1. D EMAND AND S UPPLY Economics 101 Lecturer: Jack Wu

2. RISING GASOLINE PRICES Between September 2004 and September 2005, the monthly average retail price of gasoline jumped from $1.85 per gallon to $3.08 per gallon. Sales of full-size SUVs dropped 16.8% over the same time period (with a particularly sharp 42.5% drop for full-size GM SUVs).

3. ECONOMIC QUESTIONS Why did the gasoline price rise at that time? Why did the sale of full-size SUVs drop?

4. D EMAND AND S UPPLY Demand and supply are the two words that economists use most often. Demand and supply are the forces that make market economies work. Modern microeconomics is about supply, demand, and market equilibrium.

5. M ARKET A market is a group of buyers and sellers of a particular good or service. Can be highly organized E.g.: agricultural commodities Can be less organized E.g.: ice cream Buyers determine demand. Sellers determine supply

6. C OMPETITIVE M ARKET A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price.

7. PERFECT COMPETITION 完全競爭 Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers

8. N O C OMPETITION Monopoly 獨佔 : One seller, and seller controls price Monopsony 獨買 : One buyer, and buyer controls price

9. IMPERFECT COMPETITION 不完全競爭 Oligopoly 寡佔 Few sellers Not always aggressive competition Monopolistic Competition 獨佔競爭 Many sellers Slightly differentiated products Each seller may set price for its own product

10. DEMAND 需求 Quantity demanded 需求量 is the amount of a good that buyers are willing and able to purchase. Law of Demand The law of demand 需求法則 states that, other things equal, the quantity demanded of a good falls when the price of the good rises.

11. DEMAND SCHEDULE 需求表 Demand Schedule The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded.

12. E XAMPLE OF D EMAND S CHEDULE Price Quantity ($ per movie) (movies per month) 10.00 0 7.50 1 5.00 2 2.50 4 0.00 7

13. DEMAND CURVE 需求曲線 Demand Curve The demand curve is a graph of the relationship between the price of a good and the quantity demanded.

14. 0 2.50 5 7.50 10 1472 individual demand curve Quantity (Movies a month) Price ($ per movie) INDIVIDUAL DEMAND CURVE

15. T WO V IEWS for every possible price, it shows the quantity demanded for each unit of item, it shows the maximum price that the buyer is willing to pay

16. A NOTHER E XAMPLE OF D EMAND S CHEDULE

17. Copyright © 2004 South-Western Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 0.50 1234567891011 Quantity of Ice-Cream Cones $3.00 12 1. A decrease in price... 2....increases quantity of cones demanded. A NOTHER W AY OF D EMAND C URVE

18. N EGATIVE P RICE ? A negative price case : Hoover ’ s special promotion -- two free air tickets (worth more than £ 400) for purchase of appliance over £ 100.  promotion attracted over 100,000 customers  Hoover incurred £ 48 million loss

19. C ETERIS P ARIBUS When a demand curve is drawn, everything but price and quantity demanded is held constant. Definition: a Latin phrase, translated as “other things being equal”.

20. M ARKET D EMAND Market demand refers to the sum of all individual demands for a particular good or service. Graphically, individual demand curves are summed horizontally to obtain the market demand curve.

21. M ARKET DEMAND AS THE SUM OF INDIVIDUAL DEMANDS ( DEMAND SCHEDULE ) 21 Price of ice-cream coneCatherineNicholasMarket $0.00 0.50 1.00 1.50 2.00 2.50 3.00 12 10 8 6 4 2 0 +76543217654321 =19 16 13 10 7 4 1

22. M ARKET DEMAND AS THE SUM OF INDIVIDUAL DEMANDS 22 D Catherine 0121011912345678 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Catherine’s demand D Nicholas 01234567 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Nicholas’s demand += D Market 018246810121416 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Market demand

23. C HANGE IN Q UANTITY D EMANDED Change in Quantity Demanded Movement along the demand curve. Caused by a change in the price of the product.

24. 0 D Price of Ice- Cream Cones Quantity of Ice-Cream Cones A tax that raises the price of ice-cream cones results in a movement along the demand curve. A B 8 1.00 $2.00 4 C HANGES IN Q UANTITY D EMANDED

25. C HANGE IN D EMAND Change in Demand A shift in the demand curve, either to the left or right. Caused by any change that alters the quantity demanded at every price.

26. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones Increase in demand Decrease in demand Demand curve,D 3 Demand curve,D 1 Demand curve,D 2 0 C HANGE IN D EMAND

27. S HIFT IN THE D EMAND C URVE Consumer income Prices of related goods Tastes Expectations Number of buyers

28. D EMAND AND I NCOME Changes in income normal good 正常財 – demand increases with income inferior good 劣等財 – demand falls with income -- example: potato

29. I NFERIOR G OOD V. S. B ADS Inferior good is different from “bads”. Examples of “bads”: pollution or garbage

30. D EMAND AND P RICES OF R ELATED G OODS Prices of Related Goods When a fall in the price of one good reduces the demand for another good, the two goods are called substitutes 替代品. When a fall in the price of one good increases the demand for another good, the two goods are called complements 互補品.

31. C ASE S TUDY Two ways to reduce the quantity of smoking demanded: -- Public service announcements, mandatory health warnings on cigarette packages, and the prohibition of cigarette advertising on TV (shift demand curve) -- Raising the price of cigarettes through tobacco taxes (move along demand curve)

32. S HIFTS IN DEMAND CURVE VS. MOVEMENTS ALONG DEMAND CURVE 32 Price of Cigarettes, per Pack Number of Cigarettes Smoked per Day 0 D1D1 D2D2 A policy to discourage smoking shifts the demand curve to the left 10 20 $2.00 BA (a) A Shift in the Demand Curve Price of Cigarettes, per Pack Number of Cigarettes Smoked per Day 0 D1D1 A tax that raises the price of cigarettes results in a movement along the demand curve 12 20 2.00 C A (b) A Movement along the Demand Curve $4.00

33. S UMMARY variablechangeDemandShift Income (Normal)Rise (fall) Right (left) Income (Inferior)Rise (fall)Fall (rise)Left (right) Price of substituteRise (fall) Right (left) Price of complementRise (fall)Fall (rise)Left (right) TasteRise (fall) Right (left) Expected PriceRise (fall) Right (left) Number of buyersRise (fall) Right (left)

34. SUPPLY 供給 Quantity supplied 供給量 is the amount of a good that sellers are willing and able to sell. Law of Supply The law of supply 供給法則 states that, other things equal, the quantity supplied of a good rises when the price of the good rises.

35. SUPPLY SCHEDULE 供給表 Supply Schedule The supply schedule is a table that shows the relationship between the price of the good and the quantity supplied.

36. E XAMPLE OF S UPPLY S CHEDULE

37. SUPPLY CURVE 供給曲線 Supply Curve The supply curve is the graph of the relationship between the price of a good and the quantity supplied.

38. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 2.50 2.00 1.50 1.00 1234567891011 Quantity of Ice-Cream Cones $3.00 12 0.50 1. An increase in price... 2.... increases quantity of cones supplied.

39. T WO V IEWS For every possible price, it shows the production rate For each unit of item, it shows the minimum price that the seller is willing to accept

40. M ARKET S UPPLY Market supply refers to the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve.

41. M ARKET SUPPLY AS THE SUM OF INDIVIDUAL SUPPLIES ( SUPPLY SCHEDULE ) 41 Price of ice-cream coneBenJerryMarket $0.00 0.50 1.00 1.50 2.00 2.50 3.00 00123450012345 +00024680002468 =0 1 4 7 10 13

42. M ARKET SUPPLY AS THE SUM OF INDIVIDUAL SUPPLIES 42 S Ben 0121011912345678 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Ben’s supply S Jerry 01234567 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Jerry’s supply += S Market 018246810121416 Quantity of Ice-Cream Cones $3.00 2.50 2.00 1.50 1.00 0.50 Price of Ice Cream Cones Market supply

43. C HANGE IN Q UANTITY S UPPLIED Change in Quantity Supplied Movement along the supply curve. Caused by a change in price.

44. 1 5 Price of Ice- Cream Cone Quantity of Ice-Cream Cones 0 S 1.00 A C $3.00 A rise in the price of ice cream cones results in a movement along the supply curve. C HANGE IN Q UANTITY S UPPLIED

45. C HANGE IN S UPPLY Change in Supply A shift in the supply curve, either to the left or right. Caused by a change in a determinant other than price.

46. F IGURE 7 S HIFTS IN THE S UPPLY C URVE Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone Quantity of Ice-Cream Cones 0 Increase in supply Decrease in supply Supply curve,S 3 curve, Supply S 1 curve,S 2

47. S HIFT IN THE S UPPLY C URVE Input prices Technology Expectations Number of sellers

48. S UMMARY variablechangeSupplyShift Input (factor) price Rise (fall) Fall (rise)Left (right) TechnologyRise (fall) Right (left) Expected Price Rise (fall) Fall (rise)Left (right) Number of sellers Rise (fall) Right (left)

49. EQUILIBRIUM 均衡 Equilibrium refers to a situation in which the price has reached the level where quantity supplied equals quantity demanded.

50. E QUILIBRIUM P RICE AND Q UANTITY Equilibrium Price The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.

51. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0123456789101112 Quantity of Ice-Cream Cones 13 Equilibrium quantity Equilibrium price Equilibrium Supply Demand $2.00

52. S URPLUS AND S HORTAGE Surplus When price > equilibrium price, then quantity supplied > quantity demanded. There is excess supply or a surplus. Suppliers will lower the price to increase sales, thereby moving toward equilibrium. Shortage When price the quantity supplied. There is excess demand or a shortage. Suppliers will raise the price due to too many buyers chasing too few goods, thereby moving toward equilibrium.

53. M ARKETS NOT IN EQUILIBRIUM 53 Price of Ice Cream Cones Quantity of Ice-Cream Cones 0 Demand 7 $2.50 (a) Excess Supply(b) Excess demand 2.00 Supply Surplus 4 Quantity demanded 10 Quantity supplied Price of Ice Cream Cones Quantity of Ice-Cream Cones 0 Demand 7 1.50 $2.00 Supply Shortage 4 Quantity supplied 10 Quantity demanded

54. A LTERNATIVE E XAMPLE : #2 L EAD P ENCILS PriceQuantity demandedQuantity supplied 0.051000400 0.10800500 0.15600 0.20400700 0.25200800

55. Q UICK Q UIZ 1 Find equilibrium price and quantity

56. Q UICK Q UIZ 2 How would following events shift either the demand or the supply of #2 lead pencil? -- an increase in the use of standardized exams (using opscan forms) -- a decrease in the price of ink pens -- a start of a school year

57. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Supply Initial equilibrium D D 3....and a higher quantity sold. 2.... resulting in a higher price... 1. Hot weather increases the demand for ice cream... 2.00 7 New equilibrium $2.50 10 I NCREASE IN D EMAND

58. Copyright©2003 Southwestern/Thomson Learning Price of Ice-Cream Cone 0 Quantity of Ice-Cream Cones Demand New equilibrium Initial equilibrium S1S1 S2S2 2.... resulting in a higher price of ice cream... 1. An increase in the price of sugar reduces the supply of ice cream... 3....and a lower quantity sold. 2.00 7 $2.50 4 D ECREASE IN S UPPLY

59. S UMMARY

60. D ISCUSSION Each of the events listed below has an impact on the market for bicycles. 1.An increase in the price of automobile. 2.A decrease in incomes of consumers if bicycles are a normal good.

61. D ISCUSSION - CONTINUED 3.An increase in the price of steel used to make bicycle frames. 4.An environmental movement shifts tastes toward bicycling.

62. D ISCUSSION - CONTINUED 5.Consumers expect the price of bicycles to fall in the future. 6.A technological advance in the manufacture of bicycles.

63. D ISCUSSION - CONTINUED 7.A reduction in the price of bicycle helmets and shoes. 8.A decrease in incomes of consumers if bicycles are an inferior good.