Principles of Economics by Fred M Gottheil Chap. 3 SUPPLY AND DEMAND

What is Supply and Demand? A model of price behavior in competitive markets

Note that Demand is not The same as wants The same as needs necessarily the same as the actual quantity purchased

The Law of Demand When price increases the quantity demanded decreases and vice versa, ceteris paribus ©1999 South-Western College Publishing

What assumption is always made when the price changes? Ceteris paribus or everything else stays the same-abbreviated cet.par. ©1999 South-Western College Publishing

What is a Demand Schedule? Shows the specific quantity of a good or service that people are willing and able to buy at different prices ©1999 South-Western College Publishing

Price Quantity Demanded $10 0 $9 1 $8 2 $7 3 $6 4 $5 5 $10 0 $9 1 $8 2 $7 3 $6 4 $5 5 7 ©1999 South-Western College Publishing

What is a Demand Curve? A graph that depicts the relationship between price and quantity demanded ©1999 South-Western College Publishing

P1 Demand Curve P2 Q1 Q2 9 ©1999 South-Western College Publishing

Reasons for the Law of Demand?? The substitution (relative price) effect The real income effect

What is a change in Demand? A change in the amount demanded of a good that is caused by factors other than a change in the price of that good ©1999 South-Western College Publishing

P D2 D1 Q Shift in Demand Curve 1212 ©1999 South-Western College Publishing 1212

A rightward shift in the demand curve is an increase in demand, a leftward shift is a decrease in demand.

What causes a shift in Demand? Change in tastes Income changes Changes in Population Changes in the prices of related goods Changes in Expectations

Income changes: 2 possibilities: Normal goods: as income rises, demand rises, cet. par. Inferior goods: As income rises, demand falls, cet. par.

Changes in related goods prices: 2 cases: Substitute goods: As the price of Y increases, the demand for X increases Complementary goods: As the price of Y increases, the demand for X decreases

Changes in future price expectations The expectation of a future rise in price leads to an increase in demand now, cet. par.

What is Market Demand? The sum of all individual demands in a market

NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND ©1999 South-Western College Publishing

Changes in demand vs. changes in quantity demanded Changes in quantity demanded only caused by changes in the products own price, a movement along a demand curve Changes in demand--a shift in the demand curve caused by factors other than the price of the product

P P P1 P2 D1 D D Q1 Q2 Q Q A change in demand A change in quantity demanded

Do you really understand????? Do you understand? Do you really understand?????

Which of the following would increase the current demand for cd’s? a. A decrease in the price of cd’s A decline in the teenage population A lower cost for producing cd’s An expectation of a drop in cd prices A decrease in the price of cd players The correct answer is…….E

1. According to the "Law of Demand," as the price of a good increases a. the demand for the good increases. b. the demand for the good decreases. c. the quantity demanded increases. d. the quantity demanded decreases. 2. Tea and Coffee are ____________. Peanut butter and jelly are ____________. a. complements; substitutes b. complements; complements c. substitutes; complements d. substitutes; substitutes

3. Which of the following will increase the demand for pencils? a. a decrease in the price b. a decrease in the student population c. a decrease in the price of pens d. a decrease in the price of erasers  

The supply side of the market Supply refers to willingness and ability to produce something

As price rises, the quantity supplied rises, cet. par. The Law of Supply As price rises, the quantity supplied rises, cet. par.

Reasons for the Law of Supply? Monetary incentives The Law of Increasing Opportunity Costs

What is a Supply Schedule? Shows the specific quantity of a good or service that suppliers are willing and able to provide at different prices ©1999 South-Western College Publishing

Price Quantity Supplied $5 0 $6 1 $7 2 $8 3 $9 4 $10 5 $5 0 $6 1 $7 2 $8 3 $9 4 $10 5 3030 ©1999 South-Western College Publishing

What is a Supply Curve? Depicts the relationship between price and quantity supplied ©1999 South-Western College Publishing

P2 S Supply Curve P1 Q1 Q2 32 ©1999 South-Western College Publishing

What is Market -day Supply? A market situation in which the quantity of a good supplied is fixed, regardless of price ©1999 South-Western College Publishing

S P2 P1 Supply Curve Q 34 ©1999 South-Western College Publishing

What is a change in Supply? A change in the amount supplied of a good that is caused by factors other than a change in the price of that good ©1999 South-Western College Publishing

Shift in Supply P S1 S2 Q 3636 ©1999 South-Western College Publishing

A rightward shift in the supply curve is an increase in supply, a leftward shift is a decrease in supply.

What causes a shift in Supply Technology changes Changes in resource prices Changes in the number of suppliers Changes in other good prices Changes in expectations

Increases in supply can be caused by: Improved technology Lower resource prices Greater number of firms Expected lower future prices

NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY ©1999 South-Western College Publishing

Changes in supply vs. changes in quantity supplied Changes in quantity supplied only caused by changes in the products own price, a movement along a supply curve Changes in supply--a shift in the supply curve caused by factors other than the price of the product

S P S1 S P P2 P1 Q1 Q2 Q Q A change in supply A change in quantity supplied

Supply and demand together Put supply and demand curves on the same graph Intersection gives the equilibrium price and quantity

PE and QE represent the equilibrium price and quantity

What is Equilibrium Price? The price that equates the quantity demanded and the quantity supplied ©1999 South-Western College Publishing

What happens if price is below equilibrium? A shortage, or excess demand, arises

At P2, QD > QS, thus a shortage or excess demand exists 47

How is the shortage eliminated? The price rises, leading to a decrease in quantity demanded and an increase in quantity supplied.

What happens if price is above equilibrium? A surplus, or excess supply, arises

At P1, QD < QS, thus a surplus or excess supply exists 50

How is the surplus eliminated? The price falls, leading to a decrease in quantity supplied and an increase in quantity demanded.

S D Q3 P1 P3 P2 Surplus Shortage Summary, shortages, surpluses, and equilibrium S P1 Surplus P3 D Shortage P2 Q3 52 ©1999 South-Western College Publishing

How shifts in S and D affect equilibrium price and quantity

S D2 D1 Q1 Q2 Right Shift in Demand P2 P1 54 ©1999 South-Western College Publishing

S1 D1 D2 Q2 Q1 Left Shift in Demand P1 P2 55 ©1999 South-Western College Publishing

Summary, demand changes Increased demand, price and quantity both rise Decreased demand, price and quantity both fall

D S1 S2 Q1 Q2 Right Shift in Supply P1 P2 5757 ©1999 South-Western College Publishing

D S2 S1 Q2 Q1 Left Shift in Supply P2 P1 5858 ©1999 South-Western College Publishing

Summary, supply changes Increased supply, price falls, quantity rises Decreased supply, price rises, quantity falls

If both curves shift, can predict price or quantity, but not both unless the magnitude of the shifts are known

Examples: shifts in both S and D curves Say both S and D increase, what can we say about equilibrium P and Q?

Q will increase, but P is indeterminate ANSWER Q will increase, but P is indeterminate

Examples: shifts in both S and D curves Say S increases but D decreases, what can we say about equilibrium P and Q?

P will decrease, but Q is indeterminate ANSWER: P will decrease, but Q is indeterminate

What assumption is always made when the price changes? What is a Demand Curve? What is a Supply Curve? What is equilibrium Price? What are shortages and surpluses? What happens when demand and supply curves shift?

Supply and demand problems Suppose apples and oranges are substitutes to consumers: Bad weather destroys many apple orchards--what happens to equilibrium price and quantity in the apple market? In the Orange market?? Illustrate graphically.

S1 S P P S P2 P2 P1 D1 P1 D D Q Q1 Q2 Q2 Q1 Q Orange market, demand increases, price and quantity rise Apple market, supply decreases, price rises, quantity falls

Oprah Winfrey says on tv that she will never eat another hamburger Oprah Winfrey says on tv that she will never eat another hamburger. What might happen to the equilibrium price and quantity in the beef market? Show graphically with supply and demand curves.

Decrease in demand in the beef market, price and quantity fall 69

The demand for computers has clearly increased over time, due to higher incomes and changing preferences towards computers. Despite the increased demand, the price of computers has continued to fall. Show graphically with supply and demand curves how this could happen, and give some possible explanations.

S S1 P2 P1 P3 D1 D If supply increases more than demand, price falls--greater supply due possibly to lower input costs, better technology, more firms

An increase in the wages paid to fishermen will have what effect on the fish market equilibrium? a. Price will decrease, and quantity will decrease. b. Price will increase, and quantity will increase. c. Price will decrease, and quantity will increase. d. Price will increase, and quantity will decrease. e. Price and quantity will stay the same.

Over the past couple of years, prices for personal computers have fallen dramatically, but suppliers have offered more and more of them for sale. Does this refute the law of supply? Explain.