demand and supply when you have completed your study of this chapter, you will be able to c h a p t...

Demand and Supply

When you have completed your study of this chapter, you will be able to

C H A P T E R C H E C K L I S T

Distinguish between quantity demanded and demand and explain what determines demand.

1

Distinguish between quantity supplied and supply and explain what determines supply.

Explain how demand and supply determine price and quantity in a market and explain the effects of changes in demand and supply.

2

3

4.1 DEMAND

Law of Demand

Other things remaining the same,• If the price of the good rises, the quantity

demanded of that good decreases.• If the price of the good falls, the quantity

demanded of that good increases.

4.1 DEMAND

Quantity demanded

One quantity and one price

Demand

List of quantities at different prices (uses a curve and schedule)

4.1 DEMAND

4.1 DEMAND

Individual Demand and Market Demand

Market demand

The sum of the demands of all the buyers in a market.

4.1 DEMAND

Checking for Understanding

On a separate piece of paper, write out a scenario involving changing prices. Make a demand schedule and demand curve to illustrate it.

4.1 DEMAND

Changes in Demand

4.1 DEMAND

Figure 4.3 showschanges in demand.

1. When demand decreases, the demand curve shifts leftward from D0 to D1.

2. When demand increases, the demand curve shifts rightward from D0 to D2.

4.1 DEMAND

The main influences on buying plans that change demand are

• Prices of related goods

• Income

• Expectations

• Number of buyers

• Preferences

4.1 DEMAND

Prices of Related Goods

Substitute Goods

Complementary Goods

4.1 DEMAND

Income

Normal good

Inferior good

4.1 DEMAND

Expectations

Number of Buyers

Preferences

4.1 DEMAND

Change in Quantity Demanded Versus Change in Demand

Change in the quantity demanded

A change in the quantity of a good that people plan to buy that results from a change in the price of the good.

Change in demand

A change in the quantity that people plan to buy when any influence other than the price of the good changes.

4.1 DEMAND

Figure 4.4 illustrates and summarizes the distinction.

CHECKING FOR UNDERSTANDING

In the market for cell phones, several events occur, one at a time. For each scenario, tell whether the demand or quantity demanded changes. When demand changes, tell whether the curve shifts to the left or the right.

The events are:• The price of a cell phone falls• The price of a call made from a cell phone falls• After a public outcry against the ringing of cell phones, cities and towns

ban cell phones from public places• Incomes increase• Rumor has it that the price of a cell phone will rise next month• With the introduction of camera phones, cell phones are more popular

p. 97

5.1 THE PRICE ELASTICITY OF DEMAND

ELASTIC

VS.

INELASTIC DEMAND


• Computing the Price Elasticity of Demand

• If the price elasticity of demand is greater than 1, demand is elastic.

• If the price elasticity of demand equals 1, demand is unit elastic.

• If the price elasticity of demand is less than 1, demand is inelastic.

Price elasticity of demand

Percentage change in quantity demanded

Percentage change in the price=


• Computing the Price Elasticity of Demand

We can use this formula to calculate the price elasticity of demand for a Starbucks latte:

Price elasticity of demand

Percentage change in quantity demanded

Percentage change in the price=

Price elasticity of demand100%

50%= 2=


• Interpreting the Price Elasticity of Demand Number

The elasticity of demand for a Starbucks latte of 2 tell us three things:

1. The demand for a Starbucks latte is elastic--it has substitutes and the proportion of a buyer’s income spent is small.

2. If Starbucks raised its price, revenue per cup will rise but it will lose lots of potential business.

3. Even a slightly lower price could bring in a lot more revenue.


Figure 5.1(a) shows a perfectly elastic demand.

1. For a small change in the price of spring water,

2. The quantity demanded of spring water changes by a large amount.

3. The demand for spring water is perfectly elastic.


Figure 5.1(e) shows a perfectly inelastic demand.

1. When the price rises,

2. The quantity demanded does not decrease.

3. Demand is perfectly inelastic.

INFLUENCES ON THE PRICE ELASTICITY OF DEMAND

–Availability of Substitutes–Luxury Versus Necessity –Narrowness of Definition

–Time Elapsed Since Price Changed

–Proportion of Income Spent

Beverly Hills

Weezer

4.2 SUPPLY

Quantity supplied

Supply

The Law of SupplyOther things remaining the same, (Ceteris Paribus)

•If the price of a good rises, the quantity supplied of that good increases.

•If the price of a good falls, the quantity supplied of that good decreases.

4.2 SUPPLY

4.2 SUPPLY

Individual Supply and Market Supply

Market supply

The sum of the supplies of all sellers in a market.

The market supply curve is the horizontal sum of the supply curves of all the sellers in the market.

4.2 SUPPLY

4.2 SUPPLY

Changes in Supply

4.2 SUPPLY

2. When supply increases, the supply curve shifts rightward from S0 to S2.

1. When supply decreases, the supply curve shifts leftward from S0 to S1.

Figure 4.7 shows changes in supply.

4.2 SUPPLY

4.2 SUPPLY

The main influences on selling plans that change supply are

• Prices of resources and other Inputs

• Expectations

• Number of sellers

• Productivity (technology)

4.2 SUPPLY

Change in Quantity Supplied Versus a Change in Supply

Change in quantity supplied

A change in the quantity of a good that suppliers plan to sell that results from a change in the price of the good.

Change in supply

A change in the quantity that suppliers plan to sell when any influence on selling plans other than the price of the good changes.

4.2 SUPPLY

Figure 4.8 illustrates and summarizes the distinction

CHECKING FOR UNDERSTANDINGTimber beams are made from logs, and in the process of making

beams, the mill produces sawdust, which is made into pressed wood. Explain the influence of each event on the quantity supplied and supply of timber beams. For each event that affects supply, tell whether the curve will move to the left or right.

• The wage rate of sawmill workers rises.• The price of sawdust rises.• The price of a timber beam rises.• The price of a timber beam is expected to rise next year.• Environmentalists convince Congress to introduce a new law that

reduces the amount of forest that can be cut for timber products.• A new technology lowers the cost of producing timber beams.

Price Elasticity of Supply• Elastic Supply: Change in price

results in change in supply

• Inelastic Supply: Supply is constant, regardless of a change in price

Determinants of Price Elasticity of Supply• Production possibilities: how much of the

product can ever be available?– Silicon is made from sand (plentiful)– There is a limited number of lots available in

a subdivision.

• Storage– If an item is perishable (and cannot be

stored) its supply is inelastic. – If an item can be stored, you can decide to

release more supply later. It is elastic

4.3 MARKET EQUILIBRIUM

Market equilibriumWhen the quantity demanded equals the quantity supplied—when buyers’ and sellers’ plans are consistent.

Equilibrium priceThe price at which the quantity demanded equals the quantity supplied.


Figure 4.9 shows theequilibrium price andequilibrium quantity.

1. Market equilibrium at the intersection of the demand curve and the supply curve.

2. The equilibrium price is $1 a bottle.

3. The equilibrium quantity is 10 million bottles a day.


Price: A Market’s Automatic Regulator

Law of market forces• When there is a shortage, the price rises.• When there is a surplus, the price falls.

Shortage or Excess Demand

The quantity demanded exceeds the quantity supplied.

Surplus or Excess Supply

The quantity supplied exceeds the quantity demanded.


Figure 4.10(a) marketachieves equilibrium.

At 75 cents a bottle:1. Quantity is demanded

11 million bottles.

3. There is a shortage of 2 million bottles.

4. Price rises until the shortage is eliminated and the market is in equilibrium.

2. Quantity supplied is 9 million bottles.

4.3 MARKET EQUILIBRIUMFigure 4.10(b) marketachieves equilibrium.

At $1.50 a bottle:1. Quantity supplied is

11 million bottles.

3. There is a surplus of 2 million bottles.

4. Price falls until the surplus is eliminated and the market is in equilibrium.

2. Quantity demanded is 9 million bottles.


Effects of Changes in Demand

Event: A new study says that tap water is unsafe.

To work out the effects on the market for bottled water:

1. With tap water unsafe, demand for bottled water changes.

2. The demand for bottled water increases, the demand curve shifts rightward.

3. What are the new equilibrium price and equilibrium quantity and how have they changed?


Figure 4.11(a) illustrates the outcome.

1. An increase in demand shifts the demand curve rightward.

2. At $1.00 a bottle, there is a shortage, so the price rises.

3. Quantity supplied increases along the supply curve.

4. Equilibrium quantity increases.


Event: A new zero-calorie sports drink is invented.


1. The new drink is a substitute for bottled water, so the demand for bottled water changes

2. The demand for bottled water decreases, the demand curve shifts leftward.



Figure 4.11(b) shows theoutcome.

1. A decrease in demand shifts the demand curve leftward.

2. At $1.00 a bottle, there is a surplus, so the price falls.

3. Quantity supplied decreases along the supply curve.

4. Equilibrium quantity decreases.


Effects of Changes in Supply

Event: Europeans produce bottled water in the United States.


1. With more suppliers of bottled water, supply changes.

2. The supply of bottled water increases, the supply curve shifts rightward.



Figure 4.12(a) shows theoutcome.

1. An increase in supply shifts the supply curve rightward.

2. At $1.00 a bottle, there is a surplus, so the price falls.

3. Quantity demanded increases along the demand curve.

4. Equilibrium quantity increases.


Event: Drought dries up some springs in the United States.


1. Drought changes the supply of bottled water.

2. The supply of bottled water decreases, the supply curve shifts leftward.



Figure 4.12(b) shows theoutcome.

1. A decrease in supply shifts the supply curve leftward.

2. At $1.00 a bottle, there is a shortage, so the price rises.

3. Quantity demanded decreases along the demand curve.

4. Equilibrium quantity decreases.

Governmental Influence

• Price Ceiling (maximum price allowed)

• Price Floor (minimum price allowed)

Amarillo Sky

demand and supply when you have completed your study of this chapter, you will be able to c h a p t...

Documents

demand curve

demand changes

demand increases

demand decreases

demandindividual demand

demand schedule

price elasticity of

price elasticity of