Economics Combined Version Edwin G. Dolan Best Value Textbooks 4 th edition Chapter 2 Supply and Demand The Basics Dolan, Microeconomics 4e, Ch. 2

 Demand is the amount of a product that consumers are willing and able to purchase at each possible price during a given period of time, everything else (but price) held constant. (ceteris paribus) 2 ◦ It is a relationship between prices and quantities.

 Law of Demand: There is an inverse relationship between the price of a good and the quantity consumers are willing and able to purchase during a particular period of time. ◦ As price of a good rises, consumers buy less. ◦ Demand depicts the quantity-price relationship ceteris paribus. 3

4  A graphical representation of Demand

 Change in Quantity Demanded - movement along the same demand curve in response to a price change. ◦ Results from a price change ◦ A movement along a curve  Change in Demand - shift in entire demand curve. ◦ Results from a change in a determinant of demand ◦ Results from a change in a determinant of demand (a ceteris paribus variable) ◦ A whole new curve 5

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 The Demand Shifters are factors other than price that influence demand: income, tastes, prices of related goods, expectations, and numbers of buyers.  Δ Demand Shifters leads to Δ DEMAND itself – ie a whole new demand curve 7

 Changes in Consumer Income ◦ Normal goods: goods for which demand increases as income increases. ◦ Inferior goods: goods for which demand decreases as income increases. 8

 Δ the Number of Buyers  Δ Demographic Characteristics 9

 Δ Price of Related Goods ◦ Substitute goods: goods that can be used in place of each other. ◦ Complementary goods: goods that are used together. 10

 Δ Consumer Expectations 11

 Δ Consumer Tastes and Preferences 12

13  Supply is the amount of a good or service that producers are willing and able to offer for sale at each possible price during a period of time, ceteris paribus. ◦ It is a price-quantity relationship.  The quantity supplied is the amount sellers are willing and able to offer for sale during a period of time at a specific price, ceteris paribus. ◦ It is a specific quantity tied to a specific price

14  Law of Supply - there is a positive relationship between the price of a product and the amount of it that will be supplied. ◦ As the price of a product rises, producers will be willing to supply more. ◦ The height of the supply curve at any quantity also shows the opportunity cost of producing the next unit of the good.

15  A graphical representation of Supply

 The production possibility frontier provides one explanation of why the supply curve has a positive slope  As the quantity of chicken produced increases, the opportunity cost of producing it increases, as shown by the increasing slope of the PPF

17  Δ Quantity Supplied - movement along the same supply curve in response to a price change. ◦ Results from Δ price ◦ Movement along a curve  Δ Supply - shift in entire supply curve. ◦ Results from Δ some other variables besides price. (Δ a ceteris paribus variable) ◦ Whole new curve

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19  Δ Resource Prices

20  Δ Technology and Productivity

21  Δ Expectations of Producers

22  Δ Number of Producers  Δ Prices of Related Goods or Services ◦ the opportunity cost of producing any good is the lost production of some other good

23  Supply Increases or Decreases  Supply shifts right or left  Supply NEVER, NEVER, NEVER goes UP or DOWN!! – not ever. Note: The textbook uses the Up/Down language in an example in CH 3. It may be “technically” OK, but it WILL confuse you if you use it!!!

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 When the plans of buyers and sellers mesh when tested in the market place, the market is in equilibrium  If the price is too high, there will be a surplus  If the price is too low, there will be a shortage

27  The just right Price where qD = qS ◦ Markets tend towards equilibrium unless something prevents price adjustments

 Which diagram best represents the effect on the market for beef of an increase in the cost of corn used as feed for beef cattle?  An increase in the price of an input will shift the supply curve as shown in the right-hand diagram

29  Price Floor: price is not allowed to decrease below a certain level. Examples: minimum wage, agricultural price supports. ◦ If the floor is above the equilibrium price, then it results in a surplus. ◦ In the labor market, a “surplus” means unemployment. But how much?  Price Ceiling: price is not allowed to increase above a certain level. Example: rent controls. ◦ If the ceiling is below the equilibrium price, then it results in a shortage.

 With demand curve in position D 1, the market would be in equilibrium at a price of $13  With a price support (minimum price) of $13 and demand curve D 2, there would be a surplus of milk

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Dolan, Economics Combined Version 4e, Ch. 2  Rent control (maximum rent) on housing will cause a shortage of rental housing  The shortage will be greater in the long run, when there is time to adjust the quantity of housing supplied

35  A surplus occurs whenever qS>qD.  A shortage occurs whenever qD>qS.  Surpluses and shortages can be resolved with price changes.

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40 1. Price of Passenger cars goes up dramatically: 2. A public campaign encouraging conservation of fuel by using public transportation and small cars whenever possible creates a change in preferences: 3. The price of tires quadruples: 4. A huge strike hits truck manufacturers, shutting down many plants: 5. Gasoline prices plummet to $0.02 per gallon: 6. The price of steel is cut in half: 7. A major recession strikes and income levels drop: 8. The price of camp trailers drops by 90%: The Market for Pickup Trucks is in equilibrium. What happens in this market with each of the following changes? Draw a graphical representation and identify what happens in the market for Pickup Trucks to (A) Supply, (B) Demand, (C) Price in the market for pickup trucks, ceteris paribus, (D) Equilibrium Quantity Demanded and Quantity Supplied?