change in quantity demanded.A movement along a fixed demand curve is called a change in quantity demanded.

40. © 2011 Thomson South-Western Table 4: What Happens to Price and Quantity When Supply or Demand Shifts?

41. © 2011 Thomson South-Western A C T I V E L E A R N I N G 3: Changes in supply and demand Use the three-step method to analyze the effects of each event on the equilibrium price and quantity of music downloads. Event A: A fall in the price of compact discs Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell. Event C: Events A and B both occur.

42. © 2011 Thomson South-Western 2.D shifts left A C T I V E L E A R N I N G 3: A. Fall in price of CDs P Q D1D1 S1S1 P1P1 Q1Q1 D2D2 The market for music downloads P2P2 Q2Q2 1.D curve shifts 3.P and Q both fall. STEPS

43. © 2011 Thomson South-Western A C T I V E L E A R N I N G 3: B. Fall in cost of royalties P Q D1D1 S1S1 P1P1 Q1Q1 S2S2 The market for music downloads Q2Q2 P2P2 1.S curve shifts 2.S shifts right 3.P falls, Q rises. STEPS (royalties are part of sellers’ costs)

44. © 2011 Thomson South-Western A C T I V E L E A R N I N G 3: C. Fall in price of CDs AND Fall in cost of royalties STEPS 1.Both curves shift (see parts A & B). 2.D shifts left, S shifts right. 3.P unambiguously falls. Effect on Q is ambiguous: The fall in demand reduces Q, the increase in supply increases Q. STEPS 1.Both curves shift (see parts A & B). 2.D shifts left, S shifts right. 3.P unambiguously falls. Effect on Q is ambiguous: The fall in demand reduces Q, the increase in supply increases Q.

45. © 2011 Thomson South-Western A C T I V E L E A R N I N G 3: A & B P Q D1D1 S1S1 P1P1 Q1Q1 S2S2 The market for music downloads 1.D & S curve shifts 2.D shifts left S shifts right S shifts right 3.P definitely falls, Q? ambiguous STEPS D2D2 P2P2

46. © 2011 Thomson South-Western A C T I V E L E A R N I N G 3: A & B P Q D1D1 S1S1 P1P1 Q1Q1 S2S2 The market for music downloads 1.D & S curve shifts 2.D shifts left S shifts right S shifts right 3.P definitely falls, Q? ambiguous STEPS D2D2 P2P2

47. © 2011 Thomson South-Western CONCLUSION: How Prices Allocate Resources One of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity.One of the Ten Principles from Chapter 1: Markets are usually a good way to organize economic activity. In market economies, prices adjust to balance supply and demand.In market economies, prices adjust to balance supply and demand. These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.These equilibrium prices are the signals that guide economic decisions and thereby allocate scarce resources.

48. Summary © 2011 Thomson South-Western Economists use the model of supply and demand to analyze competitive markets.Economists use the model of supply and demand to analyze competitive markets. In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.In a competitive market, there are many buyers and sellers, each of whom has little or no influence on the market price.

49. Summary © 2011 Thomson South-Western The demand curve shows how the quantity of a good depends upon the price.The demand curve shows how the quantity of a good depends upon the price. –According to the law of demand, as the price of a good falls, the quantity demanded rises. Therefore, the demand curve slopes downward. –In addition to price, other determinants of how much consumers want to buy include income, the prices of complements and substitutes, tastes, expectations, and the number of buyers. –If one of these factors changes, the demand curve shifts.

50. Summary © 2011 Thomson South-Western The supply curve shows how the quantity of a good supplied depends upon the price.The supply curve shows how the quantity of a good supplied depends upon the price. –According to the law of supply, as the price of a good rises, the quantity supplied rises. Therefore, the supply curve slopes upward. –In addition to price, other determinants of how much producers want to sell include input prices, technology, expectations, and the number of sellers. –If one of these factors changes, the supply curve shifts.

51. Summary © 2011 Thomson South-Western Market equilibrium is determined by the intersection of the supply and demand curves.Market equilibrium is determined by the intersection of the supply and demand curves. At the equilibrium price, the quantity demanded equals the quantity supplied.At the equilibrium price, the quantity demanded equals the quantity supplied. The behavior of buyers and sellers naturally drives markets toward their equilibrium.The behavior of buyers and sellers naturally drives markets toward their equilibrium.

52. Summary © 2011 Thomson South-Western To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity.To analyze how any event influences a market, we use the supply-and-demand diagram to examine how the event affects the equilibrium price and quantity. In market economics, prices are the signals that guide economic decisions and thereby allocate resources.In market economics, prices are the signals that guide economic decisions and thereby allocate resources.