part i introduction to economics
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Demand, Supply, and Market Equilibrium. PART I INTRODUCTION TO ECONOMICS. 3. Firms and Households: The Basic Decision-Making Units. Households: Individuals and families who buy goods and services for consumption. - PowerPoint PPT PresentationTRANSCRIPT
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 1 of 49
3PART I INTRODUCTION TO ECONOMICS
Demand, Supply, and Market Equilibrium
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 2 of 49
Firms and Households: The Basic Decision-Making Units
Firms: Business organizations that transforms resources (inputs) into products (outputs) for profit.
Entrepreneurs: Persons who organize, manage, and assume the risks of a firm, taking new ideas or new products and turning them into profit.
Households: Individuals and families who buy goods and services for consumption.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 3 of 49
Input Markets and Output Markets: The Circular Flow
Product or output markets: Markets in which goods and services are exchanged.
Input or factor markets: Markets in which the resources are exchanged.
Resources: labor, land, capital, entrepreneurship
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 4 of 49
Input Markets and Output Markets: The Circular Flow
Labor markets: Markets in which households supply work for wages to firms that demand labor.
Capital markets: Markets in which households supply their savings, for interest, to firms that demand funds to buy capital goods.
Land markets: Markets in which households supply land in exchange for rent.
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Input Markets and Output Markets: The Circular Flow
The Circular Flow of Economic Activity
A diagram showing interactions between households and firms in product markets and resource markets.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 6 of 49
Demand for Products
Household’s decision about what quantity of a particular product to demand depends on a number of factors:
The price of the product
Household income and wealth
The prices of other products
Consumer taste Expectations of change in income, wealth, and
prices.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 7 of 49
Demand for Products
Quantity Demanded: The amount of a product that a household would buy at a given price.
Demand: The amount of a product that a household is willing and able to buy in at various prices.
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Demand for Products
Changes in Quantity Demanded vs. Changes in Demand
Changes in the price of a product affect the quantity demanded.
For example: an increase in the price of Coca-Cola would cause a decrease in the quantity of Coca-Cola demanded, all being equal.
Changes in any other factor, such as household income or taste, will affect demand.
For example, an increase in household income would cause an increase in the demand for Coca-Cola, given the price.
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 9 of 49
Demand for Products
Demand schedule: A table showing how much of a product a household is willing and able to buy at different prices.
Price and Quantity Demanded: The Law of Demand
Demand curve: A graph illustrating how much of a product a household is willing and able to buy at different prices.
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Anna’s Demand Schedule for Telephone Calls
Price(Per Call)
Quantity Demanded(Calls Per Month)
$ 0 30
.50 25
3.50 7
7.00 3
10.00 1
15.00 0
The Law of Demand: price and quantity demanded are negatively related.
Demand for Products
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Normal goods: Goods for which demand goes up when income increases and demand goes down when income decreases.
Inferior goods: Goods for which demand goes up when income decreases and demand goes down when income increases.
Demand for Products
Demand and Income
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Substitute goods: Goods that serve as “replacements” for one another; when the price of one increases, demand for the other increases.
Complementary goods: Goods that “go together”; a decrease in the price of one product results in an increase in demand for the other.
Demand for Products
Prices of Other Goods and Services
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Demand in Products
Consumer Taste
Within the constraints of prices and incomes, consumer taste shapes the demand curve; an improvement in consumer taste for a good would increase the demand for the good.
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Demand for Products
Expectations
What you decide to buy today certainly depends on today’s product prices and your income and wealth.
• Expectations of a price increase will raise the demand.
• Expectations of higher income or increased wealth will increase the demand.
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Demand for ProductsShift of Demand vs. Movement Along a Demand Curve
Shift of Anna’s Demand Schedule Due to increase I Income
Schedule D0 Schedule D1
Price(Per Call)
Quantity Demanded(Calls Per Month at an
Income of $300 Per Month)
Quantity Demanded(Calls Per Month at an
Income of $600 Per Month)
$ 0.00 30 35
0.50 25 33
3.50 7 18
7.00 3 12
10.00 1 7
15.00 0 2
20.00 0 0
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 16 of 49
Demand for Products
Shift of the demand: A shift is caused by a change in the determinants of the demand, given the price.
Movement along the demand: A movement along the demand is caused by a change in the price, all being equal.
Change in price of leads to change in quantity demanded: movement along the demand
Change in income, preferences, or prices of other goods or services leads to change in demand:
shift of the demand
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© 2009 Pearson Education, Inc. Publishing as Prentice Hall Principles of Macroeconomics 9e by Case, Fair and Oster 17 of 49
Demand for Products
Change in Income and Shift of Demand
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Demand for Products
If the price of hamburger rises, the quantity of hamburger demanded declines— this is a movement along the demand curve.
The price rise for hamburger would shift the demand for chicken (its substitute) to the right and the demand for ketchup (its complement) to the left.
Shift of Demand versus Movement Along a Demand Curve
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Market demand is the horizontal sum of all households’ demands.
Demand for Products
From Household Demand To Market Demand
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Demand for ProductsFrom Household Demand To Market Demand
FIGURE 3.5 Deriving Market Demand from Individual Demand Curves
Total demand in the marketplace is simply the sum of the demands of all the households shopping in a particular market. It is the sum of all the individual demand curves—that is, the sum of all the individual quantities demanded at each price.
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Supply of Products
Quantity supplied: The amount of a product that a firm offers for sale at a given price.
Supply: The amount of a product that a firm is willing and able to sell at various prices, all being equal.
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Supply of Products
Supply curve: A graph illustrating how much of a product a firm is willing and able to sell at different prices.
Supply schedule: A table showing how much of a product a firm is willing and able to sell at different prices.
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TABLE 3.3 Clarence Brown’s Supply Schedule for Soybeans
Price (Per Bushel)Quantity Supplied(Bushels Per Year)
$1.50 0
1.75 10,000
2.25 20,000
3.00 30,000
4.00 45,000
5.00 45,000
The Law of Supply: price and quantity supplied are positively related.
Supply of Products
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Supply of Products
Determinants Of Supply
The Cost of Production
In order for a firm to make a profit, its revenue must exceed its costs.
Cost of production depends on a number of factors, including available technology and input prices paid by the firm (wages, salaries, interest, rent, etc.).
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Assuming that its objective is to maximize profits, a firm’s decision about what quantity of a product to supply depends on:
1. The price of the good or service
2. The cost of producing the product
3. The prices of related products
Supply of Products
Determinants Of Supply
Prices of Related Products
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Movement along supply: The change in quantity supplied caused by a change in price, all being equal.
Shift of supply: The shift caused by a change in the determinants of the supply, given the price.
Supply of Products
Shift of Supply vs. Movement Along a Supply Curve
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TABLE 3.4 Shift of Supply Schedule for Soybeans Following Development of a New Disease-Resistant Seed Strain
SCHEDULE D0 SCHEDULE D1
Price(per Bushel)
Quantity Supplied(Bushels per Year Using Old Seed)
Quantity Supplied(Bushels per Year Using New Seed)
$1.50 0 5,000
1.75 10,000 23,000
2.25 20,000 33,000
3.00 30,000 40,000
4.00 45,000 54,000
5.00 45,000 54,000
Supply of Products
Shift of Supply vs. Movement Along a Supply Curve
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Supply of Products
Shift of Supply vs. Movement Along a Supply Curve
Change in price of a good or service leads toChange in quantity supplied: movement along supply.
Change in income, preferences, or prices of other goods or services leads to
Change in supply: shift of supply.
Shift of the supply: A shift is caused by a change in the determinants of the supply, given the price.
Movement along the supply: A movement along the supply is caused by a change in the price, all being equal.
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Market supply is the horizontal sum of all individual firms’ supplies.
Supply of Products
From Individual Supply to Market Supply
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Supply of ProductsFrom Individual Supply to Market Supply
FIGURE 3.8 Deriving Market Supply from Individual Firm Supply Curves
Total supply in the marketplace is the sum of all the amounts supplied by all the firms selling in the market. It is the sum of all the individual quantities supplied at each price.
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Market Equilibrium
Equilibrium: A condition at which quantity supplied and quantity demanded are equal. At equilibrium, there is no tendency for price to change.
Excess demand or Shortage: A condition at which quantity demanded exceeds quantity supplied at the market price.
Excess supply or Surplus: The condition at which quantity supplied exceeds quantity demanded at the market price.
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When quantity demanded exceeds quantity supplied, price tends to rise. When the price in a market rises, quantity demanded falls and quantity supplied rises until an equilibrium is reached at which quantity demanded and quantity supplied are equal.
Market EquilibriumExcess Demand
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When quantity supplied exceeds quantity demanded at the current price, the price tends to fall. When price falls, quantity supplied is likely to decrease and quantity demanded is likely to increase until an equilibrium price is reached where quantity supplied and quantity demanded are equal.
Market EquilibriumExcess Supply
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Market EquilibriumChanges In Equilibrium
When supply and demand curves shift, the equilibrium price and quantity change.
Before the freeze, the coffee market was in equilibrium at a price of $1.20 per pound.At that price, quantity demanded equaled quantity supplied. The freeze shifted the supply curve to the left (from S0 to S1),
increasing the equilibrium price to $2.40.
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Market EquilibriumChanges In Equilibrium
FIGURE 3.12 Examples of Supply and Demand Shifts for Product X
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Bad News for Orange Juice Fanatics
Orange Juice Prices Could Skyrocket After Freeze Destroys Most of California Output
City News
Demand and Supply ApplicationsChanges In Equilibrium
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Why Do the Prices of Newspapers Rise?
In 2006, the average price for a daily edition of a Baltimore newspaper was $0.50. In 2007, the average price had risen to $0.75.
Demand and Supply Applications