1. Demand, Supply, and Equilibrium Chapter 17 McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 17-2 Learning Objectives  After this chapter, you should be able to: 1. Define and differentiate individual demand and market demand 2. Distinguish between changes in demand and changes in quantity demanded 3. List and discuss the causes of changes in demand 4. Define and differentiate individual supply and market supply 5. Distinguish between changes in supply and changes in quantity supplied 6. List and discuss the causes of changes in supply 7. Draw graphs of supply and demand curves 8. Identify equilibrium price and quantity 9. Explain why people have trouble selling their homes

3. 17-3 Individual Demand and Market Demand  The law of demand holds for both individuals and markets.  Individual demand is the schedule of quantities that a person would purchase at various prices.  Market demand is the schedule of quantities that everyone in the market would buy at various prices.

4. 17-4 What is the market?  The market is where people buy and sell. Local markets:  Gasoline, groceries Regional:  Automobiles National or international:  Computers  eBay has created a global market for goods that previously had purely local markets.

5. 17-5 Changes in Demand Price QD(1) QD(2) $30 4 5 $25 9 11 $20 14 18 $15 18 28 $10 23 38 $ 5 26 50  A change in demand: a change in the entire demand schedule.

6. 17-6 Increases in Demand Price QD(1) QD(2) $30 4 5 $25 9 11 $20 14 18 $15 18 28 $10 23 38 $ 5 26 50 An increase in demand is an increase in the quantity people are willing to purchase at all prices. The demand curve shifts to the right.

7. 17-7 Changes in Quantity Demanded and Changes in Demand Move from point E to point F  a change in quantity demanded E and F are on the same line, so they are on the same schedule. If they are on the same schedule, there can be no change in demand. A price change led to a change in quantity demanded.

8. 17-8 Increase in Demand Move from point F to point G  an increase in demand F to G is an increase in demand because people are willing to buy more at all prices on G’s curve which is to the right of F’s curve

9. 17-9 Practice Problems: A Change in What?  From H to G?  From H to E?  From F to G?

10. 17-10 What Causes Changes in Demand?  Changes in income  Changes in the prices of related goods and services  Changes in tastes and preferences  Changes in price expectations  Changes in population

11. 17-11 Changes in Income  The demand for NORMAL goods varies directly with income. When income goes up people buy more, therefore demand goes up.  The demand for INFERIOR goods varies inversely with income. When income goes up people buy less, therefore demand goes down.

12. 17-12 Changes in the Price of Related Goods and Services  Substitute goods  Hot dogs and hamburgers; tuna and salmon  Direct relationship: price of hamburgers up, price of hot dogs up. Why?  As p hamburgers up  increased demand for hot dogs  increases p of hot dogs  Complementary goods  Hot dogs and buns; DVDs and DVD players; airfare and hotel rooms  Inverse relationship: p hot dogs up  decrease in quantity demanded of hot dogs  decrease in demand for hot dog buns  lower price of hot dog buns

13. 17-13

14. 17-14

15. 17-15 Changes in Taste and Preferences  Taste and preferences tend to change over time. Energy-efficient cars and less-fattening foods Designer clothing and brand-name sneakers Fewer people are smoking (has been helped by a campaign to reduce smoking).

16. 17-16 Changes in Price Expectations  If people expect the price of something to rise, they rush out to stock up before it does. This increases the demand.  If people expect the price of something to fall, they will hold off buying it. This decreases the demand.  Closely related is the introduction of or expiration of a tax credit. Did “Cash for Clunkers” increase the demand for new cars in the summer of 2009?

17. 17-17 Changes in Population  As the nation’s population increases, the demand for particular goods and services increase. General growth increases the demand for food, housing, autos, etc. Immigration leads to population growth.  The changing age distribution affects demand. In the next three decades there will be a higher demand for retirement homes, nursing homes, wheelchairs, bifocal glasses, etc.

18. 17-18 Questions for Thought and Discussion  The rapid growth of the Chinese economy has raised the average income of its citizens. How would you expect that this has impacted the demand for food in worldwide markets? Try drawing this outcome.  If some gas stations on a state highway have a contract that only permits price changes on Fridays, why might there be long lines at these gas stations on Thursdays?

19. 17-19 Individual and Market Supply

20. 17-20 Hypothetical Supply of American Cars, 2025

21. 17-21 Changes in Supply and Changes in Quantity Supplied  Change in quantity supplied: movement along a supply curve due to a change in price.  A change in supply: a change in the entire supply schedule.  An increase in supply is an increase in the quantity producers are willing to supply at all prices.

22. 17-22 Changes in Quantity Supplied Move from point F to point G  a change in quantity supplied F and G are on the same line, so they are on the same schedule. If they are on the same schedule, there can be no change in supply. A price change led to a change in quantity supplied.

23. 17-23 Increase in Supply Move from point F to point E  an increase in supply F to E is an increase in supply because producers are willing to supply more at all prices on E’s curve which is to the right of F’s curve

24. 17-24 Practice Problems: A Change in What?  From G to F?  From H to E?  From E to G?

25. 17-25  Changes in the cost of production When costs rise, S decreases.  Technological advances (increase S)  Prices of other goods  Change in the number of suppliers New suppliers increase S; shutdowns decrease S.  Changes in taxes Tax increases reduce S; tax decrease raise S.  Changes in price expectations  Random causes, e.g. Hurricane Katrina in 2005 What Causes Changes in Supply?

26. 17-26 Questions for Thought and Discussion  The shift to ethanol as a form of fuel (to alleviate global warming) has led some farmers to sell their feed corn to energy companies.  How would you expect that this would impact the supply of feed corn in the global market for food?  How would the decreased availability of feed corn affect the price of meat?  Try graphing these outcomes.

27. 17-27 Graphing Demand and Supply Curves Sample Demand Schedule Price QD $ 13 1 $ 12 2 $ 11 4 $ 10 8 $ 9 15 $ 8 20

28. 17-28 Graphing Demand and Supply Curves Sample Supply Schedule Price QS $ 13 23 $ 12 20 $ 11 15 $ 10 8 $ 9 3 $ 8 1

29. 17-29 Graphing Equilibrium Sample D and S Schedules Price QD QS $ 13 1 23 $ 12 2 20 $ 11 4 15 $ 10 8 8 $ 9 15 3 $ 8 261 Equilibrium: where the demand & supply curves cross; Q* = 8, P* = $10

30. 17-30 Above Equilibrium Above P*, surpluses P Price tends toward equilibrium. If price is above equilibrium, sellers will lower prices until the price declines to the equilibrium price. P P

31. 17-31 Below Equilibrium Below P*, shortages P Price tends toward equilibrium. If price is below equilibrium, buyers will bid prices up until the price rises to the equilibrium price. P P

32. 17-32 Application: Why Can’t I Sell My House?  You can sell virtually any good or service for which there is a demand. As long as people are willing and able to pay for that good or service, you can sell it.  If you want to sell some good or service pretty quickly and you get no bites, what do you do? You lower the price.  What do you do if there is still no one willing and able to pay your price? You keep lowering it until you make a sale!

33. 17-33 Simultaneous Shifts in Demand and Supply: What Happens to Equilibrium?  D goes up and S goes up  What happens to P* and Q*?

34. 17-34 Simultaneous Shifts: Which Curve Shifts More and then What Happens to Equilibrium?