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Learning Objectives

Learning Objectives. Explain the law of demand Distinguish between changes in demand and changes in quantity demanded Explain the law of supply Distinguish between changes in supply and changes in quantity supplied

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Learning Objectives

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  1. Learning Objectives • Explain the law of demand • Distinguish between changes in demand and changes in quantity demanded • Explain the law of supply • Distinguish between changes in supply and changes in quantity supplied • Understand how supply and demand interact to determine equilibrium price and quantity Chapter 3 - Demand and Supply

  2. Did You Know That... • The average price of an apartment-sized condominium has often exceeded the average price of a standalone house? • The relative physical size of items does not determine the prices at which people exchange them for? • By using demand and supply you can develop a better understanding of why relative size of an item typically has little to do with the price at which it sells? Chapter 3 - Demand and Supply

  3. Markets • Markets • Arrangements that individuals have for exchanging with one another • Represent the interaction of buyers and sellers for goods and services • Markets set the prices we pay and receive. • Automobile market • Health care market • Labor market • Stock market Chapter 3 - Demand and Supply

  4. The Law of Demand • Demand • A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant Chapter 3 - Demand and Supply

  5. The Law of Demand • Law of Demand • Quantity demanded is inversely related to price, holding other factors constant. • Price # Qd $ • Price $ Qd # Chapter 3 - Demand and Supply

  6. The Law of Demand • What are we holding constant? • Income • Tastes and preferences • Price of other goods • Many other factors Chapter 3 - Demand and Supply

  7. The Demand Schedule • The demand schedule • Table relating prices to quantity demanded • We must consider • Time dimension • Constant-quality units • Demand Curve • A graphical representation of the demand schedule • Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal Chapter 3 - Demand and Supply

  8. The Individual Demand Schedule and the Individual Demand Curve Chapter 3 - Demand and Supply

  9. The Individual Demand Schedule and the Individual Demand Curve Chapter 3 - Demand and Supply

  10. The Demand Schedule • Individual versus market demand curves • Market Demand • The demand of all consumers in the marketplace for a particular good or service • Summation at each price of the quantity demanded by each individual Chapter 3 - Demand and Supply

  11. The Horizontal Summation of Two Demand Curves Chapter 3 - Demand and Supply

  12. The Horizontal Summation of Two Demand Curves Chapter 3 - Demand and Supply

  13. The Market Demand Schedule for Flash Memory Pen Drives Chapter 3 - Demand and Supply

  14. The Market Demand Schedule for Flash Memory Pen Drives Chapter 3 - Demand and Supply

  15. Shifts in Demand • Scenario • Imagine the federal government gives every student registered in a college, university, or technical school in the United States a notebook computer. • If some factor other than price changes, we can show its effect by moving the entire demand curve, shifting the curve left or right. Chapter 3 - Demand and Supply

  16. A Shift in the Demand Curve Suppose universities prohibit the use of notebook computers Suppose the federal government gives every student a notebook computer Chapter 3 - Demand and Supply

  17. Determinants of Demand • Ceteris-Paribus Conditions • Determinants of the relationship between price and quantity that are unchanged along a curve • Changes in these factors cause a curve to shift Chapter 3 - Demand and Supply

  18. Normal and Inferior Goods • Normal Goods • Goods for which demand rises as income rises, most goods are normal goods • Inferior Goods • Goods for which demand falls as income rises Chapter 3 - Demand and Supply

  19. Shifts in Demand • Determinants of demand • Income • Tastes and preferences • The prices of related goods • Substitutes • Complements Chapter 3 - Demand and Supply

  20. Shifts in Demand • Substitutes • Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. Chapter 3 - Demand and Supply

  21. Shifts in Demand • Complements • Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other. Chapter 3 - Demand and Supply

  22. Shifts in Demand • Determinants of demand • Expectations • Future prices • Income • Product availability • Market size (number of buyers) Chapter 3 - Demand and Supply

  23. Increase in income increases demand Decrease in income decreases demand D3 D2 Shifts in Demand The Determinants of Demand Income: Normal Good Price D1 Q/Units Chapter 3 - Demand and Supply

  24. D3 D2 Shifts in Demand The Determinants of Demand Income: Inferior Good Price Decrease in income increases demand Increase in income decreases demand D1 Q/Units Chapter 3 - Demand and Supply

  25. Hybrid vehicles • Increase in demand SUVs • Decrease in demand D3 D2 Shifts in Demand The Determinants of Demand Tastes and Preferences Price D1 Q/Units Chapter 3 - Demand and Supply

  26. D2 Shifts in Demand The Determinants of Demand Price of Related Goods: Substitutes Price Butter and Margarine • Price of both = $2/lb • Price of margarine increases to $3/lb • Demand for butter increases D1 Q/Butter Chapter 3 - Demand and Supply

  27. D3 D2 Shifts in Demand The Determinants of Demand Price of Related Goods: Complements Price Speakers and Amplifiers • Decrease the relative price of amplifiers • Demand for speakers increases Speakers and Amplifiers • Increase the relative price of amplifiers • Demand for speakers decreases D1 Q/Speakers Chapter 3 - Demand and Supply

  28. D3 D2 Shifts in Demand The Determinants of Demand Expectations: Income, Future Prices Price A higher income or expectations of a higher future price will increase demand A lower income or expectations of a lower future price will decrease demand D1 Q/Units Chapter 3 - Demand and Supply

  29. D3 D2 Shifts in Demand The Determinants of Demand Market Size (Number of Buyers) Price Increase in the number of buyers increases demand Decrease in the number of buyers decreases demand D1 Q/Units Chapter 3 - Demand and Supply

  30. Shifts in Demand • Changes in demand versus changes in quantity demanded • A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand. • This is a shift of the whole curve. Chapter 3 - Demand and Supply

  31. Shifts in Demand • Changes in demand versus changes in quantity demanded • A change in a good’s own price leads to a change in quantity demanded. • This is a movement along the same curve. • ∆D is not the same as ∆Qd. Chapter 3 - Demand and Supply

  32. Movement Along a Given Demand Curve A change in the price changes the quantity of a good demanded, movement along the curve Chapter 3 - Demand and Supply

  33. The Law of Supply • Supply • Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal • The amount of a product or service that firms are willing to sell at alternative prices Chapter 3 - Demand and Supply

  34. The Law of Supply • Law of Supply • The price of a product or service and the quantity supplied are directly related. • P # Qs # • P $ Qs $ Chapter 3 - Demand and Supply

  35. The Supply Schedule • The supply schedule is a table relating prices to quantity supplied at each price. • Supply Curve • A graphical representation of the supply schedule • Positively sloped line showing direct relationship between price and quantity supplied, all else equal Chapter 3 - Demand and Supply

  36. The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives Chapter 3 - Demand and Supply

  37. The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives Chapter 3 - Demand and Supply

  38. Horizontal Summation of Supply Curves Chapter 3 - Demand and Supply

  39. Horizontal Summation of Supply Curves Chapter 3 - Demand and Supply

  40. The Market Supply Schedule and the Market Supply Curve for Flash Memory Pen Drives Chapter 3 - Demand and Supply

  41. The Market Supply Schedule and the Market Supply Curve for Flash Memory Pen Drives Chapter 3 - Demand and Supply

  42. Shifts in Supply • Scenario • A new method of manufacturing flash memory pen drives reduces the cost of production dramatically. Chapter 3 - Demand and Supply

  43. A Shift in the Supply Curve If costs increase, supply decreases If costs decrease, supply increases If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve Chapter 3 - Demand and Supply

  44. A Shift in the Supply Curve S2 5 S1 a 4 c Price per Flash Memory Pen Drive ($) When supply increases the quantity supplied will be greater at each price 3 2 1 0 2 4 6 8 10 12 14 Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) Chapter 3 - Demand and Supply

  45. A Shift in the Supply Curve S2 5 S1 a 4 b c Price per Flash Memory Pen Drive ($) When supply increases the quantity supplied will be greater at each price 3 d 2 1 0 2 4 6 8 10 12 14 Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) Chapter 3 - Demand and Supply

  46. A Shift in the Supply Curve S3 5 S1 b a 4 When supply decreases the quantity supplied will be less at each price d c Price per Flash Memory Pen Drive ($) 3 2 1 0 2 4 6 8 10 12 14 Quantity of Flash Memory Pen Drives Supplied (millions of constant-quality units per year) Chapter 3 - Demand and Supply

  47. Shifts in Supply • Determinants of supply • Cost of inputs • Technology and productivity • Taxes and subsidies • Price expectations • Number of firms in industry Chapter 3 - Demand and Supply

  48. S3 S2 Shifts in Supply The Determinants of Supply Cost of Inputs Price S1 Increase in cost decreases supply Decrease in cost increases supply Q/Units Chapter 3 - Demand and Supply

  49. S3 S2 Shifts in Supply The Determinants of Supply Technology and Productivity Price S1 Decreases in productivity decrease supply Improvements in technology or increases in productivity increase supply Q/Units Chapter 3 - Demand and Supply

  50. S3 S2 Shifts in Supply The Determinants of Supply Taxes and Subsidies Price S1 Increases in taxes or decreases in subsidies decrease supply Decreases in taxes or increases in subsidies increase supply Q/Units Chapter 3 - Demand and Supply

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