1. Chapter 3 Supply, Demand, and Price

2. Determinates of Demand
Income
Normal good
Inferior good
Preferences
Prices of Related Goods
Substitutes
Compliments

3. Determinates Continued…
Number of Buyers
Expectations of Future

4. Change in Demand vs. Change in Quantity Demanded
SHIFT OF CURVE
Due to any non-price determinate
Change in Quantity demanded
MOVEMENT ON ORIGINAL CURVE
Due only to a change in price

5. Change in Demand versus Change in Quantity Demanded

6. Change in Demand SHIFT OF CURVE SHIFT LEFT?? SHIFT RIGHT??
DECREASE IN DEMAND
SHIFT RIGHT??
INCREASE IN DEMAND

7. Shifts in the Demand Curve

8. Shifts in the Demand Curve

9. Change in price of related goods
Substitutes
Something used in replace of another good
Compliments
Something used with another good

10. Substitutes and Complements

11. Substitutes and Complements

12. SELF TEST-Do we understand??
Substitutes
Coke vs. Pepsi --- what happens if the price of Coke increases?
Qd of Pepsi?
NOTHING
Qd of Coke?
DECREASES
Demand for Coke?
Demand for Pepsi?
INCREASES

13. Compliments
Tennis Balls and Tennis Rackets --- what happens if the price of Tennis Rackets increase?
Qd of Tennis Balls?
NOTHING
Qd of Tennis Rackets?
DECREASES
Demand for Tennis Balls?
Demand for Tennis Rackets?

14. Examples The housing market: Consumer’s income increases
The sugar market: Saccharine is found to lead to cancer
The jelly market: The price of peanut butter increases
The beer market: The price of beer decreases

15. Does the Law of Demand Hold?
The price of eating out increases from $10 to $15 and the quantity demanded of restaurants increases from 10 to 14 meals.

16. The Law of Demand Holds

17. The other side…supply Quantity supplied
Amount of a good that producers are willing and able to sell at a particular point in time at a particular price

18. Important Parts
Able
Willing
Particular price
Particular point in time

19. Supply Quantity Supplied at all prices during a specific time period
Thus…

20. Law of Supply
As the price of a good increases (decreases) the quantity supplied of that good increases (decreases)

21. Supply Schedule
Numerical table of quantity supplied at different prices 10 1 20 2 30 3 40 4
Quantity
Price

22. Supply Curve Supply Curve
Graphical representation of the relationship between price and quantity supplied
What type of relationship do we have between price and quantity supplied?

23. Supply Curve Exhibit 7

24. Stuff continued… Change in supply SHIFT OF SUPPLY CURVE
Change in quantity supplied
MOVEMENT ALONG ORIGINAL SUPPLY CURVE
Increase in supply --- shift right
Decrease in supply --- shift left

25. Change in Supply versus Change in Quantity Supplied

26. Shifts in the Supply Curve

27. Shifts in the Supply Curve

28. Question???
Can the supply curve ever be vertical?
First…what does a vertical curve indicate about the relationship between price and quantity supplied?

29. Supply Curves When There Is No Time to Produce More or No More Can Be Produced

30. Determinates of Supply
Price of inputs
Technology
Number of sellers
Price expectations
Taxes and subsidies

31. Examples The computer market: The price of computer chips decreases
The fast food market: McDonalds opens three new stores in Bakersfield
The pencil market: The price of pencils increases
The gasoline market: A tax is imposed on gas station owners for each gallon of gas pumped out of their station

32. Market Supply Curves Previous supply curve was for an individual
Single seller
How can we get the market curve from individual supply curves?
All sellers
Sum the individual supply curves…

33. Therefore….

34. Deriving a Market Supply Schedule & Curve

35. Deriving a Market Supply Schedule & Curve

36. Putting Supply and Demand Together
Next Step….
Putting Supply and Demand Together

37. Auction Model
Can think of supply and demand as an auction where buyers bid the price down and sellers bid the price up until Qs and Qd are equal at the same price

38. But… There is only one price where Qs=Qd
This is called the equilibrium price
The market is always working towards this price

39. Scissors and economics?
Alfred Marshall compared Supply and demand to a pair of scissors
“It is impossible to say which blade is actually doing the cutting just like it is impossible to say whether demand or supply is responsible for the price

40. What determines the price?
The interaction of supply and demand
Price S D
Quantity

41. Equilibrium Also called the market clearing price Disequilibrium
When Qs=Qd
Disequilibrium

42. At Disequilibrium can have…
Shortage (excess demand)
Qd > Qs
Price too low
Price must increase to rid shortage
Surplus (excess supply)
Qd < Qs
Price too high
Price must decrease to rid surplus

43. Moving to Equilibrium

44. Moving to Equilibrium
If we have a surplus, price must _______ to get to equilibrium.
Decrease
If we have a shortage, price must _______ to get to equilibrium.
Increase

45. Do Shortage and Scarcity refer to the same thing???
NO!!
Shortage is only when price is less than the equilibrium price
Scarcity is always present (at all prices)

46. Applications of Supply and Demand
Romanee-Conti Wine
Dated back to 1990 and sells for $800 a bottle or $8 a sip…why?
Ticket scalping
Why would people pay higher prices to see an event?
Prices must have been below equilibrium.
Freeway
Why would people be willing to pay a toll to use a road?

47. Remember..
Equilibrium price and quantity are determined by the INTERACTION of supply and demand
A change in supply, demand, or both will change the equilibrium price
Exception: If supply and demand move in same direction and magnitude so changes are offset

48. Change in Supply and Demand but no change in equilibrium price
quantity

49. What Happens??? Increase D and S constant? Decrease D and S constant?
D constant and increase S?
D constant and decrease S?
D increase and S decreases by equal amounts?
D decrease and S increases by equal amounts?
D increases more than S decreases?
D increases less than S decreases?

50. A Summary Exhibit of a Market

51. Price Controls
Produces a barrier to which the economy can no longer operate freely
Can’t get to equilibrium price
Two types
Price ceiling
Price Floor

52. Price Ceiling
Government mandated maximum price above which legal trades cannot be made
Price ceiling is below equilibrium price.

53. Price Ceiling

54. Impacts of Price Ceilings
Shortage sustained
Fewer exchanges
Non-price rationing schemes
First come first served
Buying & selling at prohibited prices
Black markets
Tie in Sales
Pay certain amount for rent of the house and an amount for renting the refrigerator
Distort normal economic information and incentives
Lower prices is supposed to mean greater availability

55. Price Floor
Government mandated minimum price below which legal trades cannot be made
Price floor is above equilibrium price

56. Price Floor

57. Impacts of Price Floors
Sustained surpluses
Fewer exchanges
Example: Minimum wage

58. Minimum Wage In California the minimum wage is $6.75 per hour
Increased from $6.26 on January 1, 2002
Government mandated minimum wage is $5.15
Last increase was on September 1, 1997

59. Impacts of Minimum Wage
Surplus of unskilled
Fewer workers overall employed
Supply and Demand would determine wage
Minimum wage doesn’t guarantee better standards of living for low wage employees

60. Effects of the Minimum Wage
5.75
Effects of the Minimum Wage
4.25

61. Homework #4
Chapter 3
Numbers: 1, 4, 8, 10, and 14

62. Did we understand Chapter 3???
In-class exercise 4