copyright © 2001 by houghton mifflin company. all rights reserved. 1 economics third edition by...

Copyright © 2001 by Houghton Mifflin Company. All rights reserved.

1

EconomicsTHIRD EDITION

By John B. Taylor Stanford University


2

Chapter 3

The Supply and Demand Model


3

Overview

The supply and demand model is fundamental to economics. Supply and demand are discussed as representing the interests of sellers and buyers, respectively. Next, supply and demand curves are shown. Shifts of the curves compared to movements along the curves are discussed. The model is then used to show the determination of price. The causes of shortages and surpluses are explained. Finally, market interference is discussed within the issues of price ceiling and price floors.


4

Teaching Objectives

1. Develop the demand curve. Differentiate between changes in demand and changes in quantity demanded.

2. Develop the supply curve. Differentiate between changes in supply and changes in quantity supplied. List the factors that shift the supply curve.

3. Show how the interaction of supply and demand determines the equilibrium price.


5

Teaching Objectives (Cont.)

4. Use supply and demand analysis to explain things students are interested in.

5. Show how price controls interfere with the market and create surpluses or shortages.

6. Discuss how shifts in the demand and/or the supply curve will change the equilibrium price. Shift curves simultaneously. Again, the "shifts" versus "movements along" distinction is very important but difficult for some students.


6

Demand

1a. Demand is a relation between the price of a good or service and the quantity of that good or service consumers are willing to buy at that price per unit of time, ceteris paribus. Demand curves relate price and quantity demanded


7

Demand

1b. The law of demand states that price and quantity demanded are negatively related.

Price is the independent variable and quantity demanded is the dependent variable. Price determines quantity.


8

Figure 3.1The Demand Curve


9

Demand

1c. Demand is shown graphically by the demand curve – see Figure 3.1. We relate the negative slope to the inverse relationship in the law of demand.

1d. Price affects quantity because changes in price create an incentive to substitute.


10

Shifts in the Demand Curve

1e. Demand curves shift around, indicating changes in other variables. A shift is called a change in demand. See Figure 3.2.

1e.1. The main determinants of demand are consumer preferences, information, income, price expectations, population, and the prices of related goods.


11

Figure 3.2A Shift in the Demand Curve


12

Shifts versus movements

1e.2. It is important to distinguish between shifts of the demand curve and movements along the demand curve. Use Figure 3.3.

Note: Changes in a variable not identified on the vertical axis shift the function, whereas changes in the listed variable cause movement along the given function.


13

Figure 3.3Shifts versus Movements Along the Demand Curve


14

2. Supply

2a. Supply is a relation between the price of a good or service and the quantity of the good or service a supplier is willing to sell at that price, ceteris paribus.

2b. The law of supply states that price and quantity supplied are positively related. This is shown in Table 3.2.


15

Figure 3.4The Supply Curve


16

Supply

2c. As with demand, price creates an incentive to increase the quantity supplied as price increases.

Again, price is the independent variable and quantity supplied is the dependent variable. Relate this to the issue of causality discussed earlier. Figure 3.4 gives the supply curve

The positive slope is due to the positive relationship in the law of supply.


17

Shifts in Supply Curve

2d. Supply curves shift around, indicating changes in other variables. See Figure 3.5. A shift is called a change in supply.

2d.1. The principal determinants of supply are the state of technology, the price of inputs, price expectations, the number of sellers, and other things that affect costs such as taxes, subsidies, and regulations.


18

Figure 3.5A Shift in the Supply Curve


19

Shifts versus Movements

• 2e. Figure 3.6 to shows the difference between movements along the supply curve and shifts in it.

• Movements are due to changes in non-price determinants of supply while movements are due to price changes (variable on the vertical axis).


20

Figure 3.6Shifts versus Movements Along the Supply Curve


21

Figure 3.7Overview of Supply and Demand


22

3. Market Equilibrium: Combining Supply and Demand

• 3a. The model of supply and demand is used to explain the determination of market price. Use Table 3.3 and Figure 3.7.

3b. Price adjusts to differences in quantity demanded and quantity supplied. A shortage indicates a willingness on the part of consumers to pay sellers higher prices. A surplus indicates a willingness on the part of sellers to lower prices.

3c. Price reaches equilibrium when quantity demanded equals quantity supplied, ceteris paribus.


23

Figure 3.8Equilibrium Price and Equilibrium Quantity


24

Equilibrium

Note: Price adjustment represents movements along the curves and not shifts of the curves.

3d. Shifts in the demand and/or the supply curve may result in a price adjustment. Figures 3.8 and 3.9 will be useful.


25

4. Using the Supply and Demand Model: A Case Study

• 4a. Figures 3.11, 3.12, and 3.13 show the effects of shifts in the demand and supply of peanuts on the price of peanuts. This example shows the confusion between movements along the demand curve and shifts in the demand curve. See Figure 3.10.


26

Figure 3.9Effects of a Shift in Demand


27

Figure 3.10Effects of a Shift in Supply


28

5. Interference with Market Prices

• 5a. One form of government interference with the market process is the use of price controls. Price ceilings keep prices from rising, whereas price floors keep prices from falling.

5b. Price ceilings are always associated with shortages because the ceiling keeps the price from rising to equilibrium. Thus, the quantity demanded always exceeds the quantity supplied. Rent controls are a classic example. Black markets usually develop. Use Figure 3.14.

5c. Price floors are associated with surpluses. Use Figure 3.15. Governments must purchase the surplus to support the price.


29

Figure 3.11Peanut Production in the United States


30

Figure 3.12Supply and Demand for Peanuts


31

Figure 3.13Effects of a Drought in the Southeast


32

Figure 3.14Predicted Effects of an Increase in the Peanut Quota

copyright © 2001 by houghton mifflin company. all rights reserved. 1 economics third edition by...

Documents

demand curve slide

demand curves

supply curve slide

houghton mifflin company

demand model slide

demand analysis

demand andor

supply curves