Download Chapter 3

Macroeconomics
ECON 2302
May 2009
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 3
Quiz 1 Reminder
 If you have not yet done so, I need you to
send me an email, so I’ll have you in my
database.
 Send your email, including your first and
last names in the body of the email, to
[email protected].
 4 points of extra credit
First class meeting’s topics review
Syllabus
Basic economics definitions
Basic economics assumptions
Positive v. normative analysis
Circular flow model
Production possibilities frontier
Any questions on
these topics?
Anything else?
Critical Email Issue
Please be sure your email account allows you to keep your
“Sent Mail.” I recommend that you use your Islander
account to send me any and all assignments.
Sometimes emails do not go through, and I do not accept
assignments that are turned in late.
The only way you can protect your grades in such an email
environment is to forward your date & time stamped Sent
Mail file to me.
Chapter 3.
Where Prices Come From:
Interaction of Supply &
Demand
LEARNING OBJECTIVES
After studying this chapter, you should be able
to:
1
Discuss the variables that influence demand.
2
Discuss the variables that influence supply.
3
Use a graph to illustrate market equilibrium.
4
Use demand and supply graphs to predict changes
in prices and quantities.
Chapter 3 Topics:
Market demand
Market supply
Equilibrium
Shortages
Surpluses
What happens when demand or supply
changes
1 LEARNING OBJECTIVE
The Demand Side of the Market
The Demand of an Individual Buyer
3-1
Plotting a Price-Quantity
Combination on a Graph
At a price of $125 per
printer, Kate, the purchasing
manager for the Prudential
Insurance Company, will be
willing to buy 5 printers in
the next month.
Quantity demanded The
quantity of a good or service
that a consumer is willing to
purchase at a given price.
The Demand Side of the Market
Demand Schedules and Demand Curves
3-2
Kate’s Demand Schedule and
Demand Curve
Demand schedule A table
showing the relationship
between the price of a
product and the quantity
of the product demanded.
Demand curve A curve that shows the
relationship between the price of a
product and the quantity of the
product demanded.
The Demand Side of the Market
Individual Demand and Market Demand
3-3
Deriving the Market Demand Curve
from Individual Demand Curves
Market demand The
demand for a product
by all the consumers in
a given geographical
area.
The Demand Side of the Market
 The Law of Demand
 The Law of Demand Holding everything else constant,
when the price of a product falls, the quantity demanded
of the product will increases, and when the price of a
product rises, the quantity demanded of the product will
decrease.
 What Explains the Law of Demand?
Substitution effect The change in the quantity
demanded of a good that results from a change in price
making the good more or less expensive relative to other
goods that are substitutes.
Income effect The change in the quantity demanded of
a good that results from the effect of a change in the
good’s price on consumer purchasing power.
The Demand Side of the Market
 Holding Everything Else Constant:
The Ceteris Paribus Condition
Ceteris paribus (“all else equal”) The
requirement that when analyzing the
relationship between two variables —
such as price and quantity demanded —
other variables must be held constant.
The Demand Side of the Market
Variables That Shift Market Demand
Price of related goods
 Substitutes Goods and services that can be
used for the same purpose.
Complements Goods that are used together.
2. Income
 Normal good A good for which the demand
increases as income rises and decreases as
income falls.
Inferior good A good for which the demand
increases as income falls, and decreases as
income rises.
1.
The Demand Side of the Market
Variables That Shift Market Demand
Tastes
4. Population and demographics
 Demographics The characteristics of a
population with respect to age, race, and
gender.
5. Expected future prices
3.
The Demand Side of the Market
Variables That Shift Market Demand
3-4
Shifting the Demand Curve
Why Supermarkets Need to
Understand Substitutes and
Complements
3-1
FROZEN HOT
ICE POTATO REGULAR SPAGHETT
I
YOGURT
COFFEE PIZZA DOGS CREAM CHIPS CEREAL
SAUCE
Varieties in Five
Chicago
Supermarkets
391
337
128
421
285
242
194
288
Varieties
Introduced
in a 2-Year Period
113
109
47
129
93
114
70
107
Varieties Removed
in a 2-Year Period
135
86
32
118
77
75
36
51
A supermarket shouldn’t remove a slowselling soup from its shelves without
researching whether shoppers use that
soup as a substitute or a complement for
another soup.
3-2
Companies Respond to a
Growing Hispanic Population
Firms are responding to the
tastes of a growing Hispanic
population. Some Home
Depot stores, for example,
include signs in both English
and Spanish.
The Demand Side of the Market
Variables That Shift Market Demand
3-1
Variables That Shift Market
Demand Curves
The Demand Side of the Market
Variables That Shift Market Demand
3 - 1 (continued)
Variables That Shift Market
Demand Curves
The Demand Side of the Market
A Change in Demand versus a Change in Quantity Demanded
3-5
A Change in Demand versus a
Change in the Quantity Demanded
3-3
Estimating the Demand for
Printers at Hewlett-Packard
Inaccurate forecasts in 2001
caused Hewlett-Packard to
produce more printers than
they could sell.
2 LEARNING OBJECTIVE
The Supply Side of the Market
Quantity supplied The quantity of a good
or service that a firm is willing to supply at a
given price.
Supply Schedules and Supply Curves
 Supply schedule A table that shows the
relationship between the price of a product and
the quantity of the product supplied.
 Supply curve A curve that shows the
relationship between the price of a product and
the quantity of the product demanded.
The Supply Side of the Market
3-6
Hewlett-Packard’s Supply
Schedule and Supply Curve
The Supply Side of the Market
Individual Supply and Market Supply
3-7
Deriving the Market
Supply Curve from the
Individual Supply Curves
The Supply Side of the Market
The Law of Supply
Law of supply Holding everything
else constant, increases in price cause
increases in the quantity supplied, and
decreases in price cause decreases in
the quantity supplied.
The Supply Side of the Market
Variables That Shift Supply
 Price of inputs
 Technological change
A positive or negative
change in the ability of a
firm to produce a given
level of output with a
given amount of inputs.
 Prices of substitutes in
production
 Expected future prices
 Number of firms in the
market
3-8
Shifting the Supply Curve
The Supply Side of the Market
Variables That Shift Supply
3-2
Variables That Shift Market
Supply Curves
The Supply Side of the Market
Variables That Shift Supply
3 - 2 (continued)
Variables That Shift Market
Supply Curves
The Supply Side of the Market
A Change in Supply versus a Change in Quantity Supplied
3-9
The Difference between
a Change in Supply
versus a Change in the
Quantity Supplied
3 LEARNING OBJECTIVE
Market Equilibrium: Putting
Demand and Supply Together
3 - 10
Market Equilibrium
Market equilibrium A
situation where quantity
demanded equals
quantity supplied.
Competitive market
equilibrium A market
equilibrium with many
buyers and many sellers.
Market Equilibrium: Putting Demand and
Supply Together
How Markets Eliminate Surpluses and Shortages
3 - 11
Surplus A situation in
which the quantity supplied is
greater than the quantity
demanded.
Shortage A situation in
which the quantity demanded
is greater than the quantity
supplied.
The Effect of Surpluses and
Shortages on the Market Price
4 LEARNING OBJECTIVE
The Effect of Demand and Supply Shifts on
Equilibrium
The Effect of Shifts in Supply on Equilibrium
3 - 12
The Effect of a
Decrease in Supply on
Equilibrium
3-4
Corning’s breakthrough spurred
the manufacture of LCD
televisions in Taiwan, South
Korea, and Japan, and an
eventual decline in price.
The Falling Price of Large
Flat-Screen Televisions
The Effect of Demand and Supply Shifts on
Equilibrium
The Effect of Shifts in Demand on Equilibrium
3 - 13
The Effect of an Increase
in Demand on Equilibrium
The Effect of Demand and Supply Shifts on
Equilibrium
The Effect of Shifts in Demand and Supply over Time
3 - 14
Shifts in Demand and Supply over Time
The Effect of Demand and Supply Shifts on
Equilibrium
The Effect of Shifts in Demand and Supply over Time
3 - 13
The Demand for Chicken
Has Increased More
Than the Supply
Picking a Big Fight with Dell, H-P Cuts PC Profits Razor-Thin
 Ceteris paribus (“all else










equal”)
Competitive market
equilibrium
Complements
Demand curve
Demand schedule
Demographics
Income effect
Inferior good
Law of demand
Law of supply
Market demand
 Market equilibrium
 Normal good
 Quantity demanded
 Quantity supplied
 Shortage
 Substitutes
 Substitution effect
 Supply curve
 Supply schedule
 Surplus
 Technological change
Reality check to be completed
before class, May 15:
From Ch. 4:
Review Questions:
Consumer surplus is used as a measure of a
consumer’s net benefit from purchasing a good or
service. Explain why consumer surplus is a measure
of net benefit.
Why would economists use a term like “deadweight
loss” to describe the impact on consumer and
producer surplus from a price control?”)
Problems and Applications , p. 134, 4A.5, 4A.6, 4A.7
& 4A.8 (1st edition: 1-4 on p. 129).