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Chapter 3 - Demand and supply. After studying this chapter, you should be able to: Describe the relationship between price and quantity demanded, describe the relationship between price and quantity supplied, diagram demand and supply relationships and identify market equilibrium,…
Introduction to Economics: Social Issues and Economic Thinking Wendy A Stock PowerPoint Prepared by Z Pan Chapter demand and supply Copyright © 2013 John Wiley & Sons, Inc / Photo Credit: © Sean Locke/iStockphoto After studying this chapter, you should be able to: Ø Ø Ø Describe the relationship between price and quantity demanded Describe the relationship between price and quantity supplied Ø Ø Describe factors that shift demand and supply Illustrate how changes in demand or supply affect market equilibrium Diagram demand and supply relationships and identify market equilibrium Copyright © 2013 John Wiley & Sons, Inc Markets Ø A market exists anywhere there are buyers willing to buy a good and sellers willing to sell it Could be: ØA physical location, like a grocery store, gas station, or bakery ØA cyberspace at sites like eBay, Amazon, Monster.com ØFormal or informal Copyright © 2013 John Wiley Demand Ø Ø Demand: The relationship between the price of a good and the quantity of the good that buyers are willing and able to buy at that price, ceteris paribus Quantity demanded: The amount of a good that buyers are willing and able to buy at a given price, ceteris paribus Copyright © 2013 John Wiley Demand Table and Demand Curve Copyright © 2013 John Wiley The Law of Demand Ø The law of demand: There is an inverse relationship between price and quantity demanded P Ø Qd Why? q Substitution Effect q Income Effect Copyright © 2013 John Wiley Income Effect and Substitution Effect Ø Ø The Income Effect implies that changes in the price of a good affect the amount of it that you can afford, which results in a change in quantity demanded, ceteris paribus The Substitution Effect implies that consumers will respond to a higher price of a good, ceteris paribus, by decreasing their quantity demanded of that good and substituting instead into goods whose prices have not changed Copyright © 2013 John Wiley Law of Diminishing Marginal Utility and Demand Curve Ø The Law of Diminishing Marginal Utility: The extra utility you get from consuming a good gets smaller as more of the good is consumed As a result, your willingness to pay for another unit of a good decreases as more of the good is consumed Ø The Law of Diminishing MU implies Demand Curve qHorizontal vs Vertical interpretation of Demand curve Copyright © 2013 John Wiley Change in Demand vs Change in Quantity Demanded Ø A change in quantity demanded results from a change in the price of the good It is represented by a movement along the demand curve Copyright © 2013 John Wiley Change in Demand vs Change in Quantity Demanded Ø A change in demand means that quantity demanded changes at each price As a result, the demand curve shifts Copyright © 2013 John Wiley 10 Market Equilibrium Ø Ø Ø Market equilibrium occurs at the price where quantity demanded is equal to quantity supplied The equilibrium price is the price at which the quantity demanded equals the quantity supplied The equilibrium quantity is the quantity bought and sold at the equilibrium price Copyright © 2013 John Wiley 26 Market Equilibrium Copyright © 2013 John Wiley 27 Market Adjusting toward Equilibrium Shortage - when quantity demanded is greater than quantity supplied P Example: S D $6.00 If P = $1, $5.00 then $4.00 QD = 21 loaves and $3.00 QS = loaves $2.00 resulting in a $1.00 shortage of 16 loaves $0.00 Shortage 10 15 20 25 30 35 Q Market Adjusting toward Equilibrium Shortage when quantity demanded is greater than quantity supplied P Facing a shortage, S D $6.00 sellers raise the price, $5.00 causing QD to fall and QS to rise, …which reduces the shortage $4.00 $3.00 $2.00 $1.00 Shortage $0.00 10 15 20 25 30 35 Q Market Adjusting toward Equilibrium Shortage when quantity demanded is greater than quantity supplied P Facing a shortage, S D $6.00 sellers raise the price, $5.00 causing QD to fall and QS to rise $4.00 $3.00 Prices continue to rise until market reaches equilibrium $2.00 $1.00 Shortage $0.00 10 15 20 25 30 35 Q Market Adjusting toward Equilibrium Surplus when quantity supplied is greater than quantity demanded P Example: S D Surplus $6.00 If P = $5, $5.00 then QD = loaves $4.00 $3.00 and QS = 25 loaves $2.00 $1.00 $0.00 resulting in a surplus of 16 loaves Q 10 15 20 25 30 35 Market Adjusting toward Equilibrium Surplus when quantity supplied is greater than quantity demanded P S Facing a surplus, D Surplus $6.00 sellers try to increase $5.00 sales by cutting the price $4.00 This causes QD to rise and QS to fall… …which reduces the surplus $3.00 $2.00 $1.00 $0.00 10 15 20 25 30 35 Q Market Adjusting toward Equilibrium Surplus when quantity supplied is greater than quantity demanded $6.00 P D $5.00 $4.00 Surplus S Facing a surplus, sellers try to increase sales by cutting the price Falling prices cause QD to rise and QS to fall $3.00 Prices continue to fall until market reaches equilibrium $2.00 $1.00 $0.00 10 15 20 25 30 35 Q Market Adjustment to Increase in Demand Copyright © 2013 John Wiley 34 Market Adjustment to Decrease in Demand Copyright © 2013 John Wiley 35 Market Adjustment to Increase in Supply Copyright © 2013 John Wiley 36 Market Adjustment to Decrease in Supply Copyright © 2013 John Wiley 37 Market Adjustment to Changes in Both Demand and Supply Copyright © 2013 John Wiley 38 Questions/Discussions A perennial problem at grocery stores and shopping malls is that they tend to have too few parking spaces Offer solutions to the problem that focus on (1) price changes; (2) a shift in demand; (3) a shift in supply Discussion: Which of your proposed solutions you think is the best? Why? Copyright © 2013 John Wiley 39 Key Concepts Demand Quantity demanded Law of demand Income effect Consumer substitution effect Law of diminishing marginal utility Change in quantity demanded Increase in demand Decrease in demand Normal goods Copyright © 2013 John Wiley 40 ... are willing and able to buy at a given price, ceteris paribus Copyright © 20 13 John Wiley Demand Table and Demand Curve Copyright © 20 13 John Wiley The Law of Demand Ø The law of demand: There... Copyright © 20 13 John Wiley 13 Factors That Shift Demand Curve Prices of Related Goods Ø Complements are goods that tend to be used together.(e.g iPods and iTunes downloads, bread and peanut butter)... peanut butter) Copyright © 20 13 John Wiley 14 Factors That Shift Demand Curve Tastes and Preferences If it becomes trendy or fashionable to have tattoos, the demand for tattoos increases If wearing