mcgraw-hill/irwin ©2008 the mcgraw-hill companies, all rights reserved supply and demand chapter 3
TRANSCRIPT
McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies, All Rights Reserved
Supply and Demand
Chapter 3
2
3 – Supply and Demand
1 – Market Participants & the Circular Flow Model
2 – Demand
3 – Supply
4 – Equilibrium & Market Outcomes
3
1 – Market Participants
&
the Circular Flow Model
4
Markets
Markets exist whenever/wherever an economic exchange takes place:
goods/services (in product markets), or…
resources (in factor markets).
5
Specialization and Exchange
Markets allow specialization for efficiency.
6
Maximizing Behavior in the Market Place
Consumers: strive to maximize their utility (satisfaction) given limited resources.
Businesses: strive to maximize profits by using resources efficiently in producing goods.
Government: strives to maximize the general welfare of society.
These basic goals explain most market activity.
7
The Circular Flow Model
A model of the market system.
Four different groups participate in our economy:
Consumers
Business firms
Government
Foreigners
8
The Circular Flow (pg. 44)
Internationalparticipants
Consumers
Internationalparticipants
BusinessFirms
Governments
Productmarkets
Factormarkets
Goods and servicessupplied
Factors ofproduction supplied
Goods and servicesdemanded
Factors ofproduction demanded
9
Supply and Demand
Every market transaction must have:a buyer (demand), and …
a seller (supply).
LO1
10
2 – Demand
11
Demand
Demand:the ability and willingness to buy specific quantities of a good…
at alternative prices…
in a given time period, …
(ceteris paribus.)
*** Quantity demanded is a FUNCTION of price. ***
LO1
12
Demand Schedule and Curve (pg. 47)
2 4 6 8 10 12 14 16 18 20 (tutoring , hours) Quantity
PRICE$5045403530252015105
0
A
B
CD
E
F
GH
I
LO1
13
Demand
The law of demand:
- the quantity of a good demanded is inversely related to its price …
(…in a given time period…)
(…ceteris paribus).
LO1
14
Demand
Demand, technically:
an expression of consumer buying intentions –
a willingness and ability to buy -
not a statement of actual purchases.
But…
Informally we measure demand by sales.
LO1
16
Construction of the Market Demand Curve (pg. 52)
+ + =
Tom’s demand curve
40
30
20
10
0 4 8 12 16
$50
Price
+
George’s demand curve
0 4 8 12 16 20 24 28
Lisa’s demand
curve
0 4 8 12
My demand curve
0 4 8 12
LO1
17
Construction of the Market Demand Curve (pg. 52)
AB
CD
E
FG
I
$50
40
30
20
10
0 4 12 20 28 36
The market demand curve
Pric
e
Quantity Demanded
H
=
LO1
18
Hang on …
…Now it starts getting tricky:
19
Ceteris Paribus
Ceteris paribus …
…the assumption that nothing else is changing.
But what if something else does change…?
LO2
20
Shifts in Demand (pg. 50)
Various factors (determinants) can shift the entire curve (relationship).
21
Shifts in Demand (pg. 50)
This changes the quantity demanded at all prices.
22
Shifts in Demand (pg. 50)
(It rewrites the function between price and quantity demanded.)
23
Shifts in Demand (pg. 50)
Decrease in demand = shift to the left.
Increase in demand = shift to the right.
25
Determinants of Demand
Determinants of market demand include:
Tastes — desire for this (and other) goods.
Income — of the consumer.
Number of buyers.
Other goods — their availability and price.
Expectations — for income, prices, tastes, etc.
LO3
26
Determinants of Demand
Tastes — desire for this (and other) goods:
Taste/Desire ↑ = Demand ↑ (shift right).
Taste/Desire ↓ = Demand ↓ (shift left).
LO3
27
Tastes — desire for this (and other) goods
28
Determinants of Demand
Income — of the consumer:Income ↑ = Demand ↑ (shift right).
Income ↓ = Demand ↓ (shift left).
LO3
29
Income — of the consumer:
30
Determinants of Demand
Number of buyers:# of buyers ↑ = Demand ↑ (shift right).
# of buyers ↓ = Demand ↓ (shift left).
LO3
31
Number of buyers:
The Baby Boom
32
Determinants of Demand
Other goods — their availability and price:
1. Substitute goods:Can be used in place of each other.
LO3
33
Determinants of Demand
1. Substitute goods:Price of substitute good ↑ = Demand ↑ (shift right).
Price of substitute good ↓ = Demand ↓ (shift left).
LO3
34
Determinants of Demand
1. Complimentary goods:Price of complimentary good ↑ = Demand ↓ (shift left).
Price of complimentary good ↓ = Demand ↑ (shift right).
LO3
35
Determinants of Demand
Other goods — their availability and price:
2. Complimentary goods:Are used together.
LO3
36
Determinants of Demand
Expectations — for income, prices, tastes, etc.:
The expectation that something is going to happen generally has the same effect on demand as that thing actually happening.
LO3
37
Expectations
40
Movements vs. Shifts
Changes in quantity demanded: movements on a demand curve, …
in response to price changes for that good.
The curve does not shift.
Changes in demand:demand curve shifts, due to:
changes in tastes, income, other goods, or expectations.
LO3
41
Movements vs. Shifts
PRICE
40
3530252015
1050
$45
2 4 6 8 10 12 14 16 18 20 22 Quantity
D1 = initial demand
d1
Movement along curve
g1
Shift in demand
D2 increased demand
d2
LO3
42
3 – Supply
43
Market Supply (pg. 54)
LO1
44
Supply
Supply:
the ability and willingness to SELL (produce) specific quantities of a good…
at alternative prices…
in a given time period…
(ceteris paribus).
LO1
45
Supply
Market supply:
the total quantities of a good that all sellers combined are willing and able to sell at alternative prices…
(in a given time period, ceteris paribus).
LO1
46
Market Supply (pg. 54)
Quantity Supplied By:
Price (per hour) Ann + Bob + Cory = Market
j $50 94 35 19 148
i 45 93 33 14 140
h 40 90 30 10 130
g 35 86 28 0 114
f 30 78 12 0 90
e 25 53 9 0 62
d 20 32 7 0 39
c 15 20 0 0 20
b 10 10 0 0 10
LO1
47
Market Supply (pg. 54)
LO1
48
Market Supply (pg. 54)
LO1
49
The Law of Supply
The law of supply:
- the quantity of a good supplied is directly related to its price …
(…in a given time period…)
(…ceteris paribus).
50
Market Supply
Technically…Market supply is an expression of sellers’ intentions – an offer to sell – not a statement of actual sales.***
LO1
51
Determinants of Supply
The determinants of market supply:
Factor (resource) costs
Technology
Number of sellers
Other goods***
Taxes, subsidies, & regulation
Expectations
LO3
52
Shifts of Supply
Changes in the quantity supplied — movements along the supply curve in response to a change in price.
Changes in supply — shifts of the whole supply curve.
LO3
53
Shifts of Supply
Increase in supply — shift to the right.
Decrease in supply — shift to the left.
LO3
54
Determinants of Supply
The determinants of market supply:
LO3
55
Determinants of Supply
Factor (resource) costs:
Costs ↓ = Supply ↑
Costs ↑ = Supply ↓
LO3
56
Factor costs
57
Determinants of Supply
Technology
New Tech = Costs ↓
LO3
= Supply ↑
58
New Technology
60
Determinants of Supply
Number of sellers:
Number of sellers ↑ = Supply ↑
Number of sellers ↓ = Supply ↓
LO3
61
Number of Sellers
“China Brilliance produces a Chinese car that (gulp) looks good”by John Neff (RSS feed) on Feb 23rd 2006 at 12:30PM
62
Determinants of Supply
Other goods:
1. Producer Substitutes:
2. Producer Compliments:
LO3
63
Producer Substitutes
64
Determinants of Supply
1. Producer Substitutes:
- Price of pro. sub. ↑ = Supply ↓
- Price of pro. sub. ↓ = Supply ↑
LO3
65
Producer Compliments
66
Determinants of Supply
2. Producer Compliments:
- Price of pro. Comp. ↑ = Supply ↑
- Price of pro. Comp. ↓ = Supply ↓
LO3
67
Determinants of Supply
Taxes, subsidies, & regulation:
Taxes & regulation = higher costs
Subsidies = lower cost
LO3
68
Taxes, Subsidies, & Regulation:
69
Determinants of Supply
Producer expectations (esp. for profit):
Can drive supply ↑ or ↓
LO3
70
Determinants of Supply
The determinants of market supply:
Technology
Factor (resource) costs
Other goods***
Number of sellers
Taxes, subsidies, & regulation***
Expectations
LO3
71
4 – Equilibrium &
Market Outcomes
73
Equilibrium (pg. 56)
Markets naturally work toward equilibrium.
Market demand
Equilibrium price & quantity
Market supply$504540353025201510
5
0 25 50 75 100 125 Quantity39
Price
Shortage
yx
Surplus
LO2
74
Equilibrium (pg. 56)
Equilibrium price (“market clearing price”):
quantity demanded = quantity supplied.
The unique outcome at market equilibrium is efficient.
LO2
77
Surplus and Shortage (pg. 56)
Market surplus: emerges when the market price is above the equilibrium price.
(excess supply).
Market shortage: emerges when the market price is below the equilibrium price.
(excess demand).
LO2
78
Price Floors & Ceilings
Price FLOOR: Minimum price set by law.
Creates an artificial surplus if set above the market clearing price.
No effect if set below market equilibrium.
LO2
79
Price Floors & Ceilings (pg. 56)
Price FLOOR:
LO2
80
Price Floors & Ceilings
Price FLOOR: Minimum price set by law.
Creates an artificial surplus if set above the market clearing price.
No effect if set below market equilibrium.
Price CEILING: Maximum price set by law.
Creates an artificial shortage if set below the market clearing price.
No effect if set above market equilibrium.LO2
81
Surplus and Shortage (pg. 56)
Price CEILING:
LO2
86
The Invisible Hand
The market mechanism is the use of market prices and sales to signal desired outputs (or resource allocations).
Adam Smith characterized this market mechanism as the invisible hand.
LO2
87
Changes in Equilibrium
No equilibrium price is permanent.
The equilibrium price will change whenever supply or demand shifts.
i.e., when the determinants of supply and demand change.
LO3
88
Changes in EquilibriumDemand Shift (pg. 59)
25 50 75 100 Quantity
Price
$50
40
30
20
10
0
E1
Initial demand
Market supply
New demand
E2
LO3
89
Changes in Equilibrium Supply Shift (pg. 59)
25 50 75 100 Quantity
Price
$50
40
30
20
10
0
E3
E1
Initial demand
Market supply
LO3
McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies, All Rights Reserved
Supply and Demand
End of Chapter 3