CHAPTER 3 DEMAND SUPPLY ECONOMIC PRINCIPLES Individual and

CHAPTER 3 DEMAND SUPPLY

ECONOMIC PRINCIPLES • Individual and market demand • Market-day, short-run and long-run supply • Determination of equilibrium price and quantity • Changes in Demand Supply Gottheil - Principles of Economics, 4 e 2

PRICE FORMATION Market price is a reflection of people’s willingness to buy and sell. Gottheil - Principles of Economics, 4 e 3

MEASURING MARKET DEMAND A change in quantity demanded is caused solely by: • A change in the price of that good. Gottheil - Principles of Economics, 4 e 4

MEASURING MARKET DEMAND Law of demand • The inverse relationship between price and quantity demanded. Gottheil - Principles of Economics, 4 e 5

MEASURING MARKET DEMAND Demand schedule • A schedule which shows the specific quantity of a good or service that people are willing and able to buy at different prices. Gottheil - Principles of Economics, 4 e 6

MEASURING MARKET DEMAND Aggregate the demand of many individuals into market demand by: • Adding up the quantities purchased by all consumers at given market prices. Gottheil - Principles of Economics, 4 e 7

MEASURING MARKET DEMAND If each of the seven dwarfs buys three cups of coffee per week at Snow White’s Café at a price of $1/cup, what is market quantity demanded at a price of $1? • 3 + 3 + 3 + 3 = 21. Gottheil - Principles of Economics, 4 e 8

EXHIBIT 1 A INDIVIDUAL DEMAND CURVES FOR FISH Gottheil - Principles of Economics, 4 e 9

EXHIBIT 1 B INDIVIDUAL DEMAND CURVES FOR FISH Gottheil - Principles of Economics, 4 e 10

EXHIBIT 2 THE MARKET DEMAND CURVE Gottheil - Principles of Economics, 4 e 11

EXHIBIT 2: THE MARKET DEMAND CURVE The curve in Exhibit 2 represents: • The market demand for fish. • It is the sum of all individual demands for fish. Gottheil - Principles of Economics, 4 e 12

MEASURING SUPPLY Supply schedule • It is a schedule showing the specific quantity of a good or service that suppliers are willing and able to provide at different prices. Gottheil - Principles of Economics, 4 e 13

MEASURING SUPPLY Market-day supply • A market situation in which the quantity of a good supplied is fixed, regardless of price. Gottheil - Principles of Economics, 4 e 14

MEASURING SUPPLY A supply curve graphs the relationship between price and quantity supplied. Gottheil - Principles of Economics, 4 e 15

MEASURING SUPPLY The supply curve is upwardsloping. • Higher prices provide sellers with an incentive to increase quantity supplied. Gottheil - Principles of Economics, 4 e 16

MEASURING SUPPLY If there are three builders in a small town, and if each supplies 4 houses per year at a price of $150, 000, what is market quantity supplied at this price? • 4 + 4 = 12. Gottheil - Principles of Economics, 4 e 17

EXHIBIT 3 MARKET-DAY SUPPLY CURVE Gottheil - Principles of Economics, 4 e 18

EXHIBIT 3: MARKET-DAY SUPPLY CURVE The market-day supply curve for fish is a vertical line because: • Fishermen cannot change the quantity they supply, once the day’s catch is in. Gottheil - Principles of Economics, 4 e 19

EXHIBIT 4 EXCESS DEMAND EXCESS SUPPLY 20 © 2005

EXHIBIT 4: EXCESS DEMAND EXCESS SUPPLY The quantity of fish purchased, when price rises from $5 to $8: • Remains at 6, 000. • The market-day supply curve is a vertical line. Gottheil - Principles of Economics, 4 e 21

EXHIBIT 4: EXCESS DEMAND EXCESS SUPPLY The relationship between quantity demanded and quantity supplied at a price of $8 is: • Quantity demanded is 4, 500. • Quantity supplied is 6, 000. • Excess supply of 1, 500. Gottheil - Principles of Economics, 4 e 22

EXHIBIT 4: EXCESS DEMAND EXCESS SUPPLY The relationship between quantity demanded and quantity supplied at a price of $4 is: • Quantity demanded is 6, 500. • Quantity supplied is 6, 000. • Excess demand of 500. Gottheil - Principles of Economics, 4 e 23

EXHIBIT 4: EXCESS DEMAND EXCESS SUPPLY The relationship between quantity demanded and quantity supplied at a price of $5 is: • They are equal. Gottheil - Principles of Economics, 4 e 24

DETERMINING EQUILIBRIUM PRICE What is unique about the Equilibrium Price? • Quantity demanded is equal to quantity supplied. • There is neither an excess supply nor an excess demand. • Price gravitates toward the equilibrium price, in well-functioning competitive markets. Gottheil - Principles of Economics, 4 e 25

EXHIBIT 5 MARKET-DAY, SHORT-RUN, AND LONG-RUN SUPPLY 26 © 2005

EXHIBIT 5: MARKET-DAY, SHORT-RUN, AND LONG-RUN SUPPLY The short-run supply curve slopes upward, while the market-day supply curve is a vertical line because: • If price rises, then in the short-run suppliers are able to increase the use of some but not all of the resources they use to produce goods and services. Gottheil - Principles of Economics, 4 e 27

EXHIBIT 5: MARKET-DAY, SHORT-RUN, AND LONG-RUN SUPPLY The short-run supply curve slopes upward, while the market-day supply curve is a vertical line because: • The short-run suppliers are able to: • Make modest increases in quantity supplied if price rises. • Make modest decreases in quantity supplied if price falls Gottheil - Principles of Economics, 4 e 28

EXHIBIT 5: MARKET-DAY, SHORT-RUN, AND LONG-RUN SUPPLY The short-run supply curve slopes upward, while the market-day supply curve is a vertical line because: • This results in a short-run supply curve which is steeply upward-sloping. • The quantity supplied is fixed on the market-day supply curve. Gottheil - Principles of Economics, 4 e 29

EXHIBIT 5: MARKET-DAY, SHORT-RUN, AND LONG-RUN SUPPLY The long-run supply curve is less steep than the short-run supply curve because: • Suppliers are able to change the quantity of all resources they use to produce goods and services during this time interval. • A given increase in price will result in a larger increase in quantity supplied in the long run than in the short run. Gottheil - Principles of Economics, 4 e 30

CHANGE IN DEMAND A change in price will not result in a change in demand. • A change in price results in a change in quantity demanded. • A change in demand is caused by factors other than a change in the price of that good. Gottheil - Principles of Economics, 4 e 31

CHANGE IN DEMAND Factors: Changes in Income. Changes in Taste. Changes in the Prices of Other Goods Changes in Expectations About Future Prices Changes in Population Size

CHANGE IN DEMAND A change in a consumer’s income will result in a change in demand. • A change in a consumer’s income will cause the demand curve to shift. Gottheil - Principles of Economics, 4 e 33

EXHIBIT 6 CHANGE IN DEMAND Gottheil - Principles of Economics, 4 e 34

EXHIBIT 6: CHANGE IN DEMAND In Exhibit 6, when the demand curve shifts from D to D′, the equilibrium price and quantity demanded: • The equilibrium price rises from $5 to $6. • The quantity demanded rises from 6, 000 to 6, 500. Gottheil - Principles of Economics, 4 e 35

EXHIBIT 6: CHANGE IN DEMAND If fish are a normal good and consumer incomes have increased, the demand will shift from D to D′. • If a good is normal, then an increase in consumer income will increase demand. Gottheil - Principles of Economics, 4 e 36

EXHIBIT 6: CHANGE IN DEMAND In Exhibit 6, when the demand curve shifts from D to D″, the equilibrium price and quantity demanded: • The equilibrium price falls from $5 to $4. • The quantity demanded falls from 6, 000 to 5, 500. Gottheil - Principles of Economics, 4 e 37

EXHIBIT 6: CHANGE IN DEMAND If fish and beef are substitutes, then a decrease in the price of beef will cause demand to shift from D to D″. If the price of beef declines: • The quantity of beef demanded will increase. • The demand curve for fish will shift left. Gottheil - Principles of Economics, 4 e 38

CHANGES IN DEMAND What happens to the demand for software when computer hardware and software complements, and the price of hardware declines: • A decline in hardware prices will increase the quantity of hardware demanded. • If more hardware is purchased, the result will be more software purchased, since they are complements. Gottheil - Principles of Economics, 4 e 39

CHANGES IN DEMAND What happens to the demand for software when computer hardware and software complements, and the price of hardware declines: • The increase in the quantity of software demanded was caused by a factor other than the price of software. • The demand for software will increase. Gottheil - Principles of Economics, 4 e 40

CHANGES IN DEMAND If consumers anticipate that computer hardware will become considerably cheaper in the coming months, today’s demand for hardware: • Today’s demand will decrease (shift to the left). • Some consumers will delay their purchase in anticipation of lower future prices. Gottheil - Principles of Economics, 4 e 41

CHANGES IN DEMAND The demand for day-old bakery goods if consumer incomes rise, and day-old bakery goods are inferior goods will: • The demand for day-old bakery goods will fall as consumer incomes rise. • Inferior goods are goods that people consume less of as their incomes rise. Gottheil - Principles of Economics, 4 e 42

CHANGES IN DEMAND When students are gone during the summer, the demand for pizza slices on campus: • The demand will fall because there will be fewer consumers. Gottheil - Principles of Economics, 4 e 43

CHANGES IN DEMAND If the Surgeon General announces that cheeseburgers reduce heart attack risk and prevent premature baldness, this will affect market demand for cheeseburgers: • The demand will rise. • The news will increase consumer tastes and preferences for cheeseburgers. Gottheil - Principles of Economics, 4 e 44

CHANGES IN DEMAND Which of the following are most likely to be consumer substitutes: i. Peanut butter and jelly ii. Coke and Pepsi iii. Cars and gasoline iv. Telephones and telephone books Gottheil - Principles of Economics, 4 e 45

CHANGES IN DEMAND Which of the following are most likely to be consumer substitutes: i. Peanut butter and jelly ii. Coke and Pepsi iii. Cars and gasoline iv. Telephones and telephone books Gottheil - Principles of Economics, 4 e 46

EXHIBIT 7 DISTINGUISHING CHANGES IN DEMAND FROM CHANGES IN QUANTITY DEMANDED 47

EXHIBIT 7: DISTINGUISHING CHANGES IN DEMAND FROM CHANGES IN QUANTITY DEMANDED Movement along the demand curve D from a price of $10 to a price of $7 illustrates a change in • Quantity demanded. Gottheil - Principles of Economics, 4 e 48

EXHIBIT 8 CHANGE IN SUPPLY Gottheil - Principles of Economics, 4 e 49

EXHIBIT 8: CHANGE IN SUPPLY When the supply changes from curve S to curve S′, this is an increase in supply. Gottheil - Principles of Economics, 4 e 50

EXHIBIT 8: CHANGE IN SUPPLY What would cause the equilibrium to shift from point a. to point b. in Exhibit 8? • A decrease in supply from S′ to S″. Gottheil - Principles of Economics, 4 e 51

CHANGES IN SUPPLY A change in supply: • A change in quantity supplied of a good or service that is caused by factors other than a change in the price of that good. Gottheil - Principles of Economics, 4 e 52

CHANGES IN SUPPLY • Changes in Tech. • Changes in Resource Prices • Changes in the Prices of Other Goods • Changes in the Number of Supplies

CHANGES IN SUPPLY If a labor union successfully negotiates a large pay increase, this will affect the supply curve for the product they make by: • Higher wages, like any other increase in resource prices, will cause the supply curve to shift inwards to the left (a decrease in supply). Gottheil - Principles of Economics, 4 e 54

CHANGES IN SUPPLY If more sellers enter the market, this will affect the market supply curve: • An increase in the number of sellers will cause the supply curve to shift outwards to the right (an increase in supply). Gottheil - Principles of Economics, 4 e 55

CHANGES IN SUPPLY Suppose that farmers who grow soybeans can also grow corn. If the price of soybeans triples, how this will affect the market supply of corn by: • This will reduce the market supply of corn, because many corn farmers will switch to growing soybeans. Gottheil - Principles of Economics, 4 e 56

EXHIBIT 9 A INCREASES IN DEMAND SUPPLY Gottheil - Principles of Economics, 4 e 57

EXHIBIT 9 B INCREASES IN DEMAND SUPPLY Gottheil - Principles of Economics, 4 e 58

EXHIBIT 9: INCREASES IN DEMAND SUPPLY (PANEL A) When both demand supply increase: • Equilibrium quantity increases. • The effect of an increase in both supply an demand on price depends on the relative size of the increases. If the increase in demand is larger than the increase in supply, then price rises. Gottheil - Principles of Economics, 4 e 59

EXHIBIT 10 A INCREASES IN DEMAND, DECREASES IN SUPPLY Gottheil - Principles of Economics, 4 e 60

EXHIBIT 10 B INCREASES IN DEMAND, DECREASES IN SUPPLY Gottheil - Principles of Economics, 4 e 61

EXHIBIT 10: INCREASES IN DEMAND, DECREASES IN SUPPLY When demand increases a little and supply decreases a lot: • The equilibrium price increases, but equilibrium quantity decreases. This effect is illustrated in Exhibit 10, panel a. Gottheil - Principles of Economics, 4 e 62

EXHIBIT 10: INCREASES IN DEMAND, DECREASES IN SUPPLY When demand increases a lot and supply decreases a little: • The equilibrium price and quantity both increase. This effect is illustrated in Exhibit 10, panel b. Gottheil - Principles of Economics, 4 e 63

DEMAND SUPPLY The equilibrium price of peaches will be affected if the demand for peaches decreases, while at the same time the supply of peaches increases: • The equilibrium price of peaches will fall. • The relative magnitude of the changes in supply and demand is needed before we can determine how the equilibrium quantity of peaches will change. Gottheil - Principles of Economics, 4 e 64

PRICE AS A RATIONING MECHANISM Price rations scarce goods and services in a market: • It rations out goods in a market in such a way that only those who have a high willingness-to-pay get them. Gottheil - Principles of Economics, 4 e 65

EXHIBIT 11 A RATIONING FUNCTION OF PRICE Gottheil - Principles of Economics, 4 e 66

EXHIBIT 11 B RATIONING FUNCTION OF PRICE Gottheil - Principles of Economics, 4 e 67