1. MBMC Supply and Demand: An Introduction Supply and Demand: An Introduction

2. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 2 Supply and Demand: An Introduction How do consumers get the goods and services they want in the right quantities and qualities? Some goods and services are allocated by the market forces of supply and demand

3. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 3 Supply and Demand: An Introduction Why do some goods and services have shortages or surpluses and others do not? Some good and supplies services are regulated by government

4. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 4 What, How, and For Whom? Central Planning Versus the Market Three Problems All Economic Systems Must Address What should be produced? How should it be produced? For whom will it be produced?

5. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 5 What, How, and For Whom? Central Planning Versus the Market A small number of individuals address: What  Establish production targets for factories and farms How  Plan how to achieve the goals For Whom  Distribute the goods and services produced

6. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 6 What, How, and For Whom? Central Planning Versus the Market Free-Market or Capitalist Economic System Individual choices determine:  Which careers to pursue  Which products to produce or buy  When to start and shut-down a business  Who gets what is decided by individual preferences and purchasing power

7. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 7 Buyers and Sellers In Markets Market Consists of all buyers and sellers of a good or service What do you think? What determines the price of pizza, gasoline, a car wash, or other goods and services?

8. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 8 Buyers and Sellers In Markets The Demand Curve A schedule or graph that tells us the quantity of a good that buyers wish to buy at each price

9. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 9 Buyers and Sellers In Markets A Property of Demand As price of a good or service goes down the quantity consumers wish to buy will increase Therefore, the demand curve is downward- sloping

10. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 10 The Daily Demand Curve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 8 2 16 3 12 Demand

11. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 11 Buyers and Sellers In Markets The Demand Curve Why do buyers purchase a greater quantity at lower prices and vice-versa?  The substitution effect  The income effect

12. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 12 Buyers and Sellers In Markets The Supply Curve A curve or schedule showing the quantity of a good that sellers wish to sell at each price

13. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 13 Buyers and Sellers In Markets The Supply Curve Sellers must receive a higher price to produce additional units of product to cover the higher opportunity costs of each additional unit

14. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 14 The Daily Supply Curve for Pizza in Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply

15. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 15 Market Equilibrium Equilibrium A system is in equilibrium when there is no tendency for it to change Market Equilibrium Occurs in a market when all buyers and sellers are satisfied with their respective quantities at the market price

16. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 16 The Equilibrium Price and Quantity of Pizza In Chicago Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply Demand Equilibrium at $3 Quantity Demanded = Quantity Supplied

17. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 17 Market Equilibrium Equilibrium Price and Equilibrium Quantity The values of price and quantity for which quantity supplied and quantity demanded are equal

18. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 18 Excess Supply Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 81216 Supply Demand Excess supply = 8,000 slices per day

19. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 19 Excess Demand Price ($ per slice) Quantity (1000s of slices per day) 4 2 3 816 Excess demand = 8,000 slices per day Supply Demand

20. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 20 Predicting and Explaining Changes In Prices and Quantities Distinguishing Between: A change in the quantity demanded  A movement along the demand curve that occurs in response to a change in price A change in demand  A shift of the entire demand curve

21. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 21 An Increase In Quantity Demanded vs. An Increase In Demand Price ($/can) Quantity (1000s of cans/day) 5 2 3 4 1 4 122 6 0 1068 Increase in quantity demanded D

22. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 22 An Increase In Quantity Demanded vs. An Increase In Demand Price ($/can) Quantity (1000s of cans/day) 5 2 3 1 4 12 6 0 Increase in demand D D D’

23. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 23 Predicting and Explaining Changes In Prices and Quantities Change in the quantity supplied A movement along the supply curve that occurs in response to a change in price Change in supply A shift of the entire supply curve

24. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 24 An Increase In Quantity Supplied vs. An Increase In Supplied Price ($/can) Quantity (1000s of cans/day) 5 2 3 4 1 4 102 6 068 S S Increase in quantity supplied

25. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 25 An Increase In Quantity Supplied vs. An Increase In Supplied Price ($/can) Quantity (1000s of cans/day) 5 2 3 4 1 4 102 6 S 068 S S’ Increase in supply

26. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 26 The Effect on the Market for Tennis Balls of a Decline in Court-Rental Fees Price ($/ball) Quantity (letters/month) 1.00 S D 40 D’ 1.40 58

27. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 27 The Effect on the Market for Overnight Letter Delivery of a Decline in the Price of Internet Access Price ($/letter) Quantity (letters/month) P Q S D P’ Q’ D’

28. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 28 The Effect of a Federal Pay Raise on the Rent for Conveniently Located Apartments in Washington D.C. Rent (dollars per month) Conveniently located apartments (units per month) D P Q S P’ Q’ D’

29. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 29 Predicting and Explaining Changes In Prices and Quantities A Change In Income Normal Good  One whose demand increases (decreases) when the incomes of buyers increase (decrease)

30. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 30 Predicting and Explaining Changes In Prices and Quantities A Change In Income Inferior Good  One whose demand decreases (increases) when the incomes of buyers increase (decrease)

31. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 31 The Effect of the Release of Jurassic Park on the Market for Toy Dinosaurs Price Toy Dinosaurs (units per month) P Q D S D’ P’ Q’ D’ = demand after release of movie

32. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 32 The Effect of a Credible Rumor on the Market for Apple Macintosh Computers Price Apple Computers (units per month) P Q S D P’ Q’ D’ D’ = demand after rumor of cheaper model soon to be released

33. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 33 The Effect of the Increase in the Population of Potential Buyers Price Housing NY City (units per month) P Q S D P’ Q’ D’ D’ = demand after increase in population

34. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 34 Predicting and Explaining Changes In Prices and Quantities Factors that Shift Demand Price of complements Price of substitutes Income Preferences Population of potential buyers Expectations

35. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 35 The Effect on the Skateboard Market of an Increase in the Price of Fiberglass Price ($/skateboard) Quantity (skateboards/month) 60 1000 S D 80 800 S’

36. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 36 The Effect on the Market for New Houses of a Decline in Carpenters’ Wage Rates Price ($1000/house) Quantity (houses/month) 120 40 D S 90 50 S’

37. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 37 Predicting and Explaining Changes In Prices and Quantities Factors that Shift Supply Costs of production Technology Weather Number of suppliers Expectations

38. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 38 Price Quantity P P’ QQ’ S D’ D An increase in demand will lead to an increase in both the equilibrium price and quantity Four Rules Governing the Effects of Supply And Demand Shifts

39. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 39 Price Quantity P’ P Q’Q S D D’ A decrease in demand will lead to a decrease in both the equilibrium price and quantity Four Rules Governing the Effects of Supply And Demand Shifts

40. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 40 P’ P QQ’ S’ D S Price Quantity An increase in supply will lead to a decrease in the equilibrium price and an increase in the equilibrium quantity Four Rules Governing the Effects of Supply And Demand Shifts

41. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 41 P P’ Q’Q S D S’ Price Quantity An decrease in supply will lead to an increase in the equilibrium price and a decrease in the equilibrium quantity Four Rules Governing the Effects of Supply And Demand Shifts

42. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 42 Predicting and Explaining Changes In Prices and Demand Factors That Cause an Increase (rightward or upward shift) in Demand 1.A decrease in the price of complements to the good or service 2.An increase in the price of substitutes for the good or service 3.An increase in income (for a normal good)

43. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 43 Predicting and Explaining Changes In Prices and Demand Factors That Cause an Increase (rightward or upward shift) in Demand 4.An increased preference by demanders for the good or service 5.An increase in the population of potential buyers 6.An expectation of higher prices in the future

44. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 44 Predicting and Explaining Changes In Prices and Demand Factors That Cause an Increase (rightward or upward shift) in Supply 1.A decrease in the cost of materials, labor, or other inputs used in the production of the good or service 2.An improvement in technology that reduces the cost of producing the good or service

45. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 45 Predicting and Explaining Changes In Prices and Demand Factors That Cause an Increase (rightward or upward shift) in Supply 3.An improvement in the weather, especially for agricultural products 4.An increase in the number of suppliers 5.An expectation of lower prices in the future

46. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 46 Seasonal Variation in Air Travel Price ($/ticket) 1000s of tickets S DSDS DWDW QWQW QSQS PWPW PSPS High Consumption and Prices Due to High Demand

47. MBMC Copyright c 2007 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 3 - Supply and Demand: An IntroductionSlide 47 Seasonal Variation in Corn Markets Price ($/bushel) Millions of bushels SWSW D QWQW QSQS PWPW PSPS S High Consumption and Low Prices due to High Supply

48. MBMC End of Chapter End of Chapter