Transcript Chapter 4

ECONOMICS 5e
Michael Parkin
CHAPTER
4
Demand and Supply
Learning Objectives
• Distinguish between a money price and a
relative price
• Explain the main influences on demand
• Explain the main influences on supply
• Explain how prices and quantities bought
and sold are determined by demand and
supply
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-2
Learning Objectives (cont.)
• Explain why some prices fall, some rise,
and some fluctuate
• Use demand and supply to make
predictions about price changes
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-3
Learning Objectives
• Distinguish between a money price and a
relative price
• Explain the main influences on demand
• Explain the main influences on supply
• Explain how prices and quantities bought
and sold are determined by demand and
supply
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-4
Price and Opportunity Cost
Price is the number of dollars that must be
given up in exchange for an item — this is
referred to as the money price.
The ratio of one price to another is referred
to as the relative price.
Relative prices are opportunity costs.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-5
Price and Opportunity Cost
• Relative Prices
•
price index
• Supply and demand determines relative
prices.
• “Price falling” means the price falls relative
to the average price of other goods and
services.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-6
The Price of Wheat
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-7
Learning Objectives
• Distinguish between a money price and a
relative price
• Explain the main influences on demand
• Explain the main influences on supply
• Explain how prices and quantities bought
and sold are determined by demand and
supply
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-8
Demand
If a person demands something, they:
• Want it.
• Can afford it.
• Have made a definite plan to buy it.
Wants are the unlimited desires or wishes
that people have for goods and services.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-9
Demand
The quantity demanded of a good or service
is the amount that consumers plan to buy
during a given time period at a particular
price.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-10
Demand
What determines buying plans?
•
The price of the good
•
The prices of related goods
•
Expected future prices
•
Income
•
Population
•
Preferences
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-11
Demand
The Law of Demand
Other things remaining the same, the higher the
price of a good, the smaller is the quantity
demanded.
Reasons for the Law of Demand
•
Substitution Effect
•
Income Effect
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-12
Demand
Demand Curve and Demand Schedule
Demand curves show the relationship between
the quantity demanded of a good and its price
(ceteris paribus).
Demand schedules list the quantities demanded
at each different price (ceteris paribus).
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-13
Demand
Price
Quantity
(dollars per tape)
(millions of tapes per week)
a
b
1
2
9
6
c
3
4
d
4
3
e
5
2
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-14
Price (dollar per tape)
Demand
6
e
5
d
4
c
3
b
2
Demand for tapes
a
1
0
2
4
6
8
10
Quantity (millions of tapes per week)
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-15
Demand
A Change in Demand
When any factor that influences buying plans
other than the price of the good changes, there
is a change in demand.
•
An increase in demand causes the demand curve to
shift rightward.
•
A decrease in demand causes the demand curve to
shift leftward.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-16
A Change in Demand
Price of Related Goods
•
Substitutes - goods used in the place of another
good
•
Complements - goods used in conjunction with
another good
What Happens to Demand if the price of a
substitute good increases? A complement?
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-17
A Change in Demand
Expected Future Prices
•
If the price of a good is expected to rise in the
future, people buy more of the good now.
•
If the price of a good is expected to fall in the
future, people buy less of the good now.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-18
A Change in Demand
Income
•
Normal Goods — demand increases as income
increases
•
Inferior Goods — demand decreases as income
increases
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-19
A Change in Demand
Population
•
Size and age structure
Preferences
•
Attitudes toward goods and services
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-20
Original demand schedule
Walkman $200
Price
(dollars
per tape)
Walkman $50
Quantity
(millions of tapes
per week)
a
1
9
b
2
6
c
3
4
d
4
3
e
5
2
Copyright © 2000 Addison Wesley Longman, Inc.
New demand schedule
Price
(dollars
per tape)
Quantity
(millions of tapes
per week)
Assume the original price of
Walkmans is $200. The
demand schedule shows
the Price-Quantity
relationship for tapes.
Slide 4-21
New demand schedule
Original demand schedule
Walkman $200
Price
(dollars
per tape)
Walkman $50
Quantity
Price
(millions of tapes
per week)
Quantity
(dollars
per tape)
(millions of tapes
per week)
a
1
9
a'
1
13
b
2
6
b'
2
10
c
3
4
c'
3
8
d
4
3
5
2
4
5
7
e
d'
e'
Copyright © 2000 Addison Wesley Longman, Inc.
6
Slide 4-22
Price (dollar per tape)
Demand
6
5
4
e
e'
d
3
d'
c
c'
2
1
0
Copyright © 2000 Addison Wesley Longman, Inc.
Demand for tapes
(Walkman $50)
b
Demand for tapes
(Walkman $200)
2
4
6
b'
a
8
a'
10
12
14
Quantity (millions of tapes per week)
Slide 4-23
The Demand for Tapes
The Law of Demand
The quantity of tapes demanded
Decreases if:
the price of a tape rises.
Increases if:
the price of a tape falls.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-24
The Demand for Tapes
Changes In Demand
The demand for tapes
Decreases if:
•
the price of a substitute falls.
•
the price of a complement rises.
•
income falls (a tape is a normal good).
•
the population decreases.
•
the price of a tape is expected to fall in the
future.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-25
The Demand for Tapes
Changes In Demand
The demand for tapes
Increases if:
•
the price of a substitute rises.
•
the price of a complement falls.
•
income rises (a tape is a normal good).
•
the population increases.
•
the price of a tape is expected to rise in the future.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-26
A Change in the Quantity Demanded
Versus a Change in Demand
A movement along a demand curve, which
results from a change in price, shows a
change in the quantity demanded.
If some other influence on buyers’ plans
changes, holding price constant, there is a
change in demand.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-27
Price
A Change in the Quantity Demanded
Versus a Change in Demand
Decrease in
quantity
demanded
Decrease in
Increase in
demand
Increase in
quantity
demanded
demand
D2
D0
D1
Quantity
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-28
Learning Objectives
• Distinguish between a money price and a
relative price
• Explain the main influences on demand
• Explain the main influences on supply
• Explain how prices and quantities bought
and sold are determined by demand and
supply
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-29
Supply
If a firm supplies a good or service, the firm
•
has the resources and technology to produce it.
•
can profit from producing it.
•
has made a definite plan to produce it and sell
it.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-30
Supply
The quantity supplied of a good or service is
the amount that producers plan to sell
during a given time period at a particular
price.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-31
Supply
What determines selling plans?
•
The price of the good
•
The prices of resources used to produce the good
•
The prices of related goods produced
•
Expected future prices
•
The number of suppliers
•
Technology
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-32
Supply
The Law of Supply
Other things remaining the same, the higher the
price of a good, the greater is the quantity
supplied.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-33
Supply
Supply Curve and Supply Schedule
Supply curves show the relationship between
the quantity supplied of a good and its price
(ceteris paribus).
Supply schedules list the quantities supplied at
each different price (ceteris paribus).
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-34
Supply
Price
Quantity
(dollars per tape)
(millions of tapes per week)
a
1
0
b
2
3
c
3
4
d
4
5
e
5
6
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-35
Price (dollar per tape)
Supply
6
Supply of Tapes
5
e
4
d
3
c
2
1
0
b
a
2
4
6
8
10
Quantity (millions of tapes per week)
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-36
Supply
A Change in Supply
When any factor that influences selling plans
other than the price of the good changes, there
is a change in supply.
•
An increase in supply causes the supply to
shift rightward.
•
A decrease in supply causes the supply curve
to shift leftward.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-37
A Change in Supply
• Price of Productive Resources
• Price of Related Goods Goods Produced
•
Substitutes in Production
•
Complements in Production
• Expected Future Prices
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-38
A Change in Supply
• The Number of Suppliers
• Technology
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-39
Supply
Original supply schedule
New supply schedule
Old technology
Price
(dollars
per tape)
New technology
Quantity
Price
(dollars
per tape)
(millions of tapes
per week)
Quantity
(millions of tapes
per week)
a
1
0
a'
1
3
b
2
3
b'
2
6
c
3
4
c'
3
8
d
4
5
d'
4
10
e
5
6
e'
5
12
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-40
Price (dollar per tape)
Supply
6
Supply of tapes
(old technology)
5
4
c
2
0
Copyright © 2000 Addison Wesley Longman, Inc.
d'
d
3
1
e'
e
c'
b
b'
Supply of tapes
(new technology)
a'
a
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
Slide 4-41
The Supply of Tapes
The Law of Supply
The quantity of tapes supplied
Decreases if:
the price of a tape falls.
Increases if:
the price of a tape rises.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-42
The Supply of Tapes
Changes In Supply
The supply of tapes
Decreases if:
•
The price of a resource used to produce tapes
rises.
•
The number of tape producers decreases.
•
The price of a substitute in production rises.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-43
The Supply of Tapes
Changes In Supply
The supply of tapes (cont.)
Decreases if:
•
The price of a complement in production
falls.
•
The price of a tape is expected to rise in the
future.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-44
The Supply of Tapes
Changes In Supply
The supply of tapes
Increases if:
•
The price of a resource used to produce tapes
falls.
•
More efficient technologies for producing tapes
are discovered.
•
The number of tape producers increases.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-45
The Supply of Tapes
Changes In Supply
The supply of tapes (cont.)
Increases if:
•
The price of a substitute in production falls.
•
The price of a complement in production rises.
•
The price of a tape is expected to fall in the
future.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-46
A Change in the Quantity Supplied
Versus a Change in Supply
A movement along a supply curve, which
results from a change in price, shows a
change in the quantity supplied.
If some other influence on sellers’ plans
changes, holding price constant, there is a
change in supply.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-47
Price
A Change in the Quantity Supplied
Versus a Change in Supply
Increase in
S2 quantity
supplied
Decrease in
supply
S0
S1
Increase in
supply
Decrease in
quantity
supplied
Quantity
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-48
Learning Objectives
• Distinguish between a money price and a
relative price
• Explain the main influences on demand
• Explain the main influences on supply
• Explain how prices and quantities bought
and sold are determined by demand and
supply
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-49
Market Equilibrium
Equilibrium in a market occurs when the
price balances the plans of buyers and
sellers.
Equilibrium price is the price at which
quantity demanded equals quantity
supplied.
Equilibrium quantity is the quantity bought
and sold at the equilibrium price.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-50
Market Equilibrium
Price as a Regulator
•
If the price is too low, quantity demanded
exceeds quantity supplied.
•
If the price is too high, quantity supplied
exceeds quantity demanded.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-51
Market Equilibrium
Price
(dollars
Quantity
demanded
Quantity
Shortage(–)
supplied or surplus(+)
per tape)
(millions of tapes per week)
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-52
Market Equilibrium
Price
(dollars
Quantity
demanded
Quantity
Shortage(–)
supplied or surplus(+)
per tape)
(millions of tapes per week)
1
2
9
6
0
3
-9
-3
3
4
4
0
4
3
5
+2
5
2
6
+4
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-53
Price (dollar per tape)
Market Equilibrium
Surplus of
2 million tapes
at $4 a tape
6
Supply of tapes
5
4
Equilibrium
3
2
Shortage of
3 million
tapes at $2
a tape
1
0
Copyright © 2000 Addison Wesley Longman, Inc.
2
4
6
Demand for tapes
8
10
Quantity (millions of tapes per week)
Slide 4-54
Market Equilibrium
Price Adjustments
•
A shortage forces the price up.
•
A surplus forces the price down.
Such price changes are mutually beneficial to
both buyers and sellers.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-55
Learning Objectives (cont.)
• Explain why some prices fall, some rise,
and some fluctuate
• Use demand and supply to make predictions
about price changes
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-56
Predicting Changes in
Price and Quantity
A Change in Demand
What would happen to the price and
quantity of tapes if the price of a Walkman
falls from $200 to $50?
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-57
The Effects of a Change in Demand
Quantity demanded
Price
(dollars
per tape )
(millions of tapes per week)
Walkman $200 Walkman $50
Quantity supplied
(millions of tapes per week)
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-58
The Effects of a Change in Demand
Quantity demanded
Price
(dollars
per tape )
(millions of tapes per week)
Quantity supplied
Walkman $200
Walkman $50
1
2
9
6
13
10
0
3
3
4
8
4
4
3
7
5
5
2
6
6
Copyright © 2000 Addison Wesley Longman, Inc.
(millions of tapes per week)
Slide 4-59
Price (dollar per tape)
The Effects of a Change in Demand
Supply of tapes
6
5
4
3
2
Demand for tapes
(Walkman $50)
1
0
Demand for tapes
(Walkman $200)
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-60
A Change in Demand
Prediction
•
When demand increases, both the price and
quantity increase.
•
When demand decreases, both the price and
quantity decrease.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-61
Predicting Changes in
Price and Quantity
A Change in Supply
What would happen to the price and
quantity of tapes if a new cost-saving
production technology was developed?
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-62
The Effects of a Change in Supply
Quantity supplied
Price
(dollars
per tape )
Quantity demanded
(millions of tapes per week)
(millions of tapes per week)
old
new
technology technology
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-63
The Effects of a Change in Supply
Quantity supplied
Price
(dollars
per tape )
Quantity demanded
(millions of tapes per week)
(millions of tapes per week)
old
new
technology technology
1
2
9
6
0
3
3
6
3
4
4
8
4
3
5
10
5
2
6
12
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-64
Price (dollar per tape)
The Effects of a Change in Supply
Supply of tapes
(old technology)
6
5
4
Supply of tapes
(new technology)
3
2
1
Demand for tapes
0
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-65
A Change in Supply
Prediction
•
When supply increases, the quantity increases
and the price falls.
•
When demand decreases, the quantity decreases
and the price falls
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-66
Predicting Changes in
Price and Quantity
A Change in Both Demand and Supply
What would happen if both demand and
supply change together?
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-67
The Effects of an Increase in Both
Demand and Supply
Original Quantities
(millions of tapes per week)
Price
Quantity
demanded
Quantity
supplied
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
(dollars
per tape )
Walkman
$200
Copyright © 2000 Addison Wesley Longman, Inc.
old
technology
New Quantities
(millions of tapes per week)
Quantity Quantity
demanded supplied
Walkman
$50
new
technology
Slide 4-68
The Effects of an Increase in Both
Demand and Supply
Original Quantities
(millions of tapes per week)
Price
(dollars
per tape )
Quantity
demanded
Quantity
supplied
New Quantities
(millions of tapes per week)
Quantity Quantity
demanded supplied
Walkman
$200
old
technology
1
2
9
6
0
3
13
10
3
6
3
4
4
8
8
4
3
5
7
10
5
2
6
6
12
Copyright © 2000 Addison Wesley Longman, Inc.
Walkman
$50
new
technology
Slide 4-69
Price (dollar per tape)
The Effects of an Increase in Both
Demand and Supply
Supply of tapes
(old technology)
6
Supply of tapes
(new technology)
5
4
3
2
Demand for tapes
(Walkman $50)
1
Demand for tapes
(Walkman $200)
0
Copyright © 2000 Addison Wesley Longman, Inc.
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
Slide 4-70
A Change in Both
Demand and Supply
Prediction
•
When both demand and supply increase, the
quantity increases and the price decreases, or
remains constant.
•
When both demand and supply decreases, the
quantity decreases and the price increases,
decreases, or remains constant.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-71
The Effects of an Decrease in
Demand and an Increase in Supply
Original Quantities
(millions of tapes per week)
Price
(dollars
per tape )
Quantity
demanded
CD player
$400
Quantity
supplied
old
technology
1
2
13
10
0
3
3
8
4
4
7
5
5
6
6
Copyright © 2000 Addison Wesley Longman, Inc.
New Quantities
(millions of tapes per week)
Quantity Quantity
demanded supplied
CD player
$200
new
technology
Slide 4-72
The Effects of an Decrease in
Demand and an Increase in Supply
Original Quantities
(millions of tapes per week)
Price
(dollars
per tape )
Quantity
demanded
CD player
$400
Quantity
supplied
old
technology
New Quantities
(millions of tapes per week)
Quantity Quantity
demanded supplied
CD player
$200
new
technology
1
2
13
10
0
3
9
6
3
6
3
8
4
4
8
4
7
5
3
10
5
6
6
2
12
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-73
Price (dollar per tape)
The Effects of an Decrease in
Demand and an Increase in Supply
Supply of tapes
(old technology)
6
Supply of tapes
(new technology)
5
4
3
2
Demand for tapes
(CD player $400)
1
Demand for tapes
(CD player $200)
0
Copyright © 2000 Addison Wesley Longman, Inc.
2
4
6
8
10
12
14
Quantity (millions of tapes per week)
Slide 4-74
The Effects of an Decrease in
Demand and an Increase in Supply
Prediction
•
When demand decreases and supply increases,
the price falls and the quantity increases,
decreases, or remains constant.
•
When demand increases and supply decreases,
the price rises and the quantity increases,
decreases, or remains constant.
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-75
CD Players, Health Care,
and Bananas
•
•
•
•
A Price Slide: CD Players
A Price Rocket: Health Care
A Price Roller Coaster: Bananas
The Invisible Hand
•
Adam Smith
•
Copyright © 2000 Addison Wesley Longman, Inc.
Each buyer and seller in a market “is led by an
invisible hand to promote an end which was no
part of his intention.”
Slide 4-76
Price Slide, Rocket,
and Roller Coaster
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-77
Price Slide, Rocket,
and Roller Coaster
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-78
Price Slide, Rocket,
and Roller Coaster
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-79
Price (P)
Mathematical Note
Demand Curve
Intercept on
y axis is a
a
P = a - bQD
Slope is - b
Demand
0
Copyright © 2000 Addison Wesley Longman, Inc.
Quantity demanded (QD)
Slide 4-80
Mathematical Note
Price (P)
Supply Curve
P = c + dQS
Intercept on
y axis is c
Supply
Slope is d
c
0
Copyright © 2000 Addison Wesley Longman, Inc.
Quantity supplied (Qs)
Slide 4-81
Mathematical Note
Find equilibrium price and quantity:
QD = QS
QD = QS = Q*
P* = a - bQ*
P* = a - bQ*
P* = c - dQ*
Solve these two equations for Q*
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-82
Mathematical Note
Solve these two equations for Q*
C + dQ = a - bQ
bQ* + dQ* = a - c
B(b + d)Q*= a - c
Using the demand equation:
a-c
P* =a-b(
)
b+d
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-83
Mathamatical Note
Using the demand equation:
a-c
P* = a-b(
)
b+d
P* = a (b + d) - b ( a - c)
b+d
P* = ad + bc
b+d
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-84
Mathematical Note
Alternatively, using the supply equation:
P* = c (b + d) + d ( a - c)
b+d
P* = cb + da
b+d
P* = ad + bc
b+d
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-85
Price (p)
Mathematical Note
Market
equilibrium
Supply
P*
Demand
0
Copyright © 2000 Addison Wesley Longman, Inc.
Q*
Quantity supplied (Qs)
Slide 4-86
The End
Copyright © 2000 Addison Wesley Longman, Inc.
Slide 4-87