1. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 1 ECONOMICS: EXPLORE & APPLY by Ayers and Collinge CHAPTER 3 “Demand and Supply” CHAPTER 3 “Demand and Supply”

2. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 2 Learning Objectives 1.Distinguish between the general notions of demand and supply used in ordinary conversation and the precise notions employed in the study of economics. 2.Explain what it means to shift demand and supply and why shifts might occur. 3.Describe how the marketplace settles on the equilibrium price and quantity. 4.Specify how demand and supply shifts cause market equilibriums to change over time. 1.Distinguish between the general notions of demand and supply used in ordinary conversation and the precise notions employed in the study of economics. 2.Explain what it means to shift demand and supply and why shifts might occur. 3.Describe how the marketplace settles on the equilibrium price and quantity. 4.Specify how demand and supply shifts cause market equilibriums to change over time.

3. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 3 Learning Objectives 5.Identify the changes to equilibrium that result from simultaneous changes in demand and supply. 6. (E&A) Discuss how vouchers use competition to improve the quality of schooling. 5.Identify the changes to equilibrium that result from simultaneous changes in demand and supply. 6. (E&A) Discuss how vouchers use competition to improve the quality of schooling.

4. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 4 3.1 DEMAND 4Demand relates the quantity of a good that consumers would purchase at each of various possible prices, over some period of time. 4 The ceteris paribus condition means that we look at only one relationship at a time. 4 Ceteris paribus is the Latin for “holding all else equal”.

5. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 5 Demand Schedule

6. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 6 Demand Curve Quantity Price ($’s) 5 4 3 2 1 0 A B C E F G 12345 Demand The demand curve slopes downward because price and quantity demanded are inversely related. The demand curve slopes downward because price and quantity demanded are inversely related.

7. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 7 Shifting Demand versus Movements along a Demand Curve A change in the price of a good causes a change in the quantity demanded, but does not shift demand but does not shift demand A change in the price of a good causes a change in the quantity demanded, but does not shift demand but does not shift demand

8. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 8 Changes in Demand vs. Changes in Quantity Demanded Quantity Price ($’s) Demand A price change would change the quantity demanded which involves movement along the demand curve.

9. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 9 Changes in Demand vs. Changes in Quantity Demanded Quantity Price ($’s) Demand Movement along the demand curve. Increase Decrease

10. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 10 Demand Shift Factors 4 Tastes and Preferences 4 Substitutes and Complements 4 Income - Normal vs. Inferior Goods 4 Population Price Expectations 4 Price Expectations 4 Tastes and Preferences 4 Substitutes and Complements 4 Income - Normal vs. Inferior Goods 4 Population Price Expectations 4 Price Expectations

11. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 11 Changes in Demand - Decrease Demand Shifts LEFT When: 3Prices of substitutes decrease 3Prices of complements increase 3Normal good-income decreases 3Inferior good-income increases 3Population decreases 3Tastes & preferences turn against the product Demand Shifts LEFT When: 3Prices of substitutes decrease 3Prices of complements increase 3Normal good-income decreases 3Inferior good-income increases 3Population decreases 3Tastes & preferences turn against the product D1 Price Quantity D2

12. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 12 Changes in Demand - Increase Demand Shifts RIGHT When: 3Prices of substitutes increase 3Prices of complements decrease 3Normal good-income increases 3Inferior good-income decreases 3Population increases 3Tastes & preferences turn in favor of the product Price Quantity D1 D2 D2

13. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 13 3.2 SUPPLY  Supply relates the quantity of a good that will be offered for sale at each of various possible prices, over some period of time, ceteris paribus.

14. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 14 Supply Schedule

15. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 15 Supply Curve Quantity Price ($’s) 5 4 3 2 1 0 12345 Supply H I J L K M The supply curve slopes upward because price and quantity supplied are directly related. The supply curve slopes upward because price and quantity supplied are directly related.

16. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 16 Supply Shift Factors 4 Prices of Inputs 4 Technological Change 4 Government or Union Restrictions 4 Prices of Substitutes in Production 4 Prices of Jointly Produced Goods 4 Expected Future Prices Number of Sellers 4 Number of Sellers 4 Prices of Inputs 4 Technological Change 4 Government or Union Restrictions 4 Prices of Substitutes in Production 4 Prices of Jointly Produced Goods 4 Expected Future Prices Number of Sellers 4 Number of Sellers

17. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 17 Changes in Supply vs. Changes in Quantity Supplied Quantity Price ($’s) 5 4 3 2 1 0 12345 Supply A price change causes movement from one point to another along the same supply curve.

18. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 18 Changes in Supply vs. Changes in Quantity Supplied Quantity Price ($’s) 5 4 3 2 1 0 12345 Supply Movement along Supply Increase Decrease

19. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 19 Changes in Supply - Decrease Supply Shifts LEFT When: 3Sellers expect price to rise in future. 3Price of labor or any input rises. 3Government or union restrictions increase cost. 3Price of substitute in production rises. 3Price of product produced jointly falls. 3Number of sellers declines Supply Shifts LEFT When: 3Sellers expect price to rise in future. 3Price of labor or any input rises. 3Government or union restrictions increase cost. 3Price of substitute in production rises. 3Price of product produced jointly falls. 3Number of sellers declines Quantity $S2 S1 S1

20. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 20 Supply Shifts RIGHT When: 3Sellers expect price to decline in future. 3Price of labor or any input falls. 3Technological change lowers cost. 3Price of substitute in production falls. 3Price of product produced jointly rises. 3Number of sellers increases Supply Shifts RIGHT When: 3Sellers expect price to decline in future. 3Price of labor or any input falls. 3Technological change lowers cost. 3Price of substitute in production falls. 3Price of product produced jointly rises. 3Number of sellers increases Changes in Supply - Increase Quantity $ S2 S2 S1 S1

21. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 21 Individual Demand to Market Demand Demand can be one individual’s or the market as a whole

22. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 22 Quantity Price ($’s) Market Demand Curve Price ($) 5 4 3 2 1 0 Jill’s Demand Jill’s Quantity Demanded 0 1 2 3 4 5 Jack’s Demand Jack’s Quantity Demanded 1 2 3 4 5 6 Market Demand Market Q Demanded 1 3 5 7 9 11 65432106543210 1 2 3 4 5 6 7 8 9 10 11

23. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 23 Individual Supply to Market Supply Supply can be from one firm or all firms in the market.

24. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 24 Market Supply Curve Quantity Price ($’s) 5 4 3 2 1 0 123457689 Market Supply Wally’s Supply Wanda’s Supply

25. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 25 Market Equilibrium There is only one price that clears the market, meaning that the quantity supplied equals the quantity demanded.

26. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 26 Market Equilibrium Pails of Water Price ($’s) 123457689 5 4 3 2 1 0 QQ*QQ* P*P*P*P* Surplus of 4 Pails Shortage of 4 Pails Too High Too Low Market equilibrium occurs where demand and supply intersect. Supply Supply Demand Demand

27. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 27 3.3 EQUILIBRIUM The market clearing price and the resulting quantity traded comprise what is referred to as the market equilibrium, meaning that there is no tendency for either price or quantity to change, ceteris paribus.

28. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 28 Changes in Market Equilibrium S Quantity Price ($’s) S new S D D Q*Q* P* P* An increase or decrease in supply. Price ($’s) Quantity

29. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 29 Changes in Market Equilibrium S Quantity Price ($’s) S D D D new Q* Q* P* P* An increase or decrease in demand. D new Quantity Price ($’s)

30. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 30 Changes in Market Equilibrium Note: In Cases 1-4 only one of the two curves is shifting.

31. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 31 Changes in Market Equilibrium Note: In Cases 5-8 both of the curves are shifting.

32. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 32 3.4 EXPLORE & APPLY Policies for Competition and Choice in Schooling 4Charter Schools: Public schools in which a non-profit group receives a contract (i.e. charter) to operate a school for a limited period of time. 4Vouchers: Monetary amounts provided by government, free of charge to parents, which would be spendable only on the education of their children, at a school chosen by the parents. 4Charter Schools: Public schools in which a non-profit group receives a contract (i.e. charter) to operate a school for a limited period of time. 4Vouchers: Monetary amounts provided by government, free of charge to parents, which would be spendable only on the education of their children, at a school chosen by the parents.

33. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 33 Test Yourself 1.The Law of demand states that consumers a.must not buy more than they need. b.must not waste what they buy. c.must pay for what they buy. d.will buy more as price falls. 1.The Law of demand states that consumers a.must not buy more than they need. b.must not waste what they buy. c.must pay for what they buy. d.will buy more as price falls.

34. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 34 Test Yourself 2. An increase in the price of football tickets would cause the ___________ basketball tickets to __________. a.demand for; increase. b.supply of; increase. c.demand for; decrease. d.supply of; decrease. 2. An increase in the price of football tickets would cause the ___________ basketball tickets to __________. a.demand for; increase. b.supply of; increase. c.demand for; decrease. d.supply of; decrease.

35. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 35 Test Yourself 3.An upward sloping supply curve means that a.consumers will wish to purchase more at higher prices. b.consumers will wish to purchase more at lower prices. c.business firms will wish to sell more at higher prices. d.business firms that lower their prices wish to sell more. 3.An upward sloping supply curve means that a.consumers will wish to purchase more at higher prices. b.consumers will wish to purchase more at lower prices. c.business firms will wish to sell more at higher prices. d.business firms that lower their prices wish to sell more.

36. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 36 Test Yourself 4.A decrease in supply is illustrated as a.a downward shift in the supply curve. b.a shift to the left in the supply curve. c.an upward movement along the supply curve. d.a downward movement along the supply curve. 4.A decrease in supply is illustrated as a.a downward shift in the supply curve. b.a shift to the left in the supply curve. c.an upward movement along the supply curve. d.a downward movement along the supply curve.

37. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 37 Test Yourself 5.If research reveals that carrot juice cures cancer, it is likely that a.the supply of carrot juice will increase, which will increase the quantity demanded. b.demand for carrot juice will increase, which will increase the quantity supplied. c.neither the demand or supply of carrot juice will increase. d.both the demand and supply of carrot juice will increase. 5.If research reveals that carrot juice cures cancer, it is likely that a.the supply of carrot juice will increase, which will increase the quantity demanded. b.demand for carrot juice will increase, which will increase the quantity supplied. c.neither the demand or supply of carrot juice will increase. d.both the demand and supply of carrot juice will increase.

38. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 38 Test Yourself 6.When there is an initial shortage, market prices eventually reach equilibrium because a.supply increases. b.price decreases. c.price increases. d.equilibrium output falls. 6.When there is an initial shortage, market prices eventually reach equilibrium because a.supply increases. b.price decreases. c.price increases. d.equilibrium output falls.

39. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 39 Terms along the Way  demand  quantity demanded  ceteris paribus  shift factors  normal goods  inferior goods  substitutes  complements  supply  demand  quantity demanded  ceteris paribus  shift factors  normal goods  inferior goods  substitutes  complements  supply  quantity supplied  market equilibrium  surplus  shortage  consumer surplus  marginal benefit  marginal cost  charter schools  vouchers

40. ©2004 Prentice Hall Publishing Ayers/Collinge, 1/e 40 The End! Next Chapter 4 “The Power of Prices"