Download Ch. 3: Supply and Demand: Theory

Ch. 3: Supply and Demand:
Theory
Demand
• Demand is: the _________and ability of
buyers to purchase different quantities of a
good at different prices during a
_______________.
• The Law of Demand: as the price of a
good rises, ______________ of that good
falls; as the price of a good falls, quantity
demanded of that good rises.
Prices
• Absolute Price: the price of a good
_____________ (Ex: A new Car costs $30,000).
• Relative Price: the price of a good
_______________ (Ex: A new Car costs 30
computers)
• Relative price is calculated by __________the
absolute price of one product with the absolute
price of another product (Ex: A Car costs
$30,000; A Computer costs $1,000; The relative
cost of a Car is 30 Computers)
Why Quantity Demanded Goes
Down As Price Goes Up
• People ___________ lower-priced goods
for higher-priced goods.
• The Law of Diminishing Marginal Utility: for
a given time period, the marginal
(additional) utility or ________ gained by
consuming equal ______________units of
a good will ___________ as the amount
consumed increases.
Four Ways to Represent The
Law Of Demand
• In Words: “As price
rises,
_________________”
• In Symbols: PQd
• In a ________
Schedule
• In a ___________
Curve
Demand Schedule
Causes of Change in the
Demand Curve
•
•
•
•
•
Income
Preferences
__________________
Number of Buyers
______________________
Income Changes in Demand
Shifts in Demand Curves
• The demand for a good increases if
people are willing and able to buy more of
the good at all prices.
• A normal good is a good the ________ for
which rises(falls) as ________ rises(falls).
• An inferior good is a good the _______ for
which rises(falls) as _______ falls(rises).
Preferences, Substitutes and
Related Goods
• Preferences affect the amount of a good they
are willing to buy at a particular price (Ex:
favorite food, favorite author)
• If the demand for Coke ________ as the price
for _____________, and the _______ for Coke
falls as the ______________, Coke and Pepsi
are___________.
• If __________ of product A falls as the
__________ for product B rises, and the price of
product A rises as the _______________, A and
B are Related Goods (Ex: Ketchup and Hot Dog
Buns).
Shifting the Demand Curve
• A change in Demand causes a __________________
curve.
• A change in the _________ Demanded _______ a
point ______ the current Demand curve.
• If Demand increases, the curve shifts to the right.
• If Demand decreases, the curve shifts to the left.
Q&A
• As Sandi’s income rises, her demand for
popcorn rises. As Mark’s income falls, his
demand for prepaid telephone cards rises.
What kinds of goods are popcorn and
telephone cards for the people who demand
each?
• Why are demand curves downward sloping?
• Give an example that illustrates how to derive
a market demand curve.
• What factors can change demand? What
factors can change quantity demanded?
Supply
• Supply is the _______ and _____ of
sellers to _______ and ____________
different quantities of a good at different
prices during a specific period of time
• Law of Supply: As the price of a good
____, the quantity _______ of the good
____; and as the price of a good falls, the
quantity supplied of the good falls.
The Supply Curve
Why Supply Curves Slope
Upwards
An Upward-sloping supply curve reflects the fact
that under certain conditions, a higher price is
an _______ to producers to produce more of a
good.
Market Supply Curve
• The Market Supply Curve represents the _____
_____ combinations for all sellers of a particular
good.
• An Individual supply curve represents the pricequantity combinations for a single seller
Supply Curve Shifters
• If the price of a relevant ______ changes, the
supply curve will ____ (EX: wood prices
increase, cost of a new house increases as well)
• ________ can increase the quantity supplied by
producing more of a product with the same
quantity of resources supplied.
• If the _________ increase, the supply curve
will shift.
• If the price of a good is _________ to be higher
in the future, the supply curve will shift
Supply Curve Shifters
• _______ increase unit costs
• Government ___________ can change the supply
curve by increasing or limiting production.
Shifting the Supply Curve
• A Change in the Supply Curve is a shift in
the Supply Curve, not merely moving up
and down the same curve.
Q&A
• Which way (if any) does the Supply Curve
shift if there is a decrease in the number of
sellers? If there is a per-unit tax is placed
on the production of the good? If the price
of a relevant resource falls?
• Why do most Supply Curves slope
upward?
The Market
Putting Supply and Demand
Together
Market Language
• If the quantity supplied is greater than the
quantity demanded, the good has a ________ or
excess supply.
• If quantity demanded is greater than quantity
supplied, a ________ or excess demand exists.
• The price at which a quantity demanded equals
the quantity supplied is the ______________, or
the market-clearing price.
• A market that has too much of a good or too little
of a good is considered to be in
________________.
Moving to Equilibrium
1. Why does the price fall when there is a surplus?
2. Why does the price rise when there is a shortage?
• _______________________________________.
Price Controls
•
•
1)
2)
3)
4)
5)
Price Ceiling: a __________ mandated price
above which __________ may not be made.
Price Ceilings may cause:
_________
Fewer Exchanges
Non-price Rationing Devices
Buying and Selling at a Prohibited Price (Black
Market)
Tie in Sales
Price Floor
• A price floor is a government _________
minimum price _____ which legal trades
cannot be made.
• Price floors can cause ________ and
Fewer Exchanges.
Q&A
• Do buyers prefer lower prices to higher
prices?
• Who might argue for a Price Ceiling? A
Price Floor? Why would they argue their
viewpoint?