Lecture Introduction to economics: Social issues and economic thinking: Chapter 3 - Wendy A. Stock

Chapter 3 - Demand and supply. After studying this chapter, you should be able to: Describe the relationship between price and quantity demanded, describe the relationship between price and quantity supplied, diagram demand and supply relationships and identify market equilibrium,…

Introduction to Economics:

Social Issues and Economic Thinking Wendy A Stock

PowerPoint Prepared by

Z Pan

Chapter 3

demand and supply

Ø Describe the relationship

between price and quantity

demanded

Ø Describe the relationship

between price and quantity

supplied

Ø Diagram demand and supply

relationships and identify

After studying this chapter, you should be

able to:

Ø A market exists anywhere there are buyers

willing to buy a good and sellers willing to sell it.Could be:

ØA physical location, like a grocery store, gas station, or bakery

ØA cyberspace at sites like eBay, Amazon,

Monster.com

ØFormal or informal

Markets

Ø Demand: The relationship between the price of a good and the quantity of the good that buyers

are willing and able to buy at that price, ceteris paribus

Ø Quantity demanded: The amount of a good that buyers are willing and able to buy at a given

price, ceteris paribus

Demand

Demand Table and Demand Curve

Ø The law of demand : There is an inverse relationship between price and quantity demanded.

The Law of Demand

q Substitution Effect

q Income Effect

Ø The Income Effect implies that changes in the price of a good affect the amount of it that you can afford, which results in a change in quantity demanded, ceteris paribus.

Ø The Substitution Effect implies that consumers will respond to a higher price of a good, ceteris paribus, by decreasing their quantity demanded

of that good and substituting instead into goods whose prices have not changed

Income Effect and Substitution Effect

Ø The Law of Diminishing Marginal Utility:

The extra utility you get from consuming a good gets smaller as more of the good is consumed As

a result, your willingness to pay for another unit of

a good decreases as more of the good is

Ø A change in quantity demanded results from a change

in the price of the good It is represented by a

movement along the demand curve.

Change in Demand vs Change in Quantity

Demanded

Ø A change in demand means that quantity demanded

changes at each price As a result, the demand curve shifts.

Change in Demand vs Change in Quantity

Demanded

Ø Income

Ø Prices of related goods

Ø Tastes and preferences

Ø Number of consumers

Ø Consumers’ expectations

Factors That Shift Demand Curve

Ø For normal goods, an increase in income

generates an increase in demand (Most goods tend to fit into this category)

Ø For inferior goods, an increase in income

generates a decrease in demand (potatoes,

Prices of Related Goods

Ø Substitutes are goods that tend to be used in place of one another (e.g bread and bagels, butter and margarine)

Factors That Shift Demand Curve

Prices of Related Goods

Ø Complements are goods that tend to be used together.(e.g iPods and iTunes downloads, bread and peanut butter)

Factors That Shift Demand Curve

Tastes and Preferences

If it becomes trendy or fashionable to have

tattoos, the demand for tattoos increases If

wearing fur coats is frowned upon, the demand for fur coats falls

Number of Consumers in the Market

If the number of consumers in your city increases, the overall demand for bread will also increase

Vice versa

Factors That Shift Demand Curve

Expectations describe our notions about what we think will happen in the future Expectations for the future affect our choices today

Expected higher income will increase demand

today, lower expected income will decrease

demand today

Factors That Shift Demand Curve

Ø Supply: The relationship between the price of a good and its quantity supplied, ceteris paribus.

Ø Quantity Supplied: The amount of a good that sellers are willing and able to sell at a given

price and time, ceteris paribus

Supply

Supply Table and Supply Curve

Ø The law of Supply : There is a positive relationship

between price and quantity supplied.

The Law of Supply

q Scale Effect

q Producer Substitution Effect

Ø The scale effect of a price increase generates increased incentives for producers to expand their scale of

production, thus increasing the quantity supplied.

Ø The Producer Substitution Effect implies that changes in the relative price of a good cause producers to move

their production into the now relatively higher priced

goods.

Ø The law of increasing marginal costs asserts that, ceteris paribus, the costs of production tend to rise as

successive units of a good are produced Thus the

Why Supply Curve is Upward Sloping?

Ø A change in quantity supplied results from a change in the price of the good It is represented by a movement along the supply curve.

Change in Supply vs Change in Quantity

Supplied

Ø A change in supply means that quantity supplied

changes at each price As a result, the supply curve

shifts.

Change in Supply vs Change in Quantity

Supplied

Costs of Production

Ø When the costs of production of a good or

service increase, ceteris paribus, the supply of the good or service will decrease

Prices of Alternative Goods

Ø E.g., if price of cookies rises, ceteris paribus,

baker faces an incentive to produce more

cookies and less bread

Factors That Shift Supply Curve

Ø Market equilibrium occurs at the price where

quantity demanded is equal to quantity supplied

Ø The equilibrium price is the price at which the

quantity demanded equals the quantity supplied

Ø The equilibrium quantity is the quantity bought

and sold at the equilibrium price

Market Equilibrium

Market Equilibrium

Q

Market Adjusting toward Equilibrium

Shortage - when quantity demanded is

greater than quantity supplied

Q

Market Adjusting toward Equilibrium

Shortage when quantity demanded is

greater than quantity supplied

Facing a shortage, sellers raise the price,

Q

Market Adjusting toward Equilibrium

Shortage when quantity demanded is

greater than quantity supplied

Facing a shortage, sellers raise the price,

causing QD to fall and QS to rise.

Shortage

Prices continue to rise until market reaches equilibrium

…which reduces the surplus

Falling prices cause

QD to rise and QS to fall

Surplus

Prices continue to fall until market reaches equilibrium

Market Adjusting toward Equilibrium

Surplus when quantity supplied is greater than quantity demanded

Market Adjustment to Increase in Demand

Market Adjustment to Decrease in Demand

Market Adjustment to Increase in Supply

Market Adjustment to Decrease in Supply

Market Adjustment to Changes in Both

Demand and Supply

shopping malls is that they tend to have too few parking spaces Offer solutions to the problem that focus on (1) price

changes; (2) a shift in demand; (3) a shift

in supply

Discussion: Which of your proposed solutions

do you think is the best? Why?

 Demand

 Quantity demanded

 Law of demand

 Income effect

 Consumer substitution effect

 Law of diminishing marginal utility

 Change in quantity demanded

 Producer substitution effect

 Change in quantity supplied

 Increase in supply

 Decrease in supply

Copyright © 2013 John Wiley

& Sons, Inc.

40

Key Concepts