MACROECONOMICS: EXPLORE & APPLY by Ayers and Collinge

1. MACROECONOMICS: EXPLORE & APPLYby Ayers and Collinge CHAPTER 3 “Demand and Supply”

2. Learning Objectives • Distinguish between the general notions of demand and supply used in ordinary conversation and the precise notions employed in the study of economics. • Explain what it means to shift demand and supply and why shifts might occur. • Describe how the marketplace settles on the equilibrium price and quantity. • Specify how demand and supply shifts cause market equilibriums to change over time.

3. Learning Objectives 5. Identify the changes to equilibrium that result from simultaneous changes in demand and supply. 6. (E&A) Discuss how vouchers use competition to improve the quality of schooling.

4. 3.1 DEMAND • Demandrelates the quantity of a good that consumers would purchase at each of various possible prices, over some period of time. • Theceteris paribuscondition means that we look at only one relationship at a time. • Ceteris paribus is the Latin for “holding all else equal”.

5. Demand Schedule

6. Demand Curve The demand curve slopes downward because price and quantity demanded are inversely related. A 5 Price ($’s) B 4 C 3 E 2 Demand F 1 G 0 1 2 3 4 5 Quantity

7. Shifting Demand versus Movements along a Demand Curve A change in the price of a good causes a change in the quantity demanded, but does not shift demand

8. A price change would change the quantity demanded which involves movement along the demand curve. Changes in Demand vs. Changes in Quantity Demanded Price ($’s) Demand Quantity

9. Movement along the demand curve. Changes in Demand vs. Changes in Quantity Demanded Price ($’s) Decrease Increase Demand Quantity

10. Demand Shift Factors • Tastes and Preferences • Substitutes and Complements • Income - Normal vs. Inferior Goods • Population • Price Expectations

11. Demand Shifts LEFT When: Prices of substitutes decrease Prices of complements increase Normal good-income decreases Inferior good-income increases Population decreases Tastes & preferences turn against the product D2 Changes in Demand - Decrease Price D1 Quantity

12. D2 Changes in Demand - Increase • Demand Shifts RIGHT When: • Prices of substitutes increase • Prices of complements decrease • Normal good-income increases • Inferior good-income decreases • Population increases • Tastes & preferences turn in favor of the product Price D1 Quantity

13. 3.2SUPPLY • Supplyrelates the quantity of a good that will be offered for sale at each of various possible prices, over some period of time,ceteris paribus.

14. Supply Schedule

15. Supply Curve Supply H Price ($’s) 5 I 4 The supply curve slopes upward because price and quantity supplied are directly related. J 3 K 2 1 L 0 1 2 3 4 5 M Quantity

16. Supply Shift Factors • Prices of Inputs • Technological Change • Government or Union Restrictions • Prices of Substitutes in Production • Prices of Jointly Produced Goods • Expected Future Prices • Number of Sellers

17. A price change causes movement from one point to another along the same supply curve. Changes in Supply vs. Changes in Quantity Supplied Supply Price ($’s) 5 4 3 2 1 0 1 2 3 4 5 Quantity

18. Changes in Supply vs. Changes in Quantity Supplied Supply Price ($’s) 5 Decrease 4 Movement along Supply Increase 3 2 1 0 1 2 3 4 5 Quantity

19. Supply Shifts LEFT When: Sellers expect price to rise in future. Price of labor or any input rises. Government or union restrictions increase cost. Price of substitute in production rises. Price of product produced jointly falls. Number of sellers declines S2 Changes in Supply - Decrease $ S1 Quantity

20. S2 Changes in Supply - Increase • Supply Shifts RIGHT When: • Sellers expect price to decline in future. • Price of labor or any input falls. • Technological change lowers cost. • Price of substitute in production falls. • Price of product produced jointly rises. • Number of sellers increases $ S1 Quantity

21. Individual Demand to Market Demand Demand can be one individual’s or the market as a whole

22. Market Demand Curve Jill’s Quantity Demanded 0 1 2 3 4 5 Jack’s Quantity Demanded 1 2 3 4 5 6 Market Q Demanded 1 3 5 7 9 11 Market Demand Jill’s Demand Jack’s Demand Price ($) 5 4 3 2 1 0 6 5 4 3 2 1 0 Price ($’s) 1 2 3 4 5 6 7 8 9 10 11 Quantity

23. Individual Supply to Market Supply Supply can be from one firm or all firms in the market.

24. Wally’s Supply Wanda’s Supply Market Supply Market Supply Curve Price ($’s) 5 4 3 2 1 0 1 2 3 4 5 6 7 8 9 Quantity

25. Market Equilibrium There is only one price that clears the market, meaning that the quantity supplied equals the quantity demanded.

26. Market Equilibrium Market equilibrium occurs where demand and supply intersect. Price ($’s) 5 Supply Surplus of 4 Pails Too High 4 P* 3 Too Low 2 Shortage of 4 Pails 1 Demand 0 1 2 3 4 5 6 7 8 9 Q* Pails of Water

27. 3.3 EQUILIBRIUM The market clearing price and the resulting quantity traded comprise what is referred to as the market equilibrium, meaning that there is no tendency for either price or quantity to change, ceteris paribus.

28. Changes in Market Equilibrium Snew S Price ($’s) Snew Price ($’s) S P* P* D D Quantity Q* Q* Quantity An increase or decrease in supply.

29. Dnew Dnew Changes in Market Equilibrium S Price ($’s) Price ($’s) S P* P* D D Q* Q* Quantity Quantity An increase or decrease in demand.

30. Changes in Market Equilibrium Note: In Cases 1-4 only one of the two curves is shifting.

31. Changes in Market Equilibrium Note: In Cases 5-8 both of the curves are shifting.

32. 3.4 EXPLORE & APPLYPolicies for Competition and Choice in Schooling • Charter Schools:Public schools in which a non-profit group receives a contract (i.e. charter) to operate a school for a limited period of time. • Vouchers:Monetary amounts provided by government, free of charge to parents, which would be spendable only on the education of their children, at a school chosen by the parents.

33. Test Yourself • The Law of demand states that consumers • must not buy more than they need. • must not waste what they buy. • must pay for what they buy. • will buy more as price falls.

34. Test Yourself 2. An increase in the price of football tickets would cause the ___________ basketball tickets to __________. • demand for; increase. • supply of; increase. • demand for; decrease. • supply of; decrease.

35. Test Yourself 3. An upward sloping supply curve means that • consumers will wish to purchase more at higher prices . • consumers will wish to purchase more at lower prices. • business firms will wish to sell more at higher prices. • business firms that lower their prices wish to sell more.

36. Test Yourself 4. A decrease in supply is illustrated as • a downward shift in the supply curve. • a shift to the left in the supply curve . • an upward movement along the supply curve. • a downward movement along the supply curve.

37. Test Yourself 5. If research reveals that carrot juice cures cancer, it is likely that • the supply of carrot juice will increase, which will increase the quantity demanded. • demand for carrot juice will increase, which will increase the quantity supplied . • neither the demand or supply of carrot juice will increase. • both the demand and supply of carrot juice will increase.

38. Test Yourself 6. When there is an initial shortage, market prices eventually reach equilibrium because • supply increases. • price decreases . • price increases. • equilibrium output falls.

39. demand quantity demanded ceteris paribus shift factors normal goods inferior goods substitutes complements supply quantity supplied market equilibrium surplus shortage consumer surplus marginal benefit marginal cost charter schools vouchers Terms along the Way

40. The End! Next Chapter 4 “The Power of Prices"