Download Demand and Supply

Chapter 3:
Demand
and Supply
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
Objectives
After studying this chapter, you will be able to:
§ Describe a competitive market and think about a price as an
opportunity cost
§ Explain the influences on demand
§ Explain the influences on supply
§ Explain how demand and supply determine prices and
quantities bought and sold
§ Use demand and supply to make predictions about changes in
prices and quantities
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-2
Slide, Rocket, Roller Coaster
§ Some prices slide, some rocket, and some roller
coaster.
§ This chapter explains how prices are determined and
how markets guide and coordinate choices.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-3
Markets and Prices
§ A market is any arrangement that enables buyers and sellers to
get information and do business with each other.
§ A competitive market is a market that has many buyers and
many sellers, so no single buyer or seller can influence the
price.
§ The money price of a good is the amount of money needed to
buy it.
§ The relative price of a good—the ratio of its money price to
the money price of the next best alternative good—is its
opportunity cost.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-4
Demand
§ If you demand something, then you:
§ want it,
§ can afford it, and
§ have made a definite plan to buy it.
§ Wants are the unlimited desires or wishes people have for
goods and services. Demand reflects a decision about
which wants to satisfy.
§ The quantity demanded of a good or service is the amount
that consumers plan to buy during a particular time period,
and at a particular price.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-5
Demand
§ The law of demand
§ The law of demand states:
§ Other things remaining the same, the higher the price
of a good, the smaller is the quantity demanded.
§ The law of demand results from:
§ A substitution effect
§ An income effect
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-6
Demand
§ Substitution effect
§ When the relative price (opportunity cost) of a good or
service rises, people seek substitutes for it, so the
quantity demanded decreases.
§ Income effect
§ When the price of a good or service rises relative to
income, people cannot afford all the things they
previously bought, so the quantity demanded decreases
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-7
Demand
§ Demand curve and demand schedule
§ The term demand refers to the entire relationship
between the price of the good and quantity demanded of
the good.
§ A demand curve shows the relationship between the
quantity demanded of a good and its price, when all other
influences on consumers’ planned purchases remain the
same.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-8
Demand
§ Figure 3.1 on the following slide shows a demand curve for
recordable compact discs (CD-Rs).
§ A rise in the price, other things remaining the same, brings a
decrease in the quantity demanded and a movement along
the demand curve.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-9
The Demand Curve
Figure 3.1
Price (dollars
per disc)
3.00
e
2.50
d
2.00
c
1.50
b
1.00
a
0.50
0
2
Demand
for CD-Rs
4
6
8
10
Quantity (millions of discs per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-10
Demand
Price
Quantity
(dollars per disc)
(millions of discs per week)
A
0.50
9
B
1.00
6
C
1.50
4
D
2.00
3
E
2.50
2
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-11
Demand
§ A demand curve is also a willingness-and-ability-to-pay
curve.
§ The smaller the quantity available, the higher is the price
that someone is willing to pay for another unit.
§ Willingness to pay measures marginal benefit.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-12
Demand
§ A change in demand
§ When any factor that influences buying plans changes, other
than the price of the good, there is a change in demand for
that good. The quantity of the good that people plan to buy
changes at each and every price, so there is a new demand
curve.
§ When demand increases, the quantity that people plan to
buy increases at each and every price, so the demand curve
shifts rightward.
§ When demand decreases, the quantity that people plan to
buy decreases at each and every price, so the demand curve
shifts leftward.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-13
Demand
§ Six main factors bring changes in demand.
§ They are:
§
§
§
§
§
§
Prices of related goods
Income
Expected future prices
Expected future income
Population
Preferences
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-14
Demand
§ Prices of related goods
§ A substitute is a good that can be used in place of
another good.
§ A complement is a good that is used in conjunction
with another good.
§ When the price of a substitute for CD-Rs rises, or when
the price of a complement for CD-Rs falls, the demand
for CD-Rs increases.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-15
An Increase in Demand
Original demand schedule
New demand schedule
CD burner $300
A
B
C
D
E
CD burner $100
Price
Quantity
Price
(dollars
per disc)
(millions of discs
per week)
(dollars
per disc)
0.50
1.00
1.50
2.00
2.50
9
6
4
3
2
A'
B'
C'
D'
E'
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
0.50
1.00
1.50
2.00
2.50
Quantity
(millions of discs
per week))
13
10
8
7
6
3-16
An Increase in Demand and a Shift
in the Demand Curve
Figure 3.2
Price (dollar per disc)
3.00
2.50
2.00
E
E'
D
D'
C
1.50
C'
1.00
0.50
0
Demand for CD-Rs
(CD burner $100)
B
Demand for CD-Rs
(CD burner $200)
2
4
B'
A
A'
6
8 10 12 14
Quantity (millions of discs per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-17
Demand
§ Expected future prices
§ If the price of a good is expected to rise in the future, current
demand increases and the demand curve shifts rightward.
§ Income
§ When income increases, consumers buy more of most
goods, and the demand curve shifts rightward. A normal
good is one for which demand increases as income
increases. An inferior good is a good for which demand
decreases as income increases.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-18
Demand
§ Population
§
The larger the population, the greater is the demand for all
goods.
§ Preferences
§
People with the same income have different demands if
they have different preferences.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-19
A Change in the Quantity
Demanded Versus a Change in
Demand
Price
Figure 3.3
Decrease in
quantity
demanded
Decrease in
Increase in
demand
Increase in
quantity
demanded
demand
D2
D0
D1
Quantity
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-20
A Change in the Quantity
Demanded Versus a Change in
Demand
§ When the price of the good changes and everything else
remains the same, there is a change in the quantity
demanded and a movement along the demand curve.
§ When one of the other factors that influence buying plans
changes, there is a change in demand and a shift of the
demand curve.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-21
Supply
§
If a firm supplies a good or service, then the firm:
1. Has the resources and the technology to produce it,
2. Can profit from producing it, and
3. Has made a definite plan to produce and sell it.
§
Resources and technology determine what it is possible to
produce. Supply reflects a decision about which
technologically feasible items to produce.
§
The quantity supplied of a good or service is the amount
that producers plan to sell during a given time period at a
particular price.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-22
Supply
§ The law of supply
§ The law of supply states:
§ Other things remaining the same, the higher the price
of a good, the greater is the quantity supplied.
§ The law of supply results from the general tendency for
the marginal cost of producing a good or service to
increase as the quantity produced increases.
§ Producers are willing to supply only if they at least cover
their marginal cost of production.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-23
Supply
§ Supply curve and supply schedule
§ The term supply refers to the entire relationship between the
quantity supplied and the price of a good.
§ The supply curve shows the relationship between the
quantity supplied of a good and its price when all other
influences on producers’ planned sales remain the same.
§ A supply schedule lists the quantities supplied at each price
when all the other influences on producers’ planned sales
remain the same.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-24
The Supply Curve
Figure 3.4
Price (dollar per disc)
3.00
Supply of CD-Rs
2.50
e
2.00
d
1.50
c
1.00
Supply curve
b
0.50
a
0
2
4
6
8
10
Quantity (millions of discs per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-25
A Supply Schedule
Price
Quantity
(dollars per disc)
(millions of discs per week)
A
0.50
0
B
1.00
3
C
1.50
4
D
2.00
5
E
2.50
6
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-26
Supply
§ A change in supply
§
When any factor that influences selling plans other than the
price of the good changes, there is a change in supply.
§ An increase in supply causes the supply to shift
rightward.
§ A decrease in supply causes the supply curve to shift
leftward.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-27
A Change in Supply
§ Five main factors that bring changes to supply:
1. Prices of the factors of production
2. Price of related goods produced
§
§
Substitutes in Production
Complements in Production
3. Expected future prices
4. The number of suppliers
5. Technology
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-28
The Supply of CD-Rs
§ Changes in supply
§ The supply of CD-Rs decreases if:
§ The price of a factor of production used to produce discs
rises
§ The price of a substitute in production rises
§ The price of a complement in production falls
§ The price of a CD-R is expected to rise in the future
§ The number of CD-R producers decreases
§ A less efficient technology is used to produce CD-Rs.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-29
The Supply of CD-Rs
§ Changes in supply
§ The supply of CD-Rs increases if:
§ The price of a factor of production used to produce the
good falls
§ The price of a substitute in production falls
§ The price of a complement in production rises
§ The price of a CD-R is expected to fall in the future
§ The number of firms supplying CD-Rs increases
§ More efficient technologies technology is used to
produce CD-Rs.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-30
An Increase in Supply
Original supply schedule
New supply schedule
Old technology
A
B
C
D
E
New technology
Price
Quantity
Price
(dollars
(millions of tapes
(dollars
(millions of tapes
per tape)
per week)
per tape)
per week)
0.50
1.00
1.50
2.00
2.50
0
3
4
5
6
A'
B'
C'
D'
E'
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
0.50
1.00
1.50
2.00
2.50
Quantity
3
6
8
10
12
3-31
An Increase in Supply and a
Shift in the Supply Curve
Price (dollar per disc)
3.00
Supply of CD-Rs
(old technology)
2.50
e
2.00
e'
d
1.50
d'
c
1.00
0.50
Supply of CD-Rs
(new technology)
b
a
c'
b'
a'
Figure 3.5
0
2
4
6
8
10
12
14
Quantity (millions of discs per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-32
Supply
§ A change in the quantity supplied versus a change in
supply
§ When the price of the good changes and other influences on
selling plans remain the same, there is a change in the
quantity supplied and a movement along the supply curve.
§ When one of the other factors that influence selling plans
changes, there is a change in supply and a shift of the
supply curve.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-33
A Change in the Quantity Supplied
Versus a Change in Supply
Price
Figure 3.6
S1
Increase in
quantity
supplied
Decrease in
supply
S0
S2
Increase in
supply
Decrease in
quantity
supplied
Quantity
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-34
Market Equilibrium
§ Equilibrium is a situation in which opposing forces
balance each other. Equilibrium in a market occurs
when the price balances the plans of buyers and
sellers.
§ The equilibrium price is the price at which the quantity
demanded equals the quantity supplied.
§ The equilibrium quantity is the quantity bought and sold at
the equilibrium price.
§ Price regulates buying and selling plans.
§ Price adjusts when plans don’t match.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-35
Market Equilibrium
§ Price as a regulator
§ If the price is too low, quantity demanded exceeds quantity
supplied.
§ If the price is too high, quantity supplied exceeds quantity
demanded.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-36
Market Equilibrium
Quantity
Price
demanded
(dollars
per disc)
Quantity
Shortage(–)
supplied
or surplus(+)
(millions of discs per week)
0.50
9
0
–9
1.00
6
3
–3
1.50
4
4
0
2.00
3
5
+2
2.50
2
6
+4
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-37
Market Equilibrium
Surplus of
2 million discs
at $2 a disc
Price (dollar per disc)
3.00
Figure 3.7
Supply of CD-Rs
2.50
2.00
Equilibrium
1.50
1.00
0.50
0
Shortage of
3 million
discs at $2 a
disc
2
Demand
for CD-Rs
4
6
8
10
Quantity (millions of discs per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-38
Market Equilibrium
§ Price adjustments
§ At prices above the equilibrium, a surplus forces the price
down.
§ At prices below the equilibrium, a shortage forces the price
up.
§ At the equilibrium price, buying plans and selling plans
agree and the price doesn’t change.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-39
Predicting Changes in Price
and Quantity
§ A change in demand
§ When demand increases, both the price and the quantity
increase.
§ An increase in demand shifts the demand curve
rightward and creates a shortage at the original price.
§ The price rises and the quantity supplied increases.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-40
The Effect of a Change in
Demand
Quantity demanded
Price
(dollars/tape)
0.50
1.00
1.50
2.00
2.50
Quantity supplied
(millions of discs per week)
millions of discs per week
CD burner $300 CD Burner $100
9
6
4
3
2
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
13
10
8
7
6
0
3
4
5
6
3-41
The Effects of a Change in
Demand
Supply of CD-Rs
3.00
Figure 3.8
Price (dollar per disc)
2.50
2.00
1.50
1.00
Demand for CD-Rs
(CD burner $100)
0.50
Demand for tapes
(CD burner $300)
0
2
4
6
8
10
12
14
Quantity (millions of discs per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-42
Predicting Changes in Price
and Quantity
§ A change in supply
§ An increase in supply shifts the supply curve
rightward and creates a surplus at the original
price.
§ The price falls and the quantity demanded
increases.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-43
The Effects of a Change in
Supply
Price
dollars/disc
Quantity demanded
(millions of discs per week)
Quantity supplied
(millions of tapes/week)
Old
technology
1
2
3
4
5
9
6
4
3
2
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
0
3
4
5
6
New
technology
3
6
8
10
12
3-44
Price (dollar per disc)
The Effects of a Change in
Supply
Supply of CD-Rs
(old technology)
3.00
Supply of CD-Rs
(new technology)
2.50
2.00
1.50
1.00
0.50
Demand for CD-Rs
0
2
4
Figure 3.9
6
8
10
12
14
Quantity (millions of disc per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-45
Predicting Changes in Price
and Quantity
§ The effects of an increase in both demand and supply
§ A change in both demand and supply changes the
equilibrium price and the equilibrium quantity, but we need
to know the relative magnitudes of the changes to predict
some of the consequences.
§ An increase in both demand and supply increases the
equilibrium quantity but has an uncertain effect on the
equilibrium price.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-46
The Effects of an Increase in
Both Demand and Supply
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-47
The Effects of an Increase in
Both Demand and Supply
Supply of CD-Rs
(old technology)
Price (dollar per disc)
3.00
Supply of CD-Rs
(new technology)
2.50
2.00
1.50
Demand for tapes
(CD burner $50)
1.00
0.50
0
Demand for tapes
(CD burner $300)
2
4
Figure 3.10
6
8
10
12
14
Quantity (millions of discs per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-48
Predicting Changes in Price
and Quantity
§ The effects of a decrease in demand and an
increase in supply
§ An increase in supply and a decrease in demand lowers
the equilibrium price, but has an uncertain effect on the
equilibrium quantity.
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-49
The Effects of a Decrease in
Demand and an Increase in Supply
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-50
The Effects of a Decrease in
Demand and an Increase in Supply
Supply of CD-Rs
(old technology)
Price (dollar per disc)
3.00
Figure 3.11
2.50
Supply of CD-Rs
(new technology)
2.00
1.50
Demand for CD-Rs
(MP3 download
free
1.00
0.50
Demand for CD-Rs
(MP3 download $10)
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-51
END
CHAPTER 3
McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia
3-52