Transcript Chapter 4

Introduction to
Economics
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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-4
Price and Opportunity Cost
Price is the number of monetary units
(euros, dollars, leva, yens, etc.) 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-6
The Price of Wheat
Copyright © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-10
Demand
What determines buying plans?
•
The price of the good
•
The prices of related goods
•
Expected future prices
•
Income
•
Population
•
Preferences
Copyright © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-13
Demand
Price
Quantity
(dollars per CD)
(millions of CD’s per week)
a
b
1
2
9
6
c
3
4
d
4
3
e
5
2
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-14
Demand
Price (dollar per CD)
6
e
5
d
4
c
3
b
2
Demand for CDs
a
1
0
2
4
6
8
10
Quantity (millions of CD’s per week)
Copyright © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-18
A Change in Demand
Income
•
Normal Goods — demand increases as income
increases
•
Inferior Goods (lower quality) — demand
decreases as income increases
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-19
A Change in Demand
Population
•
Size and age structure
Preferences
•
Attitudes toward goods and services
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-20
Original demand schedule
Walkman $200
Price
(dollars
per CD)
Walkman $50
Quantity
(millions of CD’s
per week)
a
1
9
b
2
6
c
3
4
d
4
3
e
5
2
Copyright © 1998 Addison Wesley Longman, Inc.
New demand schedule
Price
(dollars
per CD)
Quantity
(millions of CDs
per week)
Assume the original price of
Walkmans is $200. The
demand schedule shows
the Price-Quantity
relationship for CDs.
TM 4-21
New demand schedule
Original demand schedule
Walkman $200
Price
(dollars
per CD)
Walkman $50
Quantity
Price
(dollars
per CD)
(millions of CDs
per week)
Quantity
(millions of CDs
per week)
a
1
9
a'
1
13
b
2
6
b'
2
10
c
3
4
c'
3
8
d
4
3
d'
4
7
e
5
2
e'
5
6
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-22
Demand
Price (dollar per CD)
6
5 e
4
e'
d
3
d'
c
c'
2
1
0
Copyright © 1998 Addison Wesley Longman, Inc.
Demand for CDs
(Walkman $50)
b
b'
Demand for CDs
(Walkman $200)
2
4
a
6
8
a'
10
12
14
Quantity (millions of CDs per week)
TM 4-23
The Demand for Tapes
The Law of Demand
The quantity of CDs demanded
Decreases if:
The price of a CD rises.
Increases if:
The price of a CD falls.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-24
The Demand for CDs
Changes In Demand
The demand for CDs
Decreases if:
•
The price of a substitute falls.
•
The price of a complement rises.
•
Income falls (a CD is a normal good).
•
The population decreases.
•
The price of a CD is expected to fall in the
future.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-25
The Demand for CDs
Changes In Demand
The demand for CDs
Increases if:
•
The price of a substitute rises.
•
The price of a complement falls.
•
Income rises (a CD is a normal good).
•
The population increases.
•
The price of a CD is expected to rise in the
future.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-34
Supply
Price
Quantity
(dollars per CD)
(millions of CDs per week)
a
1
0
b
2
3
c
3
4
d
4
5
e
5
6
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-35
Supply
Price (dollar per CD)
6
Supply of CDs
5
e
4
d
3
c
2
1
b
a
0
2
4
6
8
10
Quantity (millions of CDs per week)
Copyright © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-37
A Change in Supply
• Price of Productive Resources
• Price of Related Goods Produced
•
Substitutes in Production
•
Complements in Production
• Expected Future Prices
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-38
A Change in Supply
• The Number of Suppliers
• Technology
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-39
Supply
Original supply schedule
New supply schedule
New technology
Old technology
Price
(dollars
per CD)
Quantity
Price
(dollars
per CD)
(millions of CDs
per week)
Quantity
(millions of CDs
per week)
a
1
0
a'
1
3
b
2
3
b'
2
6
c
3
4
c'
3
8
d
4
5
5
6
4
5
10
e
d'
e'
Copyright © 1998 Addison Wesley Longman, Inc.
12
TM 4-40
Price (dollar per CD)
Supply
6
Supply of CDs
(old technology)
5
4
d'
d
3
c
2
1
e'
e
c'
b
a'
a
0
Copyright © 1998 Addison Wesley Longman, Inc.
b'
2
4
6
8
Supply of CDs
(new technology)
10
12
14
Quantity (millions of CDs per week)
TM 4-41
The Supply of Tapes
The Law of Supply
The quantity of CDs supplied
Decreases if:
The price of a CD falls.
Increases if:
The price of a CD rises.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-42
The Supply of Tapes
Changes In Supply
The supply of CDs
Decreases if:
•
The price of a resource used to produce CDs
rises.
•
The number of CD producers decreases.
•
The price of a substitute in production rises.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-43
The Supply of CDs
Changes In Supply
The supply of CDs (cont.)
Decreases if:
•
The price of a complement in production
falls.
•
The price of a CD is expected to rise in the
future.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-44
The Supply of CDS
Changes In Supply
The supply of CDs
Increases if:
•
The price of a resource used to produce CDs
falls.
•
More efficient technologies for producing CDs
are discovered.
•
The number of CD producers increases.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-45
The Supply of CDs
Changes In Supply
The supply of CDs (cont.)
Increases if:
•
The price of a substitute in production falls.
•
The price of a complement in production rises.
•
The price of a CD is expected to fall in the future.
Copyright © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-51
Market Equilibrium
Price
(dollars
Quantity
demanded
Quantity Shortage(–)
supplied or surplus(+)
per CD)
(millions of CDS per week)
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-52
Market Equilibrium
Price
(dollars
Quantity
demanded
Quantity Shortage(–)
supplied or surplus(+)
per CD)
(millions of CDs per week)
1
2
9
6
0
3
-9
-3
3
4
4
0
4
3
5
+2
5
2
6
+4
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-53
Price (dollar per CD)
Market Equilibrium
Surplus of
2 million CDs
at $4 a CD
6
Supply of CDs
5
4
Equilibrium
3
2
Shortage of
3 million
CDs at $2 a
CD
1
0
Copyright © 1998 Addison Wesley Longman, Inc.
2
4
6
Demand for CDs
8
10
Quantity (millions of CDs per week)
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-56
Predicting Changes in
Price and Quantity
A Change in Demand
What would happen to the price and
quantity of CDs if the price of a Walkman
falls from $200 to $50?
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-57
The Effects of a Change in Demand
Quantity demanded
Price
(millions of CDs per week)
(dollars
per CD )
Walkman $200 Walkman $50
Quantity supplied
(millions of CDs per week)
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-58
The Effects of a Change in Demand
Quantity demanded
Price
(dollars
per CD )
(millions of CDs per week)
Walkman $200 Walkman $50
Quantity supplied
(millions of CDs per week)
1
2
9
6
13
10
0
3
3
4
8
4
4
3
7
5
5
2
6
6
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-59
Price (dollar per CD)
The Effects of a Change in Demand
Supply of CDs
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 CDs per week)
Copyright © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-61
Predicting Changes in
Price and Quantity
A Change in Supply
What would happen to the price and
quantity of CDs if a new cost-saving
production technology was developed?
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-62
The Effects of a Change in Supply
Quantity supplied
Price
(dollars
Quantity demanded
per CD ) (millions of CDs per week)
(millions of CDs per week)
old
new
technology technology
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
Copyright © 1998 Addison Wesley Longman, Inc.
TM 4-63
The Effects of a Change in Supply
Quantity supplied
Price
(dollars
Quantity demanded
per CD ) (millions of CDs per week)
(millions of CDs 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 © 1998 Addison Wesley Longman, Inc.
TM 4-64
Price (dollar per CD)
The Effects of a Change in Supply
Supply of CDs
(old technology)
6
5
4
Supply of CDs
(new technology)
3
2
1
Demand for CDs
0
Copyright © 1998 Addison Wesley Longman, Inc.
2
4
6
8
10
12
14
Quantity (millions of CDs per week)
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-67
The Effects of an Increase in Both
Demand and Supply
Original Quantities
(millions of CDs per week)
Price
Quantity
demanded
Quantity
supplied
1
2
9
6
0
3
3
4
4
4
3
5
5
2
6
(dollars
per CD )
Walkman
$200
Copyright © 1998 Addison Wesley Longman, Inc.
old
technology
New Quantities
(millions of CDs per week)
Quantity Quantity
demanded supplied
Walkman
$50
new
technology
TM 4-68
The Effects of an Increase in Both
Demand and Supply
Original Quantities
(millions of CDs per week)
Price
New Quantities
(millions of CDs per week)
Quantity
demanded
Quantity
supplied
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
(dollars
per tape )
Walkman
$200
Copyright © 1998 Addison Wesley Longman, Inc.
old
technology
Quantity Quantity
demanded supplied
Walkman
$50
new
technology
TM 4-69
Price (dollar per CD)
The Effects of an Increase in Both
Demand and Supply
Supply of CDs
(old technology)
6
Supply of CDs
(new technology)
5
4
3
2
Demand for CDs
(Walkman $50)
1
Demand for CDs
(Walkman $200)
0
Copyright © 1998 Addison Wesley Longman, Inc.
2
4
6
8
10
12
14
Quantity (millions of CDs per week)
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-71
The Effects of an Decrease in Demand
and an Increase in Supply
Original Quantities New Quantities
(millions of CDs per week)
Price
(dollars
per CD)
Quantity
demanded
MP3 player
$400
Quantity
supplied
old
technology
1
2
13
10
0
3
3
8
4
4
7
5
5
6
6
Copyright © 1998 Addison Wesley Longman, Inc.
(millions of CDs per week)
Quantity
demanded
MP3 player
$200
Quantity
supplied
new
technology
TM 4-72
The Effects of an Decrease in Demand
and an Increase in Supply
Original Quantities New Quantities
(millions of tapes per week)
Price
(dollars
per CD )
Quantity
demanded
MP3 player
$400
Quantity
supplied
old
technology
(millions of tapes per week)
Quantity
demanded
MP3 player
$200
Quantity
supplied
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 © 1998 Addison Wesley Longman, Inc.
TM 4-73
Price (dollar per CD)
The Effects of an Decrease in
Demand and an Increase in Supply
Supply of CDs
(old technology)
6
Supply of CDs
(new technology)
5
4
3
2
1
Demand for CDs
(MP3 player $200)
0
2
4
6
8
10
12
Demand for CDs
(MP3 player $400)
14
Quantity (millions of CDs per week)
Copyright © 1998 Addison Wesley Longman, Inc.
TM 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 © 1998 Addison Wesley Longman, Inc.
TM 4-75
Price (p)
Market EQUILIBRIUM
Market
equilibrium
Supply
P*
Demand
0
Copyright © 1998 Addison Wesley Longman, Inc.
Q*
Quantity supplied (Qs)
TM 4-76
Market SURPLUS
P
$5
surplus
S
4
3
2
1
o
Copyright © 1998 Addison Wesley Longman, Inc.
D
2
4
6
78
10 12 14 16
Q
TM 4-77
Market DEFICIT
P
S
$5
4
3
2
deficit
1
o
D
2
4
6
78
Corn
Copyright © 1998 Addison Wesley Longman, Inc.
101112 14 16
Q
TM 4-78