Download Introduction Learning Objectives

Chapter 3
Demand
and Supply
Copyright ©2011 by Pearson Education, Inc.
All rights reserved.
Introduction
Three decades ago, 45% of U.S. residents were classified as
“overweight”. Today, about 67% fall into this category.
One explanation for higher body weights is less exercise; another
is that people simply consume more food than in the past.
Determining why individuals eat more requires understanding of
how two key variables—price and income—influence desired
consumption of an item such as food.
3-2
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Learning Objectives
• Explain the law of demand
• Discuss the difference between money
prices and relative prices
• Distinguish between changes in demand
and changes in quantity demanded
3-3
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Learning Objectives (cont'd)
• Explain the law of supply
• Distinguish between changes in supply and
changes in quantity supplied
• Understand how supply and demand
interact to determine equilibrium price and
quantity
3-4
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Chapter Outline
•
•
•
•
•
•
•
Demand
The Demand Schedule
Shifts in Demand
The Law of Supply
The Supply Schedule
Shifts in Supply
Putting Demand and Supply Together
3-5
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Did You Know That...
• No new oil refineries have been built in the
U.S. since 1976?
• Recently, however, Hyperion, a Dallasbased company, announced its intention to
build a new refinery at Elk Pont, South
Dakota.
• By using demand and supply you can
develop a better understanding of why we
sometimes see large increases in the price
of gasoline.
3-6
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Did You Know That… (cont’d)
• Markets
– Arrangements that individuals have for
exchanging with one another
– Represent the interaction of buyers and
sellers for goods and services
– Markets set the prices we pay and receive.
•
•
•
•
Automobile market
Health care market
Labor market
Stock market
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Demand
• A schedule showing how much of a good or
service people will purchase at any price
during a specified time period, other things
being constant
3-8
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Demand (cont’d)
• Law of Demand
– Quantity demanded is inversely related to price,
holding other factors constant.
• Price Qd • Price Qd 3-9
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Demand (cont’d)
• What are we holding constant?
– Income
– Tastes and preferences
– Price of other goods
– Many other factors
3-10
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Demand (cont’d)
• Relative prices and money prices
– Relative Price
• The price of a commodity in terms of
another commodity
– Money Price
• Price we observe today in today’s dollars (absolute, or
nominal price)
3-11
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Table 3-1 Money Price versus
Relative Price
3-12
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E-Commerce Example: Quality-Adjusting
the Price of Broadband Service
• In most U.S. areas, broadband Internet service is
priced at about $15 per month compared to France,
where price is about $36 per month.
• U.S. providers, however, typically offer broadband
speeds of less than 0.77 megabit per second
compared to 20 megabits per second in France.
• Thus, the U.S. speed-adjusted price is nearly 10
times higher than in France.
3-13
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The Demand Schedule
• The demand schedule
– Table relating prices to quantity demanded
– We must consider
• Time dimension
• Constant-quality units
• Demand Curve
– A graphical representation of the demand schedule
– Negatively sloped line showing inverse
relationship between price and quantity
demanded, all else equal
3-14
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Figure 3-1 The Individual Demand Schedule
and the Individual Demand Curve, Panel (a)
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Figure 3-1 The Individual Demand Schedule
and the Individual Demand Curve, Panel (b)
3-16
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The Demand Schedule (cont’d)
• Individual versus market demand curves
• Market Demand
– The demand of all consumers in the
marketplace for a particular good or service
– Summation at each price of the quantity
demanded by each individual
3-17
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Figure 3-2 The Horizontal Summation of
Two Demand Curves, Panel (a)
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Figure 3-2 The Horizontal Summation of
Two Demand Curves, Panels (b), (c), (d)
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Figure 3-3 The Market Demand Schedule
for Secure Digital Cards, Panel (a)
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Figure 3-3 The Market Demand Schedule
for Secure Digital Cards, Panel (b)
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Shifts in Demand
• Scenario
– Imagine the federal government gives every
student registered in a college, university, or
technical school in the United States a laptop
with a slot for secure digital cards.
• If some factor other than price changes, we can show
its effect by moving the entire demand curve, shifting
the curve left or right.
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Figure 3-4 A Shift in the Demand
Curve
Suppose universities
prohibit the use of
notebook computers
Suppose the federal
government gives
every student a
notebook computer
3-23
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Determinants of Demand
• Ceteris-Paribus Conditions
– Determinants of the relationship between price
and quantity that are unchanged along a curve
– Changes in these factors cause a curve to shift
3-24
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Normal and Inferior Goods
• Normal Goods
– Goods for which demand rises as income rises;
most goods are normal goods
• Inferior Goods
– Goods for which demand falls as income rises
3-25
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Shifts in Demand
• Determinants of demand
– Income
– Tastes and preferences
– The prices of related goods
• Substitutes
• Complements
3-26
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Shifts in Demand (cont'd)
• Substitutes
– Two goods are substitutes when a change in the
price of one causes a shift in demand for the
other in the same direction as the price change.
3-27
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Example: Diamonds May Not
Really Be Forever
• The day that sellers of diamonds have long dreaded has
arrived. Several experts examine three gems.
• The first gem is a real diamond; the second is cubic zirconia;
the third is a gem-quality diamond produced in a lab—known
as a “synthetic” diamond.
• The jewelry experts pronounce the synthetic gem as the
highest quality of the three.
• In what direction do you think the demand curve for real
diamonds has shifted as lower-priced synthetic diamonds
have become available?
3-28
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Shifts in Demand (cont'd)
• Complements
– Two goods are complements when a change in
the price of one causes an opposite shift in the
demand curve for the other.
3-29
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Shifts in Demand (cont'd)
• Determinants of demand
– Expectations
• Future prices
• Income
• Product availability
– Market size (number of buyers)
3-30
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Shifts in Demand (cont'd)
The Determinants of Demand
Income: Normal Good
Price
Increase in income
increases demand
Decrease in income
decreases demand
D3
D1
D2
Q/Units
3-31
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Shifts in Demand (cont'd)
The Determinants of Demand
Income: Inferior Good
Price
Decrease in income
increases demand
Increase in income
decreases demand
D3
D1
D2
Q/Units
3-32
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Shifts in Demand (cont'd)
The Determinants of Demand
Tastes and Preferences
Price
Hybrid vehicles
• Increase in demand
SUVs
• Decrease in demand
D3
D1
D2
Q/Units
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3-33
Shifts in Demand (cont'd)
The Determinants of Demand
Price of Related Goods: Substitutes
Price
Butter and Margarine
• Price of both = $2/lb
• Price of margarine
increases to $3/lb
• Demand for butter
increases
D1
D2
Q/Butter
3-34
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Shifts in Demand (cont'd)
The Determinants of Demand
Price of Related Goods: Complements
Price
Speakers and Amplifiers
• Decrease the relative
price of amplifiers
• Demand for speakers
increases
Speakers and Amplifiers
• Increase the relative
price of amplifiers
• Demand for speakers
decreases
D3
D1
D2
Q/Speakers
3-35
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Shifts in Demand (cont'd)
The Determinants of Demand
Expectations: Income, Future Prices
Price
A higher income or
expectations of a higher future
price will increase demand
A lower income or
expectations of a lower future
price will decrease demand
D3
D1
D2
Q/Units
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3-36
Shifts in Demand (cont'd)
The Determinants of Demand
Market Size (Number of Buyers)
Price
Increase in the
number of buyers
increases demand
Decrease in the
number of buyers
decreases demand
D3
D1
D2
Q/Units
3-37
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Shifts in Demand (cont'd)
• Changes in demand versus changes in
quantity demanded
– A change in one or more of the non-price
determinants (income, tastes, etc.) will lead to a
change in demand.
• This is a shift of the whole curve.
3-38
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Shifts in Demand (cont'd)
• Changes in demand versus changes in
quantity demanded
– A change in a good’s own price leads to a change
in quantity demanded.
• This is a movement along the same curve.
– ∆D is not the same as ∆Qd.
3-39
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Figure 3-5 Movement Along a
Given Demand Curve
A change in the price
changes the quantity
of a good demanded,
movement along the curve
3-40
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The Law of Supply
• Supply
– Schedule showing relationship between price and
quantity supplied for a specified time period,
other things being equal
– The amount of a product or service that firms
are willing to sell at alternative prices
3-41
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The Law of Supply (cont'd)
• Law of Supply
– The price of a product or service and the
quantity supplied are directly related.
•P
Qs •P
Qs 3-42
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The Supply Schedule
• The supply schedule is a table relating
prices to quantity supplied at each price.
• Supply Curve
– A graphical representation of the
supply schedule
– Positively sloped line showing direct relationship
between price and quantity supplied, all else
equal
3-43
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Figure 3-6 The Individual Producer’s Supply
Schedule and Supply Curve for Secure Digital
Cards, Panel (a)
3-44
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Figure 3-6 The Individual Producer’s Supply
Schedule and Supply Curve for Secure Digital
Cards, Panel (b)
3-45
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Figure 3-7 Horizontal Summation
of Supply Curves, Panel (a)
3-46
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Figure 3-7 Horizontal Summation of
Supply Curves, Panels (b), (c), (d)
3-47
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Figure 3-8 The Market Supply Schedule
and the Market Supply Curve for Secure
Digital Cards, Panel (a)
3-48
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Figure 3-8 The Market Supply Schedule
and the Market Supply Curve for Secure
Digital Cards, Panel (b)
3-49
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Shifts in Supply
• Scenario
– A new method of manufacturing SD cards
significantly reduces the cost of production.
– What will producers of SD cards do?
3-50
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Figure 3-9 A Shift in the Supply
Curve
If some other factor than
price changes, the only
way we can show its
effect is by moving the
entire supply curve
If costs increase,
supply decreases
If costs decrease,
supply increases
3-51
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Price per Flash Memory Pen Drive ($)
Figure 3-9 A Shift in the Supply
Curve (cont’d)
5
S2
S1
a
4
c
When supply increases
the quantity supplied will
be greater at each price
3
2
1
0
2
4
6
10
8
12
14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
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Price per Flash Memory Pen Drive ($)
Figure 3-9 A Shift in the Supply
Curve (cont’d)
5
S2
S1
a
4
b
c
3
When supply increases
the quantity supplied will
be greater at each price
d
2
1
0
2
4
6
10
8
12
14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
3-53
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Price per Flash Memory Pen Drive ($)
Figure 3-9 A Shift in the Supply
Curve (cont’d)
S3
5
S1
b
4
d
a
When supply decreases
the quantity supplied will
be less at each price
c
3
2
1
0
2
4
6
8
10
12
14
Quantity of Flash Memory Pen Drives Supplied
(millions of constant-quality units per year)
3-54
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Shifts in Supply (cont'd)
• Determinants of supply
– Cost of inputs
– Technology and productivity
– Taxes and subsidies
– Price expectations
– Number of firms in industry
3-55
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Shifts in Supply (cont'd)
The Determinants of Supply
Cost of Inputs
Price
Increase in cost
decreases supply
S3
S1
S2
Decrease in cost
increases supply
Q/Units
3-56
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Shifts in Supply (cont'd)
The Determinants of Supply
Technology and Productivity
Price
S3
S1
S2
Decreases in productivity
decrease supply
Improvements in technology or
increases in productivity
increase supply
Q/Units
Copyright © 2011 Pearson Education, Inc. All rights reserved.
3-57
Shifts in Supply (cont'd)
The Determinants of Supply
Taxes and Subsidies
Price
S3
S1
S2
Increases in taxes or
decreases in subsidies
decrease supply
Decreases in taxes or
increases in subsidies
increase supply
Q/Units
3-58
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Shifts in Supply (cont'd)
The Determinants of Supply
Price Expectations
Price
Expectations of higher
future prices decrease
supply
S3
S1
S2
Expectations of lower
future prices increase
supply
Q/Units
3-59
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Shifts in Supply (cont'd)
The Determinants of Supply
Number of Firms in Industry
Price
Decrease in the
number of firms
decreases supply
S3
S1
S2
Increase in the
number of firms
increases supply
Q/Units
Copyright © 2011 Pearson Education, Inc. All rights reserved.
3-60
Shifts in Supply (cont'd)
• Changes in supply versus changes in
quantity supplied
– A change in one or more of the non-price
determinants will lead to a change in supply.
• This is a shift of the whole curve.
3-61
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Shifts in Supply (cont'd)
• Changes in supply versus changes in
quantity supplied
– A change in a good’s own price leads to a change
in quantity supplied.
• This is a movement along the same curve.
– ∆S is not the same as ∆Qs.
3-62
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International Policy Example:
Government Subsidies Generate More
Train Traffic in Europe
• Recently, national governments of the European
Union decided to shoulder most of the regular
expenses associated with maintaining rail track
networks, providing a subsidy per kilometer of track
traversed by rail freight.
• European rail companies have responded by
increasing the amounts of freight transport services
they provide.
• Thus, the provision of government subsidies has
brought about an increase in the supply of
European rail-freight services.
3-63
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Putting Demand
and Supply Together
• Putting demand and supply together
• Equilibrium (Market Clearing) Price
– The price that clears the market
– The price at which quantity demanded equals
quantity supplied
– The price where the demand curve intersects the
supply curve
3-64
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Figure 3-10 Putting Demand and
Supply Together, Panel (a)
3-65
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Figure 3-10 Putting Demand and
Supply Together, Panel (b)
3-66
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Putting Demand
and Supply Together (cont'd)
• Equilibrium
– The situation when quantity supplied equals
quantity demanded at a particular price
– There tends to be no movement of the price of
the quantity away from this point unless demand
or supply changes.
– Equilibrium is a stable point – any point that is
not equilibrium is unstable and will not persist.
3-67
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Putting Demand
and Supply Together (cont'd)
• Shortages
– The situation when quantity demanded is greater
than quantity supplied
• Qd > Qs
– Exist at any price below the market clearing
price
3-68
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Putting Demand
and Supply Together (cont'd)
• Surpluses
– The situation when quantity supplied is
greater than quantity demanded
• Qd < Qs
– Exist at any price above the market
clearing price
3-69
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Policy Example: Should Shortages in the
Ticket Market Be Solved by Scalpers?
• If you’ve ever tried to get tickets to the big
game you know all about “shortages.”
• Since the quantity of tickets is fixed, the
price can go pretty high.
• Enter the scalper.
3-70
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Figure 3-11 Shortages of Super
Bowl Tickets
3-71
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Issues and Applications: Why Are
People Eating More?
• Being overweight predisposes an individual to ailments such
as arthritis, diabetes, heart disease, high blood pressure,
respiratory problems, and strokes.
• Yet, about two-thirds of the U.S. population is overweight.
• A more sedentary lifestyle and increased calorie consumption
help explain the increase in body mass of the average U.S.
resident.
• One of the reasons for the increase in food consumption is
the fact that relative food prices have fallen by over 17
percent over the last three decades.
3-72
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Issues And Applications: Why Are
People Eating More? (cont’d)
• One reason people today buy and eat more
food is simply because food is cheaper than
it used to be.
• Incomes have also risen over the same time
span and most food items are normal
goods, hence demand for food has risen.
• Without additional exercise, people have
been gaining more weight.
3-73
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Figure 3-12 U.S. Calorie Consumption
and the Relative Price of Food, Panel (a)
3-74
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Figure 3-12 U.S. Calorie Consumption
and the Relative Price of Food, Panel (b)
3-75
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Summary Discussion
of Learning Objectives
• The law of demand says that prices
and quantity demanded are
inversely related.
– At a higher price people buy less, at a lower
price people buy more.
• Relative prices must be distinguished from
money prices, since people respond to
changes in relative prices.
3-76
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Summary Discussion
of Learning Objectives (cont'd)
• A change in quantity demanded versus a
change in demand
– A change in quantity demanded is a movement
along the same demand curve.
– A change in demand is a shift of the whole
demand curve.
3-77
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Summary Discussion
of Learning Objectives (cont'd)
• The law of supply states that price and
quantity supplied are directly related.
– At a high price firms offer more; at a low price
firms offer less.
• A change in quantity supplied versus a
change in supply
– A change in quantity supplied is a movement
along the same supply curve.
– A change in supply is a shift of the whole
supply curve.
3-78
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Summary Discussion
of Learning Objectives (cont'd)
• Determining market price and equilibrium
quantity
– The demand and supply curves intersect at the
market clearing, or equilibrium point.
– Surpluses exist if the price of the good is greater
than the market price.
– Shortages exist when the price of a good is
below the market price.
3-79
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