1. Transparency 3-1 Chapter 3 Supply, Demand, and Price © West Publishing Company 1996

2. Transparency 3-2 MARKETS DEFINED

3. Transparency 3-3 MARKETS DEFINED COMPETITION

4. Transparency 3-4 MARKETS DEFINED.... FOR PRODUCTS & RESOURCES COMPETITION

5. Transparency 3-5 MARKETS DEFINED.... FOR PRODUCTS & RESOURCES PRICES COMPETITION

6. Transparency 3-6 MARKETS DEFINED.... FOR PRODUCTS & RESOURCES.... THE RATIONING FUNCTION PRICES COMPETITION

7. Transparency 3-7 DEMAND AND SUPPLY THEORY In a free market, allocation of a good or service is accomplished in a decentralized way. The market price of a good rations the available goods among competing consumers.

8. Transparency 3-8 Circular- Flow Diagram and Two Markets Exhibit 1

9. Transparency 3-9 THE DEMAND SCHEDULE at each price how much of a good or service a person is willing and able to purchase other relevant factors being held constant

10. DEMAND... P Q d $ 1 $ 2 $ 3 $ 4 $ 510 20 35 55 80 o P Q d P L O T T H E P O I N T S

11. DEMAND... o P Q d 10 20 355580 P Q d $ 1 $ 2 $ 3 $ 4 $ 510 20 35 55 80 1 2 3 4 5

12. DEMAND... o P P Q d $ 1 $ 2 $ 3 $ 4 $ 510 20 35 55 80 Q d 1020355580 1 2 3 4 5

13. DEMAND... o P D P Q d $ 1 $ 2 $ 3 $ 4 $ 510 20 35 55 80 Q d 1020355580 1 2 3 4 5

14. Transparency 3-14 LAW OF DEMAND FOR HIGHER PRICES DEMAND & SUPPLY

15. Transparency 3-15 LAW OF DEMAND FOR HIGHER PRICES LESS QUANTITY IS DEMANDED DEMAND & SUPPLY

16. Transparency 3-16 LAW OF DEMAND All else assumed equal, consumers purchase MORE of a good during a given time period the LOWER its opportunity cost (relative price).

17. Transparency 3-17 From Individual to Market Demand At each price there is a quantity demanded for each individual. The quantities demanded are summed horizontally. The result is the quantity demanded by the entire market at each price.

18. Transparency 3-18 Deriving a Market Demand Schedule & Curve Exhibit 3 (1 of 2) QUANTITY DEMANDED Part (a) OTHER BUYERS 20 45 70 100 130 160 ALL BUYERS 23 50 77 109 141 173 SMITH 2 3 4 5 6 7 JONES 1 2 3 4 5 6 PRICE $15 14 13 12 11 10

19. Transparency 3-19 Factors That Can Cause the Demand Curve to Shift Income Preferences Price of Related Goods Number of Buyers Expectations of Future Price

20. Transparency 3-20 Shifts in the Demand Curve Exhibit 4 (2 of 2)

21. Transparency 3-21 Shifts in the Demand Curve Exhibit 4 (1 of 2)

22. Transparency 3-22 PROVIDE EXAMPLES OF THE FOLLOWING: Two goods that are SUBSTITUTES Two goods that are COMPLEMENTS a NORMAL good An INFERIOR good

23. Transparency 3-23 Substitutes and Complements Exhibit 5 (1 of 2)

24. Transparency 3-24 Substitutes and Complements Exhibit 5 (2 of 2)

25. Transparency 3-25 SHIFT VERSUS MOVEMENT A change in the PRICE of a good CAUSES a MOVEMENT ALONG the demand schedule. This is known as a CHANGE IN THE QUANTITY DEMANDED.

26. Transparency 3-26 SHIFT VERSUS MOVEMENT continued A change in OTHER FACTORS CAUSES a SHIFT in the demand schedule itself. This is known as a CHANGE IN DEMAND.

27. Transparency 3-27 Change in Demand versus Change in Quantity Demanded Exhibit 6

28. Transparency 3-28 THE SUPPLY SCHEDULE represents producers’ response to prices for each price the supply schedule gives the quantity of a good or service producers are willing and able to produce and sell

29. SUPPLY... o P 1 2 3 4 5 P Q s $ 1 $ 2 $ 3 $ 4 $ 560 50 35 20 5 Q s 1020355580

30. SUPPLY... o P CONNECT THE DOTS 1 2 3 4 5 P Q s $ 1 $ 2 $ 3 $ 4 $ 560 50 35 20 5 Q s 1020355580

31. SUPPLY... o P S 1 2 3 4 5 P Q s $ 1 $ 2 $ 3 $ 4 $ 560 50 35 20 5 Q s 1020355580

32. Transparency 3-32 DEMAND & SUPPLY LAW OF SUPPLY FOR HIGHER PRICES

33. Transparency 3-33 DEMAND & SUPPLY LAW OF SUPPLY FOR HIGHER PRICES GREATER QUANTITY IS SUPPLIED

34. Transparency 3-34 DEMAND & SUPPLY LAW OF SUPPLY FOR HIGHER PRICES GREATER QUANTITY IS SUPPLIED SUPPLY IS ALWAYS BASED UPON A FIRM'S COSTS

35. Transparency 3-35 THE LAW OF SUPPLY All else assumed equal, HIGHER PRICES induce GREATER PRODUCTION AND SALES of output. Firms provide LESS during a given time period at LOWER PRICES.

36. Transparency 3-36 From Individual to Market Supply At each price there is a quantity supplied for each individual producer. The quantities supplied are summed horizontally. The result is the quantity supplied by the entire market at each price.

37. Transparency 3-37 Deriving a Market Supply Schedule & Curve Exhibit 10 (1of 2) QUANTITY SUPPLIED Part (a) ALL SUPPLIERS 99 103 109 115 119 123 OTHER SUPPLIERS 96 98 102 106 108 110 ALBERTS 2 3 4 5 6 7 BROWN 1 2 3 4 5 6 PRICE $10 11 12 13 14 15

38. Transparency 3-38 Factors That Can Cause the Supply Curve to Shift Prices of Relevant Resources Technology Number of Sellers Expectations of Future Price Taxes and Subsidies Government Restrictions

39. Transparency 3-39 Shifts in the Supply Curve Exhibit 11 (1 of 2)

40. Transparency 3-40 Shifts in the Supply Curve Exhibit 11 (2 of 2)

41. Transparency 3-41 SHIFT VERSUS MOVEMENT THE LAW OF SUPPLY states that as the PRICE of a good increases the QUANTITY SUPPLIED increases. A change in PRICE causes a MOVEMENT ALONG THE SUPPLY SCHEDULE.

42. Transparency 3-42 SHIFT VERSUS MOVEMENT continued changes in factors other than price cause a SHIFT in the SUPPLY SCHEDULE. This is known as a CHANGE IN SUPPLY.

43. Transparency 3-43 Change in Supply versus Change in Quantity Supplied Exhibit 12

44. Transparency 3-44 Supply Curves When There Is No Time to Produce More or No More Can Be Produced Exhibit 9 (b) Price X Supply Curve of Stradivarius Violins Number of Stradivarius Violins 0 Price 500 Supply Curve of Theater Seats for Tonight’s Performance Number of Theater Seats (a) 0

45. Transparency 3-45 EQUILIBRIUM A state of balance between opposing forces. In this case, consumers and producers are the opposing forces.

46. DEMAND & SUPPLY PUTTING THE TWO TOGETHER P Q s o P 5 20 35 50 60 1 2 3 4 5 S Q d 10 20 35 55 80 D $ 1 $ 2 $ 3 $ 4 $ 5 1020355580 Q

47. MARKET CLEARING EQUILIBRIUM DEMAND & SUPPLY PUTTING THE TWO TOGETHER P Q s o P 5 20 35 50 60 1 2 3 4 5 S Q d 10 20 35 55 80 D $ 1 $ 2 $ 3 $ 4 $ 5 1020355580 Q

48. Transparency 3-48 SHIFTING DEMAND (with no change in supply) Price and Quantity move in the same direction as demand. Demand increases: Price increases and quantity increases Demand decreases: Price decreases and quantity decreases.

49. 95 75 60 50 40 DEMAND & SUPPLY INCREASE IN DEMAND P Q s 5 20 35 50 60 Q d 10 20 35 55 80$ 1 $ 2 $ 3 $ 4 $ 5 d’ Q o P 1 2 3 4 5 $6 D 1020355580 Q S D’

50. DEMAND & SUPPLY DECREASE IN DEMAND 35 20 15 10 5 P Q s 5 20 35 50 60 Q d 10 20 35 55 80$ 1 $ 2 $ 3 $ 4 $ 5 d’ Q o P 1 2 3 4 5 $6 D 1020355580 Q S D’

51. Transparency 3-51 Equilibrium Price and Quantity Effects of Supply and Demand Shifts Exhibit 16 (1 of 4) 0 P Q 0 P Q S D D DS  PQDS  PQ (a) (b) S D D    1 1 1 1 2 2

52. Transparency 3-52 SUPPLY SHIFTS (with no change in demand) Quantity moves with supply, but price moves in the opposite direction. Supply increases: quantity increases and price falls. Supply decreases: quantity decreases and price rises.

53. 95 85 75 55 35 DEMAND & SUPPLY INCREASE IN SUPPLY 80 55 35 20 10 P Q s 5 20 35 50 60 Q’ s $ 1 $ 2 $ 3 $ 4 $ 5 d Q o P 1 2 3 4 5 $6 D 1020355580 Q S S’

54. DEMAND & SUPPLY DECREASE IN SUPPLY 25 20 15 10 2 80 55 35 20 10 P Q s 5 20 35 50 60 Q’ s $ 1 $ 2 $ 3 $ 4 $ 5 d Q o P 1 2 3 4 5 $6 D 1020355580 Q S S’

55. Transparency 3-55 Equilibrium Price and Quantity Effects of Supply and Demand Shifts Exhibit 16 (2 of 4) 0 P Q 0 P Q SD  PQSD  PQ (c) (d) S S D S S D    1 2 1 2 1 1

56. Transparency 3-56 SHIFTS IN BOTH CURVES When both supply and demand shift at the same time, a certain amount of uncertainty results.

57. Transparency 3-57 Equilibrium Price and Quantity Effects of Supply and Demand Shifts Exhibit 16 (4 of 4) 0 P Q 0 P Q D < S  PQ D > S  PQ (h) (g) S S D D S S D D       1 1 1 1 2 22 2

58. Transparency 3-58 SHIFTS IN BOTH SUPPLY AND DEMAND S D = P ? Q S D = P Q ?

59. Transparency 3-59 PRICE CONTROLS Price ceiling: a government- mandated “maximum” price “above” which legal trades cannot be made Price floor: a government- mandated “minimum” price “below” which legal trades cannot be made

60. INTERFERENCE WITH MARKET PRICE LEADS TO PROBLEMS o P 1 2 3 4 5 S D } } SURPLUS SHORTAGE $6 PRICE FLOOR PRICE CEILING DEMAND & SUPPLY 1020355580

61. Transparency 3-61 Price Ceiling Exhibit 18 0100150 190 8 12 18 A price ceiling creates a shortage D S Price (dollars Equilibrium Price Price Ceiling Equilibrium Quantity Quantity of GoodX Shortage

62. Transparency 3-62 Effects of Price Ceiling Shortages Fewer Exchanges Nonprice Rationing Devices: FCFS Buying & Selling at Prohibited Price

63. Transparency 3-63 Price Floor Exhibit 19 0 90 130180 15 20 A price floor creates a surplus D S Price (dollars) Equilibrium Price Price Floor Equilibrium Quantity Quantity of GoodX Surplus

64. Transparency 3-64 Effect of Price Floor Surpluses Fewer Exchanges

65. Transparency 3-65 Effects on the Minimum Wage Exhibit 20 0 3.25 4.25 D S Wage Rate (dollars) Equilibrium Wage Minimum Wage Number of Unskilled Workers Surplus Number of Workers Who Want to Work at Minimum Wage Number of Workers Employed atEquilibrium Wage Number of Workers Employed at Minimum Wage N 2 N 1 N 3

66. Transparency 3-66 ANY QUESTIONS?