third edition supply and demand chapter 3.pdf · 2017-02-10 · consumer surplus 15 total consumer...
TRANSCRIPT
MODERN PRINCIPLES OF ECONOMICSThird Edition
Supply and Demand
Chapter 3
Outline
The Demand Curve for Oil
Consumer Surplus
What Shifts the Demand Curve?
The Supply Curve for Oil
Producer Surplus
What Shifts the Supply Curve?
2
Definition
Demand Curve:
A function that shows the quantity
demanded at different prices.
3
Quantity Demanded:
The quantity that buyers are willing
and able to buy at a particular price.
4
Demand
Demand for Oil
Price Quantity
Demanded
$55 5
$20 25
$5 50
• This table shows demand for oil - the quantities demanded at different prices.
• The data can be used to construct a demand curve.
Demand
Quantity
Demanded
5
Demand Curve
Price of oil
per barrelPrice of oil
per barrel
Quantity of
oil (MBD)
Price Quantity
Demanded
$55 5
$20 25
$5 50
Reading a Demand Curve
A Demand Curve Can Be Read:
Horizontally: At a given price, how much are
people willing to buy?
Vertically: What are people willing to pay for
a given quantity?
6
7
Reading a Demand Curve
HORIZONTAL: At $20 per barrel, buyers are willing to buy 25m barrels of oil per day.
8
Reading a Demand Curve
VERTICAL: The maximum price that buyers are willing to pay to purchase 25m barrels per day is $20 per barrel.
Self-Check
What quantity is demanded at $15?
a. 10.
b. 50.
c. 75.
9
Answer: b. 50
$15
Self-Check
At what price would 100 be demanded?
a. $5.
b. $1.
c. $10.
10
Answer: a. $5
$5
Law of Demand
A demand curve is negatively sloped.
The lower the price, the greater the quantity
demanded.
Demand summarizes how consumers choose to
use a good, given their preferences and the
possibilities for substitution.
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Law of Demand
For example, when the price of oil is high,
consumers will use it only in its most valuable
uses (e.g., gasoline and jet fuel).
As the price falls, consumers will also use oil in
its less valued uses (heating and rubber
duckies).
Consumers will buy more oil at lower prices than
at higher prices.
12
Definition
13
Consumer Surplus:
The consumer’s gain from exchange,
or the difference between the
maximum price a consumer is willing
to pay for a certain quantity and the
market price.
Definition
14
Total Consumer Surplus:
The area beneath the demand curve and above the price.
Consumer Surplus:
The consumer’s gain from exchange, or the difference between the maximum price a consumer is willing to pay for a certain quantity and the market price.
Consumer Surplus
15Total consumer surplus with a linear demand curve
Self-Check
16
What is total consumer surplus if market
price is $10?
a. $500.
b. $700.
c. $1400.
Answer: b. $700 70
70 x ($30-$10)
2
Shifting the Demand Curve
An increase in demand shifts the demand
curve to the right.
• At the same price, people are willing to buy
more.
• At the same quantity, people are willing to pay
a higher price.
17
Shifting the Demand Curve
Quantity of Oil
(MBD)
Price of
oil/barrel
Old Demand
0 70 140
$50
$25New Demand
Willing to pay a higher
price for same quantity.
Willing to buy more
at the same price.
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An Increase in Demand
Shifting the Demand Curve
Decrease in demand – shifts the demand
curve to the left.
• At the same price, people are willing to buy
less.
• At the same quantity, people are willing to pay
a lower price.
19
Shifting the Demand Curve
Old Demand
0 74
$25
$50
New Demand
Willing to buy less
at the same price.
Willing to pay a lower price
for the same quantity
62
20
Price of
oil/barrel
Quantity of Oil
(MBD)
A Decrease in Demand
Demand Shifters
Factors That Shift Demand:
1. Income
2. Population
3. Price of substitutes
4. Price of complements
5. Expectations
6. Tastes
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Demand Shifters
1. Income
When people get richer, they buy more stuff.
When an increase in income increases the
demand for a good, it is a normal good.
Most goods are normal goods.
When an increase in income decreases the
demand for a good, it is an inferior good.
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Self-Check
23
If iPads are a normal good, when incomes
increase, the demand curve for iPads will:
a. Shift to the right.
b. Shift to the left.
c. Not change.
Answer: a
Higher incomes increase demand for a normal
good, shifting the demand curve to the right.
Demand Shifters
2. Population
An increase in population will increase
demand generally.
A shift in subpopulations will change the
demand for specific goods and services.
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Demand Shifters
3. Prices of Substitutes
A substitute is a good that can be consumed
instead of another good.
A decrease in the price of a substitute will
decrease demand for the other good.
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Self-Check
26
If orange juice and apple juice are substitutes,
an increase in the price of orange juice will:
a. Increase demand for apple juice.
b. Decrease demand for apple juice.
c. Not affect demand for apple juice.
Self-Check
27
Answer: a – increase demand for apple juice.
A higher price for orange juice will cause some
people to substitute the now lower-priced apple
juice. This increases the demand for apple juice.
If orange juice and apple juice are substitutes,
an increase in the price of orange juice will:
Demand Shifters
4. Prices of Complements
Complements are things that go well together.
A drop in the price of a complement increases
demand for the complementary good.
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Demand Shifters
5. Expectations
The expectation of a reduction in future supply
increases the demand today.
6. Tastes
Changes in tastes caused by fads, fashions,
and advertising can all increase or decrease
demand.
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Supply Curve
Price of oil per barrel
Quantity of oil (MBD)
Price Quantity
Supplied
$55 50
$20 30
$5 10
Reading a Supply Curve
A Supply Curve Can Be Read:
Horizontally: At a given price, how much are
suppliers willing to sell?
Vertically: To produce a given quantity, what
price must sellers be paid?
31
Definition
32
Supply Curve:
A function that shows the quantity
supplied at different prices.
Quantity Supplied:
The quantity that sellers are willing
and able to sell at a particular price.
Law of Supply
As the price of oil rises, it becomes profitable to
extract from more costly sources.
As the price rises, the quantity supplied increases. 33
Top photo: Dan Lamont/Corbis Bottom: Bettmann/Corbis
Self-Check
At what price will producers be willing to
supply 50 units?
a. $10.
b. $20.
c. $30.
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Answer: a - $10
Definition
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Producer Surplus:
The producer’s gain from exchange,
or the difference between the market
price and the minimum price at which
a producer would be willing to sell a
particular quantity.
Definition
36
Total Producer Surplus:
The area above the supply curve
and below the price.
Producer Surplus
37
Shifting the Supply Curve
Increase in Supply - shifts the supply
curve to the right.
• At the same price producers are willing to
sell more.
• At the same quantity, producers are willing
to accept a lower price
38
Shifting the Supply Curve
Quantity of Oil
(MBD)
Old supply
Increase in supply
0
40
$60
8060
New supply
Greater quantity
supplied at the
same price Willing to accept
a lower price for
the same quantity
18
39
Price of
oil/barrel
Shifting the Supply Curve
Decrease in supply – shifts the supply
curve to the left.
• At the same price sellers will offer less.
• At the same quantity, sellers demand a
higher price.
40
Shifting the Supply Curve
Quantity of Oil
(MBD)
Old supply
Decrease in supply
$50
20 60
New supply
Smaller quantity supplied
at the same price
Higher price required
for the same quantity
$28
41
Price of
oil/barrel
Supply Shifters
Factors That Shift Supply:
1. Technological innovations and changes in
the price of inputs
2. Taxes and subsidies
3. Expectations
4. Entry or exit of producers
5. Changes in opportunity costs
42
Supply Shifters
1. Technological Innovations
Improvements in technology can reduce
costs, thus increasing supply.
A reduction in input prices also reduces costs
and thus has a similar effect.
43
Supply Shifters
2. Taxes and Subsidies
A tax on output has the same effect as an increase
in costs.
A subsidy is the reverse of a tax. 44
Supply Shifters
3. Expectations
Suppliers who expect prices to increase will
store goods for future sale and sell less today.
The expectation of a future price increase
therefore decreases current supply.
Supply curve shifts to the left.
45
Supply Shifters
4. Entry or Exit of Producers
The entry of new producers increases supply,
shifting the curve down and to the right.
46
Supply Shifters
5. Changes in Opportunity Costs
An increase in opportunity costs shifts the
supply curve up and to the left.
If the price of wheat increases, the opportunity
cost of growing soybeans increases.
Some farmers will shift away from producing
soybeans and start producing wheat.
47
Supply Shifters
5. Changes in Opportunity Costs
The supply curve for soybeans will shift up
and to the left. 48
Self-Check
49
Suppose a new technology reduces the time it
takes to assemble a car. How would this affect
the supply of cars?
a. Shift supply to the right.
b. Shift supply to the left.
c. It would have no effect on supply.
Self-Check
50
Suppose a new technology reduces the time it
takes to assemble a car. How would this affect
the supply of cars?
Answer: a – producers would be able to
supply more cars at the current price, shifting
the supply curve to the right.
Takeaway
A demand curve shows how customers respond to higher prices by buying less, and to lower prices by buying more.
A supply curve shows how producers respond to higher prices by producing more, and to lower prices by producing less.
The difference between market price and the maximum a consumer is willing to pay is the consumer’s gain from exchange or consumer surplus.
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Takeaway
The difference between market price and
the minimum price which a producer is
willing to accept is the producer’s gain from
exchange, or producer surplus.
An increase in demand means that buyers
want a greater quantity at the same price or,
equivalently, they are willing to pay a higher
price for the same quantity.
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Takeaway
An increase in supply means that sellers
are willing to sell a greater quantity at the
same price or, equivalently, they are willing
to sell a given quantity at a lower price.
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Sources
54
"Coffee with Cream and Sugar (6703560771)" by TheCulinaryGeek from Chicago, USA - Coffee with Cream and SugarUploaded by the wub. Licensed under CC BY 2.0 via Wikimedia Commons -http://commons.wikimedia.org/wiki/File:Coffee_with_Cream_and_Sugar_(6703560771).jpg#mediaviewer/File:Coffee_with_Cream_and_Sugar_(6703560771).jpg
"Oh Henry bar". Via Wikimedia Commons -http://commons.wikimedia.org/wiki/File:Oh_Henry_bar.jpg#mediaviewer/File:Oh_Henry_bar.jpg
"Kinderchocolate" by Thegreenj - Own work. Licensed under CC BY-SA 3.0 via Wikimedia Commons -http://commons.wikimedia.org/wiki/File:Kinderchocolate.jpg#mediaviewer/File:Kinderchocolate.jpg