lecture ch 3 eft market demand & supply

8/10/2019 Lecture Ch 3 Eft Market Demand & Supply

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Chapter 3

Market Demand and Supply

Economics for Todays World

Irvin B. Tucker

Lecture Slides

2011 South-Western, a part of Cengage Learning


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Why is this chapterimportant?

It introduces

basic supply anddemand analysis



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What is demand?Demandrepresents thechoice making

behavior ofbuyers



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What does ceterisparibus mean?

All else remains

the same



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What is the

law of demand?There is an inverse

relationship between thepr iceof a good and thequant i tybuyers are

willing to purchase in adefined time period,

ceteris paribus

2011South-Western, a part of Cengage Learning


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Consumer Sovereignty

Is the freedom of theconsumers to make their own

choices about which goodsand services to buy. If consumers prevail, these

choices are made withoutcoercion on the part ofbusiness or government.



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What is the law ofdiminishing marginal utility?

Explain why consumers

will buy more of a goodonly if its pricedecreases, ceteris

paribus.



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What is a

demand curve?

A curve that shows thequantities of a good orservice that people arewilling and able to buy atdifferent prices



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Exhibit 1 An Individual Demand Curve for DVDs

An Individual Buyer`s Demand Schedule for DVDs

Price per

DVD

Point Quantity Demanded

(per year)A $20 4

B 15 6

C 10 10

D 5 16



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1

0

20

15

10

5

0 4 8 12 16

AB

C

D

Exhibit 1 Individuals Demand Curve for DVDs

Quantity of DVDser ear

PriceperDVD(

dollars)

DemandCurve

20 2011 South-Western, a part of Cengage Learning


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Why do demand curveshave a negative slope?

As the price per unit of agood or service falls,buyers can afford to buymore units per period oftime.



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What ismarket demand?

The summation ofthe individual

demand schedulesin a market



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Exhibit 2 The Market Demand Curve for DVDs

Price

$20

5

Price Price

$20 $20

5 5

D1 D2

0 0

DTOTAL

0

Freds Demand Curve Marys Demand Curve Market Demand Curve+ =

2 1 35 127Quantity( per year)

Quantity(per year)

Quantity(per year)



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KNOW THE DIFFERENCEBETWEEN ACHANGE INTHE QUANTITY

DEMANDED AND ACHANGE IN DEMAND

Important !



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Pricedecreases

Downward movementalong the demand curve

Increase in quantitydemanded

PriceIncreases

Upward movement alongthe demand curve

Decrease inquantity demanded


E hibit 3(a) A change in price causes a change in


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20

15

10

5

10 20 30 40

A

B

Exhibit3(a) A change in price causes a change inthe quantity demanded

D50

Quantity of DVDs(millions per year)

Pricepe

rDVD

(dolla

rs)

0



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Non-price determinants

1. the number of buyers

2. taste and preferences

3. income

4. expectations

5. prices of related goods



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When a variable other

than price changes,what happens?

The whole demandcurve shifts, statedas there is achange in demand



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Change in anonprice

determinant

Decrease orincrease in

demand

Leftward or rightward shiftin the demand curve


E hibit 3(b) Wh th t i ib ti i


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20

15

10

5

10 20 30 40

D1

D2

50

Exhibit 3(b) When the ceteris paribus assumption isrelaxed, the whole curve can shift

BA


Pricepe

rDVD

(dolla

rs)

02011South-Western, apart of Cengage Learning


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What is the

conclusion?Changes in nonprice

determinants canproduce only a shi f tin

a demand curve andno t a movement alongthe demand cu rve



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Exhibit 4 Terminology for changes in price andnonprice determinants of demand

Price Incease

2011 South-Western, a part of Cengage Learning 20


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Exhibit 4 Two types of Demand Changes Illustrated

D3

Priceper unit

D1 D2

Quantity of good or service per unit of time

Change inNonpriceDeterminant

Causes

Change inNonprice

DeterminantCauses

2011 South-Western, apart of Cengage Learning


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What is a no rmal good? Any good for which

there is a directrelationship betweenchanges in income andits demand curve.

Example: new cars,airline travel, jewelleries



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What does a direct

relationshipbetween price andquantity mean?

The two variablesmove in the samedirection



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What is aninferior good?

Any good for which

there is an inverserelationship betweenchanges in income andits demand curve.Example: increasedincome reducespurchase of second

hand car. 2011 South-Western, a part of Cengage Learning


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What does an inverserelationship between

price & quantity mean?

It means that the two

variables move inopposite directions



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What are

substitute goods?Goods that

competewithone another for

consumerpurchases



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What happens when

the price increases fora good that has a

substitute?The demand curve

for the substitutegood increases



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What happens when

the price decreases fora good that has a

substitute?The demand curve for

the substitute gooddecreases



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What are

complementary goods?Goods that are

jointly consumedwith another good



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What happens when

the price increases fora good that has a

complement?The demand curve forthe substitute gooddecreases



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What happens when

the price decreasesfor a good that has a

complement?The demand curvefor the substitutegood increases



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Ashi f tin a demand

curve is caused by achange in:

Number of buyers in the market

Tastes and preferences

Income

Expectations of buyers

Prices of related goods2011South-Western, a part of Cengage Learning

Exhibit 5 Summary of the Impact of Changes in Nonprice


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Exhibit 5 Summary of the Impact of Changes in NonpriceDeterminants of Demand on the Demand Curve

NonpriceDeterminant

of Demand

Relationship toChanges in

Demand Curve

Shift in the

Demand Curve

Examples

Numberof buyers

Immigration fromMexico increases thedemand for Mexican

food products ingrocery stores.

P

Q

D1 D2

D1D2

P

Q

A decline in the

birthrate reduces thedemand for babyclothes.

1. Direct




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NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Demand Curve

Examples

Tastes andpreferences

For no apparentreason, consumerswant Beanie Babies

and demandincreases.

P

Q

D1 D2

D1D2

P

Q

After a while, the fad

dies and demanddeclines.

2. Direct




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NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Demand Curve

Examples

Incomea. Normalgoods

Consumers incomes

increase, and thedemand for steaksincreases.

P

Q

D1 D2

D1D2

P

Q

A decline in income

decreases thedemand for airtravel.

3. Direct




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NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Demand Curve

Examples

Inferiorgoods Consumers incomes

increase, and the

demand for hamburgerdecreases.

P

Q

D2 D1

D2D1

P

Q

A decline in income

increases the demandfor bus service.

b. Inverse




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NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Demand Curve

Examples

Expectationsof buyers

Consumers expect that gasoline

will be in short supply nextmonth and prices will risesharply. Consequently,

consumers fill the tanks in theircars this month, and there is anincrease in demand for gasoline.

P

Q

D1 D2

D1D2

P

Q

Months later consumers expectthe price of gasoline to fallsoon, and the demand forgasoline decreases.

4. Direct




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NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Demand Curve

Examples

Prices ofrelatedgoods

A reduction in theprice of tea decreases

the demand for coffee.

P

Q

D2

D2D1

P

Q

An increase in the price

of airfares causeshigher demand for bustransportation.

5. Direct

a. Substitutegoods

D1




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NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Demand Curve

Examples

Complementarygoods

A decline in the priceof cellular serviceincreases thedemand for cellphones.

P

Q

D1 D2

D1D2

P

Q

A higher price for

peanut butterdecreases thedemand for jelly.

b. Inverse



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What is supply?

Supplyrepresentsthe choice making

behavior of sellers



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What is the

law of supply? There is a directrelationship

between the pr iceof a goodand the quant i tysellers arewilling to offer for sale in a

defined time period, ceterisparibus



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Exhibit 6 An Individual Supply Curve for DVDs

An Individual Seller`s Demand Schedule for DVDs

Price per

DVD

Point Quantity Supplied(thousands per year)

A $20 50

B 15 45

C 10 35

D 5 20


Exhibit 6 An Individual Sellers Supply Curve for DVDs


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20

15

10

5

10 20 30 40

D

C

Exhibit 6 An Individual Seller s Supply Curve for DVDs

B

A

Quantity of DVDs(thousands per year)

Pricepe

rDVD

(dollars)

0 50 2011 South-Western, apart of Cengage Learning


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Why do supply curves

have a positiveslope? Only at a higher price will it

be profitable for sellers toincur the higher opportunitycost associated withsupplying a larger quantity



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What is market supply?The horizontal

summation of all thequantities supplied at

various prices thatmight prevail in themarket



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Exhibit 7 The Market Supply Curve for DVDs

Quantity(thousands per year)

Price

$25

15

Price Price

$25 $25

15 15

S1 S2

0

0

STOTAL

0

Entertain City SupplyCurve

High Vibes SupplyCurve

Market Supply Curve+ =

15 25 25 35 40 60Quantity

(thousands per year)

Quantity(thousands per year)



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KNOW THE

DIFFERENCE BETWEENACHANGE IN THE

QUANTITY SUPPLIEDAND A CHANGE INSUPPLY

IMPORTANT !



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When price changes,what happens?

The curve does no tshiftand there is achange in thequantity supplied



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Increase inprice

Increase in quantitysupplied

Upward movement alongthe supply curve

Decrease inprice

Downward movementalong the supply curve

Decrease in quantitysupplied


Exhibit 8(a) Supply Curve


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20

15

10

5

10 20 30 40

A

( ) pp y

A change in pricecauses a change in

the quantity supplied

BPricepe

rDVD

(dolla

rs)


0

S



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When a variable other

than price changes,what happens?

The whole curve shifts

and there is a changein supply 2011 South-Western, a part of Cengage Learning


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Change innonprice

determinant

Decrease or increasein supply

Leftward or rightward shift

in the supply curve


Exhibit 8(b) Increase in Supply


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20

15

10

5

10 20 30 40

S1

S2

b t 8(b) c ease Supp y

A B

Pricepe

rDVD

(dolla

rs)


0



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What is the

conclusion?Changes in nonprice

determinants canproduce only a shi f tina supply curve andno ta movement alongthe demand curve


Exhibit 9 Terminology for changes in price


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Exhibit 9 Terminology for changes in priceand nonprice determinants of supply


Exhibit 9 Two types of Supply Changes Illustrated


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Exhibit 9 Two types of Supply Changes Illustrated

S3

Priceper unit

S1 S2

Quantity of good or service per unit of time

Change inNonprice

DeterminantCauses

Change in

NonpriceDeterminant

Causes


A hi f t i l


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A shi f tin a supply

curve is caused by achange in: Number of sellers in the market Technology Resource prices Taxes and subsidies Expectations of producers Prices of other goods and

services the firm could produce 2011 South-Western, a part of Cengage Learning

Exhibit 10 Summary of the Impact of Changes inN i D t i t f D d th S l C


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Nonprice Determinants of Demand on the Supply Curve

NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Supply Curve

Examples

Numberof

sellers

The United States lowerstrade restrictions onforeign textiles, and the

supply of textiles in theUnited States increases.

P

Q

S1 S2

S2 S1P

Q

A severe drought destroys

the orange crop, and thesupply of orangesdecreases.

1. Direct


Exhibit 10 Summary of the Impact of Changes inN i D t i t f D d th S l C


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NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Supply Curve

Examples

TechnologyNew methods of producingautomobiles reduceproduction costs, and the

supply of automobilesincreases.

P

Q

S1 S2

S2 S1

P

Q

Technology is destroyed

in war, and productioncosts increase; the resultis a decrease in thesupply of good X.

2. Direct


Exhibit 10 Summary of the Impact of Changes in

D d


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Nonprice Determinants of Demandon the Supply Curve

NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Supply Curve

Examples

Resourceprices

A decline in the price ofcomputer chips increases

the supply of computers.

P

Q

S1 S2

S2 S1P

Q

An increase in the cost of

farm equipment decreasesthe supply of soybeans.

3. Inverse




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NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Supply Curve

Examples

Taxes andsubsidies

An increase in the per-packon cigarettes reduces the

supply of cigarettes.

P

Q

S2 S1

S1 S2

P

Q

A government payment todairy farmers based on thenumber of gallonsproduced increases thesupply of milk.

4. Inverseanddirect




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Nonprice Determinants of Demandon the Supply CurveNonpriceDeterminant

of Demand


Demand Curve

Shift in the

Supply Curve

Examples

Expectations Oil companies anticipate asubstantial rise in future oilprices, and this expectation

causes these companies todecrease their current supplyof oil.

P

Q

S2 S1

S1 S2

P

Q

Farmers expect the future

price of wheat to decline,so they increases thepresent supply of wheat.

5. Inverse


Exhibit 10 Summary of the Impact of Changes in NonpriceDeterminants of Demand on the Supply Curve


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Determinants of Demand on the Supply Curve

NonpriceDeterminant

of Demand


Demand Curve

Shift in the

Supply Curve

Examples

Prices ofother goodsand services

A rise in brand-name drugscauses drug companies to

decrease the supply ofgeneric drugs.

P

Q

S2 S1

S1 S2

P

Q

A decline in the price of

tomatoes causes farmersto increase the supply ofcucumbers.

6. Inverse



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What is a market?

Any arrangement inwhich buyers andsellers interact todetermine the price and

quantity of goods andservices exchanged



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Where is the

equilibrium price?

At the price where thequantity demanded

and the quantitysupplied are equal


Exhibit 11Demand Supply


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Exhibit 11Demand, Supply,and Equilibrium for Sneakers (pairs per year)


Exhibit 12 The Supply & Demand for Sneakers


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90

60

30

20 50 80D

S

Surplus

120

Priceperpa

ir

(dollars)

Quantity of Sneakers(thousands of pairs per year)

0

Shortage

E



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What is the

price system?

A mechanism that usesthe forces of supplyand demand to createan equilibrium throughrising and falling prices



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END

lecture ch 3 eft market demand & supply

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