Download Supply and Demand: An Introduction

Supply and Demand:
An Introduction
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
Supply and Demand:
An Introduction
How do consumers get the goods and
services they want in the right quantities
and qualities?

Some goods and services are allocated by
the market forces of supply and demand
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 2
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
Supply and Demand:
An Introduction
Why do some goods and services have
shortages or surpluses and others do
not?

Some good and supplies services are
regulated by government
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 3
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
What, How, and For Whom?
Central Planning Versus the Market
Three Problems All Economic Systems
Must Address
What should be produced?
 How should it be produced?
 For whom will it be produced?

Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 4
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
What, How, and For Whom?
Central Planning Versus the Market
A small number of individuals address:

What
 Establish
production targets for factories and
farms

How
 Plan

how to achieve the goals
For Whom
 Distribute
the goods and services
produced
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 5
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
What, How, and For Whom?
Central Planning Versus the Market
Free-Market or Capitalist Economic
System

Individual choices determine:
 Which
careers to pursue
 Which products to produce or buy
 When to start and shut-down a business
 Who gets what is decided by individual
preferences and purchasing power
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 6
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Buyers and Sellers In Markets

Market


Consists of all buyers and sellers of a good
or service
What do you think?

What determines the price of pizza,
gasoline, a car wash, or other goods and
services?
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 7
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Buyers and Sellers In Markets

The Demand Curve

A schedule or graph that tells us the
quantity of a good that buyers wish to buy
at each price
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 8
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Buyers and Sellers In Markets

A Property of Demand
As price of a good or service goes down
the quantity consumers wish to buy will
increase
 Therefore, the demand curve is downwardsloping

Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 9
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The Daily Demand
Curve for Pizza in Chicago
Price
($ per slice)
4
3
2
Demand
8
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
12
16
Chapter 3 - Supply and Demand: An Introduction
Quantity
(1000s of slices per day)
Slide 10
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Buyers and Sellers In Markets

The Demand Curve

Why do buyers purchase a greater quantity
at lower prices and vice-versa?
 The
substitution effect
 The income effect
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 11
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Buyers and Sellers In Markets

The Supply Curve

A curve or schedule showing the quantity
of a good that sellers wish to sell at each
price
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 12
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Buyers and Sellers In Markets

The Supply Curve

Sellers must receive a higher price to
produce additional units of product to cover
the higher opportunity costs of each
additional unit
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 13
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The Daily Supply
Curve for Pizza in Chicago
Price
($ per slice)
Supply
4
3
2
8
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
12
16
Chapter 3 - Supply and Demand: An Introduction
Quantity
(1000s of slices per day)
Slide 14
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Market Equilibrium

Equilibrium


A system is in equilibrium when there is no
tendency for it to change
Market Equilibrium

Occurs in a market when all buyers and
sellers are satisfied with their respective
quantities at the market price
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 15
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The Equilibrium Price and
Quantity of Pizza In Chicago
Price
($ per slice)
Supply
Equilibrium at $3
Quantity Demanded =
Quantity Supplied
4
3
2
Demand
8
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
12
16
Chapter 3 - Supply and Demand: An Introduction
Quantity
(1000s of slices per day)
Slide 16
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Market Equilibrium

Equilibrium Price and Equilibrium
Quantity

The values of price and quantity for which
quantity supplied and quantity demanded
are equal
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 17
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Excess Supply
Excess supply = 8,000 slices per day
Price
($ per slice)
Supply
4
3
2
Demand
8
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
12
16
Chapter 3 - Supply and Demand: An Introduction
Quantity
(1000s of slices per day)
Slide 18
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Excess Demand
Price
($ per slice)
Supply
4
Excess demand = 8,000
slices per day
3
2
Demand
8
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
16
Chapter 3 - Supply and Demand: An Introduction
Quantity
(1000s of slices per day)
Slide 19
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
Predicting and Explaining
Changes In Prices and Quantities
Distinguishing Between:

A change in the quantity demanded
A
movement along the demand curve that
occurs in response to a change in price

A change in demand
A
shift of the entire demand curve
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 20
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An Increase In Quantity
Demanded vs. An Increase In Demand
Price
($/can)
Increase in
quantity
demanded
6
5
4
3
2
1
0
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
D
2
4
6
8
10
12
Quantity
(1000s of cans/day)
Chapter 3 - Supply and Demand: An Introduction
Slide 21
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An Increase In Quantity
Demanded vs. An Increase In Demand
Price
($/can)
6
D’
D
5
4
Increase in demand
3
2
D’
1
0
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
D
12
Quantity
(1000s of cans/day)
Chapter 3 - Supply and Demand: An Introduction
Slide 22
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
Change in the quantity supplied


Predicting and Explaining
Changes In Prices and Quantities
A movement along the supply curve that
occurs in response to a change in price
Change in supply

A shift of the entire supply curve
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 23
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An Increase In Quantity
Supplied vs. An Increase In Supplied
Price
($/can)
S
6
5
Increase in
quantity supplied
4
3
2
S
1
0
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
2
4
6
8
10
Quantity
(1000s of cans/day)
Chapter 3 - Supply and Demand: An Introduction
Slide 24
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An Increase In Quantity
Supplied vs. An Increase In Supplied
Price
($/can)
6
S’
S
5
4
3
Increase in supply
2
1
S’
S
0
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
2
4
6
8
10
Quantity
(1000s of cans/day)
Chapter 3 - Supply and Demand: An Introduction
Slide 25
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The Effect on the Market for Tennis
Balls of a Decline in Court-Rental Fees
Price
($/ball)
S
1.40
1.00
D’
D
40
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
58
Chapter 3 - Supply and Demand: An Introduction
Quantity
(letters/month)
Slide 26
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The Effect on the Market for Overnight Letter
Delivery of a Decline in the Price of Internet Access
Price
($/letter)
S
P
P’
D
D’
Q’
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Q
Chapter 3 - Supply and Demand: An Introduction
Quantity
(letters/month)
Slide 27
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The Effect of a Federal Pay Raise on the Rent for
Conveniently Located Apartments in Washington D.C.
Rent
(dollars per month)
S
P’
P
D
Q
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
D’
Q’
Chapter 3 - Supply and Demand: An Introduction
Conveniently
located apartments
(units per month)
Slide 28
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
Predicting and Explaining
Changes In Prices and Quantities
A Change In Income

Normal Good
 One
whose demand increases (decreases)
when the incomes of buyers increase
(decrease)
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 29
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
Predicting and Explaining
Changes In Prices and Quantities
A Change In Income

Inferior Good
 One
whose demand decreases (increases)
when the incomes of buyers increase
(decrease)
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 30
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The Effect of the Release of Jurassic
Park on the Market for Toy Dinosaurs
D’ = demand after release of movie
Price
S
P’
P
D’
D
Q
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Q’
Chapter 3 - Supply and Demand: An Introduction
Toy Dinosaurs
(units per month)
Slide 31
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The Effect of a Credible Rumor on
the Market for Apple Macintosh Computers
D’ = demand after rumor of cheaper
model soon to be released
Price
S
P
P’
D’
Q’
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
D
Q
Chapter 3 - Supply and Demand: An Introduction
Apple Computers
(units per month)
Slide 32
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The Effect of the Increase in
the Population of Potential Buyers
D’ = demand after increase in population
Price
S
P’
P
D
Q
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
D’
Q’
Chapter 3 - Supply and Demand: An Introduction
Housing NY City
(units per month)
Slide 33
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
Predicting and Explaining
Changes In Prices and Quantities
Factors that Shift Demand
Price of complements
 Price of substitutes
 Income
 Preferences
 Population of potential buyers
 Expectations

Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 34
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The Effect on the Skateboard Market
of an Increase in the Price of Fiberglass
Price
($/skateboard)
S’
S
80
60
D
800 1000
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Quantity
(skateboards/month)
Slide 35
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The Effect on the Market for New Houses
of a Decline in Carpenters’ Wage Rates
Price
($1000/house)
S
S’
120
90
D
40
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
50
Chapter 3 - Supply and Demand: An Introduction
Quantity
(houses/month)
Slide 36
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
Predicting and Explaining
Changes In Prices and Quantities
Factors that Shift Supply
Costs of production
 Technology
 Weather
 Number of suppliers
 Expectations

Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 37
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Four Rules Governing the Effects
of Supply And Demand Shifts
An increase in demand will lead to an increase
in both the equilibrium price and quantity
Price
S
P’
P
D
Q
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
D’
Q’
Chapter 3 - Supply and Demand: An Introduction
Quantity
Slide 38
MB MC
Four Rules Governing the Effects
of Supply And Demand Shifts
A decrease in demand will lead to a decrease
in both the equilibrium price and quantity
Price
S
P
P’
D’
Q’
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
D
Quantity
Q
Chapter 3 - Supply and Demand: An Introduction
Slide 39
MB MC
Four Rules Governing the Effects
of Supply And Demand Shifts
An increase in supply will lead to a
decrease in the equilibrium price
and an increase in the equilibrium quantity
Price
S
S’
P
P’
D
Q
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Q’
Chapter 3 - Supply and Demand: An Introduction
Quantity
Slide 40
MB MC
Four Rules Governing the Effects
of Supply And Demand Shifts
An decrease in supply will lead to
an increase in the equilibrium price
and a decrease in the equilibrium quantity
Price
S’
S
P’
P
D
Q’
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Quantity
Q
Chapter 3 - Supply and Demand: An Introduction
Slide 41
MB MC

Predicting and Explaining
Changes In Prices and Demand
Factors That Cause an Increase
(rightward or upward shift) in Demand
1. A decrease in the price of complements
to the good or service
2. An increase in the price of substitutes for
the good or service
3. An increase in income (for a normal
good)
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 42
MB MC

Predicting and Explaining
Changes In Prices and Demand
Factors That Cause an Increase
(rightward or upward shift) in Demand
4. An increased preference by demanders
for the good or service
5. An increase in the population of potential
buyers
6. An expectation of higher prices in the
future
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 43
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
Predicting and Explaining
Changes In Prices and Demand
Factors That Cause an Increase
(rightward or upward shift) in Supply
1. A decrease in the cost of materials, labor,
or other inputs used in the production of
the good or service
2. An improvement in technology that
reduces the cost of producing the good or
service
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 44
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
Predicting and Explaining
Changes In Prices and Demand
Factors That Cause an Increase
(rightward or upward shift) in Supply
3. An improvement in the weather,
especially for agricultural products
4. An increase in the number of suppliers
5. An expectation of lower prices in the
future
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
Chapter 3 - Supply and Demand: An Introduction
Slide 45
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Seasonal Variation in Air Travel
High Consumption and Prices Due to High Demand
Price
($/ticket)
S
PS
PW
DS
DW
QW
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
QS
Chapter 3 - Supply and Demand: An Introduction
1000s of
tickets
Slide 46
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Seasonal Variation in Corn Markets
Price
($/bushel)
High Consumption and Low Prices due to High Supply
SW
SS
PS
PW
D
QW
Copyright c 2007 by The McGraw-Hill
Companies, Inc. All rights reserved.
QS
Chapter 3 - Supply and Demand: An Introduction
Millions of
bushels
Slide 47
End of
Chapter
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MC