Embed Size (px)
Citation preview
1 of 46
Chapter Outline andLearning Objectives
CH
AP
TE
R
3
3.1 The Demand Side of the Market
3.2 The Supply Side of the Market
3.3 Market Equilibrium: Putting Demand and Supply Together
3.4 The Effect of Demand and Supply Shifts on Equilibrium
Where Prices Come From: The Interaction of Demand and Supply
2 of 46
Demand for tablet computers• How many tablets do consumers want to buy?
• Affected by price of the tablets• Affected by other factors, including prices of other goods
Supply of tablet computers• How many tablets are producers willing to sell?
• Affected by price of the tablets• Affected by other factors, including prices of other goods
What determines the price of a tablet computer?
3 of 46
Discuss the variables that influence demand.
3.1 LEARNING OBJECTIVE
The Demand Side of the Market
4 of 46
Demand Schedule:Table showing how many of a product will be purchased at various prices.
Demand Curve:Graphical representation of demand schedule.
Price on y-axis.
Quantity demanded on x-axis.
Figure 3.1
Demand
5 of 46
Law of Demand:As price changes, quantity demanded changes in opposite direction, ceteris paribus.
Implication:Demand curve slopes downward
Ceteris Paribus:Latin phrase meaning “all else equal”
Figure 3.1
Demand
6 of 46
Figure 3.2A change in something other than price that affects demand causes the entire demand curve to shift.
A shift to the right (D1 to D2) is an increase in demand.
A shift to the left (D1 to D3) is a decrease in demand.
Changes in demand
7 of 46
Figure 3.2As the demand curve shifts, the quantity demanded is likely to change, even if the price doesn’t change.
The quantity demanded changes at every possible price.
P1
Q3 Q1 Q2
Changes in demand
8 of 46
Income of consumers
Increase in income increases demand if product is normal, decreases demand if product is inferior.
Price of related goods
Increase in price of related good increases demand if products are substitutes, decreases demand if products are complements
Tastes and preferences
Population and demographics
Expected future prices
What would cause a change in demand?
9 of 46
Normal goods:Goods for which the demand increases as income rises, and decreases as income falls
Examples: Clothing
Restaurant meals
Vacations
Inferior goods:Goods for which the demand decreases as income rises, and increases as income falls
Examples: Second-hand clothing
Ramen noodles
Are tablet computers normal or inferior goods?
Probably normal
Effect of increase in income, if good is normal
Effect of increase in income, if good is inferior
Changes in demand: consumer incomes
10 of 46
Substitutes:Goods and services that can be used forthe same purpose
Examples: Big Mac and Whopper
Ford F-150 and Dodge Ram
Jeans and Khakis
Complements:Goods and services that are consumed together
Examples: Big Mac and McDonald’s fries
Hot dogs and hot dog buns
Left shoes and right shoes
Effect on demand for Big Macs, if price of Whopper
increases
Effect on demand for Big Macs, if price of McDonald’s
fries increases
Changes in demand: Price of related goods
11 of 46
If consumers’ tastes or preferences change, they may buy more or less of the product
Example:
If consumers become more concerned about eating healthily, they might decrease their demand for fast food
Effect on demand for fast food, if consumers want to eat
healthy
Increases in the number of people buying something will increase the amount demanded
Example: An increase in the elderly population increases the demand for medical care
Effect on demand for medical care, as the population ages
Changes in demand: Tastes and preferences
Changes in demand: Population and demographics
12 of 46
Consumers decide which products to buy and when to buy them.• Future products are substitutes for
current products• An expected increase in the price
tomorrow increases demand today.• An expected decrease in the price
tomorrow decreases demand today.
Example: If you found out the price of gasoline would go up tomorrow, you would increase your demand today.
Effect on today’s gasoline demand, if price will rise tomorrow
Changes in demand: Expected future prices
13 of 46
Apple’s policy on speculation about future products
Makingthe
Connection
Apple strongly discourages its employees from speculating about when a new model will appear. Why?
Suppose a customer learns that a new iPad model will be available next month.
• The new model is a potential substitute for the current model
• The price of the current model will likely fall next month
• Both effects decrease current demand (bad for Apple!)
14 of 46
Figure 3.3
A change in the price of the product being examined causes a movement along the demand curve.This is a change in quantity demanded.
Any other change affecting demand causes the entire demand curve to shift.This is a change in demand.
Change in demand vs. change in quantity demanded
15 of 46
Discuss the variables that influence supply.
3.2 LEARNING OBJECTIVE
The Supply Side of the Market
16 of 46
Figure 3.4Supply Schedule:Table showing how many of a product will be available for purchase at various prices.
Supply Curve:Graphical representation of supply schedule.
Price on y-axis.
Quantity demanded on x-axis.
Supply schedule and supply curve
17 of 46
Figure 3.4
Law of Supply:As price changes, quantity supplied changes in the same direction, ceteris paribus.
Implication:supply curve slopes upward
Law of supply
18 of 46
Figure 3.5
A change in something other than price that affects supply causes the entire supply curve to shift.
A shift to the right (S1 to S3) is an increase in supply.
A shift to the left (S1 to S2) is a decrease in supply.
Changes in supply
19 of 46
Figure 3.5
As the supply curve shifts, the quantity supplied is likely to change, even if the price doesn’t change.
The quantity supplied changes at every possible price.
P1
Q2 Q1 Q3
Changes in supply
20 of 46
Price of inputs
Technological change
Prices of substitutes in production
Number of firms in the market
Expected future prices
What would cause a change in supply?
21 of 46
Inputs are things used in the production of a good or service.
Examples of inputs for tablet computers:
Computer processor
Plastic housing
Labor
An increase in the price of an input decreases the profitability of selling the good, causing a decrease in supply.
A decrease in the price of an input increases the profitability of selling the good, causing an increase in supply.
Effect of an increase in the price of input goods
Effect of a decrease in the price of input goods
Changes in supply: Price of inputs
22 of 46
A firm may experience a positive or negative change in its ability to produce output given a fixed amount of inputs.
Examples:
A new, more productive variety of wheat would increase the supply of wheat.
Governmental restrictions on land use for agriculture might decrease the supply of wheat.
Changes raise or lower firms’ costs, hence their supply of the good.
Effect of a positive change in technology
Effect of a negative change in technology
Changes in supply: Technological change
23 of 46
Many firms can produce and sell more than one product.
Example:
An Illinois farmer can plant corn or soybeans. If the price of soybeans rises, he will plant (supply) less corn.
Effect on the supply of corn, of an increase in the price of
soybeans
Effect of a increase in the number of firms
More firms in the market will result in more product available at a given price (greater supply).
Fewer firms → supply decreases.
Changes in supply: Prices of substitutes in production
Changes in supply: Number of firms in the market
24 of 46
If a firm anticipates the price of its product will be higher in the future, it might decrease its supply today in order to increase it in the future.
What types of products could be “stored” like this?
Non-perishable products
Effect of an increase in future expected price of a
good
Changes in supply: Expected future prices
25 of 46
Figure 3.6A change in the price of the product being examined causes a movement along the supply curve.This is a change in quantity supplied.
Any other change affecting supply causes the entire supply curve to shift.This is a change in supply.
Change in supply vs. change in quantity supplied
26 of 46
Use a graph to illustrate market equilibrium.
3.3 LEARNING OBJECTIVE
Market Equilibrium: Putting Demand and Supply Together
27 of 46
Figure 3.8If the price of a tablet is $600, consumers want to buy 4 million per month, while producers want to sell 6 million.
This gives a surplus of 2 million tablets.
Prediction: sellers will compete amongst themselves, driving the price down.
Surplus
28 of 46
If the price of a tablet is $300, consumers want to buy 7 million per month, while producers want to sell 3 million.
This gives a shortage of 4 million tablets.
Prediction: sellers will realize they can increase the price and still sell as many tablets, so the price will rise.
Shortage
Figure 3.8
29 of 46
At a price of $500, consumers want to buy 5 million tablets, and producers want to sell 5 million.
There is no reason for the price to change.
Equilibrium price:$500
Equilibrium quantity:5 million per month
Figure 3.7
Market equilibrium
30 of 46
Price is determined by the interaction of buyers and sellers.
Neither group can dictate price in a competitive market (i.e. one with many buyers and sellers).
However changes in supply and/or demand will affect the price and quantity traded.
Who determines price, buyers or sellers?
31 of 46
Use demand and supply graphs to predict changes in prices and quantities.
3.4 LEARNING OBJECTIVE
The Effect of Demand and Supply Shifts on Equilibrium
32 of 46
Predictions about price and quantity in model require us to know supply and demand curves.
Typically, we know price and quantity, but do not know the curves that generate them.
The power of the supply and demand model is in its ability to predict directional changes in price and quantity traded.
Usefulness of the supply and demand model
33 of 46
Toshiba enters the tablet computer market, introducing the Thrive.
More tablets are available at any given price – an increase in supply from S1 to S2.
Equilibrium price falls from P1 to P2.
Equilibrium quantity rises from Q1 to Q2.
The effect of shifts in supply on equilibrium
Figure 3.9
34 of 46
Figure 3.9
The effect of shifts in supply on equilibrium
By how much will price fall? By how much will quantity rise?
We cannot say, without knowing more information.
For now, we can only predict that price will fall and quantity traded will rise.
35 of 46
Figure 3.10Consumer incomes increase. What happens to equilibrium in the tablet market?
Tablets are normal goods, so as income rises, demand rises(D1 to D2).
Equilibrium price rises (P1 to P2).
Equilibrium quantity rises (Q1 to Q2).
The effect of shifts in demand on equilibrium
36 of 46
Table 3.3Supply Curve Unchanged
Supply Curve Shifts to the Right
Supply Curve Shifts to the Left
Demand Curve Unchanged
Q unchangedP unchanged
Q ↑P ↓
Q ↓P ↑
Demand Curve Shifts to the Right Q ↑
P ↑
Demand Curve Shifts to the Left
Q ↓P ↓
Effects of shifts in demand and supply
37 of 46
The Falling Price of Blu-ray PlayersMaking
the
Connection
From 2006 to 2010, the price of Blu-ray players fell from almost $1000 to about $120, while the number of Blu-ray players traded increased dramatically.
What best explains this change?A: Increase in demandB: Decrease in demandC: Increase in supplyD: Decrease in supply
Can you show this change on a supply-and-demand diagram?
38 of 46
The Falling Price of Blu-ray PlayersMaking
the
Connection
Supply increased as additional firms started manufacturing Blu-ray players and input costs fell.
39 of 46
Suppose supply and demand both increase.
What does our model predict?
S↑ ( P↓ and Q↑ )
D↑ ( P↑ and Q↑ )
So we can be sure equilibrium quantity will rise; but the effect on equilibrium price is not clear.
Effect on price depends on how far each curve moves.
In this graph, demand moves more than supply.
Simultaneous shifts in supply and demand
40 of 46
Suppose supply and demand both increase.
What does our model predict?
S↑ ( P↓ and Q↑ )
D↑ ( P↑ and Q↑ )
So we can be sure equilibrium quantity will rise; but the effect on equilibrium price is not clear.
Effect on price depends on how far each curve moves.
In this graph, supply moves more than demand.
Simultaneous shifts in supply and demand
41 of 46
Supply Curve Unchanged
Supply Curve Shifts to the Right
Supply Curve Shifts to the Left
Demand Curve Unchanged
Q unchangedP unchanged
Q ↑P ↓
Q ↓P ↑
Demand Curve Shifts to the Right
Q ↑P ↑
Q ↑P effect uncertain
Q effect uncertainP ↑
Demand Curve Shifts to the Left
Q ↓P ↓
Q effect uncertainP ↓
Q ↓P effect uncertain
Effects of shifts in demand and supply
42 of 46
Over time, it is common for both supply and demand to shift.
The stronger of the two effects will determine the overall change in price and quantity.
In the Blu-ray example, demand for Blu-ray players increased from 2006 to 2010. But the supply effect was stronger.
How can we tell? Because we know the price fell; if the demand effect were stronger, the price would have risen.
Supply and demand shifts over time
43 of 46
Terminology: movement along the curve (caused by price change) vs. shifting the curve (caused by other changes).
Not moving curves far enough to be able to illustrate a change.
Exaggerating curve shifts is okay.
Incompletely labeling diagrams.
Use your arrows!
Common misconceptions to avoid
44 of 46
Shifting a curve, then shifting another curve due to the resulting price change.
The price change does not cause a further shift in demand or supply.
Being certain of both price and quantity changes when both demand and supply curves move.
Only one of these effects will be certain.
Common misconceptions to avoid
