1. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 1 of 83 3 PART I INTRODUCTION TO ECONOMICS Demand, Supply, and Market Equilibrium Firms and Households: The Basic Decision-Making Units Input Markets and Output Markets: The Circular Flow Demand in Product/Output MarketsChanges in Quantity Demanded versus Changes in Demand Price and Quantity Demanded: The Law of Demand Other Determinants of Household DemandShift of Demand versus Movement Along the Demand Curve From Household Demand to Market DemandSupply in Product/Output MarketsPrice and Quantity Supplied: The Law of SupplyOther Determinants of SupplyShift of Supply versus Movement Along the Supply Curve From Individual Supply to Market SupplyMarket EquilibriumExcess DemandExcess SupplyChanges in EquilibriumDemand and Supply in Product Markets: A Review Looking Ahead: Markets and the Allocation of Resources CHAPTER OUTLINE

2. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 2 Terms And Concepts capital market: sermaye piyasası complements, complementary goods: tamamlayıcı, tamamlayıcı mallar demand curve: talep eğrisi demand schedule: talep cetveli, talep şedülü (tablosu) entrepreneur: girişimci, müteşebbis, iş adamı equilibrium: denge excess demand or (shortage): talep fazlası, aşırı talep, fazla talep veya (noksanlık, yetersizlik, eksiklik) excess supply or (surplus): arz fazlası, aşırı arz, fazla arz veya (fazla, artık) factors of production: üretim faktörleri (vasıtaları) firm: firma, işletme, müessese households: hanehalkı income: gelir inferior goods: düşük mallar input or factor markets: girdi piyasaları veya faktör piyasaları, üretim faktörleri piyasası labor market: işgücü piyasası, emek piyasası land market: arazi piyasası, doğal kaynaklar piyasası

3. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 3 terms and concepts law of demand: talep (istem) yasası law of supply: arz (sunum) yasası market demand: piyasa (pazar, endüstri) talebi market supply: piyasa (pazar, endüstri) arzı movement along a demand curve: talep eğrisi boyunca hareket movement along a supply curve: arz eğrisi boyunca hareket normal goods: normal mallar perfect substitutes: tam ikame edenler product or output markets: ürün (çıktı) piyasaları profit: kar quantity demanded: talep edilen miktar quantity supplied: arz edilen miktar shift of a demand curve: talep eğrisinin yer değiştirmesi shift of a supply curve: arz eğrisinin yer değiştirmesi substitutes: ikame edenler (mallar, başkasının yerine geçen supply curve: arz eğrisi supply schedule: arz cetveli (şedülü, tablosu) wealth or net worth: servet veya net değer (varlık)

4. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 4 of 83 Firms and Households: The Basic Decision-Making Units Demand, supply and market equilibrium: The basic forces and analysis of market system: Testes and preferences of consumers for many different goods in modern economies can be satisfied by specialization of the producers. When there is specialization, there must be exchange and markets. Markets are the institutions through which exchange takes place. Without any central planning, individual decision of households and firms together, answer the three basic questions of an economic system: what gets produced, how is it produced and who gets what is produced? It is necessary to analysis the behavior of two fundamental decision making units that are firms and households.

5. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 5 of 83 Firms and Households: The Basic Decision-Making Units Firm An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy. Most firms exist to make profit, except some of them like some foundations. They engage in production because they sell their products for more then its cost. It is assumed that firms make decisions in order to maximize profits.

6. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 6 of 83 Firms and Households: The Basic Decision-Making Units Entrepreneur A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business. Early economics texts included entrepreneurship as a type of input, just like land, labor and capital. Treating entrepreneurship as a separate factor of production is not common anymore since its different nature from land, labor and capital. First of all it is unmeasurable. If profit opportunities exist, that is likely that entrepreneurs will crop up to take advantage of them.

7. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 7 of 83 Firms and Households: The Basic Decision-Making Units Households The consuming units in an economy. A household may consist of any number of people. Household decisions are based on individual testes and preferences. Even though households have wide-ranging preferences, they also have some things in common. All –even the very rich- have ultimately limited resources- incomes, and all must pay in some way for the things they consume.

8. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 8 of 83 Input Markets and Output Markets: The Circular Flow  FIGURE 3.1 The Circular Flow of Economic Activity Households and firms interact in two basic kind of market: Product (or output) markets and Factor (or input) markets. product or output markets The markets in which goods and services are exchanged. Firms supply goods and services while households demand them in products markets. input or factor markets The markets in which the resources used to produce products are exchanged. Households supply production factors while firms demand them in factor markets.

9. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 9 of 83 In the input, or factor markets, which side of the market do firms and households occupy? a.Firms are on the supply side and households on the demand side. b.Firms are on the demand side and households on the supply side. c.Both firms and households are on the demand side. d.Both firms and households are on the supply side. e.Neither firms nor households are part of the demand side or the supply side.

10. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 10 of 83 In the input, or factor markets, which side of the market do firms and households occupy? a.Firms are on the supply side and households on the demand side. b.Firms are on the demand side and households on the supply side. c.Both firms and households are on the demand side. d.Both firms and households are on the supply side. e.Neither firms nor households are part of the demand side or the supply side.

11. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 11 of 83 Input Markets and Output Markets: The Circular Flow  FIGURE 3.1 The Circular Flow of Economic Activity When a firm decides how much to produce (supply) in output markets, it must simultaneously decide how much of input it needs. Similarly, when a household decides how much to demand in output markets, it must simultaneously decide how much of input to supply. However, household may have a constrain to supply labor, due to unemployment that appears periodically in market economies.

12. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 12 of 83 Input Markets and Output Markets: The Circular Flow  FIGURE 3.1 The Circular Flow of Economic Activity The circular flow of economic activity shows how firms and households interact in input and output markets. Product or output markets are the markets in which goods and services are exchanged. Input markets are the markets in which resources—labor, capital, and land—used to produce products, are exchanged

13. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 13 of 83 Input Markets and Output Markets: The Circular Flow  FIGURE 3.1 The Circular Flow of Economic Activity Goods and services flow clockwise. Firms provide goods and services; households supply labor services. Payments (usually money) flow in the opposite direction (counterclockwise) as the flow of labor services, goods, and services.

14. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 14 of 83 Input Markets and Output Markets: The Circular Flow  FIGURE 3.1 The Circular Flow of Economic Activity Input or factor markets are the markets in which the resources used to produce products are exchanged. They include: labor market The input/factor market in which households supply work for wages to firms that demand labor. capital market The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods. land market The input/factor market in which households supply land or other real property in exchange for rent. factors of production The inputs into the production process. Land, labor, and capital are the three key factors of production.

15. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 15 of 83 Input Markets and Output Markets: The Circular Flow  FIGURE 3.1 The Circular Flow of Economic Activity The supply of inputs and their prices ultimately determines household income. The amount of household income depends on types and quantities of inputs supplied. Input and output markets are connected through the behavior of both firms and households: Firms determines the quantities and character of outputs produced and the types and quantities of inputs demanded. Households determine the types and quantities of products demanded and the quantities and types of inputs supplied.

16. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 16 of 83 Input Markets and Output Markets: The Circular Flow  FIGURE 3.1 The Circular Flow of Economic Activity: A summary Diagrams like this one show the circular flow of economic activity, hence the name circular flow diagram. Here goods and services flow clockwise: Labor services supplied by households flow to firms, and goods and services produced by firms flow to households. Payment (usually money) flows in the opposite (counterclockwise) direction: Payment for goods and services flows from households to firms, and payment for labor services flows from firms to households. Note: Color Guide—In Figure 3.1 households are depicted in blue and firms are depicted in red. From now on all diagrams relating to the behavior of households will be blue or shades of blue and all diagrams relating to the behavior of firms will be red or shades of red.

17. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 17 of 83 Which of the following is supplied by households in factor markets? a.Labor. b.Savings. c.Land. d.All of the above. e.None of the above.

18. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 18 of 83 Which of the following is supplied by households in factor markets? a.Labor. b.Savings. c.Land. d.All of the above. e.None of the above.

19. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 19 of 83 Demand in Product/Output Markets A household’s decision about what quantity of a particular output, or product, to demand depends on a number of factors, including:  The price of the product in question.  The income available to the household.  The household’s amount of accumulated wealth.  The prices of other products available to the household.  The household’s tastes and preferences.  The household’s expectations about future income, wealth, and prices.

20. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 20 of 83 Demand in Product/Output Markets quantity demanded The amount (number of units) of a product that a household would buy in a given period if it could buy all it wanted at the current market price.

21. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 21 of 83 Demand in Product/Output Markets The most important relationship in individual markets is that between market price and quantity demanded. Changes in Quantity Demanded versus Changes in Demand Changes in the price of a product affect the quantity demanded per period. Changes in any other factor, such as income or preferences, affect demand. Thus, we say that an increase in the price of Coca-Cola is likely to cause a decrease in the quantity of Coca- Cola demanded. However, we say that an increase in income is likely to cause an increase in the demand for most goods.

22. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 22 of 83 Demand in Product/Output Markets It is very important to distinguish between price changes, which affects the quantity of a good demanded, and changes in other factors (such as income, wealth, prices of other products, tastes-preferences, and future income, wealth and prices), which change the entire relationship between price and quantity. We use the ceteris paribus or “all else equal” device, to examine the relationship between the quantity demanded of a good per period of time and the price of that good, while holding income, wealth, other prices, tastes, and expectations constant. Changes in price affect the quantity demanded per period. Changes in income, wealth, other prices, tastes, or expectations affect demand. Changes in Quantity Demanded versus Changes in Demand

23. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 23 of 83 Demand in Product/Output Markets demand schedule A table showing how much of a given product a household would be willing to buy at different prices. The table on the right is a hypothetical demand schedule of Anna’s telephone calls. Price and Quantity Demanded: The Law of Demand The relationship between price (P) and quantity (q) presented graphically is called a demand curve. Demand curves are usually derived from demand schedules. The demand curve presents graphically the same information as demand schedule. demand curve A graph below illustrating how much of a given product a household would be willing to buy at different prices.

24. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 24 of 83 TABLE 3.1 Anna’s Demand Schedule for Telephone Calls Price (Per Call) Quantity Demanded (Calls Per Month) $ 030.5025 3.507 7.003 10.001 15.000 Demand in Product/Output Markets Price and Quantity Demanded: The Law of Demand  FIGURE 3.2 Anna’s Demand Curve The relationship between price (P) of per call and quantity demanded (q) of calls per month is presented graphically on the right as a demand curve. Demand curves have a negative slope, indicating that lower prices cause quantity demanded to increase. Note that Anna’s demand curve is blue; demand in product markets is determined by household choice.

25. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 25 of 83 Demand in Product/Output Markets law of demand The negative relationship between price and quantity demanded: As price rises, quantity demanded decreases; as price falls, quantity demanded increases. Demand Curves Slope Downward It is reasonable to expect quantity demanded to fall when price rises, ceteris paribus, and to expect quantity demanded to rise when price falls, ceteris paribus. Demand curves have a negative slope. Price and Quantity Demanded: The Law of Demand

26. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 26 Price and Quantity Demanded: The Law of Demand The law of demand states that there is a negative (inverse), relationship between price and the quantity of a good demanded and its price. Demand curves have a negative slope. This means that demand curves slope downward. As price rises, quantity demanded decreases. As price falls, quantity demanded increases.

27. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 27 of 83 Fill in the blanks. It is reasonable to expect that quantity demanded will __________ when price rises, ceteris paribus, and that demand curves have a __________ slope. a.rise; positive b.rise; negative c.fall; positive d.fall; negative

28. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 28 of 83 Fill in the blanks. It is reasonable to expect that quantity demanded will __________ when price rises, ceteris paribus, and that demand curves have a __________ slope. a.rise; positive b.rise; negative c.fall; positive d.fall; negative

29. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 29 of 83 Demand in Product/Output Markets Other Properties of Demand Curves Two additional things are notable about Anna’s demand curve. As long as households have limited incomes and wealth, all demand curves will intersect the price axis. For any commodity, there is always a price above which a household will not or cannot pay. Even if the good or service is very important, all households are ultimately constrained, or limited, by income and wealth. That demand curves intersect the quantity axis is a matter of common sense. Demand in a given period of time is limited, if only by time, even at a zero price. Price and Quantity Demanded: The Law of Demand

30. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 30 of 83 Demand in Product/Output Markets Other Properties of Demand Curves Price and Quantity Demanded: The Law of Demand To summarize what we know about the shape of demand curves: 1. They have a negative slope. An increase in price is likely to lead to a decrease in quantity demanded, and a decrease in price is likely to lead to an increase in quantity demanded. 2. They intersect the quantity (X-) axis, a result of time limitations and diminishing marginal utility. 3.They intersect the price (Y-) axis, a result of limited incomes and wealth.

31. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 31 of 83 That demand curves intersect both the price and the quantity axes is a matter of common sense. Which of the following explains that they intersect the price axis? a.Time limitations and diminishing marginal utility. b.Limited incomes and wealth. c.The law of demand. d.All of the above.

32. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 32 of 83 That demand curves intersect both the price and the quantity axes is a matter of common sense. Which of the following explains that they intersect the price axis? a.Time limitations and diminishing marginal utility. b.Limited incomes and wealth. c.The law of demand. d.All of the above.

33. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 33 of 83 Demand in Product/Output Markets income The sum of all a household’s wages, salaries, profits, interest payments, rents, and other forms of earnings in a given period of time. It is a flow measure. Income And Wealth wealth or net worth The total value of what a household owns minus what it owes. It is a stock measure. Other Determinants of Household Demand

34. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 34 of 83 normal goods Goods for which demand goes up when income is higher and for which demand goes down when income is lower. inferior goods Goods for which demand tends to fall when income rises. Demand in Product/Output Markets Income And Wealth Other Determinants of Household Demand

35. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 35 of 83 substitutes Goods that can serve as replacements for one another; when the price of one increases, demand for the other increases. perfect substitutes Identical products. complements, complementary goods Goods that “go together”; a decrease in the price of one results in an increase in demand for the other and vice versa. Demand in Product/Output Markets Prices of Other Goods and Services Other Determinants of Household Demand

36. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 36 of 83 Demand in Product/Output Markets Tastes and Preferences Other Determinants of Household Demand Income, wealth, and prices of goods available are the three factors that determine the combinations of goods and services that a household is able to buy. Changes in preferences can and do manifest themselves in market behavior. Within the constraints of prices and incomes, preference shapes the demand curve, but it is difficult to generalize about tastes and preferences. First, they are volatile. Second, tastes are idiosyncratic.

37. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 37 of 83 Demand in Product/Output Markets Other Determinants of Household Demand Expectations What you decide to buy today certainly depends on today’s prices and your current income and wealth. There are many examples of the ways expectations affect demand. Increasingly, economic theory has come to recognize the importance of expectations. It is important to understand that demand depends on more than just current incomes, prices, and tastes.

38. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 38 of 83 Demand in Product/Output Markets Shift of Demand versus Movement Along a Demand Curve TABLE 3.2 Shift of Anna’s Demand Schedule Due to increase in Income Schedule D 0 Schedule D 1 Price (Per Call) Quantity Demanded (Calls Per Month at an Income of $300 Per Month) Quantity Demanded (Calls Per Month at an Income of $600 Per Month) $ 0.003035 0.502533 3.50718 7.00312 10.0017 15.0002 20.0000  FIGURE 3.3 Shift of a Demand Curve Following a Rise in Income When the price of a good changes, we move along the demand curve for that good. When any other factor that influences demand changes (income, tastes, and so on), the relationship between price and quantity is different; there is a shift of the demand curve, in this case from D 0 to D 1. Telephone calls are normal goods.

39. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 39 of 83 Demand in Product/Output Markets A change in demand is not the same as a change in quantity demanded. A change in demand causes shift of a demand curve as a whole while a change in quantity demanded causes movement along a demand curve. shift of a demand curve The change that takes place in a demand curve corresponding to a new relationship between quantity demanded of a good and price of that good. The shift is brought about by a change in the original conditions. Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve. movement along a demand curve The change in quantity demanded brought about by a change in price. Shift of Demand versus Movement Along a Demand Curve Change in price of a good or service leads to Change in quantity demanded (movement along the demand curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (shift of the demand curve).

40. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 40 A Change in Demand Versus a Change in Quantity Demanded When the price of good changes, the quantity demanded of that good changes and we move along the demand curve for that good. Change in price of a good or service causes Change in quantity demanded (Movement along the curve). When not price but any other factor that influences demand changes (income, preferences, or prices of other goods or services) the demand of that good changes and the demand curve of that good shifts. The relationship between price and quantity is different; there is a shift of the demand curve, in this case from D0 to D1. Telephone calls are normal goods. Change in income, preferences, or prices of other goods or services causes Change in demand (Shift of curve).

41. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 41 of 83 Refer to the figure below. Which move illustrates the impact of a decrease in market price on market demand, all else the same? a.The move from A to B. b.The move from A to C. c.Both moves show the same result on demand. d.None of the above.

42. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 42 of 83 Refer to the figure below. Which move illustrates the impact of a decrease in market price on market demand, all else the same? a.The move from A to B. b.The move from A to C. c.Both moves show the same result on demand. d.None of the above.

43. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 43 of 83 Demand in Product/Output Markets  FIGURE 3.4 Shifts versus Movement Along a Demand Curve a. When income increases; the demand for inferior goods shifts to the left (higher income decreases the demand for an inferior good) and the demand for normal goods shifts to the right (higher income increases the demand for a normal good). Shift of Demand versus Movement Along a Demand Curve The Impact of a Change in Income

44. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 44 of 83 Demand in Product/Output Markets  FIGURE 3.4 Shifts versus Movement Along a Demand Curve (continued) b. If the price of hamburger rises, the quantity of hamburger demanded declines: this is a movement along the demand curve. The same price rise for hamburger would shift; the demand for chicken (a substitute for hamburger) to the right and the demand for ketchup (a complement to hamburger) to the left. Shift of Demand versus Movement Along a Demand Curve The Impact of a Change in the Price of Related Goods

45. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 45 of 83 Demand for a good or service can be defined for an individual household, or for a group of households that make up a market. market demand The sum of all the quantities of a good or service demanded per period by all the households buying in the market for that good or service. A market demand curve shows the total amount of a product that would be sold at each price. The total quantity demanded is different from market demand. The total quantity demanded in the market at a given price is simply the sum of all the quantities demanded by all the individual households shopping in the market at that price. Demand in Product/Output Markets From Household Demand To Market Demand

46. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 46 of 83 The market demand curve is the sum of all the individual demand curves that is, the sum of all the individual quantities demanded at each price. The market demand curve thus takes its shape and position from the shapes, positions, and number of individual demand curves. Each additional individual demand curves shifts the market demand curve to the right. Market demand curves may also shift as a result of preference changes, income changes, or changes in the number of demanders. As a rule, capital letters refer to entire market and lowercase letters refer to individual households or firms. For example, Q refers to total quantity demanded in the market, while q refers to the quantity demanded by individual household. Demand in Product/Output Markets From Household Demand To Market Demand

47. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 47 of 83 Refer to the figure below. Assume that TVs and VCRs are two complements and that the diagram below represents the demand for VCRs. Which move would best describe the impact of a decrease in the price of TVs on this diagram? a.The move from A to B. b.The move from A to C. c.Both a and b above. d.None of the above.

48. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 48 of 83 Refer to the figure below. Assume that TVs and VCRs are two complements and that the diagram below represents the demand for VCRs. Which move would best describe the impact of a decrease in the price of TVs on this diagram? a.The move from A to B. b.The move from A to C. c.Both a and b above. d.None of the above.

49. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 49 of 83 Demand in Product/Output Markets From Household Demand To Market Demand: Assuming there are only three households in the market, market demand is derived as follows:  FIGURE 3.5 Deriving Market Demand from Individual Demand Curves Total demand in the marketplace is simply the sum of the demands of all the households shopping in a particular market. It is the sum of all the individual demand curves—that is, the sum of all the individual quantities demanded at each price.

50. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 50 of 83 Supply in Product/Output Markets In addition to dealing with household demands, economic theory deals with the behavior of business firms, which supply in output markets and demand in input markets Supply decisions depend on profit potential. Successful firms make profits because they are able to sell their products for more than it costs to produce them. profit The difference between revenues and costs. The amount of revenue depends on selling price and quantity of the product. The amount of cost depends on many factors, the most important of which are: The kinds of inputs needed to produce the product, The amount of each input required and The prices of inputs

51. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 51 of 83 Supply in Product/Output Markets The supply decision is just one of several decisions that firm makes to maximize profit. There are usually a number of ways to produce any given product. Firms must choose the production technique most appropriate to their products and projected level of production. The best method of production is the one that minimizes cost, thus maximizing profit. Production technique depends on input prices. For example, labor is chosen when it is cheaper than machinery.

52. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 52 quantity supplied The amount of a particular product that a firm would be willing and able to offer for sale at a particular price during a given time period. A supply schedule is a table showing how much of a product firms will supply at different prices. Supply in Product-Output Markets

53. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 53 Price and Quantity Supplied: The Law of Supply law of supply The positive relationship between price and quantity of a good supplied: An increase in market price will lead to an increase in quantity supplied, and a decrease in market price will lead to a decrease in quantity supplied. This means that supply curves typically have a positive slope. supply curve A graph illustrating how much of a product a firm will sell at different prices p q

54. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 54 of 83 TABLE 3.3 Clarence Brown’s Supply Schedule for Soybeans Price (Per Bushel) Quantity Supplied (Bushels Per Year) $1.500 1.7510,000 2.2520,000 3.0030,000 4.0045,000 5.0045,000 Price and Quantity Supplied: The Law of Supply  FIGURE 3.6 Clarence Brown’s Individual Supply Curve A producer will supply more when the price of output is higher. The slope of a supply curve is positive. Note that the supply curve is red: Supply is determined by choices made by firms. Supply in Product/Output Markets

55. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 55 of 83 Assuming that its objective is to maximize profits, a firm’s decision about what quantity of output, or product, to supply depends on: 1.The price of the good or service. 2.The cost of producing the product, which in turn depends on: The price of required inputs (labor, capital, and land). The technologies that can be used to produce the product. 3.The prices of related products. Supply in Product/Output Markets Determinants Of Supply

56. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 56 of 83 Supply in Product/Output Markets Other Determinants Of Supply The Cost Of Production In order for a firm to make a profit, its revenue must exceed its costs. Thus, the supply decision is likely to change in response to changes in the cost of production. Cost of production depends on a number of factors, including the available technologies and the prices and quantities of the inputs needed by the firm (labor, land, capital, energy, and so on). The technological advance lowers the cost of production and increases the productivity. The prices of related product. Increase in the price of substitute product leads to increase in production of that product. Increase in the price of complement product leads to decrease in production of that product.

57. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 57 of 83 The decision of a profit-maximizing firm about what quantity of output to supply depends on: a.The price of the good or service. b.The cost of producing the product. c.The technologies that can be used to produce the product. d.All of the above.

58. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 58 of 83 The decision of a profit-maximizing firm about what quantity of output to supply depends on: a.The price of the good or service. b.The cost of producing the product. c.The technologies that can be used to produce the product. d.All of the above.

59. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 59 A supply curve shows the relationship between the quantity of a good supplied by a firm and the price that brings in the market. A supply curve shows the relationship between the quantity of a good supplied by a firm and the price that product brings in the market. movement along a supply curve The change in quantity supplied brought about by a change in price. When the price of a product changes, ceteris paribus, a change in the quantity supplied follows. A higher price causes higher quantity supplied, and a move along the supply curve. Shift of Supply Versus Movement Along a Supply Curve

60. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 60 We know that when the price of a product changes, we move along the supply curve for that product; the quantity supplied rises or falls. When not price but any other factor effecting supply changes, the supply curve shifts as a whole. shift of a supply curve The change that takes place in a supply curve corresponding to a new relationship between quantity supplied of a good and the price of that good. The shift is brought about by a change in the original conditions. Shift of Supply Versus Movement Along a Supply Curve

61. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 61 of 83 TABLE 3.4 Shift of Supply Schedule for Soybeans Following Development of a New Disease-Resistant Seed Strain SCHEDULE D 0 SCHEDULE D 1 Price (per Bushel) Quantity Supplied (Bushels per Year Using Old Seed) Quantity Supplied (Bushels per Year Using New Seed) $1.5005,000 1.7510,00023,000 2.2520,00033,000 3.0030,00040,000 4.0045,00054,000 5.0045,00054,000 Supply in Product/Output Markets Shift of Supply versus Movement Along a Supply Curve  FIGURE 3.7 Shift of the Supply Curve or Soybeans Following Development of a New Seed Strain When the price of a product changes, we move along the supply curve for that product; the quantity supplied rises or falls. When any other factor affecting supply changes, the supply curve shifts.

62. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 62 the factor affecting supply of soya beans may be a technological change in soybean production. There is a shift of the supply curve as a result of technological change in soybean production The technological advance leads to more output that can be supplied for at any given price level Shift of Supply Curve for Soybeans Following Development of a New Seed Strain

63. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 63 As with demand, it is very important to distinguish between movements along supply curves (changes in quantity supplied) and shifts in supply curves (changes in supply): To summarize : Change in price of a good or service leads to Change in quantity supplied (Movement along the curve) Change in costs, input prices, technology, or prices of related goods and services leads to Change in supply (Shift of curve) Shift of Supply Versus Movement Along a Supply Curve

64. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 64 of 83 The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry. market supply The sum of all that is supplied each period by all producers of a single product. Supply in Product/Output Markets From Individual Supply to Market Supply

65. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 65 From Individual Supply to Market Supply The supply of a good or service can be defined for an individual firm, or for a group of firms that make up a market or an industry. market supply The sum of all that is supplied each period by all producers of a single product. As with market demand, market supply is the horizontal summation of individual firms’ supply curves.

66. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 66 of 83 Supply in Product/Output Markets From Individual Supply to Market Supply  FIGURE 3.8 Deriving Market Supply from Individual Firm Supply Curves Total supply in the marketplace is the sum of all the amounts supplied by all the firms selling in the market. It is the sum of all the individual quantities supplied at each price.

67. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 67 of 83 Refer to the figure below. Which of the following moves best describes what happens when a change in the price of soybeans affects market supply? a.A move from A to B. b.A move from A to C. c.Either move from A to B or A to C. d.A move from B to C.

68. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 68 of 83 Refer to the figure below. Which of the following moves best describes what happens when a change in the price of soybeans affects market supply? a.A move from A to B. b.A move from A to C. c.Either move from A to B or A to C. d.A move from B to C.

69. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 69 of 83 Market Equilibrium  FIGURE 3.9 Market Equilibrium & Excess Demand, or Shortage Market Equilibrium Supply and demand in the market interact to determine equilibrium price and quantity equilibrium The condition that exists when quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change. Only in equilibrium is quantity supplied equal to quantity demanded. At any price level other than P 0, such as P 1, quantity supplied does not equal quantity demanded.

70. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 70 of 83 When quantity demanded exceeds quantity supplied, price tends to rise. When the price in a market rises, quantity demanded falls and quantity supplied rises until an equilibrium is reached at which quantity demanded and quantity supplied are equal. Market Equilibrium Excess Demand  FIGURE 3.9 Excess Demand, or Shortage Excess demand or shortage The condition that exists when quantity demanded exceeds quantity supplied at the current price When quantity demanded exceeds quantity supplied, price tends to rise until equilibrium is restored. At a price of $1.75 per bushel, quantity demanded exceeds quantity supplied. When excess demand exists, there is a tendency for price to rise. When quantity demanded equals quantity supplied, excess demand is eliminated and the market is in equilibrium. Here the equilibrium price is $2.50 and the equilibrium quantity is 35,000 bushels.

71. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 71 of 83 When quantity supplied exceeds quantity demanded at the current price, the price tends to fall. When price falls, quantity supplied is likely to decrease and quantity demanded is likely to increase until an equilibrium price is reached where quantity supplied and quantity demanded are equal. Market Equilibrium Excess Supply excess supply or surplus The condition that exists when quantity supplied exceeds quantity demanded at the current price When quantity supplied exceeds quantity demanded, price tends to fall until equilibrium is restored At a price of $3.00, quantity supplied exceeds quantity demanded by 20,000 bushels. This excess supply will cause the price to fall.  FIGURE 3.10 Excess Supply, or Surplus

72. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 72 of 83 Refer to the figure below. When market price is $1.75, which of the following is correct? a.There is excess supply. b.There is a surplus. c.Quantity demanded is greater than quantity supplied. d.All of the above.

73. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 73 of 83 Refer to the figure below. When market price is $1.75, which of the following is correct? a.There is excess supply. b.There is a surplus. c.Quantity demanded is greater than quantity supplied. d.All of the above.

74. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 74 of 83 Market Equilibrium Changes In Equilibrium When supply and demand curves shift, the equilibrium price and quantity change.  FIGURE 3.11 The Coffee Market: A Shift of Supply and Subsequent Price Adjustment Before the freeze, the coffee market was in equilibrium at a price of $1.20 per pound. At that price, quantity demanded equaled quantity supplied. The freeze shifted the supply curve to the left (from S 0 to S 1 ), increasing the equilibrium price to $2.40.

75. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 75 of 83 Market Equilibrium Changes In Equilibrium  FIGURE 3.12 Examples of Supply and Demand Shifts for Product X

76. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 76 of 83 Which of the following situations leads to a lower equilibrium price? a.An increase in demand, without a change in supply. b.A decrease in supply accompanied by an increase in demand. c.A decrease in supply, without a change in demand. d.A decrease in demand accompanied by an increase in supply. e.An increase in demand accompanied by an increase in supply.

77. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 77 of 83 Which of the following situations leads to a lower equilibrium price? a.An increase in demand, without a change in supply. b.A decrease in supply accompanied by an increase in demand. c.A decrease in supply, without a change in demand. d.A decrease in demand accompanied by an increase in supply. e.An increase in demand accompanied by an increase in supply.

78. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 78 of 83 Bad News for Orange JuiceFanatics Orange Juice Prices Could Skyrocket After Freeze Destroys Most of California Output City News Market Equilibrium Changes In Equilibrium

79. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 79 of 83 Demand and Supply in Product Markets: A Review 1.A demand curve shows how much of a product a household would buy if it could buy all it wanted at the given price. A supply curve shows how much of a product a firm would supply if it could sell all it wanted at the given price. 2.Quantity demanded and quantity supplied are always per time period—that is, per day, per month, or per year. 3.The demand for a good is determined by price, household income and wealth, prices of other goods and services, tastes and preferences, and expectations. Here are some important points to remember about the mechanics of supply and demand in product markets:

80. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 80 of 83 Demand and Supply in Product Markets: A Review 4.The supply of a good is determined by price, costs of production, and prices of related products. Costs of production are determined by available technologies of production and input prices. 5.Be careful to distinguish between movements along supply and demand curves and shifts of these curves. When the price of a good changes, the quantity of that good demanded or supplied changes—that is, a movement occurs along the curve. When any other factor changes, the curve shifts, or changes position. 6.Market equilibrium exists only when quantity supplied equals quantity demanded at the current price. Here are some important points to remember about the mechanics of supply and demand in product markets:

81. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 81 of 83 Why Do the Prices ofNewspapers Rise? In 2006, the average price for a daily edition of a Baltimore newspaper was $0.50. In 2007, the average price had risen to $0.75. Demand and Supply in Product Markets: A Review

82. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 82 of 69 Looking Ahead: Markets and the Allocation of Resources You can already begin to see how markets answer the basic economic questions of what is produced, how it is produced, and who gets what is produced.  Demand curves reflect what people are willing and able to pay for products; demand curves are influenced by incomes, wealth, preferences, prices of other goods, and expectations.  Firms in business to make a profit have a good reason to choose the best available technology—lower costs mean higher profits.  When a good is in short supply, price rises. As it does, those who are willing and able to continue buying do so; others stop buying.

83. CHAPTER 3 Demand, Supply, and Market Equilibrium © 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Economics 9e by Case, Fair and Oster 83 In Summary: Markets answer the basic economic questions of what is produced, how it is produced and who gets what is produced. A firm will produce what is profitable to produce. If it can sell a product at a price that is sufficient to leave a profit after production costs are paid, it will in all likelihood produce that product. Resources will flow in the direction of profit opportunities.