Macroeconomics ECON 2302 May 2009 Marilyn Spencer, Ph.D. Professor of Economics Chapter 3

Quiz 1 Reminder 4 If you have not yet done so, I need you to send me an , so I’ll have you in my database. 4 Send your , including your first and last names in the body of the , to 4 4 points of extra credit

First class meeting’s topics review 4 Syllabus 4 Basic economics definitions 4 Basic economics assumptions 4 Positive v. normative analysis 4 Circular flow model 4 Production possibilities frontier

Any questions on these topics? Anything else?

Critical Issue Please be sure your account allows you to keep your “Sent Mail.” I recommend that you use your Islander account to send me any and all assignments. Sometimes s do not go through, and I do not accept assignments that are turned in late. The only way you can protect your grades in such an environment is to forward your date & time stamped Sent Mail file to me.

Chapter 3. Where Prices Come From: Interaction of Supply & Demand

After studying this chapter, you should be able to: Discuss the variables that influence demand. Discuss the variables that influence supply. Use a graph to illustrate market equilibrium. Use demand and supply graphs to predict changes in prices and quantities. LEARNING OBJECTIVES

Chapter 3 Topics: 4 Market demand 4 Market supply 4 Equilibrium 4 Shortages 4 Surpluses 4 What happens when demand or supply changes

The Demand Side of the Market The Demand of an Individual Buyer LEARNING OBJECTIVE 1 Quantity demanded The quantity of a good or service that a consumer is willing to purchase at a given price Plotting a Price-Quantity Combination on a Graph At a price of $125 per printer, Kate, the purchasing manager for the Prudential Insurance Company, will be willing to buy 5 printers in the next month.

The Demand Side of the Market Demand schedule A table showing the relationship between the price of a product and the quantity of the product demanded. Demand curve A curve that shows the relationship between the price of a product and the quantity of the product demanded. Demand Schedules and Demand Curves Kate’s Demand Schedule and Demand Curve

The Demand Side of the Market Individual Demand and Market Demand Market demand The demand for a product by all the consumers in a given geographical area Deriving the Market Demand Curve from Individual Demand Curves

The Demand Side of the Market 4 The Law of Demand 4 The Law of Demand Holding everything else constant, when the price of a product falls, the quantity demanded of the product will increases, and when the price of a product rises, the quantity demanded of the product will decrease. 4 What Explains the Law of Demand? Substitution effect The change in the quantity demanded of a good that results from a change in price making the good more or less expensive relative to other goods that are substitutes. Income effect The change in the quantity demanded of a good that results from the effect of a change in the good’s price on consumer purchasing power.

The Demand Side of the Market 4 Holding Everything Else Constant: The Ceteris Paribus Condition Ceteris paribus (“all else equal”) The requirement that when analyzing the relationship between two variables — such as price and quantity demanded — other variables must be held constant.

The Demand Side of the Market Variables That Shift Market Demand 1. Price of related goods ÜSubstitutes Goods and services that can be used for the same purpose. Complements Goods that are used together. 2. Income ÜNormal good A good for which the demand increases as income rises and decreases as income falls. Inferior good A good for which the demand increases as income falls, and decreases as income rises.

3. Tastes 4. Population and demographics ÜDemographics The characteristics of a population with respect to age, race, and gender. 5. Expected future prices The Demand Side of the Market Variables That Shift Market Demand

The Demand Side of the Market Variables That Shift Market Demand Shifting the Demand Curve

Why Supermarkets Need to Understand Substitutes and Complements A supermarket shouldn’t remove a slow- selling soup from its shelves without researching whether shoppers use that soup as a substitute or a complement for another soup. COFFEE FROZEN PIZZA HOT DOGS ICE CREAM POTATO CHIPS REGULAR CEREAL SPAGHETT I SAUCE YOGURT Varieties in Five Chicago Supermarkets Varieties Introduced in a 2-Year Period Varieties Removed in a 2-Year Period

Companies Respond to a Growing Hispanic Population Firms are responding to the tastes of a growing Hispanic population. Some Home Depot stores, for example, include signs in both English and Spanish.

The Demand Side of the Market Variables That Shift Market Demand Variables That Shift Market Demand Curves 3 - 1

The Demand Side of the Market Variables That Shift Market Demand Variables That Shift Market Demand Curves (continued)

The Demand Side of the Market A Change in Demand versus a Change in Quantity Demanded A Change in Demand versus a Change in the Quantity Demanded

Estimating the Demand for Printers at Hewlett-Packard Inaccurate forecasts in 2001 caused Hewlett-Packard to produce more printers than they could sell.

The Supply Side of the Market ÜQuantity supplied The quantity of a good or service that a firm is willing to supply at a given price. LEARNING OBJECTIVE 2 4 Supply schedule A table that shows the relationship between the price of a product and the quantity of the product supplied. 4 Supply curve A curve that shows the relationship between the price of a product and the quantity of the product demanded. Supply Schedules and Supply Curves

The Supply Side of the Market Hewlett-Packard’s Supply Schedule and Supply Curve

The Supply Side of the Market Individual Supply and Market Supply Deriving the Market Supply Curve from the Individual Supply Curves

The Supply Side of the Market The Law of Supply 4 Law of supply Holding everything else constant, increases in price cause increases in the quantity supplied, and decreases in price cause decreases in the quantity supplied.

The Supply Side of the Market  Price of inputs  Technological change  A positive or negative change in the ability of a firm to produce a given level of output with a given amount of inputs.  Prices of substitutes in production  Expected future prices  Number of firms in the market Variables That Shift Supply Shifting the Supply Curve

The Supply Side of the Market Variables That Shift Supply Variables That Shift Market Supply Curves 3 - 2

The Supply Side of the Market Variables That Shift Supply Variables That Shift Market Supply Curves (continued)

The Difference between a Change in Supply versus a Change in the Quantity Supplied The Supply Side of the Market A Change in Supply versus a Change in Quantity Supplied 3 - 9

Market Equilibrium: Putting Demand and Supply Together LEARNING OBJECTIVE 3 Market equilibrium A situation where quantity demanded equals quantity supplied. Competitive market equilibrium A market equilibrium with many buyers and many sellers Market Equilibrium

Market Equilibrium: Putting Demand and Supply Together How Markets Eliminate Surpluses and Shortages Surplus A situation in which the quantity supplied is greater than the quantity demanded. Shortage A situation in which the quantity demanded is greater than the quantity supplied The Effect of Surpluses and Shortages on the Market Price

LEARNING OBJECTIVE 4 The Effect of Shifts in Supply on Equilibrium The Effect of a Decrease in Supply on Equilibrium The Effect of Demand and Supply Shifts on Equilibrium

The Falling Price of Large Flat-Screen Televisions Corning’s breakthrough spurred the manufacture of LCD televisions in Taiwan, South Korea, and Japan, and an eventual decline in price

The Effect of Shifts in Demand on Equilibrium The Effect of an Increase in Demand on Equilibrium The Effect of Demand and Supply Shifts on Equilibrium

The Effect of Shifts in Demand and Supply over Time Shifts in Demand and Supply over Time The Effect of Demand and Supply Shifts on Equilibrium

The Effect of Shifts in Demand and Supply over Time The Demand for Chicken Has Increased More Than the Supply The Effect of Demand and Supply Shifts on Equilibrium

Picking a Big Fight with Dell, H-P Cuts PC Profits Razor-Thin

4 Ceteris paribus (“all else equal”) 4 Competitive market equilibrium 4 Complements 4 Demand curve 4 Demand schedule 4 Demographics 4 Income effect 4 Inferior good 4 Law of demand 4 Law of supply 4 Market demand 4 Market equilibrium 4 Normal good 4 Quantity demanded 4 Quantity supplied 4 Shortage 4 Substitutes 4 Substitution effect 4 Supply curve 4 Supply schedule 4 Surplus 4 Technological change

Reality check to be completed before class, May 15:  From Ch. 4: ÜReview Questions:  Consumer surplus is used as a measure of a consumer’s net benefit from purchasing a good or service. Explain why consumer surplus is a measure of net benefit.  Why would economists use a term like “deadweight loss” to describe the impact on consumer and producer surplus from a price control?”) ÜProblems and Applications, p. 134, 4A.5, 4A.6, 4A.7 & 4A.8 (1 st edition: 1-4 on p. 129).