Chapter 3 – Demand, Supply, & Price ECONOMICS THEORY AND PRACTICE Seventh Edition Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Patrick J. Welch St. Louis University Gerry F. Welch St. Louis Community College at Meramec & PowerPoint Presentation by: Dr. Ray Everett Pima Community College

Demand, Supply, & Price Determination Contents Demand: The Buyer’s Side Supply: The Seller’s Side Market Demand & Supply Equilibrium Price & Quantity Changes in Qty. Demanded & Supplied Changes in Demand & Supply Changes in Demand Changes in Supply Changes in Equilibrium Price & Quantity Limiting Price Movements Price Elasticity of Demand & Supply Measuring Price Elasticity (Chapter 3 Appendix)

Demand, Supply, & Price Determination Chapter Objectives To explain what economists mean by demand, the Law of Demand, supply, and the Law of Supply. To demonstrate how demand and supply work, using schedules and graphs. To explain how price changes affect the quantity of a good demanded or supplied. To show how demand and supply curves shift with changes in underlying nonprice influences. To distinguish between a change in the quantity demanded or supplied (a movement along a curve), and a change in demand or supply (a shift of a curve). To demonstrate how demand and supply interact in markets to determine prices. To define and illustrate equilibrium price, equilibrium quantity, shortages, and surpluses in a market.

Demand, Supply, & Price Determination Chapter Objectives (cont.) To explain how changes in demand and changes in supply (shifts in demand and supply curves) affect equilibrium prices and quantities in markets. To illustrate how government-imposed price ceilings and price floors influence market conditions. To introduce the concept of price elasticity, which measures buyers’ and sellers’ sensitivities to price changes. To calculate price elasticity of demand and of supply.

Demand  Different amounts of a product that a buyer would be willing and able to purchase at different prices - over a given period of time when all nonprice factors are held constant. Demand Schedule  A list of amounts of a product that a consumer would be willing and able to buy (demand) at different prices over a given time period when all nonprice factors are held constant. Demand: The Buyer’s Side 3-1a

Law of Demand  As price increases, the quantity of the product demanded decreases, and as price decreases, the quantity demanded increases - an inverse relationship exists between the price and the quantity demanded. Demand Curve (a graph showing the relationship)  A downward sloping line on a graph will illustrate a demand schedule. Demand: The Buyer’s Side 3-1b

Supply: The Seller’s Side Supply  Different amounts of a product that a seller would offer for sale at different prices in a defined time period when all nonprice factors are held constant. Supply Schedule  A list of the amount of a product that a seller would offer for sale at different prices in a defined time period when all nonprice factors are held constant. 3-2a

Supply: The Seller’s Side Law of Supply  As price increases, the quantity of a good or service a supplier is willing to offer will increase, and as price decreases, the quantity supplied will decrease – a direct relationship exists between price and quantity supplied. Supply Curve (a graph showing the relationship)  An upward sloping line on a graph will illustrate a supply schedule. 3-2b

Market  Place or situation in which the buyers and sellers of a product interact for the purpose of exchange. Market Demand & Market Supply  The demand of all buyers and supply of all sellers in a market for a good or service; found by adding together individual demand or supply schedules. Market Demand & Supply 3-3

Equilibrium Price & Quantity Equilibrium Price  Also called the market clearing price.  Price that sets buyers’ plans equal to sellers’ plans. Equilibrium Quantity  Quantity at which those plans are equal. 3-4a

Equilibrium Price & Quantity Surplus  Occurs in a market when the quantity demanded is less than the quantity supplied, or when the product’s price is above equilibrium price. 3-4b

Equilibrium Price & Quantity Shortage  Occurs in a market when the quantity demanded is greater than the quantity supplied, or when the product’s price is below the equilibrium price. 3-4c

Changes in Qty. Demanded & Supplied Change in Quantity Demanded  Movement along a demand curve from one price-quantity point to another due to a change in price. Change in Quantity Supplied  Movement along a supply curve from one price-quantity point to another due to a change in price. 3-5

Changes in Demand & Supply Change in Demand & Supply  Change in the demand or supply schedule due to a change in a nonprice factor.  Causes the demand or supply curve to shift to the left or the right depending on the nature of the change. 3-6

Changes in Demand Nonprice Factors Influencing Demand  Taste, fashion, and popularity.  Buyers’ incomes.  Buyers’ expectations concerning future income, prices, or availabilities.  Prices of goods related as substitutes and compliments.  The number of buyers in the market. 3-7a

Increase in Demand  Change in a nonprice factor that causes more of a product to be demanded at each price.  Demand curve shift to the right. Changes in Demand 3-7b Decrease in Demand  Change in a nonprice factor that causes less of a product to be demanded at each price.  Demand curve shift to the left.

Changes in Supply Nonprice Factors Influencing Supply  The cost of producing an item.  Expectations about future market conditions.  Other items the seller does, or could supply.  The number of sellers in a market. 3-8a

Changes in Supply Increase in Supply  Change in a nonprice factor that causes more of a product to be supplied at each price.  Supply curve shift to the right. 3-8b Decrease in Supply  Change in a nonprice factor that causes less of a product to be supplied at each price.  Supply curve shift to the left.

Changes in Equilibrium Price & Qty. Effect of an Increase in Demand  Causes the equilibrium price and quantity to increase. 3-9a Effect of a Decrease in Demand  Causes the equilibrium price and quantity to decrease.

Effect of an Increase in Supply  Causes the equilibrium price and quantity to increase. Changes in Equilibrium Price & Qty. 3-9b Effect of a Decrease in Supply  Causes the equilibrium price and quantity to decrease.

Price Ceilings  Government-set maximum price that can be charged for a good or service.  A shortage will develop if the equilibrium price is above the price ceiling. Limiting Price Movements 3-10a

Price Floors  Government-set minimum price that can be charged for a good or service.  A surplus will develop if the equilibrium price is below the price floor. Limiting Price Movements 3-10b

Price Elasticity  Measure of the strength of buyers’ or sellers’ responses to a price change. Price Elastic  Strong response to a price change.  Occurs when the % of change in the quantity demanded or supplied is greater than the % of change in price. Price Inelastic  Weak response to a price change.  Occurs when the % of change in the quantity demanded or supplied is less than the % of change in price. Price Elasticity of Demand & Supply 3-11a

Factors Affecting Price Elasticity of Demand  Necessities versus luxury goods Strong response to price changes in luxury goods. Weak response to price changes in necessities.  Substitutes Strong response to price changes in products with many substitutes or similar alternatives. Weak response to price changes in products that have few substitutes or similar alternatives.  Proportion of income Strong response to price changes in goods or services that require a greater proportion of income. Weak response to price changes in goods or services that require a lesser proportion of income. Factor Affecting Price Elasticity of Supply  Time to react Price Elasticity of Demand & Supply 3-11b

Price Elasticity of Demand & Total Revenue  Strong response to a price change Causes revenue to move in the opposite direction of the change in price.  Weak response to a price change Causes revenue to move in the same direction of the change in price. Price Elasticity of Demand & Supply 3-11b

Determining Percentage Changes  Use the table below to assist you in determining percentage changes. Determining Price Elasticity  Use the table below and your elasticity coefficient to assist you in determining if the demand or supply is elastic, inelastic, or unitary elastic. Price Elasticity (Appendix Slide 1) 3-12

ECONOMICS THEORY AND PRACTICE Seventh Edition Copyright © 2004 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the expressed written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein. Chapter 3 – Demand, Supply, & Price This is the end of Chapter 3. To return to the contents menu of this chapter, click on the menu graphic to the right of this text. To begin Chapter 4, click on the next chapter icon to the right of this text. Menu Next Chapter