1 principles of economics by fred m gottheil chap. 3 supply and demand

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Principles of Economicsby Fred M Gottheil

Principles of Economicsby Fred M Gottheil

Chap. 3 Chap. 3 SUPPLY AND DEMANDSUPPLY AND DEMAND

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What is Supply and Demand?

What is Supply and Demand?

A model of price behavior in

competitive markets

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Note that Demand is notNote that Demand is not

• The same as wants• The same as needs• necessarily the same as the actual quantity purchased

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The Law of Demand The Law of Demand

When price increases the quantity demanded decreases and vice versa, ceteris paribus

©©1999 South-Western College Publishing

5

What assumption is always made when the price

changes?

What assumption is always made when the price

changes?Ceteris paribus or

everything else stays the same-abbreviated cet.par.

©©1999 South-Western College Publishing

6

What is a Demand Schedule?

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

©©1999 South-Western College Publishing

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Price Quantity Demanded

$10 0

$9 1

$8 2

$7 3

$6 4

$5 5©©1999 South-Western College Publishing

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What is a Demand Curve?

What is a Demand Curve?

A graph that depicts the relationship between price and quantity demanded

©©1999 South-Western College Publishing

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Demand Curve

Demand Curve

P1

Q1

P2

Q29©©1999 South-Western College Publishing

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Reasons for the Law of Demand??

Reasons for the Law of Demand??

• The substitution (relative price) effect

• The real income effect

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What is a change in Demand?

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

©©1999 South-Western College Publishing

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Shift in Demand CurveShift in Demand Curve

D1

D2

P

Q1122

©©1999 South-Western College Publishing

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

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What causes a shift in Demand?

What causes a shift in Demand?•Change in tastes

•Income changes

•Changes in Population

•Changes in the prices of related goods

•Changes in Expectations

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Income changes: 2 possibilities:

Income changes: 2 possibilities:

• Normal goods: as income rises, demand rises, cet. par.

• Inferior goods: As income rises, demand falls, cet. par.

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Changes in related goods prices: 2 cases:

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

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Changes in future price expectations

Changes in future price expectations

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

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What is Market Demand?What is Market Demand?The sum of all individual

demands in a market

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NOTENOTE - KNOW THE - KNOW THE DIFFERENCE DIFFERENCE BETWEEN A CHANGE BETWEEN A CHANGE IN THE QUANTITY IN THE QUANTITY DEMANDED AND A DEMANDED AND A CHANGE IN DEMANDCHANGE IN DEMAND

©©1999 South-Western College Publishing

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Changes in demand vs. changes in quantity demanded

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

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P P

Q Q

DD1

A change in demand A change in quantity demanded

D

P1

P2

Q1 Q2

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Do you understand?Do you understand?

Do you really understand?????

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Which of the following would increase the current demand for cd’s?

Which of the following would increase the current demand for cd’s?

a. A decrease in the price of cd’sb. A decline in the teenage populationc. A lower cost for producing cd’sd. An expectation of a drop in cd pricese. A decrease in the price of cd players

The correct answer is…….E

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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 ____________. Peanutbutter and jelly are ____________. a. complements; substitutes b. complements; complements c. substitutes; complements d. substitutes; substitutes

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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  

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The supply side of the market

The supply side of the market

Supply refers to willingness and ability to produce something

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The Law of SupplyThe Law of Supply

As price rises, the quantity supplied

rises, cet. par.

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Reasons for the Law of Supply?

Reasons for the Law of Supply?

• Monetary incentives• The Law of Increasing

Opportunity Costs

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What is a Supply Schedule?

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

©©1999 South-Western College Publishing

3030

Price Quantity Supplied

$5 0

$6 1

$7 2

$8 3

$9 4

$10 5©©1999 South-Western College Publishing

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What is a Supply Curve?What is a Supply Curve?Depicts the relationship

between price and quantity supplied

©©1999 South-Western College Publishing

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Supply Curve

Supply Curve S

P1

Q1

P2

Q2

32©©1999 South-Western College Publishing

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What is Market -day Supply?

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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Sup

ply

Cur

veS

uppl

y C

urve

S

P1

Q

P2

34©©1999 South-Western College Publishing

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What is a change in Supply?

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

©©1999 South-Western College Publishing

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S1S2

P

Q

Shift in SupplyShift in Supply

3366

©©1999 South-Western College Publishing

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

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What causes a shift in Supply

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

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Increases in supply can be caused by:

Increases in supply can be caused by:

Improved technologyLower resource pricesGreater number of firmsExpected lower future prices

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

©©1999 South-Western College Publishing

41

Changes in supply vs. changes in quantity supplied

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

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P P

Q Q

A change in supply A change in quantity supplied

P2

P1

Q1 Q2

SS1 S

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Supply and demand together

Supply and demand together

• Put supply and demand curves on the same graph

• Intersection gives the equilibrium price and quantity

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D

S Price

Quantity

PE

QE

PE and QE represent the equilibrium price and quantity

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What is Equilibrium Price?

What is Equilibrium Price?

The price that equates the quantity demanded and the quantity supplied

©©1999 South-Western College Publishing

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What happens if price is below equilibrium?

What happens if price is below equilibrium?

A shortage, or excess demand, arises

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D

S

P2

47QDQS

At P2, QD > QS, thus a shortage or excess

demand exists

Shortage

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How is the shortage eliminated?

How is the shortage eliminated?

The price rises, leading to a decrease in quantity

demanded and an increase in quantity supplied.

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What happens if price is above equilibrium?

What happens if price is above equilibrium?

A surplus, or excess supply, arises

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D

SP1

Surplus

50QD

QS

At P1, QD < QS, thus a surplus or excess supply exists

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How is the surplus eliminated?

How is the surplus eliminated?

The price falls, leading to a decrease in quantity supplied and an increase in quantity

demanded.

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D

SP3

Q3

P1 Surplus

P2

Shortage

52©©1999 South-Western College Publishing

Summary, shortages, surpluses, and equilibrium

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How shifts in S and D affect equilibrium price

and quantity

How shifts in S and D affect equilibrium price

and quantity

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S

D2P1

Right Shift in Demand Right Shift in Demand

P2

Q2Q1D1

54©©1999 South-Western College Publishing

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S1

D1

Left Shift in Demand Left Shift in Demand

D2

P2

Q2

P1

Q155©©1999 South-Western College Publishing

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Summary, demand changes

Summary, demand changes

Increased demand, price and quantity both rise

Decreased demand, price and quantity both fall

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S1

S2P1

Right Shift in SupplyRight Shift in Supply

P2

Q2Q1D

5577

©©1999 South-Western College Publishing

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S2

S1P2

Left Shift in SupplyLeft Shift in Supply

P1

Q1Q2D

5588

©©1999 South-Western College Publishing

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Summary, supply changes

Summary, supply changes

Increased supply, price falls, quantity rises

Decreased supply, price rises, quantity falls

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

are known

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

are known

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Examples: shifts in both S and D curves

Examples: shifts in both S and D curves

Say both S and D increase, what can we say about equilibrium P and Q?

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Q will increase, but P is indeterminate

Q will increase, but P is indeterminate

ANSWER

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Examples: shifts in both S and D curves

Examples: shifts in both S and D curves

Say S increases but D decreases, what can we say about equilibrium P and Q?

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P will decrease, but Q is indeterminate

P will decrease, but Q is indeterminate

ANSWER:

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• 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 s

upply curves shift?

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Supply and demand problems

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.

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P P

Q Q

S

S1

D

D1P1

P2

Q1Q2

Apple market, supply decreases, price rises,

quantity falls

D

S

Orange market, demand increases, price and

quantity rise

P1

P2

Q1 Q2

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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.

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S1

D1

Decrease in demand in the beef Decrease in demand in the beef

market, price and quantity fallmarket, price and quantity fall

D2

P2

Q2

P1

Q169

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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.

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S

S1

D

D1

P1

P2

P3

If supply increases more than demand, price falls--greater supply due possibly to lower input costs, better technology, more firms

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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.

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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.