CHAPTER 3 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM

1. CHAPTER 3 DEMAND, SUPPLY, AND MARKET EQUILIBRIUM AP ECONOMICS

2. MICROECONOMICS • That part of economics that deals with behavior and decision making by small units, such as individuals and firms

3. The Market Forces of Supply and Demand • Supply and Demand are the two words that economists use most often. • Supply and Demand are the forces that make market economies work! • Modern microeconomics is about supply, demand, and market equilibrium.

4. Markets and Competition The terms supply and demand refer to the behavior of people. . . . . .as they interact with one another in markets.

5. Market: any institution, mechanism, or arrangement which facilitates exchange. • A marketis a group of buyers and sellers of a particular good or service. • Buyers determine demand... • Sellers determine supply... • Markets bring together buyers and sellers. • Examples: • Gas station • E-commerce site • Local music store • Farmer’s roadside stand • NYSE • Auctions

6. DEMAND • For this to work there has to be “wanting” of a product • Consumers have to desire the product and have the willingness and ability to buy a product • Use schedules and graphs to represent approximations of consumer behavior

7. Ceteris Paribus . . . ...implies that all the relevant variables (e.g. determinants of demand) are held constant, except the one(s) being studied at the time.

8. Demand Schedules a table listing that shows the quantity demanded at all prices that might prevail in the market at a given time Demand Curves graphs that plot the quantity demanded at all prices DEMAND

9. The Concept of Demand. . . P • Quantity Demanded refers to the amount (quantity) of a good that buyers are willing and able to purchase at alternative prices for a given point in time. • Point in time is a specific period could mean a day, a week, or a month D Q

10. LAW OF DEMAND • Demand for an economic product varies inversely with its price • Prices Quantity Demanded • Prices Quantity Demanded • The movement along a demand curve shows a CHANGE IN THE QUANTITY DEMANDED or a change in the quantity of the product purchased in response to a change in price

11. Law of Demand: Market Price P Law of Demand: There exists an inverse relationship between Price and Quantity Demanded. (Negative Relationship) D Q

12. Example: Demand For Ice Cream Demand Price of Ice Cream D Quantity of Ice Cream

13. UTILITY • Usefulness or satisfaction from consumption • MARGINAL UTILITY • the extra usefulness or satisfaction a person gets from acquiring one more unit of a product • Example: Drinking glass of ice-cold lemonade after playing a hard game of tennis or basketball on a hot summer afternoon

14. MARGINAL UTILITY CONT. • Consumers keep on buying a product until they reach a point where the last unit consumed gives enough, and only enough, satisfaction to justify the price. • When consumers reach the point that the marginal utility is less than the price, you will stop buying.

15. DIMINISHING MARGINAL UTILITY • The more units of a certain economic product a person can acquire, the less eager that person is to buy still more. • As people’s wants for a particular product become more fully satisfied, they become less willing to spend their limited incomes to buy more of that product. • The principle of diminishing marginal utility can also be used to explain the downward-sloping nature of the demand curve

16. EFFECTS OF QUANTITY DEMANDED • Income Effect • the change in the quantity demanded because of a change in the consumer’s real income when the price of a commodity changes • Increases the purchasing power of a buyer’s money income enabling the buyer to purchase more of the product than before • Substitution Effect • the change in quantity demanded because of the change in relative price of the product • Buyers have the incentive to substitute a less expensive product for similar products that are now relatively more expensive

17. QUANTITY DEMANDED AND DEMAND ARE NOT THE SAME • When QUANTITY DEMANDED (Qd) changes, it does so because of a change in the price (P) of a product, and movement occurs along the current demand curve • When DEMAND(D) changes, the entire demand curve moves or shifts. The change in demand results in an entirely new curve.

18. Changes in Quantity Demanded Price $2.00 Quantity D 7

19. Changes in Quantity Demanded Price $2.00 $1.00 Quantity D 7 13

20. Change in Demand Price $2.00 Quantity D 7

21. Change in Demand Price $2.00 D2 D Quantity 7 10

22. Market Demand • Adding all the quantities demanded by all consumers at each of the various possible prices, we can get from individual demand to market demand

23. Determinants of Demand • What factors determine how much ice cream you will buy? • What factors determine how much will you really purchase? • Demand Shifters

24. Determinants of Demand • Consumers’ Tastes and Preferences • Number of Consumers (buyers) • Consumers’ Income • Price of Related Goods • Consumer Expectations

25. Shift to the Right increase in demand Shift to the Left decrease in demand CHANGE IN DEMAND OR SHIFT IN DEMAND

26. GOODS • Normal Goods • Goods for which demand increases when income increases • Most goods are normal goods • Inferior Goods • Goods and services for which demand decreases when income increases. • Inferior is not the products quality • Generic brand products, hamburgers, and used clothing Generic Fast Food Used

27. Determinant of Demand: Income P • As income increases the demand for a normal goodwill increase. D D2 Q

28. Determinant of Demand: Income P • As income increases the demand for a normal goodwill increase. • As income increases the demand for a inferior gooddecrease. D D2 Q

29. CAUSES FOR CHANGES IN DEMAND (DETERMINANTS) • Consumer Income • Consumer Tastes • Price of Related Goods • Substitutes • Complements

30. Determinant of Demand: Prices of Related Goods When the fall in price of one good reduces the demand for another good, the two goods are substitutes.

31. Determinant of Demand: Prices of Related Goods When the fall in price of one good increases the demand for another good, the two goods are complements.

32. CHAPTER 3--SUPPLY AP ECONOMICS

33. SUPPLY • The quantity of goods and services that producers are willing to offer at various possible prices other things equal during a given time period • Example: During the winter months, for example, jacket manufacturers offer a certain quantity of jackets at each price.

34. Supply of Ice Cream Price S Quantity

35. LAW OF SUPPLY • States that producers supply more goods and services when they can sell them at higher prices and fewer goods and services when they must sell them at lower prices • Quantity supplied is directly related to the prices that producers can charge for their goods and services • Example: If producers of a compact disc (CD) players can charge $300 for their products, they will make more CD players than if they could charge only $200. • PRICE QUANTITY SUPPLIED • PRICE QUANTITY SUPPLIED

36. The Concept of Supply. . . P S Quantity Suppliedrefers to the amount (quantity) of a good that sellers are willing and able to make available for sale at alternative prices for a given point in time. Q

37. QUANTITY SUPPLIED • The amount of a good and service that a producer is willing to sell at each particular price • PRICE is the key factor affecting not only quantity demanded but also the quantity supplied

38. Changes in Quantity Supplied S Price $2.00 Quantity 7

39. Changes in Quantity Supplied S Price $2.00 $1.00 Quantity 1 7

40. SUPPLIERS WANT A PROFIT • Suppliers actions are based on the pursuit of profits • PROFIT is the amount of money remaining after producers have paid all of their costs • Businesses make a profit when revenues are greater than the costs of production

41. COSTS OF PRODUCTION • Wages, salaries, rent, interest on loans, bills for electricity, raw materials, and any other goods and services used to manufacture a product • To make a PROFIT, producers must provide goods and services that consumers want—at prices that consumers are willing and able to pay

42. PROFIT MOTIVE • Governs how individual companies make decisions and it also helps direct the use of resources in the entire market • It can cause an increase or a decrease in production for one company or many companies

43. Supply Schedule Lists each quantity of a product that producers are willing to supply at various market prices It shows the relationship between the price of a good or service and the quantity that producers will supply Supply Curves Plot the relationship on a graph between the price of a good or service and the quantity supplied SUPPLY

44. CHANGES IN SUPPLY • PRICE CHANGES affect the QUANTITY SUPPLIED • DETERMINANTS OF SUPPLY are the non-price factors that can shift an entire supply curve of a product.

45. Change in Supply S Price $2.00 Quantity 7

46. Change in Supply S S2 Price $2.00 Quantity 7 11

47. DETERMINANTS OF SUPPLY • Prices of resources • Government tools • Taxes and Subsidies and Regulations • Technology • Prices of related goods • Producer expectations • Competition or # of sellers (producers)

48. Determinant of Supply: Market Price P S Law of Supply There exists an direct (positive) relationship between Price and Quantity Supplied. Q

49. RESOURCES CAUSE SHIFTS • A change in the price of resources or factors of production can shift an entire supply curve • A RESOURCE is anything that can be used in the production of a good or service • Resources include raw materials, electricity, and workers’ wages  • These resources contribute to a business’s costs of production

50. RESOURCES CONT. • Any price change for a resource increases or decreases a business’s production costs • When the price of a resource falls, production costs fall accordingly. Lower production costs mean that a business can supply more of the product for the same cost • Lower production costs also create greater profits, which will cause the businesses to increase production even more  • Higher production costs mean that the company cannot supply as much of the product at the same cost as before