![Page 1: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/1.jpg)
Economics 111.3 Winter 14
January 17th, 2014Lecture 5
Ch. 3
![Page 2: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/2.jpg)
Shifts in Demand: a recapDemand Shifters are
changes in:• tastes (preferences)• number of buyers• money (nominal)
income• prices of related goods• expectations
![Page 3: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/3.jpg)
Normal good – a good, for which, all else equal, an increase in income leads to an increase in
quantity demanded
![Page 4: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/4.jpg)
Inferior good – a good, for which, all else equal, an increase in income leads to a
decrease in quantity demanded
![Page 5: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/5.jpg)
4. Changes in prices of related goods.
Change in Demand, cont’d
![Page 6: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/6.jpg)
Related Goods
Substitutes — goods used in the place of another good
Complements — goods used in conjunction with another good
![Page 7: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/7.jpg)
Change in Demand, cont’d
• when two products are SUBSTITUTES, price of one & demand for the other move in the same direction
![Page 8: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/8.jpg)
Good A and Good B are substitutes.If price of Good A Falls…
Market for Good B
![Page 9: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/9.jpg)
when two products are COMPLEMENTS, price of one and demand for the other move in opposite directions
Changes in prices of related goods, cont’d
![Page 10: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/10.jpg)
Market for blank tapes
![Page 11: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/11.jpg)
Study question• If the demand curve for product B shifts to the
right as the price of product A declines, it can be concluded that: A) both A and B are inferior goods. B) A is a superior good and B is an inferior good. C) A is an inferior good and B is a superior good. D) A and B are complementary goods.
E) A and B are substitute goods.
![Page 12: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/12.jpg)
5. Changes in expectations about future prices or incomes
• If you expect prices to fall in the future, you may put off purchases today.
• If you expect your income to rise, you may consume more now.
Change in Demand, cont’d
![Page 13: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/13.jpg)
Example: Demand for Tapes
The demand for tapes decreases if:– the price of a substitute falls.– the price of a complement rises.– income falls (a tape is a normal
good).– the population decreases.– the price of a tape is expected to
fall in the future.
![Page 14: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/14.jpg)
![Page 15: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/15.jpg)
Study questionWhich of the following statements is correct?
A) A decline in the price of product X will increase the demand for substitute product Y. B) A decrease in income will decrease the demand for an inferior good. C) An increase in income will reduce the demand for a normal good.
D) An increase in the price of C will decrease the demand for complementary product D.
![Page 16: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/16.jpg)
Individual and Market Demand Goods
• A market demand curve is the horizontal sum of all individual demand curves.–This is determined by adding the
individual demand curves of all the consumers (“demanders”).
![Page 17: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/17.jpg)
Individual Demand 1
$0
$1
$2
$3
$4
$5
0 20 40 60 80
quantity
pri
ce
Individual Demand 2
$0
$1
$2
$3
$4
$5
0 20 40 60 80
quantity
pri
ce
Market Demand
$0
$1
$2
$3
$4
$5
0 50 100 150
quantity
pri
ce
35 39
74
![Page 18: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/18.jpg)
price QD–1st buyer
QD–2nd
buyer
QD–market
$5 10 12
$4 20 23
$3 35 39
$2 55 60
$1 80 87
22
43
74
115
167
+ =
Market Demand
![Page 19: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/19.jpg)
Supply: a schedule or a curve showing the amounts that producers are willing and able to make available for sale at each of a series of possible prices, during
some specified period of time
0
1
2
3
4
5
6
0 10 20 30 40 50 60
pri
ce
quantity
SupplyPrice per
bushel
Quantity supplied per week
$5 60
4 50
3 35
2 20
1 5
![Page 20: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/20.jpg)
Law of Supply
• all else being constant, as price rises, the quantity supplied rises (& vice-versa)
• Rationale:– Revenue motive: price is revenue to suppliers– Cost motive: higher price necessary to induce
higher supply, to cover higher costs of production
![Page 21: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/21.jpg)
A Change in the Quantity Supplied Versus a Change in Supply
• When price of the product changes, there is a movement along the supply curve
• When any other determinant of supply changes, there is a shift in the supply curve
![Page 22: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/22.jpg)
Supply Shifters are changes in:• factor prices• technology• taxes and subsidies• prices of other goods• price expectations• number of sellers
Determinants of Supply
![Page 23: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/23.jpg)
Changes in factor prices:• increase will decrease supply and shift curve to the
left as less will be supplied at each price
Rationale:1. If costs rise, then profits go down, and there is less
incentive to supply.2. If costs go up substantially, the firm may even shut
down.
Changes in Supply
![Page 24: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/24.jpg)
Changes in technology:• new technology will decrease costs &
increase supply (This is especially true when new technology replaces labour)
Changes in Supply
PA S S′
QA
![Page 25: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/25.jpg)
Changes in taxes and subsidies (taxes in reverse):
• increases in taxes will reduce supply
Changes in Supply
PA SS′
QA
![Page 26: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/26.jpg)
Changes in prices of other goods:• higher prices of substitutes in production
will reduce supply and vice versa
Changes in Supply
PA SS′
QA
![Page 27: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/27.jpg)
Changes in price expectations:• of the future price of a product• difficult to generalizeChanges in number of sellers:• as the number of sellers increases, so does
supply
Changes in Supply
![Page 28: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/28.jpg)
Equilibrium As The Marriage of Supply and Demand
• Supply and demand come together to determine equilibrium quantity and equilibrium price.
![Page 29: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/29.jpg)
Equilibrium, cont’d• When quantity demanded equals quantity
supplied, prices have no tendency to change.• Equilibrium is a concept in which opposing
dynamic forces cancel each other out.• Equilibrium isn’t a state of the world—it's a
characteristic of the model used to look at the world.
• Equilibrium isn’t inherently good or bad—but simply a state in which dynamic pressures offset each other.
![Page 30: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/30.jpg)
The Law of Supply and Demand
• Conventional (free market) Economics claims that the price of any good adjusts to bring the supply and demand for that good into balance.
• Excess supply – a situation in which quantity supplied is greater than quantity demanded. The same as “surplus”
• Excess demand – a situation in which quantity demanded is greater than quantity supplied. The same as “shortage”
Excess supply
Excess demand
![Page 31: Economics 111.3 Winter 14 January 17 th, 2014 Lecture 5 Ch. 3](https://reader035.vdocuments.net/reader035/viewer/2022062407/56649dc55503460f94ab89d7/html5/thumbnails/31.jpg)
The Law of Supply and Demand, cont’d
• The larger the difference between quantity demanded and quantity supplied, the greater the pressure for prices to rise (if there is excess demand) or fall (if there is excess supply).