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McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Chapter 3: Demand and Supply.

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Presentation on theme: "McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Chapter 3: Demand and Supply."— Presentation transcript:

1 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Chapter 3: Demand and Supply

2 3-2 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Objectives After studying this chapter, you will be able to:  Describe a competitive market and think about a price as an opportunity cost  Explain the influences on demand  Explain the influences on supply  Explain how demand and supply determine prices and quantities bought and sold  Use demand and supply to make predictions about changes in prices and quantities

3 3-3 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Slide, Rocket, Roller Coaster  Some prices slide, some rocket, and some roller coaster.  This chapter explains how prices are determined and how markets guide and coordinate choices.

4 3-4 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Markets and Prices  A market is any arrangement that enables buyers and sellers to get information and do business with each other.  A competitive market is a market that has many buyers and many sellers, so no single buyer or seller can influence the price.  The money price of a good is the amount of money needed to buy it.  The relative price of a good — the ratio of its money price to the money price of the next best alternative good — is its opportunity cost.

5 3-5 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  If you demand something, then you:  want it,  can afford it, and  have made a definite plan to buy it.  Wants are the unlimited desires or wishes people have for goods and services. Demand reflects a decision about which wants to satisfy.  The quantity demanded of a good or service is the amount that consumers plan to buy during a particular time period, and at a particular price.

6 3-6 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  The law of demand  The law of demand states:  Other things remaining the same, the higher the price of a good, the smaller is the quantity demanded.  The law of demand results from:  A substitution effect  An income effect

7 3-7 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  Substitution effect  When the relative price (opportunity cost) of a good or service rises, people seek substitutes for it, so the quantity demanded decreases.  Income effect  When the price of a good or service rises relative to income, people cannot afford all the things they previously bought, so the quantity demanded decreases

8 3-8 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  Demand curve and demand schedule  The term demand refers to the entire relationship between the price of the good and quantity demanded of the good.  A demand curve shows the relationship between the quantity demanded of a good and its price, when all other influences on consumers ’ planned purchases remain the same.

9 3-9 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  Figure 3.1 on the following slide shows a demand curve for recordable compact discs (CD-Rs).  A rise in the price, other things remaining the same, brings a decrease in the quantity demanded and a movement along the demand curve.

10 3-10 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand for CD-Rs The Demand Curve e d c b a Quantity (millions of discs per week) Price ( dollars per disc) Figure 3.1

11 3-11 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand A B1.006 C1.504 D2.003 E2.502 PriceQuantity (dollars per disc)(millions of discs per week)

12 3-12 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  A demand curve is also a willingness-and-ability-to-pay curve.  The smaller the quantity available, the higher is the price that someone is willing to pay for another unit.  Willingness to pay measures marginal benefit.

13 3-13 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  A change in demand  When any factor that influences buying plans changes, other than the price of the good, there is a change in demand for that good. The quantity of the good that people plan to buy changes at each and every price, so there is a new demand curve.  When demand increases, the quantity that people plan to buy increases at each and every price, so the demand curve shifts rightward.  When demand decreases, the quantity that people plan to buy decreases at each and every price, so the demand curve shifts leftward.

14 3-14 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  Six main factors bring changes in demand.  They are:  Prices of related goods  Income  Expected future prices  Expected future income  Population  Preferences

15 3-15 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  Prices of related goods  A substitute is a good that can be used in place of another good.  A complement is a good that is used in conjunction with another good.  When the price of a substitute for CD-Rs rises, or when the price of a complement for CD-Rs falls, the demand for CD-Rs increases.

16 3-16 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia An Increase in Demand Original demand schedule New demand schedule CD burner $300 CD burner $100 Price Quantity Price Quantity (dollars (millions of discs (dollars (millions of discs per disc) per week) per disc)per week)) A A' B B' C C' D D' E E'

17 3-17 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia An Increase in Demand and a Shift in the Demand Curve E D C B A Demand for CD-Rs (CD burner $200) Quantity (millions of discs per week) Price ( dollar per disc) E' D' C' B' A' Demand for CD-Rs (CD burner $100) Figure 3.2

18 3-18 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  Expected future prices  If the price of a good is expected to rise in the future, current demand increases and the demand curve shifts rightward.  Income  When income increases, consumers buy more of most goods, and the demand curve shifts rightward. A normal good is one for which demand increases as income increases. An inferior good is a good for which demand decreases as income increases.

19 3-19 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand  Population  The larger the population, the greater is the demand for all goods.  Preferences  People with the same income have different demands if they have different preferences.

20 3-20 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Decrease in quantity demanded Increase in quantity demanded A Change in the Quantity Demanded Versus a Change in Demand Quantity Price D0D0 D0D0 D1D1 Increase in demand D2D2 Decrease in demand Figure 3.3

21 3-21 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia A Change in the Quantity Demanded Versus a Change in Demand  When the price of the good changes and everything else remains the same, there is a change in the quantity demanded and a movement along the demand curve.  When one of the other factors that influence buying plans changes, there is a change in demand and a shift of the demand curve.

22 3-22 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Supply  If a firm supplies a good or service, then the firm: 1.Has the resources and the technology to produce it, 2.Can profit from producing it, and 3.Has made a definite plan to produce and sell it.  Resources and technology determine what it is possible to produce. Supply reflects a decision about which technologically feasible items to produce.  The quantity supplied of a good or service is the amount that producers plan to sell during a given time period at a particular price.

23 3-23 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Supply  The law of supply  The law of supply states:  Other things remaining the same, the higher the price of a good, the greater is the quantity supplied.  The law of supply results from the general tendency for the marginal cost of producing a good or service to increase as the quantity produced increases.  Producers are willing to supply only if they at least cover their marginal cost of production.

24 3-24 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Supply  Supply curve and supply schedule  The term supply refers to the entire relationship between the quantity supplied and the price of a good.  The supply curve shows the relationship between the quantity supplied of a good and its price when all other influences on producers ’ planned sales remain the same.  A supply schedule lists the quantities supplied at each price when all the other influences on producers’ planned sales remain the same.

25 3-25 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Supply Curve Quantity (millions of discs per week) Price ( dollar per disc) Supply of CD-Rs a bcde Supply curve Figure 3.4

26 3-26 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia A Supply Schedule A0.500 B1.003 C1.504 D2.005 E2.506 PriceQuantity (dollars per disc) (millions of discs per week)

27 3-27 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Supply  A change in supply  When any factor that influences selling plans other than the price of the good changes, there is a change in supply.  An increase in supply causes the supply to shift rightward.  A decrease in supply causes the supply curve to shift leftward.

28 3-28 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia A Change in Supply  Five main factors that bring changes to supply: 1.Prices of the factors of production 2.Price of related goods produced  Substitutes in Production  Complements in Production 3.Expected future prices 4.The number of suppliers 5.Technology

29 3-29 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Supply of CD-Rs  Changes in supply  The supply of CD-Rs decreases if:  The price of a factor of production used to produce discs rises  The price of a substitute in production rises  The price of a complement in production falls  The price of a CD-R is expected to rise in the future  The number of CD-R producers decreases  A less efficient technology is used to produce CD-Rs.

30 3-30 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Supply of CD-Rs  Changes in supply  The supply of CD-Rs increases if:  The price of a factor of production used to produce the good falls  The price of a substitute in production falls  The price of a complement in production rises  The price of a CD-R is expected to fall in the future  The number of firms supplying CD-Rs increases  More efficient technologies technology is used to produce CD-Rs.

31 3-31 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia An Increase in Supply Original supply schedule New supply schedule Old technology New technology Price Quantity Price Quantity (dollars (millions of tapes (dollars (millions of tapes per tape) per week) per tape)per week) A A' B B' C C' D D' E E'

32 3-32 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia An Increase in Supply and a Shift in the Supply Curve Quantity (millions of discs per week) Price ( dollar per disc) a e d c b Supply of CD-Rs (new technology) a' b' c' d' e' Supply of CD-Rs (old technology) Figure 3.5

33 3-33 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Supply  A change in the quantity supplied versus a change in supply  When the price of the good changes and other influences on selling plans remain the same, there is a change in the quantity supplied and a movement along the supply curve.  When one of the other factors that influence selling plans changes, there is a change in supply and a shift of the supply curve.

34 3-34 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Increase in quantity supplied Decrease in quantity supplied A Change in the Quantity Supplied Versus a Change in Supply Quantity Price S0S0 S0S0 S2S2 Increase in supply S1S1 Decrease in Figure 3.6

35 3-35 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Market Equilibrium  Equilibrium is a situation in which opposing forces balance each other. Equilibrium in a market occurs when the price balances the plans of buyers and sellers.  The equilibrium price is the price at which the quantity demanded equals the quantity supplied.  The equilibrium quantity is the quantity bought and sold at the equilibrium price.  Price regulates buying and selling plans.  Price adjusts when plans don ’ t match.

36 3-36 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Market Equilibrium  Price as a regulator  If the price is too low, quantity demanded exceeds quantity supplied.  If the price is too high, quantity supplied exceeds quantity demanded.

37 3-37 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Market Equilibrium Quantity Quantity Shortage(–) Price demanded supplied or surplus(+) (dollars per disc) (millions of discs per week) – –

38 3-38 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Market Equilibrium Quantity (millions of discs per week) Price ( dollar per disc) Supply of CD-Rs Surplus of 2 million discs at $2 a disc Shortage of 3 million discs at $2 a disc Demand for CD-Rs Equilibrium Figure 3.7

39 3-39 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Market Equilibrium  Price adjustments  At prices above the equilibrium, a surplus forces the price down.  At prices below the equilibrium, a shortage forces the price up.  At the equilibrium price, buying plans and selling plans agree and the price doesn ’ t change.

40 3-40 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Predicting Changes in Price and Quantity  A change in demand  When demand increases, both the price and the quantity increase.  An increase in demand shifts the demand curve rightward and creates a shortage at the original price.  The price rises and the quantity supplied increases.

41 3-41 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Effect of a Change in Demand Quantity demanded Quantity supplied Price (millions of discs per week) millions of discs per week (dollars/tape) CD burner $300 CD Burner $

42 3-42 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Effects of a Change in Demand Quantity (millions of discs per week) Price ( dollar per disc) Supply of CD-Rs Demand for tapes (CD burner $300) Demand for CD-Rs (CD burner $100) Figure 3.8

43 3-43 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Predicting Changes in Price and Quantity  A change in supply  An increase in supply shifts the supply curve rightward and creates a surplus at the original price.  The price falls and the quantity demanded increases.

44 3-44 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Effects of a Change in Supply Price Quantity demanded Quantity supplied dollars/disc (millions of discs per week) (millions of tapes/week) Old New technology technology

45 3-45 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Effects of a Change in Supply Quantity (millions of disc per week) Price ( dollar per disc) Supply of CD-Rs (old technology) Demand for CD-Rs Supply of CD-Rs (new technology) Figure 3.9

46 3-46 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Predicting Changes in Price and Quantity  The effects of an increase in both demand and supply  A change in both demand and supply changes the equilibrium price and the equilibrium quantity, but we need to know the relative magnitudes of the changes to predict some of the consequences.  An increase in both demand and supply increases the equilibrium quantity but has an uncertain effect on the equilibrium price.

47 3-47 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Effects of an Increase in Both Demand and Supply

48 3-48 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Supply of CD-Rs (new technology) The Effects of an Increase in Both Demand and Supply Quantity (millions of discs per week) Price ( dollar per disc) Supply of CD-Rs (old technology) Demand for tapes (CD burner $300) Demand for tapes (CD burner $50) Figure 3.10

49 3-49 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Predicting Changes in Price and Quantity  The effects of a decrease in demand and an increase in supply  An increase in supply and a decrease in demand lowers the equilibrium price, but has an uncertain effect on the equilibrium quantity.

50 3-50 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia The Effects of a Decrease in Demand and an Increase in Supply

51 3-51 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia Demand for CD-Rs (MP3 download free The Effects of a Decrease in Demand and an Increase in Supply Quantity (millions of tapes per week) Price ( dollar per disc) Supply of CD-Rs (old technology) Supply of CD-Rs (new technology) Demand for CD-Rs (MP3 download $10 ) Figure 3.11

52 3-52 McTaggart, Findlay, Parkin: Microeconomics © 2007 Pearson Education Australia END CHAPTER 3


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