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Mini-UnitMini-UnitDemand and SupplyAnd other crap I missed
IntroductionIntroduction
Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-2
They are small, thin and lightweight…
Some are not aware of their existence, while others allocate a lot of time and effort in obtaining them.
What are they? They are sports trading cards.
Most can be purchased for a few dollars or less, but many cost much more—up to thousands of dollars each!
In this chapter you will learn why the prices of different sports trading cards can vary so widely.
Supply and DemandSupply and DemandThe average price of an apartment-sized
condominium has often exceeded the average price of a standalone house?
The relative physical size of items does not determine the prices at which people exchange them for?
By using demand and supply you can develop a better understanding of why relative size of an item typically has little to do with the price at which it sells?
Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-3
MarketsMarketsMarkets
◦ Arrangements that individuals have for exchanging with one another
◦ Represent the interaction of buyers and sellers for goods and services
◦ Markets set the prices we pay and receive. Automobile market Health care market Labor market Stock market
Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-4
The Law of DemandThe Law of DemandDemand
◦A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant
Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-5
The Law of DemandThe Law of DemandLaw of Demand
◦Quantity demanded is inversely related to price, holding other factors constant.
Price Qd
Price Qd
Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-6
The Law of Demand The Law of Demand (cont'd)(cont'd)What are we holding constant?
◦Income
◦Tastes and preferences
◦Price of other goods
◦Many other factors
If any of these change, then the demand schedule will shift.
Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-7
The Demand ScheduleThe Demand Schedule
The demand schedule ◦ Table relating prices to quantity demanded
Demand Curve◦ A graphical representation of the demand
schedule
◦ Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal
Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-8
Figure 3-1 Figure 3-1 The Individual Demand The Individual Demand Schedule and the Individual Demand Schedule and the Individual Demand Curve, Panel (a)Curve, Panel (a)
Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-9
Combination Price per Starbucks coffee
Quantity of Starbucks Coffees consumed/year
A $5 10
B $4 20
C $3 30
D $2 40
E $1 50
Figure 3-1 Figure 3-1 The Individual Demand The Individual Demand Schedule and the Individual Demand Schedule and the Individual Demand Curve, Panel (b)Curve, Panel (b)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-10
Number of coffees per year
Pri
ce p
er
coff
ee
The Demand ScheduleThe Demand Schedule
Individual versus market demand curves
Market Demand
◦The demand of all consumers in the marketplace for a particular good or service
◦Summation at each price of the quantity demanded by each individual
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-11
Figure 3-2 Figure 3-2 The Horizontal The Horizontal Summation of Two Demand Summation of Two Demand Curves, Panel (a)Curves, Panel (a)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-12
Combination
Price per Starbucks coffee
Quantity of Starbucks Coffees consumed/year (me)
Quantity of Starbucks Coffees consumed/year (wife)
Total Quantity consumed
A $5 10 10 20
B $4 20 20 40
C $3 30 40 70
D $2 40 50 90
E $1 50 60 110
Figure 3-2 Figure 3-2 The Horizontal The Horizontal Summation of Two Demand Summation of Two Demand Curves, Panels (b), (c), (d)Curves, Panels (b), (c), (d)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-13
Figure 3-3 Figure 3-3 The Market Demand The Market Demand Schedule for Flash Memory Pen Schedule for Flash Memory Pen Drives, Panel (a)Drives, Panel (a)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-14
Combination Price per Starbucks coffee
Quantity of Starbucks Coffees consumed/year in millions(total population)
A $5 2
B $4 4
C $3 6
D $2 8
E $1 10
Figure 3-3 Figure 3-3 The Market Demand The Market Demand Schedule for Flash Memory Pen Schedule for Flash Memory Pen Drives, Panel (b)Drives, Panel (b)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-15
Number of coffees per year
Pri
ce p
er
coff
ee
Shifts in DemandShifts in DemandScenario
◦Imagine a news story runs on all networks claiming that Starbucks coffee is the only safe coffee shop open and all others have health care issues
If some factor other than price changes, we can show its effect by moving the entire demand curve, shifting the curve left or right.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-16
Figure 3-4 Figure 3-4 A Shift in the Demand CurveA Shift in the Demand Curve
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-17
Suppose the news runs a story on other unsafe coffee shops
Suppose Starbucks has major health code violations
Number of coffees per year
Pri
ce p
er
coff
ee
Shifts in DemandShifts in DemandDeterminants of demand
◦Income
◦Tastes and preferences
◦The prices of related goods Substitutes
Complements
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3-18
Shifts in Demand (cont'd)Shifts in Demand (cont'd)Substitutes
◦Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change.
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3-19
Shifts in Demand (cont'd)Shifts in Demand (cont'd)Complements
◦Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-20
Shifts in Demand (cont'd)Shifts in Demand (cont'd)Determinants of demand
◦Expectations Future prices
Income
Product availability
◦Market size (number of buyers)
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3-21
Normal and Inferior Goods & Normal and Inferior Goods & IncomeIncomeNormal Goods
◦Goods for which demand rises as income rises, most goods are normal goods
Inferior Goods
◦Goods for which demand falls as income rises
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3-22
Shifts in Demand (cont'd)Shifts in Demand (cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-23
The Determinants of DemandIncome: Normal Good
D1
Q/Units
D2D3
Price
Decrease in incomedecreases demand
Increase in incomeincreases demand
Shifts in Demand (cont'd)Shifts in Demand (cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-24
The Determinants of DemandIncome: Inferior Good
D1
Q/Units
Decrease in incomeincreases demand
Increase in incomedecreases demand
Price
D2D3
Shifts in Demand (cont'd)Shifts in Demand (cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-25
The Determinants of DemandTastes and Preferences
D1
Q/Units
Price
Hybrid vehicles• Increase in demand
D2
SUVs• Decrease in demand
D3
Shifts in Demand (cont'd)Shifts in Demand (cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-26
The Determinants of DemandPrice of Related Goods: Substitutes
D1
Q/Butter
Butter and Margarine• Price of both = $2/lb• Price of margarine
increases to $3/lb• Demand for butter
increases
D2
Price
Shifts in Demand (cont'd)Shifts in Demand (cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-27
The Determinants of DemandPrice of Related Goods: Complements
D1
Q/Speakers
Speakers and Amplifiers• Decrease the relative
price of amplifiers• Demand for speakers
increases
D2D3
Speakers and Amplifiers• Increase the relative
price of amplifiers• Demand for speakers
decreases
Price
Shifts in Demand (cont'd)Shifts in Demand (cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-28
The Determinants of DemandExpectations: Income, Future Prices
D1
Q/Units
A higher income or expectations of a higher future price will increase demand
D2D3
A lower income or expectations of a lower future price will decrease demand
Price
Shifts in Demand (cont'd)Shifts in Demand (cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-29
The Determinants of DemandMarket Size (Number of Buyers)
D1
Q/Units
Increase in the number of buyers increases demand
D2D3
Decrease in the number of buyers decreases demand
Price
Shifts in Demand (cont'd)Shifts in Demand (cont'd)Changes in demand versus
changes in quantity demanded
◦A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand. This is a shift of the whole curve.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-30
Shifts in Demand (cont'd)Shifts in Demand (cont'd)Changes in demand versus
changes in quantity demanded
◦A change in a good’s own price leads to a change in quantity demanded. This is a movement along the same
curve. ∆D is not the same as ∆Qd.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-31
Figure 3-5 Figure 3-5 Movement Movement Along a Given Demand Along a Given Demand CurveCurve
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-32
A change in the price changes the quantity of a good demanded, movement along the curve
Number of coffees per year
Pri
ce p
er
coff
ee
The Law of SupplyThe Law of SupplySupply
◦Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal
◦The amount of a product or service that firms are willing to sell at alternative prices
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3-33
The Law of Supply (cont'd)The Law of Supply (cont'd)Law of Supply
◦The price of a product or service and the quantity supplied are directly related.
P Qs
P Qs
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3-34
The Supply ScheduleThe Supply Schedule
The supply schedule is a table relating prices to quantity supplied at each price.
Supply Curve
◦A graphical representation of the supply schedule
◦Positively sloped line showing direct relationship between price and quantity supplied, all else equal
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-35
Figure 3-6 Figure 3-6 The Individual Producer’s The Individual Producer’s Supply Schedule and Supply Curve for Supply Schedule and Supply Curve for Starbucks CoffeeStarbucks Coffee
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-36
Combination Price of Starbucks Coffee
Quantity of Starbucks Coffee Supplied
F $5 55
G 4 40
H 3 35
I 2 25
J 1 20
Figure 3-6 Figure 3-6 The Individual Producer’s The Individual Producer’s Supply Schedule and Supply Curve for Supply Schedule and Supply Curve for Flash Memory Pen Drives, Panel (b)Flash Memory Pen Drives, Panel (b)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-37
Number of coffees per year
Pri
ce p
er
coff
ee
Figure 3-7 Figure 3-7 Horizontal Horizontal Summation of Supply Summation of Supply Curves, Panel (a)Curves, Panel (a)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
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Price per cup of Starbucks coffee
Starbucks #501
Starbucks #233
Combined Quantity Supplied per year
$5 55 35 90
4 40 30 70
3 35 20 55
2 25 15 40
1 20 10 30
Figure 3-7 Figure 3-7 Horizontal Horizontal Summation of Supply Summation of Supply Curves, Panels (b), (c), (d)Curves, Panels (b), (c), (d)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-39
Number of coffees per year
Pri
ce p
er
coff
ee
Number of coffees per year
Pri
ce p
er
coff
ee
Number of coffees per year
Pri
ce p
er
coff
ee
Figure 3-8 Figure 3-8 The Market Supply The Market Supply Schedule and the Market Supply Curve Schedule and the Market Supply Curve for Starbucks Coffeefor Starbucks Coffee
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-40
Price Quantity of Starbucks Coffee Supplies
$5 10
$4 8
$3 6
$2 4
$1 2
Figure 3-8 Figure 3-8 The Market Supply The Market Supply Schedule and the Market Supply Curve Schedule and the Market Supply Curve for Flash Memory Pen Drives, Panel (b)for Flash Memory Pen Drives, Panel (b)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-41
Number of coffees per year
Pri
ce p
er
coff
ee
Shifts in SupplyShifts in SupplyScenario
◦A new method of manufacturing flash memory pen drives reduces the cost of production dramatically.
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3-42
Figure 3-9 Figure 3-9 A Shift in the Supply CurveA Shift in the Supply Curve
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If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve
If costs decrease, supply increases
If costs increase, supply decreases
Number of coffees per year
Pri
ce p
er
coff
ee
Figure 3-9 Figure 3-9 A Shift in the Supply Curve A Shift in the Supply Curve (cont'd)(cont'd)
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3-44
S1
Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year)
Pric
e pe
r F
lash
Mem
ory
Pen
Driv
e ($
)
2 4 6 80
1
2
3
4
5
10 12 14
S2
a
cWhen supply increases the quantity supplied will be greater at each price
Number of coffees per year
Pri
ce p
er
coff
ee
Figure 3-9 Figure 3-9 A Shift in the Supply Curve A Shift in the Supply Curve (cont'd)(cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-45
S1
Quantity of Flash Memory Pen Drives Supplied(millions of constant-quality units per year)
2 4 6 80
1
2
3
4
5
10 12 14
a
b
d
c
S2
When supply increases the quantity supplied will be greater at each price
Pric
e pe
r F
lash
Mem
ory
Pen
Driv
e ($
)
Number of coffees per year
Pri
ce p
er
coff
ee
Figure 3-9 Figure 3-9 A Shift in the Supply Curve A Shift in the Supply Curve (cont'd)(cont'd)
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3-46
Quantity of Flash Memory Pen Drives Supplied(millions of constant-quality units per year)
2 4 6 80
1
2
3
4
5
10 12 14
S1
a
c
S3
b
dWhen supply decreases the quantity supplied will be less at each price
Pric
e pe
r F
lash
Mem
ory
Pen
Driv
e ($
)
Number of coffees per year
Pri
ce p
er
coff
ee
Shifts in Supply (cont'd)Shifts in Supply (cont'd)Determinants of supply
◦Cost of inputs
◦Technology and productivity
◦Taxes and subsidies
◦Price expectations
◦Number of firms in industry
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3-47
Shifts in Supply (cont'd)Shifts in Supply (cont'd)
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3-48
The Determinants of SupplyCost of Inputs
S1
Q/Units
Decrease in cost increases supply
S2Increase in costdecreases supply
S3
Price
Shifts in Supply (cont'd)Shifts in Supply (cont'd)
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3-49
The Determinants of SupplyTechnology and Productivity
S1
Q/Units
Improvements in technology or increases in productivity increase supply
S2
Decreases in productivity decrease supply
S3
Price
Shifts in Supply (cont'd)Shifts in Supply (cont'd)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-50
The Determinants of SupplyTaxes and Subsidies
S1
Q/Units
Decreases in taxes or increases in subsidies increase supply
S2
Increases in taxes or decreases in subsidies decrease supply
S3
Price
Policy Example: Import Policy Example: Import Restrictions Restrictions Reduce the Supply of Reduce the Supply of CementCementU.S. cement manufacturers produce more than
80 million metric tons of cement per year.
The rest of the cement supplied—15 to 20 million metric tons—is imported, much of it from Mexico.
During the 1990s the U.S. government began imposing an import duty on Mexican cement.
The continuation of this tariff during the 2000s caused Mexican producers to limit sales to the United States at any given price, reducing the U.S. supply of cement.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-51
Shifts in SupplyShifts in Supply
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3-52
The Determinants of SupplyPrice Expectations*
S1
Q/Units
Expectations of increase in price increases supply
S2Expectations of lower prices decrease supply
S3Price
Expectations of higher future prices decrease supply
Expectations of lower future prices increase supply
Shifts in Supply (cont'd)Shifts in Supply (cont'd)
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3-53
The Determinants of SupplyNumber of Firms in Industry
S1
Q/Units
Increase in the number of firms increases supply
S2Decrease in the number of firms decreases supply
S3
Price
Shifts in Supply (cont'd)Shifts in Supply (cont'd)Changes in supply versus
changes in quantity supplied
◦A change in one or more of the non-price determinants will lead to a change in supply. This is a shift of the whole curve.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-54
Shifts in Supply (cont'd)Shifts in Supply (cont'd)Changes in supply versus
changes in quantity supplied
◦A change in a good’s own price leads to a change in quantity supplied. This is a movement along the same
curve. ∆S is not the same as ∆Qs.
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-55
Putting Demand Putting Demand and Supply Togetherand Supply TogetherPutting demand and supply
together
Equilibrium (Market Clearing) Price
◦The price that clears the market
◦The price at which quantity demanded equals quantity supplied
◦The price where the demand curve intersects the supply curve
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3-56
Figure 3-10 Figure 3-10 Putting Putting Demand and Supply Demand and Supply Together, Panel (a)Together, Panel (a)
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3-57
Price of Coffee
Quantity Supplied in millions
Quantity demanded in millions
Difference Condition
$5 10 2 8 million Excess quantity (surplus)
4 8 4 4 million Excess quantity (surplus)
3 6 6 0 Market clearing (equilibrium)
2 4 8 -4 million Excess demand (shortage)
1 2 10 -8 million Excess demand (shortage)
Figure 3-10 Figure 3-10 Putting Putting Demand and Supply Demand and Supply Together, Panel (b)Together, Panel (b)
Copyright © 2008 Pearson Addison Wesley. All rights reserved.
3-58
Number of coffees per year
Pri
ce p
er
coff
ee
Putting DemandPutting Demandand Supply Together (cont'd)and Supply Together (cont'd)Equilibrium
◦The situation when quantity supplied equals quantity demanded at a particular price
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3-59
Putting DemandPutting Demandand Supply Together (cont'd)and Supply Together (cont'd)Shortages
◦The situation when quantity demanded is greater than quantity supplied Qd > Qs
◦Exist at any price below the market clearing price
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3-60
Putting DemandPutting Demandand Supply Together (cont'd)and Supply Together (cont'd)Surpluses
◦The situation when quantity supplied is greater than quantity demanded Qd < Qs
◦Exist at any price above the market clearing price
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3-61
Policy Example: Should Shortages Policy Example: Should Shortages in the Ticket Market Be Solved by in the Ticket Market Be Solved by Scalpers?Scalpers?If you’ve ever tried to get tickets
to the big game you know all about “shortages.”
Since the quantity of tickets is fixed, the price can go pretty high.
Enter the scalper.
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3-62
Figure 3-11 Figure 3-11 Shortages of Super Bowl Shortages of Super Bowl TicketsTickets
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Issues and Applications: The Issues and Applications: The Market Clearing Prices of Baseball Market Clearing Prices of Baseball CardsCardsVarious companies, such as Topps and Upper
Deck, print sports trading cards that provide photos and stats on pro athletes.
Why are some of the market clearing prices so high?
The answer has to do with demand and supply. (A relatively low supply helps explain the relatively high market clearing price.)
You can buy a “Shoeless” Joe Jackson card for up to $9,000!
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3-64
Table 3-2 Table 3-2 Baseball Cards Baseball Cards with the Highest Market with the Highest Market Clearing PricesClearing Prices
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