©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 Supply and Demand Survey of ECON Robert L. Sexton Chapter 3 © TIME & LIFE PICTURES/GETTY IMAGES ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

22 Chapter 3 Sections – Competitive Markets – Demand – Supply – Market Equilibrium Price and Quantity

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 Buyers, as a group, determine the demand side of the market, whether it is consumers purchasing goods or firms purchasing inputs. Sellers, as a group, determine the supply side of the market, whether it is firms selling their goods or resource owners selling their inputs. Competitive Markets

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 66 It is the interaction of buyers and sellers that determines market prices and output through the forces of supply and demand. Competitive Markets

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 77 Because most markets contain a large degree of competitiveness, the lessons of supply and demand can be applied to many different types of problems. Competitive Markets COMPETITIVE MARKET a market in which the many buyers and sellers have little market power—each buyer’s or seller’s effect on market price is negligible

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11 According to the law of demand, the quantity of a good or service demanded varies inversely with its price, ceteris paribus. More directly, other things equal, when the price (P) of a good or service falls, the quantity demanded (Q D ) increases. The Law of Demand

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 INDIVIDUAL DEMAND SCHEDULE a schedule that shows the relationship between price and quantity demanded Individual Demand

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Exhibit 3.1: Elizabeth’s Demand Schedule for Coffee

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 It reveals the relationship between the price and the quantity demanded, showing that when the price is higher, the quantity demanded is lower. Individual Demand INDIVIDUAL DEMAND CURVE a graphical representation that shows the inverse relationship between price and quantity demanded

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15 Exhibit 3.2: Elizabeth’s Demand Curve for Coffee

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 Economists usually speak of the demand curve in terms of large groups of people. The horizontal summing of the demand curves of many individuals is called the market demand curve for a product. The market demand curve shows the amounts that all the buyers in the market would be willing and able to buy at various prices. Market Demand Curve

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 Change in Demand versus Change in Quantity Demanded A change in a good’s price leads to a change in quantity demanded, illustrated by moving along a given demand curve. But price is not the only thing that affects the quantity of a good people buy. The other factors that influence the demand curve are called determinants of demand, and they shift the entire demand curve—a change in demand.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 prices of related goods income number of buyers tastes expectations Possible Demand Shifters

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 An increase in demand is represented by a rightward shift in the demand curve. A decrease in demand is represented by a leftward shift in the demand curve. Shifts in Demand

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Substitutes A major variable that shifts the demand curve is the prices of related goods. Two goods are called substitutes if an increase in the price of one causes a decrease in the demand for the other good. The opposite also applies: Two goods are called substitutes if a decrease in the price of one causes an increase in the demand for the other good.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 For most people, good substitutes might include movie tickets and video rentals, jackets and sweaters, Exxon and Shell gasoline, and Nikes and Reeboks. Substitutes: Examples © WALTER G ALLGÖWER/PHOTOLIBRARY

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 Complements Two goods are complements if an increase in the price of one good causes a decrease in the demand for the other good. The opposite is also true: Two goods are complements if a decrease in the price of one good causes an increase in the demand for the other good.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Complements are goods that “go together.” They are often consumed or used simultaneously. Complements: Examples For example: skis and bindings, hot dogs and bun, motorcycles and motorcycle helmets, DVDs and DVD players. © RUBBERBALL/PHOTOLIBRARY

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 Income Generally the consumption of goods and services is positively related to the income available to consumers. As individuals receive more income, they tend to increase their purchases of most goods and services.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Income: Normal Goods Other things equal, an increase in income usually leads to an increase in demand for goods (rightward shift). A decrease in income usually leads to a decrease in the demand for goods (leftward shift). Such goods are called normal goods. For example: CDs and movie tickets.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29 Income: Inferior Goods Some goods exist for which rising (or falling) income leads to reduced (or increased) demand. These are called inferior goods. The term inferior does not refer to the quality of the good, but it merely shows that when income changes, demand changes in the opposite direction (inversely). For example: thrift shop clothes, store- brand products, and bus rides.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 Number of Buyers The demand for a good or service will vary with the size of the potential consumer population—the number of buyers. An increase in the potential consumer population will increase (shift right) the demand for a good or service.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 Consumers’ Preferences and Information Changes in fashions, fads, advertising, etc. can change tastes or preferences. An increase in tastes or preferences for a good or service will increase (shift right) the demand for a good or service.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 Although changes in preferences lead to shifts in demand, much of the predictive power of economic theory stems from the assumption that tastes are relatively stable over a substantial period of time. Consumers’ Preferences

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 Expectations An increase in the expected future price of a good will increase (shift right) the current demand for it. A decrease in the expected future price of a good will decrease (shift left) the current demand for it.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 Or if you expect to earn additional income in the near future, you may be more willing to dip into your current savings to buy something now. Expectations

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 If the price of a good changes, we say this leads to a change in quantity demanded. If one of the other factors (determinants of demand) influencing consumer behavior changes, we say there is a change in demand. Changes in Demand versus Changes in Quantity Demanded: Revisited

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 Supply According to the law of supply, –the higher the price of the good, the greater the quantity supplied, –and the lower the price of the good, the smaller the quantity supplied. LAW OF SUPPLY the quantity of a good or service supplied varies directly (positively) with its price, ceteris paribus

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 40 The quantity supplied is positively related to the price, because firms supplying goods and services want to increase their profits, and the higher the price per unit, the greater the profitability generated by supplying more of that good or service. Also, if costs are rising for producers as they produce more units, they must receive a higher price to compensate producers for their higher costs. Price and Quantity Supplied

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 41 An individual supply schedule reveals the different amounts of a product that a producer is willing and able to supply at various prices in a particular time interval, other things equal. An individual supply curve illustrates that information graphically. Individual Supply Curve

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 43 It shows the amount of goods and services suppliers are willing and able to supply at various prices. Market Supply Curve MARKET SUPPLY CURVE a graphical representation of the amount of goods and services that suppliers are willing and able to supply at various prices

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 45 Changes in the price of a good lead to changes in quantity supplied, which are shown as movements along a given supply curve. Changes in supply occur for other reasons than changes in the price of the product itself. A change in any other factor that can affect supplier behavior results in a shift of the entire supply curve. Change in Quantity Supplied versus Change in Supply

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 46 input prices prices of substitutes in production expectations number of suppliers technology regulations taxes subsidies weather These other factors include: Change in Quantity Supplied versus Change in Supply © KELLY JETT/ALAMY

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 47 An increase in supply shifts the supply curve to the right. A decrease in supply shifts the supply curve to the left. Shifts in Supply

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 49 Higher input prices increase the cost of production, causing the supply curve to shift to the left at each and every price. Lower input prices decrease the cost of production, causing the supply curve to shift to the right at each and every price. Input Prices

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 50 The supply of a good can be influenced by the prices of related products. Firms producing a product can sometimes use their resources to produce alternative products. Prices of Related Goods

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 51 Suppose a farmer’s land can be used to grow either wheat or cotton. If the farmer is currently growing wheat and the price of wheat falls, then this provides an incentive for the farmer to shift acreage out of wheat and into cotton. Thus, a decrease in the price of wheat will increase the supply of cotton. Prices of Related Goods

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 52 Exhibit 3.9: Substitutes and Complements in Production

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 53 If producers expect a higher price in the future, they will supply less now. They would prefer to wait and sell when their goods will be more valuable. If producers currently expect that the price will be lower later they will supply more now. Otherwise, if they wait to sell, then their goods will be worth less. Expectations

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 54 The market supply curve is the horizontal summation of the individual supply curves. So an increase in the number of suppliers will increase market supply. A decrease in the number of suppliers will decrease market supply. Number of Suppliers

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 55 Technological progress can lower the cost of production and increase supply. Supply may also change because of changes in the legal and regulatory environment in which firms operate (e.g., safety and pollution regulations). If such changes increase costs, they will decrease supply. If they decrease costs, they will increase supply. Technology

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 56 An increase in costly government regulations, taxes, or adverse production conditions will increase the cost of production, decreasing supply. Subsidies, the opposite of a tax, can lower the cost of production and shift the supply curve to the right. In addition, weather can affect the supply of certain commodities. Government and Weather

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 57 If the price of a good changes, it leads to a change in its quantity supplied, but not its supply. If one of the other factors influences sellers’ behavior, it leads to a change in supply. Changes in Supply versus Changes in Quantity Supplied Revisited:

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 61 Equilibrium Price and Quantity MARKET EQUILIBRIUM the point at which the market supply and market demand curves intersect EQUILIBRIUM PRICE the price at the intersection of the market supply and demand curves; at this price, the quantity demanded equals the quantity supplied EQUILIBRIUM QUANTITY the quantity at the intersection of market supply and demand curves; at the equilibrium quantity, the quantity demanded equals the quantity supplied

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 63 At the equilibrium price, the quantity demanded equals the quantity supplied—the amount that buyers are willing and able to buy is exactly equal to the amount that sellers are willing and able to produce. If the market price is at any other price, there will be a shortage or a surplus. Equilibrium Price and Quantity

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 64 Exhibit 3.11: Markets in Temporary Disequilibrium

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 65 At a price greater than the equilibrium price, a surplus, or excess quantity supplied, would exist. Sellers would be willing to sell more than demanders would be willing to buy. Shortages and Surpluses

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 66 Frustrated suppliers would cut their price and cut back on production, and consumers would buy more. This would eliminate the unsold surplus and return the market to equilibrium. Shortages and Surpluses

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 67 At a price less than the equilibrium price, a shortage, or excess quantity demanded, would exist. Buyers would be willing to buy more than sellers would be willing to sell. Shortages and Surpluses

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 68 Frustrated buyers would compete for the existing supply, causing the price to rise, and producers to increase the quantity supplied. This would decrease the quantity demanded, eliminate the shortage, and return the market to equilibrium. Shortages and Surpluses

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 69 Changes in Equilibrium Price and Quantity The demand and/or supply curves will shift when one of the many determinants of demand or supply (input prices, prices of related products, number of suppliers, expectations, technology, and so on) changes. These changes (shifts) in the demand and supply curves will lead to changes in the equilibrium price and equilibrium quantity.

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 70 An increase in demand results in a greater equilibrium price and a greater equilibrium quantity. Conversely, a decrease in demand results in a lower equilibrium price and a lower equilibrium quantity. A Change in Demand

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 72 A decrease in supply results in a higher equilibrium price and a lower equilibrium quantity. Conversely, an increase in supply results in a lower equilibrium price and a higher equilibrium quantity. A Change in Supply

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 74 Very often, supply and demand will both shift in the same time period. That is, supply and demand will shift simultaneously. Changes in Both Supply and Demand

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 75 When supply and demand move at the same time, we can predict the change in one variable (price or quantity), but we are unable to predict the direction of effect on the other variable. This change in the second variable, then, is said to be indeterminate, because it cannot be determined without additional information about the relative changes in supply and demand. Changes in Both Supply and Demand

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 76 If the decrease in demand is greater than the increase in supply, the equilibrium quantity will decrease. If the increase in supply is greater than the decrease in demand, the equilibrium quantity will increase. An Increase in Supply and a Decrease in Demand

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 78 An increase in supply decreases the equilibrium price and increases the equilibrium quantity. A decrease in demand decreases both the equilibrium price and quantity. Taken together, they will decrease the equilibrium price, but result in an indeterminate change in the equilibrium quantity. An Increase in Supply and a Decrease in Demand

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 79 It is also possible that both supply and demand will increase (or decrease). As a result of technological breakthroughs and new factories manufacturing flat-screen HD televisions, the supply curve for HD televisions shifted to the right. But with rising income and an increasing number of buyers, the demand increased as well. Both the increased demand and the increased supply functioned to increase the equilibrium quantity. An Increase in Demand and Supply: Example

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 80 The equilibrium price could have gone either up or down depending on the relative sizes of the demand and supply shifts. In the case of HD televisions, we know that the supply curve shifted more than the demand curve, as a result, the equilibrium price of HD televisions has dropped over time. An Increase in Demand and Supply: Example

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 81 Exhibit 3.15: An Increase in the Demand and Supply of HD Televisions

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 82 Exhibit 3.16: The Impact of Supply and Demand Shifts on Price and Quantity

©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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