The Market Forces of Supply and Demand
C H A P T E R
4 The M arket Forces of The M arket Forces of
Supply and Demand Supply and Demand P R I N C I P L E S O F P R I N C I P L E S O F conomics
E N. Gregory N. Gregory Mankiw Mankiw
Premium PowerPoint Slides © 2009 South-Western, a part of Cengage Learning, all rights reserved by Ron Cronovich In this chapter, In this chapter, look for the answers to these questions: look for the answers to these questions:
§ What factors affect buyers’ demand for goods? § What factors affect sellers’ supply of goods? How do supply and demand determine the price of
§ a good and the quantity sold?
§ How do changes in the factors that affect demand or supply affect the market price and quantity of a good?
§ How do markets allocate resources?
1 M arkets and Competition A market is
§ A competitive market is one with many buyers
§ and sellers, each has In a market:
§ perfectly competitive § §
In this chapter, we assume markets are perfectly § competitive.
2 THE MARKET FORCES OF SUPPLY AND DEMAND
Demand The quantity demanded of any good
§ Law of demand : the claim that
§ THE MARKET FORCES OF SUPPLY AND DEMAND
3 The Demand Schedule
Price Quantity
: § Demand schedule
of of lattes lattes demanded $0.00
16
1.00
14
2.00
12
3.00
10 Example:
4.00
8
§ Helen’s demand for lattes.
5.00
6
6.00
4 Notice that Helen’s
§ preferences obey the Law of Demand.
THE MARKET FORCES OF SUPPLY AND DEMAND
4 Helen’s Demand Schedule & Curve
Price Quantity
Price of Lattes of of lattes
lattes demanded
$6.00
$0.00
16
$5.00
1.00
14
$4.00
2.00
12
$3.00
3.00
10
4.00
8
$2.00
5.00
6
$1.00
6.00
4
$0.00 Quantity
5
10
15 of Lattes
5 THE MARKET FORCES OF SUPPLY AND DEMAND
M arket Demand versus Individual Demand The quantity demanded in the market
§ Suppose Helen and Ken are the only two buyers in the
§ d
Latte market. (Q = quantity demanded) d d d
Price Helen’s Q Ken’s Q Market Q $0.00
16
8
1.00
14
7
2.00
12
6
3.00
10
5
4.00
8
4
5.00
6
3
6.00
4
2
6 The M arket Demand Curve for Lattes d
Q P P
(Market) $6.00
$0.00
24 $5.00
1.00
21
2.00
18 $4.00
3.00
15 $3.00
4.00
12 $2.00
5.00
9 $1.00
6.00
6 $0.00
Q
5
10
15
20
25 THE MARKET FORCES OF SUPPLY AND DEMAND
7 Demand Curve Shifters The demand curve shows how price affects
§ quantity demanded, other things being equal.
These “other things” are non-price determinants § of demand (i.e., Changes in them shift the D curve…
§
8 THE MARKET FORCES OF SUPPLY AND DEMAND
§ Increase in # of buyers
THE MARKET FORCES OF SUPPLY AND DEMAND
9 Demand Curve Shifters: # of Buyers
10
Demand Curve Shifters: Income
§ Increase in income causes (Demand for an inferior good is ____________ related to income. An increase in income shifts D curves for inferior goods to the _______.)
Demand for a normal good is _____________ related to income.
11 §
Demand Curve Shifters: # of Buyers
Then, at each P, Q d will increase (by 5 in this example).
Q Suppose the number of buyers increases.
30 P
25
20
15
10
5
$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00
THE MARKET FORCES OF SUPPLY AND DEMAND
THE MARKET FORCES OF SUPPLY AND DEMAND
12 §
Two goods are substitutes if §
Example: §
Other examples: Demand Curve Shifters: Prices of Related Goods
THE MARKET FORCES OF SUPPLY AND DEMAND
13 §
Two goods are complements if §
Example: §
Other examples: Demand Curve Shifters: Prices of Related Goods
THE MARKET FORCES OF SUPPLY AND DEMAND
14 § Anything that causes a shift in tastes toward a good
§ Example: The Atkins diet became popular in the ’90s, caused an increase in demand for eggs, shifted the egg demand curve to the right.
Demand Curve Shifters: Tastes
THE MARKET FORCES OF SUPPLY AND DEMAND
Demand Curve Shifters: Expectations Expectations affect consumers’ buying
§ decisions.
Examples: §
THE MARKET FORCES OF SUPPLY AND DEMAND
15
1 A C T I V E L E A R N I N G A C T I V E L E A R N I N G Demand Curve Demand Curve Draw a demand curve for music downloads.
1
What happens to it in each of the following scenarios? Why? A.
The price of iPods falls B.
The price of music downloads falls C.
The price of CDs falls
17
1 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
1
A. Price of iPods falls
A. Price of iPods falls
Price of music down- loads
Quantity of music downloads
18
1 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
1
B. Price of music downloads falls
B. Price of music downloads falls
Price of music down- loads
Quantity of music downloads
19
1
1 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
C. Price of CDs falls
C. Price of CDs falls
Price of music down- loads
Quantity of music downloads
20 Supply The quantity supplied of any good
§ Law of supply :
§
21 THE MARKET FORCES OF SUPPLY AND DEMAND
The Supply Schedule
Price Quantity
Supply schedule : §
of of lattes lattes supplied $0.00
2.00
6
3.00
9 Example:
§ Starbucks’ supply of lattes.
4.00
12
5.00
15 Notice that Starbucks’
§
6.00
18
supply schedule obeys the Law of Supply.
THE MARKET FORCES OF SUPPLY AND DEMAND
22 Starbucks’ Supply Schedule & Curve
Price Quantity of of lattes
P
lattes supplied $6.00
$0.00 $5.00
1.00
3 $4.00
2.00
6 $3.00
3.00
9
4.00
12 $2.00
5.00
15 $1.00
6.00
18 $0.00
Q
5
10
15 THE MARKET FORCES OF SUPPLY AND DEMAND
23 M arket Supply versus Individual Supply § The quantity supplied in the market is § Suppose Starbucks and Jitters are the only two s sellers in this market. (Q = quantity supplied) s
Price Starbucks Jitters Market Q
- $0.00 =
1.00 3 + 2 =
5
2.00
6 4 =
10 +
9 6 =
- 3.00
15
4.00
12 8 + =
20
5.00
15 10 + =
25
18 12 =
- 6.00
30
24
The M arket Supply Curve S Q P
(Market)
P
$0.00 $6.00
1.00
5 $5.00 $4.00
3.00
15
4.00
20 $3.00
5.00
25 $2.00
6.00
30 $1.00 $0.00 Q 5 10 15 20 25
30
35 THE MARKET FORCES OF SUPPLY AND DEMAND
25 Supply Curve Shifters
The supply curve shows how price affects § quantity supplied, other things being equal.
THE MARKET FORCES OF SUPPLY AND DEMAND
26 Supply Curve Shifters: Input Prices Examples of input prices:
§ § A fall in input prices
27 THE MARKET FORCES OF SUPPLY AND DEMAND
Supply Curve Shifters: Input Prices Suppose the
P price of milk falls.
$6.00
At each price,
$5.00 $4.00 Lattes supplied
will increase
$3.00
(by 5 in this
$2.00 example). $1.00 $0.00 Q 5 10 15 20 25
30
35 THE MARKET FORCES OF SUPPLY AND DEMAND
28 Supply Curve Shifters: Technology
Technology determines how much inputs are § required to produce a unit of output.
THE MARKET FORCES OF SUPPLY AND DEMAND
29 Supply Curve Shifters: # of Sellers An increase in the number of sellers
§
30 THE MARKET FORCES OF SUPPLY AND DEMAND
Supply Curve Shifters: Expectations Example:
§ Events in the Middle East lead to expectations of higher oil prices.
In response, § §
In general, sellers may adjust supply when their
- expectations of future prices change. (
- If good not perishable)
THE MARKET FORCES OF SUPPLY AND DEMAND
31
2 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
2
Supply Curve Supply Curve Draw a supply curve for tax return preparation software.
What happens to it in each of the following scenarios? A.
Retailers cut the price of the software.
B. A technological advance
allows the software to be produced at lower cost.
C.
Professional tax return preparers raise the price of the services they provide.
33
2 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
2
A . Fall in price of tax return software A . Fall in price of tax return software
Price of tax return software
Quantity of tax return software
34 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
2
2 B. Fall in cost of producing the software
B. Fall in cost of producing the software
35 Price of
tax return software Quantity of tax return software
A C T I V E L E A R N I N G A C T I V E L E A R N I N G
3
3 C. Professional preparers raise their price
C. Professional preparers raise their price
36 Price of
tax return software Quantity of tax return software
THE MARKET FORCES OF SUPPLY AND DEMAND
37
$0.00 $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 5 10 15 20 25 30 35
P Q Supply and Demand Together
D S Equilibrium :
P D S
$6.00
D S P Q Q
$5.00 $0
24
1
21
5 $4.00
2
18
10 $3.00
3
15
15 $2.00
4
12
20 $1.00
5
9
25 $0.00
Q
6
6
30 5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
38 Surplus
P D S Example:
$6.00
If P = $5,
$5.00 $4.00 $3.00 $2.00 $1.00 $0.00
Q
5 10 15 20 25 30 35
THE MARKET FORCES OF SUPPLY AND DEMAND
40 Shortage P
Example: D S
$6.00
If P = $1,
$5.00 $4.00 $3.00 $2.00 $1.00 $0.00
Q
5 10 15 20 25 30 35
43 THE MARKET FORCES OF SUPPLY AND DEMAND
Three Steps to A nalyzing Changes in Eq’m To determine the effects of any event,
THE MARKET FORCES OF SUPPLY AND DEMAND
46 EXA M PLE 1: A Shift in Demand
EVENT TO BE
ANALYZED: P Increase in price of gas.
STEP 1: STEP 2: STEP 3:
Q THE MARKET FORCES OF SUPPLY AND DEMAND
48 Terms for Shift vs. M ovement Along Curve
§ Change in supply: occurs when a non-price determinant of supply changes (like technology or costs)
§ Change in the quantity supplied: occurs when
§ Change in demand: occurs when Change in the quantity demanded:
§ a movement along a fixed D curve occurs when
50
EXA M PLE 2: A Shift in Supply EVENT: New technology
P
reduces cost of producing hybrid cars. S
1 STEP 1:
P STEP 2:
1 STEP 3:
D
1 Q Q
1 THE MARKET FORCES OF SUPPLY AND DEMAND
51 EXA M PLE 3: A Shift in Both Supply and Demand EVENTS:
P
price of gas rises AND S S new technology reduces
1
2
production costs
STEP 1: P
2 Both curves shift.
P
1 STEP 2: Both shift to the right.
D
STEP 3:
2 D
1 Q rises, but Q Q Q
1
2 THE MARKET FORCES OF SUPPLY AND DEMAND
52 EXA M PLE 3: A Shift in Both Supply and Demand EVENTS:
P
price of gas rises AND S S new technology reduces
1
2
production costs STEP 3 , cont.
P
1 P
2 D
2 D
1 Q Q Q
1
2
53 THE MARKET FORCES OF SUPPLY AND DEMAND
3 A C T I V E L E A R N I N G A C T I V E L E A R N I N G Shifts in supply and demand Shifts in supply and demand
3
Use the three-step method to analyze the effects of each event on the equilibrium price and quantity of music downloads.
Event A: A fall in the price of CDs Event B: Sellers of music downloads negotiate a reduction in the royalties they must pay for each song they sell. Event C: Events A and B both occur.
54
3 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
3
A. Fall in price of CDs
A. Fall in price of CDs The market for music downloads
P
S
1 P
1 D
1 Q Q
1
55
3 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
3
B. Fall in cost of royalties The market for music downloads
B. Fall in cost of royalties
P
S
1 P
1 D
1 Q Q
1
56
3 A C T I V E L E A R N I N G A C T I V E L E A R N I N G
3
C. Fall in price of CDs and and fall in cost of royalties fall in cost of royalties
C. Fall in price of CDs
57 CONCLUSION:
How Prices Allocate Resources One of the Ten Principles from Chapter 1:
§ Markets are usually a good way to organize economic activity.
§ In market economies,
THE MARKET FORCES OF SUPPLY AND DEMAND
58