Understanding Individual Markets Supply Demand CHAPTER THREE Copyright

Understanding Individual Markets: Supply & Demand CHAPTER THREE Copyright Mc. Graw-Schill, Inc. 2002: Schill.

MARKETS DEFINED Copyright Mc. Graw-Schill, Inc. 2002: Schill.

MARKETS DEFINED POTENTIAL BUYERS Copyright Mc. Graw-Schill, Inc. 2002: Schill.

MARKETS DEFINED POTENTIAL BUYERS Copyright Mc. Graw-Schill, Inc. 2002: Schill. POTENTIAL SELLERS

MARKETS DEFINED POTENTIAL BUYERS POTENTIAL SELLERS MARKETS Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DEMAND DEFINED Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DEMAND DEFINED P $1 2 3 4 5 QD 80 55 35 20 10 DEMAND SCHEDULE Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DEMAND DEFINED P $1 2 3 4 5 QD 80 55 35 20 10 DEMAND SCHEDULE Various Amounts Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DEMAND DEFINED P $1 2 3 4 5 QD 80 55 35 20 10 DEMAND SCHEDULE Various Amounts A Series of Possible Prices …a specified time period …other things being equal Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • As Price Falls… Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • As Price Falls… …Quantity Demanded Rises Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • As Price Falls… …Quantity Demanded Rises • As Price Rises… Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • As Price Falls… …Quantity Demanded Rises • As Price Rises… …Quantity Demanded Falls Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • As Price Falls… …Quantity Demanded Rises • As Price Rises… …Quantity Demanded Falls An inverse relationship exists between price and quantity demanded Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • Diminishing Marginal Utility Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • Diminishing Marginal Utility • Income Effect Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • Diminishing Marginal Utility • Income Effect • Substitution Effect Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • • Diminishing Marginal Utility Income Effect Substitution Effect Demand Curve Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF DEMAND • • • Diminishing Marginal Utility Income Effect Substitution Effect Demand Curve Individual and Market Demand Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF DEMAND Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF DEMAND • Tastes and Preferences Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF DEMAND • Tastes and Preferences • Number of Customers Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF DEMAND • Tastes and Preferences • Number of Customers • Money Incomes – Normal (Superior) & Inferior Goods Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF DEMAND • Tastes and Preferences • Number of Customers • Money Incomes – Normal (Superior) & Inferior Goods • Prices of Related Goods – Substitutes & Complements Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF DEMAND • Tastes and Preferences • Number of Customers • Money Incomes – Normal (Superior) & Inferior Goods • Prices of Related Goods – Substitutes & Complements • Consumer Expectations Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Graphing Demand Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 Plot the Points 4 3 2 1 o 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

Graphing Demand Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 Plot the Points 4 3 P 1 2 1 o 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 • 5560 70 80 Quantity of Corn Q

Graphing Demand Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 Plot the Points 4 Etc. 3 2 1 o 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 3540 50 60 70 80 Quantity of Corn Q

Graphing Demand Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 4 3 2 1 o D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

SUPPLY DEFINED CORN P $1 2 3 4 5 QD 80 55 35 20 10 SUPPLY SCHEDULE Copyright Mc. Graw-Schill, Inc. 2002: Schill. CORN P QS $1 2 3 4 5 5 20 35 50 60

SUPPLY DEFINED CORN P $1 2 3 4 5 SUPPLY SCHEDULE QD 80 Various Amounts 55 35 20 10 Copyright Mc. Graw-Schill, Inc. 2002: Schill. CORN P QS $1 2 3 4 5 5 20 35 50 60

SUPPLY DEFINED CORN P $1 2 3 4 5 SUPPLY SCHEDULE CORN P QS QD 80 Various Amounts $1 5 55 2 20 35 A Series of Possible Prices 3 35 20 4 50 10 …a specified time period 5 60 …other things being equal Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF SUPPLY Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF SUPPLY • As Price Rises… Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF SUPPLY • As Price Rises… …Quantity Supplied Rises Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF SUPPLY • As Price Rises… …Quantity Supplied Rises • As Price Falls… Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF SUPPLY • As Price Rises… …Quantity Supplied Rises • As Price Falls… …Quantity Supplied Falls Copyright Mc. Graw-Schill, Inc. 2002: Schill.

LAW OF SUPPLY • As Price Rises… …Quantity Supplied Rises • As Price Falls… …Quantity Supplied Falls A direct relationship exists between price and quantity supplied Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF SUPPLY Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF SUPPLY • Resource Prices Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF SUPPLY • Resource Prices • Technique of Production Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF SUPPLY • Resource Prices • Technique of Production • Taxes & Subsidies Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF SUPPLY • • Resource Prices Technique of Production Taxes & Subsidies Prices of Other Goods Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF SUPPLY • • • Resource Prices Technique of Production Taxes & Subsidies Prices of Other Goods Price Expectations Copyright Mc. Graw-Schill, Inc. 2002: Schill.

DETERMINANTS OF SUPPLY • • • Resource Prices Technique of Production Taxes & Subsidies Prices of Other Goods Price Expectations Number of Sellers Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Graphing Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 Plot the Points CORN P QS 4 $1 2 3 4 5 3 2 1 o 5 10 20 30 40 50 60 70 80 Copyright Mc. Graw-Schill, Inc. 2002: Schill. Quantity of Corn Q 5 20 35 50 60

Graphing Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 Plot the Points CORN P QS 4 $1 2 3 4 5 3 2 1 o 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q 5 20 35 50 60

Graphing Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 Plot the Points CORN P QS Etc. 4 $1 2 3 4 5 3 2 1 o 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 3540 50 60 70 80 Quantity of Corn Q 5 20 35 50 60

Graphing Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 S CORN P QS 4 $1 2 3 4 5 3 2 1 o 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q 5 20 35 50 60

Graphing Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 S P QS 4 Combining with Demand 3 2 1 o CORN 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q $1 2 3 4 5 5 20 35 50 60

Demand & Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 S P QS 4 Market Clearing P 1 3 Equilibrium 2 1 o CORN D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 3540 Q 1 50 60 70 80 Quantity of Corn Q $1 2 3 4 5 5 20 35 50 60

Would these two AP Econ students rate Pizza the same? Would these two AP Econ students rate soap the same? Would these two AP Econ students rate panty hose the same? Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Consumer Surplus • If an ice cream cone costs $1. 50, but Shaun would pay $2. 00 for the ice cream cone than Shaun’s consumer surplus is $0. 50. • If a Hockey Stick costs 24. 50, and Jon or Adam would pay $30. 00 for a Hockey Stick than their consumer surplus is $5. 50 each or $11 in total. • They would feel good about their lucky purchases! All three boys have received some UTILITY! Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Price $40 $30 At a price of $30! $20 $10 Quantity Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Consumer Surplus in Total Producer Surplus in Total P S S P D Q Q

Dead Weight Loss P S Price Floor P 2 P 1 D Q 2 Q 1 Q

Correcting for Spillover Costs P Spillover s + Tax True Market Price! costs S New market price paid by consumers Dead Weight Loss From 2003 Essay! Price too Low! Amount of Tax needed to correct Negative externality! D 0 Copyright Schill 2003! Qd = Q s Over allocation – too much bad stuff Q

Demand & Supply Price of Corn P$5 S What if Demand Increases? 4 3 2 1 o D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

Demand & Supply Price of Corn P$5 S Increase in Quantity Supplied Increase in Demand 4 3 2 D’ 1 o D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

Demand & Supply Price of Corn P$5 S What if Demand Decreases? 4 3 2 D’ 1 o D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

Demand & Supply Price of Corn Decrease in Quantity Supplied P$5 4 3 S Decrease in Demand 2 1 o D’ 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn D Q

Demand & Supply Price of Corn P$5 S What if Supply Increases? 4 3 2 1 o D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

Demand & Supply Price of Corn P$5 Increase in Supply 4 S S’ Increase in Quantity Demanded 3 2 1 o D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

Demand & Supply Price of Corn P$5 S What if Supply Decreases? 4 3 2 S’ 1 o D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

Demand & Supply Decrease S’ Price of Corn P$5 in Supply S 4 Decrease in Quantity Demanded 3 2 1 o D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q

This Week in Econ! • Prepare for unit test!!! • Finish work on Chapters 1 - 2 – 3 • Practice manipulation of Demand Supply • Learn “Consumer surplus” and “Producer surplus” • Learn “Price ceilings” & “Price floors” Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Demand & Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 S P QS 4 Market Clearing P 1 3 Equilibrium 2 1 o CORN D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 3540 Q 1 50 60 70 80 Quantity of Corn Q $1 2 3 4 5 5 20 35 50 60

Consumer Surplus in Total Producer Surplus in Total P S S P D Q Q

Demand & Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 Surplus 4 CORN P QS $1 2 supplied than 3 demanded 4 5 more is being 3 2 1 o S At a $5 price D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q 5 20 35 50 60

Demand & Supply Price of Corn CORN P $1 2 3 4 5 QD 80 55 35 20 10 P$5 S At a $1 price 4 P QS $1 2 demanded than 3 supplied 4 Shortage 5 more is being 3 2 1 o CORN D 10 20 Copyright Mc. Graw-Schill, Inc. 2002: Schill. 30 40 50 60 70 80 Quantity of Corn Q 5 20 35 50 60

Market Equilibrium Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Market Equilibrium • Equilibrium Price & Quantity Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Market Equilibrium • Equilibrium Price & Quantity • Rationing Function of Prices Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Market Equilibrium • Equilibrium Price & Quantity • Rationing Function of Prices • Changes in Demand Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Market Equilibrium • • Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Market Equilibrium • • • Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Market Equilibrium • • • Equilibrium Price & Quantity Rationing Function of Prices Changes in Demand Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Applications. . . Price Ceiling P D The result of imposing a legal price ceiling is a. . . P S Copyright Mc. Graw-Hill, Inc. , 1999 S D Q

Applications. . . Price Ceiling P D P Pc Legal Price Ceiling S Copyright Mc. Graw-Hill, Inc. , 1999 S SHORTAGE D Q

Applications. . . Price Ceiling P D S With shortages comes. . . Rationing Problems and P Legal Price Ceiling Black Markets Pc S Copyright Mc. Graw-Hill, Inc. , 1999 SHORTAGE D Q

Applications. . . Price Ceiling Rent Controls Copyright Mc. Graw-Hill, Inc. , 1999

Applications. . . Price Ceiling Rent Controls Credit Card Interest Ceilings Copyright Mc. Graw-Hill, Inc. , 1999

Applications. . . Price Ceiling Rent Controls Credit Card Interest Ceilings Rock Concerts Copyright Mc. Graw-Hill, Inc. , 1999

Applications. . . The result of imposing a legal price floor is a. . . P D S P S Copyright Mc. Graw-Hill, Inc. , 1999 D Q Q

Applications. . . P The result of imposing a legal price floor is a. . . Pf D S SURPLUS Legal Price Floor P S Copyright Mc. Graw-Hill, Inc. , 1999 D Qd Q Qs Q

Market Equilibrium • • • Equilibrium Price & Quantity Rationing Function of Prices Complex Cases Changes in Demand Multiple Shifts Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied Copyright Mc. Graw-Schill, Inc. 2002: Schill.

Market Equilibrium • • • Equilibrium Price & Quantity Rationing Function of Prices Chapter Changes in Demand Conclusion Changes in Quantity Demanded Changes in Supply Changes in Quantity Supplied Copyright Mc. Graw-Schill, Inc. 2002: Schill.

• • • Key Terms • market demand schedule demand curve law of demand diminishing marginal utility income effects substitution effects determinants of demand normal good inferior good substitute good complementary good Copyright Mc. Graw-Schill, Inc. 2002: Schill. • • change in demand vs. quantity demanded change in supply vs. quantity supplied supply schedule determinants of supply surplus shortage equilibrium price and quantity rationing function of prices

Next: and the Chapter 4 Copyright Mc. Graw-Schill, Inc. 2002: Schill.