Download Chapter 4

Macroeconomics
ECON 2301
Spring 2009
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 4
Exam 1, February 12
 Study Chapters 1 – 4.
 Come to the exam prepared to use:
Textbook & notes
3”x5” card
Only your brains & a pencil
 Scantron sheet will be provided.
Teaching Project Orientation
 Fill out paperwork ahead of time.
 Select a teaching partner.
 Attend one of these 90-minute sessions, in
FC 101, Feb. 11 or 12:
1 p.m.
3 p.m.
5 p.m.
Chapter 4: Extensions of Demand and Supply
Analysis
Changes in Demand and Supply
 Changes in supply and demand create a
disequilibrium.
 The market price and quantity adjust to a
new equilibrium.
Review of The D Side of the Mkt.:
Variables That SHIFT Market Demand
1. 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.
The Demand Side of the Market
Variables That Shift Market Demand
3. Tastes
4. Population and demographics
Demographics The characteristics of a population
with respect to age, race, and gender.
5. Expectations
Estimating the Demand for Printers at
Hewlett-Packard
Inaccurate forecasts
in 2001 caused
Hewlett-Packard to
produce more
printers than they
could sell.
When two goods, X and Y, are complements,
which of the following occurs?
 a. An increase in the price of good X leads to an
increase in the price of good Y.
 b. An increase in the price of good X leads to a
decrease in the quantity demanded of good Y.
 c. An increase in the price of good X leads to a
decrease in the quantity demanded of good Y.
 d. An increase in the price of good X leads to an
increase in the quantity demanded of good Y.
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
Refer to the graph below. Which of the following
moves best describes what happens when a
change in the price of printers affects the market
demand for printers?




a.
b.
c.
d.
A move from A to B.
A move from A to C.
Either move from A to B or A to C.
None of the above.
Figure 4-1 Shifts in Demand and in
Supply: Determinate Results, Panel (a)
Figure 4-1 Shifts in Demand and in
Supply: Determinate Results, Panel (b)
Which of the following defines a supply curve?
 a. The quantity of a good or service that a firm is
willing to supply at a given price.
 b. A table that shows the relationship between the
price of a product and the quantity of the product
supplied.
 c. A curve that shows the relationship between the
price of a product and the quantity of the product
supplied.
 d. None of the above.
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
1. Price of inputs
2. 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.
3. Prices of substitutes in production
4. Expected future prices
5. Number of firms in the market
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
Variables That Shift Market
3 - 2 (continued) Supply Curves
The Supply Side of the Market
Variables That Shift Supply
Refer to the graphs below. Each graph refers to
the supply for printers. Which best describes the
impact of an increase in productivity?




a. The graph on the left.
b. The graph on the right.
c. Both graphs.
d. Neither graph.
Figure 4-1 Shifts in Demand and in
Supply: Determinate Results, Panel (c)
Figure 4-1 Shifts in Demand and in
Supply: Determinate Results, Panel (d)
The Falling Price of
Large Flat-Screen Televisions
Corning’s breakthrough
spurred the manufacture of
LCD televisions in Taiwan,
South Korea, and Japan, and
an eventual decline in price.
Changes in Demand and Supply (cont'd)
 Summary
Increases in demand increase equilibrium price
and quantity.
Decreases in demand decrease equilibrium
price and quantity.
Increases in supply decrease equilibrium price
and increase quantity.
Decreases in supply increase equilibrium price
and decrease quantity.
When BOTH Demand & Supply Are Shifting:
High Demand and Low Prices in the Lobster Market:
Supply and demand for lobster both increase in summer, but the supply
increase EXCEEDS the demand increase; therefore, equilibrium price falls.
Remember: A Change in a Good’s Price Does Not Cause
the Demand or Supply Curve to Shift.
Example: Why Gasoline Prices
Increased over the Past 3 Years
 One factor—an increase in demand, shown
by a rightward shift in the demand curve
 Another factor—a reduction in supply,
shown by a leftward shift in the supply
curve
 As a result, the equilibrium price of
gasoline increased.
Assignment to be completed
before class February 12:
Study for Exam 1!