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

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

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

4. The Law of Demand
When price increases the quantity demanded decreases and vice versa, ceteris paribus
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5. What assumption is always made when the price changes?
Ceteris paribus or everything else stays the same-abbreviated cet.par.
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6. 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
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7. Price Quantity Demanded $10 0 $9 1 $8 2 $7 3 $6 4 $5 5$ $ $ $ $ $ 7
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8. What is a Demand Curve?
A graph that depicts the relationship between price and quantity demanded
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9. P1
Demand Curve P2 Q1 Q2 9
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10. Reasons for the Law of Demand??
The substitution (relative price) effect
The real income effect

11. 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
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12. P D2 D1 Q Shift in Demand Curve 1212
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1212

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

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

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

16. 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

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

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

19. NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY DEMANDED AND A CHANGE IN DEMAND
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20. 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

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

22. Do you really understand?????
Do you understand?
Do you really understand?????

23. 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

24. 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

25. 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

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

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

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

29. 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
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30. Price Quantity Supplied $5 0 $6 1 $7 2 $8 3 $9 4 $10 5$ $ $ $ $ $
3030
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31. What is a Supply Curve?
Depicts the relationship between price and quantity supplied
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32. P2 S
Supply Curve P1 Q1 Q2 32
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33. What is Market -day Supply?
A market situation in which the quantity of a good supplied is fixed, regardless of price
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34. S P2 P1
Supply Curve Q 34
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35. 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
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36. Shift in Supply P S1 S2 Q
3636
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37. A rightward shift in the supply curve is an increase in supply, a leftward shift is a decrease in supply.

38. 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

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

40. NOTE - KNOW THE DIFFERENCE BETWEEN A CHANGE IN THE QUANTITY SUPPLIED AND A CHANGE IN SUPPLY
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41. 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

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

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

44. PE and QE represent the equilibrium price and quantity

45. What is Equilibrium Price?
The price that equates the quantity demanded and the quantity supplied
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46. What happens if price is below equilibrium?
A shortage, or excess demand, arises

47. At P2, QD > QS, thus a shortage or excess demand exists47

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

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

50. At P1, QD < QS, thus a surplus or excess supply exists50

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

52. S D Q3 P1 P3 P2 Surplus Shortage
Summary, shortages, surpluses, and equilibrium S P1
Surplus P3 D
Shortage P2 Q3 52
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53. How shifts in S and D affect equilibrium price and quantity

54. S D2 D1 Q1 Q2 Right Shift in Demand P2 P1 54
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55. S1 D1 D2 Q2 Q1 Left Shift in Demand P1 P2 55
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56. Summary, demand changes
Increased demand, price and quantity both rise
Decreased demand, price and quantity both fall

57. D S1 S2 Q1 Q2 Right Shift in Supply P1 P2 5757
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58. D S2 S1 Q2 Q1 Left Shift in Supply P2 P1 5858
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59. Summary, supply changes
Increased supply, price falls, quantity rises
Decreased supply, price rises, quantity falls

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

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

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

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

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

65. 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?

66. 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.

67. 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

68. 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.

69. Decrease in demand in the beef market, price and quantity fall69

70. 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.

71. 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

72. 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.

73. 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.