1. Chapter 2 Supply and Demand Issues In Economics Today, 4e Guell McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 2-2 Chapter Outline Definitions The Supply and Demand Model All About Demand All About Supply Determinants of Demand Determinants of Supply The Effect of Changes in Price Expectations on the Supply and Demand Model Kick it Up a Notch: Why the New Equilibrium

3. 2-3 You Are Here

4. 2-4 Definitions Supply and Demand: the name of the most important model in all economics Price: the amount of money that must be paid for a unit of output Market: any mechanism by which buyers and sellers negotiate price Output: the good or service and/or the amount of it sold

5. 2-5 Definitions (continued) Consumers: those people in a market who are wanting to exchange money for goods or services Producers: those people in a market who are wanting to exchange goods or services for money Equilibrium Price: the price at which no consumers wish they could have purchased more goods at that price; no producers wish that they could have sold more Equilibrium Quantity: the amount of output exchanged at the equilibrium price

6. 2-6 Quantity Demanded and Quantity Supplied Quantity demanded: how much consumers are willing and able to buy at a particular price during a particular period of time Quantity supplied: how much firms are willing and able to sell at a particular price during a particular period of time

7. 2-7 Demand and Supply Demand is the relationship between price and quantity demanded, ceteris paribus. Supply is the relationship between price and quantity supplied, ceteris paribus.

8. 2-8 The Demand Schedule The Demand Schedule presents, in tabular form, the price and quantity demanded for a good. PriceIndividual Q D Q D for 10,000 $0.00550,000 $0.50440,000 $1.00330,000 $1.50220,000 $2.00110,000 $2.5000

9. 2-9 Figure 1 The Demand Curve 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand

10. 2-10 The Supply Schedule The Supply Schedule presents, in tabular form, the price and quantity supplied for a good. PriceIndividual Q s Q S for 10 firms $0.0000 $0.5000 $1.001,00010,000 $1.502,00020,000 $2.003,00030,000 $2.504,00040,000

11. 2-11 Figure 2 The Supply Curve 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Supply

12. 2-12 Equilibrium, Shortages, and Surpluses Equilibrium is the point where the amount that consumers want to buy and the amount that firms want to sell are the same. This occurs where the supply curve and the demand curve cross. Shortage (Excess Demand): the condition where firms do not want to sell as many as consumers want to buy. Surplus (Excess Supply): the condition where firms want to sell more than consumers want to buy

13. 2-13 A Combined Supply and Demand Schedule PriceQDQD QSQS ShortageSurplus $0.0050,0000 $0.5040,0000 $1.0030,00010,00020,000 $1.5020,000 $2.0010,00030,00020,000 $2.50040,000

14. 2-14 Figure 3 The Supply and Demand Model 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Supply Demand Equilibrium

15. 2-15 All About Demand The Law of Demand –The relationship between price and quantity demanded is a negative or inverse one.

16. 2-16 The Law of Supply The Law of Supply is the statement that there is a positive relationship between price and quantity supplied.

17. 2-17 Determinants of Demand Taste Income –Normal Goods –Inferior Goods Price of Other Goods –Complement –Substitute Population of Potential Buyers Expected Price

18. 2-18 Movements in the Demand Curve Determinant Result of an increase in the determinant Result of a decrease in the determinant Taste D shifts right D shifts left Income-Normal Good D shifts right D shifts left Income-Inferior Good D shifts left D shifts right Price of Other Goods-Complement D shifts left D shifts right Price of Other Goods-Substitute D shifts right D shifts left Population of Potential Buyers D shifts right D shifts left Expected Future Price D shifts right D shifts left

19. 2-19 Figure 4 The Effect of an Increase in Demand New Demand New Equilibrium 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand Supply Old Equilibrium

20. 2-20 Figure 5 The Effect of a Decrease in Demand 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand Supply Old Equilibrium New Demand New Equilibrium

21. 2-21 The Determinants of Supply Price of Inputs Technology Price of Other Potential Output Number of Sellers Expected Future Price

22. 2-22 Movements in the Supply Curve Determinant Result of an increase in the determinant Result of a decrease in the determinant Price of InputsS shifts left S shifts right TechnologyS shifts right S shifts left Price of Other Potential Outputs S shifts left S shifts right Number of SellersS shifts right S shifts left Expected Future PriceS shifts left S shifts right

23. 2-23 Figure 6 An Increase in Supply 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand Supply Old Equilibrium New Equilibrium New Supply

24. 2-24 Figure 7 A Decrease in Supply 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand Supply Old Equilibrium New Supply New Equilibrium

25. 2-25 Kick it Up a Notch: Why the New Equilibrium? If there is a change in supply or demand then without a change in the price of the good, there will be a shortage or a surplus.

26. 2-26 Figure 8 A Shortage Resulting From an Increase in Demand (If the price does not increase) New Demand 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand Supply Shortage

27. 2-27 Figure 9 A Surplus Resulting From a Decrease in Demand (If the price does not fall) 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand Supply Old Equilibrium New Demand Surplus

28. 2-28 Figure 10 A Surplus Resulting From an Increase in Supply (If the price does not fall) 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand Supply New Supply Surplus

29. 2-29 Figure 11 A Shortage Resulting From a Decrease in Supply (If the price does not rise) 0 10 20 30 40 50 P Q/t $2.50 $2.00 $1.50 $1.00 $0.50 0 Demand Supply New Supply Shortage