Download Economics for Today by Irvin Tucker

Chapter 3
Market Supply and Demand
• Key Concepts
• Summary
• Practice Quiz
• Internet Exercises
©2000 South-Western College Publishing
1
In this chapter, you will
learn to solve these
economic puzzles:
What
is
the
difference
Can
Congress
repeal
the
Does
the price
system
between
a
“change
in
laweliminate
of supplyscarcity?
in order to
quantity
demanded”
and
a
control oil prices?
“change in demand”?
2
What is the
Law of Demand?
The principle that there is an
inverse relationship between
the price of a good and the
quantity buyers are willing
to purchase in a defined
time period, ceteris paribus
* Return to previous slide while in slide show
3
What does “Ceteris
Paribus” mean?
All else remains the same
4
What is a Demand Curve?
Depicts the relationship
between price and
quantity demanded
5
Individual’s Demand Curve for Compact Discs
P
Individuals Buyer’s Demand Schedule for Compact Discs
A
$20
$15
B
C
$10
Point
Price
per compact disk
A
B
C
D
$20
$15
$10
$5
Quantity demanded
(per year)
4
6
8
16
7
D
$5
Demand Curve
4
8
16 20
Q
6
Why do Demand Curves
have a Negative Slope?
At a higher price consumers
will buy fewer units, and at
a lower price they will buy
more units
7
What is a
Demand Schedule?
Shows the specific quantity
of a good or service that
people are willing and able
to buy at different prices
8
What is Market Demand?
The summation of
the individual
demand schedules
9
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
DEMANDED AND A
CHANGE IN DEMAND
10
When price changes,
what happens?
The curve does not shift there is a change in the
quantity demanded
11
Increase in
Quantity
Demanded
Decrease in
Price
12
P
$20
$15
Fred’s Demand Curve
$10
$5
D1
1 2 3 4 5 6 7 8 9 Q
13
P
$20
$15
Mary’s Demand Curve
$10
$5
D2
1 2 3 4 5 6 7 8 9 Q
14
P
Market Demand Curve
$20
$15
$10
$5
D3
Q
3 4 5 6 7 8 9 10 11 12
15
P
$20
$15
Fred’s Demand Curve
$10
P
$20
$15
Mary’s Demand Curve
$10
$5
1 2 3 4 5 6 7 8 9 Q
12
P
D2
$5
D1
1 2 3 4 5 6 7 8 9 Q
13
Market Demand Curve
$20
$15
$10
$5
D3
Q
3 4 5 6 7 8 9 10 11 12
14
16
Market Demand Schedule for Compact Discs
Price
$25
$20
$15
$10
$5
Fred
Mary
Total Demanded
1 + 0 = 1
2
1
3
3
3
6
4
5
9
5
7
12
17
P
A change in price causes a change
in the quantity demanded
$20
$15
A
B
$10
$5
10
20
30 40
D
Q
50
18
When something
changes other than
price, what happens?
The whole curve shifts there is a change in demand
19
P
When the ceteris paribus assumption is
relaxed, the whole curve can shift
$20
$15
A
B
$10
$5
10
20
D2
D1
Q
30 40 50
20
Increase in
demand
Change in
nonprice
determinant
21
What can cause a shift
in a Demand Curve?
1. Number of buyers in the market
2. Tastes and preferences
3. Income
4. Expectations of consumers
5. Prices of related goods
22
Decrease in
quantity
demanded
Upward
movement
along the
demand curve
Price
increases
23
Increase in
quantity
demanded
Downward
movement
along the
demand curve
Price
decreases
24
Decrease or
increase in
demand
Leftward or
rightward shift in
the demand curve
Nonprice
determinant
25
What is a Normal Good?
Any good for which there is a
direct relationship between
changes in income and its
demand curve
26
What is an
Inferior Good?
Any good for which there is
an inverse relationship
between changes in income
and its demand curve
27
What are
Substitute Goods?
Goods that compete
with one another for
consumer purchases
28
What happens when the
price increases for a good
that has a substitute?
The demand curve for the
substitute good increases
29
What happens when the
price decreases for a good
that has a substitute?
The demand curve for the
substitute good decreases
30
What does a Direct
Relationship between
price and quantity mean?
It means that the two move
in the same direction
31
What are
Complementary Goods?
Goods that are jointly
consumed with
another good
32
What happens when the
price increases for a good
that has a complement?
The demand curve for the
substitute good decreases
33
What happens when the
price decreases for a good
that has a complement?
The demand curve for the
substitute good increases
34
What does an Inverse
Relationship between
price and quantity mean?
It means that the two move
in opposite directions
35
What is the
Law of Supply?
The principle that there is a
direct relationship between
the price of a good and the
quantity sellers are willing
to offer for sale in a defined
time period, ceteris paribus
36
Why do Supply Curves
have a Positive Slope?
Only at a higher price will it
be profitable for sellers to
incur the higher opportunity
cost associated with
supplying a larger quantity
37
P
$20
A company’s
Supply Curve for
Compact Discs
$15
Supply Curve
A
B
$10
C
$5
10
20
30
40
Q
38
An Individual Seller’s Supply for Compact Discs
Point
A
B
C
Price
$20
10
6
Quantity
40
30
20
39
P
Super Sound Supply Curve
S1
$25
$20
$15
$10
10 15
20
25
Q
40
P
High Vibes Supply Curve
S2
$25
$20
$15
$10
20 25
30
35
Q
41
What is a Market?
Any arrangement in which
buyers and sellers interact
to determine the price and
quantity of goods and
services exchanged
42
What is Market Supply?
The horizontal summation of
all the quantities supplied at
various prices that might
prevail in the market
43
P
Market Supply Curve
$25
$20
S total
$15
$10
40 45
55
60
Q
44
Market Supply Schedule for Compact Discs
Price
$25
$20
$15
$10
$5
Super Sound High Vibes
Total Supplied
25 + 35 = 60
20
30
50
15
25
40
10
20
30
5
15
20
45
IMPORTANT - KNOW
THE DIFFERENCE
BETWEEN A CHANGE
IN THE QUANTITY
SUPPLIED AND A
CHANGE IN SUPPLY
46
When price changes,
what happens?
The curve does not shift there is a change in the
quantity supplied
47
P
$20
A change in price
causes a change in
the quantity
supplied
$15
Supply Curve
A
B
$10
C
$5
10
20
30
40
Q
48
Increase in
Quantity
Supplied
Increase in
Price
49
When something
changes other than
price, what happens?
The whole curve shifts there is a change in supply
50
P
$20
When the ceteris
paribus assumption is
relaxed, the whole
curve can shift
S1
S2
$15
$10
$5
10
20
30
40
Q
51
Increase in
supply
Change in
nonprice
determinant
52
What can cause a shift
in a Supply Curve?
1. Number of sellers in the market
2. Technology
3. Resource prices
4. Taxes and subsidies
5. Expectations of producers
6. Prices of other goods the firm
could produce
53
The Supply & Demand
for Tennis Shoes
P
$120
S
$90
Surplus
$60
Shortage
$30
1,000
D
2,000 3,000 4,000
Q
54
What is an Equilibrium?
A market condition that
occurs at any price for
which the quantity
demanded and the quantity
supplied are equal
55
What is the Price System?
A mechanism that uses the
forces of supply and
demand to create an
equilibrium through rising
and falling prices
56
Key Concepts
57
Key Concepts
• What is the Law of Demand?
• What is a Demand Curve?
• Why do Demand Curves have a Negative
Slope?
• When price changes, what happens?
• When something changes other than price,
what happens?
• What can cause a shift in a Demand Curve?
58
Key Concepts cont.
• What is the Law of Supply?
• Why do Supply Curves have a Positive
Slope?
• When price changes, what happens?
• When something changes other than price,
what happens?
• What can cause a shift in a Supply Curve?
• What is a Market?
• What is an Equilibrium?
59
Summary
60
The law of demand states there
is an inverse relationship between the
price and the quantity demanded,
ceteris paribus. A market demand
curve is the horizontal summation of
individual demand curves.
61
Individual’s Demand Curve for Compact Discs
P
Individuals Buyer’s Demand Schedule for Compact Discs
A
$20
$15
B
C
$10
Point
Price
per compact disk
A
B
C
D
$20
$15
$10
$5
Quantity demanded
(per year)
4
6
10
16
7
D
$5
Demand Curve
4
8
12 16
Q
62
A change in quantity demanded is
a movement along a stationary demand
curve caused by a change in price.
When any of the nonprice determinants
of demand changes, the demand curve
responds by shifting. An increase in
demand (rightward shift) or a decrease
in demand (leftward shift) is caused by
a change in one of the nonprice
determinants.
63
P
When the ceteris paribus assumption is
relaxed, the whole curve can shift
$20
$15
A
B
$10
$5
10
20
D2
D1
Q
30 40 50
64
Nonprice determinants of
demand are
a. the number of buyers,
b. tastes and preferences.
c. income (normal and inferior).
d. expectations of future p;rice and
income changes, and
e. prices of related goods
(substitutes and complements).
65
The law of supply states there is a
direst relationship between the price
and the quantity supplied, ceteris
paribus. The market supply curve is
the horizontal summation of
individual supply curves.
66
A change in quantity supplied is a
movement along a stationary supply
curve caused by a change in price.
When any of the nonprice determinants
of supply changes, the supply curve
responds by shifting. An increase in
supply (rightward shift) or a decrease
in supply (leftward shift) is caused by a
change in one of the nonprice
determinants.
67
P
$20
A company’s
Supply Curve for
Compact Discs
$15
Supply Curve
A
B
$10
C
$5
10
20
30
40
Q
68
P
$20
When the ceteris
paribus assumption is
relaxed, the whole
curve can shift
S1
S2
$15
$10
$5
10
20
30
40
Q
69
Nonprice determinants of supply
a. the number of sellers.
b. technology
c. resource prices.
d. taxes and subsidies.
e. expectations of future price changes,
f. prices of other goods.
70
A surplus or shortage exists at
any price where the quantity
demanded and the quantity supplied
are not equal. When the price of a
good is greater than the equilibrium
price, there is an excess quantity
supplied called a surplus. When the
price is less than the equilibrium
price, there is an excess quantity
demanded called a shortage.
71
Equilibrium is the unique price
and quantity established at the
intersection of the supply and the
demand curves. Only at equilibrium
does quantity demanded equal
quantity supplied.
72
The Supply & Demand
for Tennis Shoes
P
$120
S
$90
Surplus
$60
Shortage
$30
1,000
D
2,000 3,000 4,000
Q
73
The price system is the supply and
demand mechanism that establishes
equilibrium through the ability of prices
to rise or fall.
74
Chapter 3 Quiz
©2000 South-Western College Publishing
75
1. If the demand curve for good X is
downward-sloping, this means that an
increase in the price will result in
a. an increase in the demand for good X.
b. a decrease in the demand for good X.
c. no change in the quantity demanded for
good X.
d. a larger quantity demanded for good X.
e. a smaller quantity demanded for good X.
E. When price changes there is a opposite
change in the quantity demanded as
measured on the horizontal axis.
76
2. The law of demand states that the quantity
demanded of a good changes, other things
being equal, when
a. the price of the good changes.
b. consumer income changes.
c. the prices of other goods change.
d. a change occurs in the quantities of other
goods purchased.
A. A “change in demand” means that the
whole curve shifts, but a “change in the
quantity demanded” means that there is
movement along a stationary curve.
77
3. Which of the following is the result of a
decrease in the price tea, other things
being equal?
a. A leftward shift in the demand curve
for tea.
b. A downward movement along the
demand curve for tea.
c. A rightward shift in the demand curve
for tea.
d. An upward movement along the
demand curve for tea.
B. Because demand curves have a negative
slope, as the price declines, the quantity
demanded will increase.
78
4. Which of the following will cause a
movement along the demand curve for X?
a. A change in the price of a close
substitute.
b. A change in the price of good X.
c. A change in consumer tastes and
preferences for good X.
d. A change in consumer income.
B. Movement along a given demand curve
always occurs when the price changes, if
anything other than price changes, then
the whole curve will shift.
79
5. Assuming that beef and pork are
substitutes, a decrease in the price of pork
will cause the demand curve for beef to
a. shift to the left as consumers switch
from beef to pork.
b. shift to the right as consumers switch
from beef to pork.
c. remain unchanged, since beef and pork
are sold in separate markets.
d. none of the above.
A. With a decrease in the price of pork
people will want to buy more pork;
because beef and pork are substitutes, they
will buy less at possible prices for beef.
80
6. Assuming that coffee and tea are substitutes,
a decrease in the price of coffee, other things
being equal, results in a (an)
a. downward movement along the demand
curve for tea.
b. leftward shift in the demand curve for tea.
c. upward movement along the demand curve
for tea.
d. rightward shift in the demand curve for
tea.
B. With a decrease in the price of coffee
people will want to buy more coffee;
because coffee and tea are substitutes, they
will buy less at possible prices for tea.
81
7. Assuming steak and potatoes are
complements, a decrease in the price of
steak will
a. decrease the demand for steak.
b. increase the demand for steak.
c. increase the demand for potatoes.
d. decrease the demand for potatoes.
C. With a decrease in the price of steak
people will want to buy more steak;
because steak and potatoes are
complements, they will buy more
potatoes as well.
82
8. Assuming that steak is a normal good,
a decrease in consumer income, other
things being equal, will
a. cause a downward movement along
the demand curve for steak.
b. shift the demand curve for steak to
the left.
c. cause an upward movement along
the demand curve for steak.
d. shift the demand curve for steak to
the right.
B. Normal goods are goods that people will
buy more of as their incomes increase and
less of as their income decreases.
83
9. An increase in consumer income, other
things being equal, will
a. shift the supply curve for a normal good
to the right.
b. cause an upward movement along the
demand curve for an inferior good.
c. shift the demand curve for an inferior
good to the left.
d. cause a downward movement along the
supply curve for a normal good.
C. Inferior goods are goods that people will
buy less of at possible prices as their
income increases.
84
10. Yesterday, seller A supplied 400 units of a
good X at $10 per unit. Today, seller A
supplies the same quantity of units at $5 per
unit. Based on this evidence, seller A has
experienced a (an)
a. decrease in supply.
b. increase in supply.
c. increase in the quantity supplied.
d. decrease in the quantity supplied.
e. increase in demand.
B. A shift to the right of a supply curve along
a stationary demand curve will result in a
lower price as illustrated on the next page.
85
P
$20
When the ceteris
paribus assumption is
relaxed, the whole
curve can shift
S1
S2
$15
$10
$5
10
20
30
40
Q
86
11. An improvement technology causes a (an)
a. leftward shift of the supply curve.
b. upward movement along the supply curve.
c. firm to supply a larger quantity at any
given price.
d. downward movement along the supply
curve.
C. When price changes, the supply curve
itself does not change, but when other
things change, the whole curve will shift.
A change in technology is an example of
what can cause the supply curve to shift.
87
12. Suppose auto workers receive a substantial
wage increase. Other things being equal, the
price of autos will rise because of a (an)
a. increase in the demand for autos.
b. rightward shift of the supply curve for
autos.
c. leftward shift of the supply curve for autos.
d. reduction in the demand for autos.
C. A change in costs for a business is a factor
that will shift the supply curve. If costs go
up, as in the case of having to pay higher
wages, the supplier has less of an ability to
supply cars.
88
13. Assuming that soybeans and tobacco can
both be grown on the same land, an increase
in the price of tobacco, other things being
equal, causes a (an)
a. upward movement along the supply curve
for soybeans.
b. downward movement along the supply
curve for soybeans.
c. rightward shift in the supply for soybeans.
d. leftward shift in the supply for soybeans.
D. With an increase in the price of tobacco
farmers will want to grow more tobacco to
take advantage of the higher price.
Farmers will therefore plant soybeans on
89
land they used to use for tobacco.
14. If Qd = quantity demanded and Qs =
quantity supplied at a given price, a
shortage in the market results when
a. Qs is greater than Qd.
b. Qs equals Qd.
c. Qs is less than or equal to Qd.
d. Qs is greater than or equal to Qd.
D. When there are more units of
something being demanded than being
supplied, a shortage will result.
90
15. Assume that the equilibrium price for a good
is $10. If the market price is $5, a
a. shortage will cause the price to remain at $5.
b. surplus will cause the price to remain at $5.
c. shortage will cause the price to rise toward
$10.
d. surplus will cause the price to rise toward
$10.
C. When the price of a good is below the
market price, there are more units being
supplied than being demanded. The result
is a shortage and consumers will bid the
price up toward the equilibrium price.
91
P
Supply & Demand Exhibit
$2.00
S
$1.50
$1.00
D
$.50
100
200
300
400
Q
92
16. In the market shown in the previous graph,
the equilibrium price and quantity of good X
are
a. $0.50, 200.
Previous graph
b. $1.50, 300.
c. $2.00, 100.
d. $1.00, 200.
D. The equilibrium price and equilibrium
quantity are at the point where the
quantity demanded equals the quantity
supplied. This is the price toward which
the economy tends.
93
17. In the previous graph, at a price of $2.00,
the market for good X will experience a
a. shortage of 150 units.
b. surplus of 100 units.
Previous graph
c. shortage of 100 units.
d. surplus of 200 units.
D. At a price of $2.00 the quantity demanded
is 100 and the quantity supplied is 300; 300
units minus 100 equals 200 units.
94
18. In the previous graph, if the price of good
X moves from $1.00 to $2.00, the new
market condition will put
Previous graph
a. upward pressure on price.
b. no pressure on price to change.
c. downward pressure on price.
d. no pressure on quantity to change.
C. Anytime the price is above the
equilibrium price a surplus will result.
Suppliers will therefore lower price to
get rid of the surplus.
95
Internet Exercises
Click on the picture of the book,
choose updates by chapter for
the latest internet exercises
96
END
97