Macroeconomics CHAPTER 3 Supply and Demand PowerPoint® Slides by Can Erbil © 2004 Worth Publishers, all rights reserved
Supply and Demand A competitive market is a market in which there are ¾many buyers and sellers ¾of the same good or service. The supply and demand model is a model of how a competitive market works. Five key elements in this model: ¾The demand curve ¾The supply curve ¾The set of factors that cause the demand curve to shift, and the set of factors that cause the supply curve to shift ¾The equilibrium price ¾The way the equilibrium price changes when the supply and demand curves shift
Demand Schedule A demand schedule shows how much of a good or service consumers will want to buy at different prices. Demand Schedule for Tickets Price ($ per ticket)
Quantity demanded (tickets)
A demand curve is the graphical representation of the demand schedule; it shows how much of a good or service consumers want to buy at any given price.
The quantity demanded is the actual amount consumers want to buy at some specific price. If the scalpers are charging $250 per ticket, 8,000 tickets will be purchased.
That is, 8,000 is the quantity demanded at a price of $250.
The law of demand says that a higher price for a good, other things equal, leads people to demand a smaller quantity of the good. ¾
If the price drops to $100,
20,000 fans want to buy tickets. At $250, only 8,000 tickets are demanded.
¾This Note The reflects law that of thethe demand demand general
proposition a higher curve to slopes points thethat inverse price reducesbetween the number downward. relationship price of people willing to buy a and the quantity good. demanded.
Shifts of the Demand Curve
A change in the quantity demanded at any given price, represented by the replacement of the original demand curve with a new demand curve.
Gretzky is retiring!!!
¾The Announcement of Gretzky ’sbyretirement generates anthe increase Thisincrease event is in represented demand shifts the thetwo demand demand curve schedules: to right.
in demand, anbefore increase the quantity demanded at any given ¾ Demand theinannouncement price. ¾ Demand after the announcement
“Movement Along” vs. “Shift” of the Demand Curve A movement along the demand curve is a change in the quantity demanded of a good that is the result of a change in that good’s price.
¾¾ ¾ from from it point point AA to toofof Itisisthe theresult result
point a fallincrease in B: the C: increase price of in an in the the quantity good.demanded quantity a shift of reflects demanded at any movement the demand given price. along
curve the demand curve
Shifts of the Demand Curve (continued)
A andecrease “increaseinin demand demand”,means meansa a leftward rightwardshift shiftofofthe demand curve. the demand curve: ¾
¾At at any any given given price, price,
consumers demand a smaller quantity larger quantity than before. (D1Æ (D2) D1ÆD3)
What causes a demand curve to shift? ¾
Changes in the Prices of Related Goods ¾
one of the goods makes consumers less willing to buy the other good. Ex.: muffins and donuts. Complements: Two goods are complements if a fall in the price of one good makes people more willing to buy the other good. Ex: squash balls and squash racquets.
Changes in Income ¾
Substitutes: Two goods are substitutes if a fall in the price of
Normal Goods: When a rise in income increases the demand
for a good—the normal case—we say that the good is a normal good. Inferior Goods: When a rise in income decreases the demand for a good, it is an inferior good. Ex: instant noodles.
Changes in Tastes Changes in Expectations
Supply Schedule A supply schedule shows how much of a good or service would be supplied at different prices. Supply Schedule for Tickets Price ($ per ticket)
Quantity supplied (tickets)
A supply curve shows graphically how much of a good or service people are willing to sell at any given price.
… orhigher Just The as fordemand that the curvesbeing price matter, normally the more slope offered, of any good the they downwards, more will bepeople willingwill to supply be sell. willing curves to part normally with theirslope hockey tickets,… upwards:
Shifts of the Supply Curve A shift of the supply curve is a change in the quantity supplied of a good at any given price.
Gretzky is retiring!!!
of Gretzky’s retirement a decrease in supply, The decrease in supply shiftsgenerates the supply curve to thea decrease left. in the quantity supplied at any given price.
“Movement Along” vs. “Shift” of the Supply Curve A movement along the supply curve is a change in the quantity supplied of a good that is the result of a change in that good’s price.
¾¾ from frompoint pointAAtotopoint
C: point the B: decrease the decrease in ¾ It is is the the result result of of aa quantity in itquantity supplied supplied fall decrease in the in price theof of the the aashift reflects reflects good. quantity supplied at supply movement curve along any price. the given supply curve
Shifts of the Supply Curve (continued) The Any principal “decrease increase in in factors that shift the supply” means a supply curve: rightward leftward shift shiftofofthe supply curve: the supply curve: ¾changes in the ¾
price of an input
¾ at any given price, ¾changes in there is a andecrease increase
intechnology the quantity supplied. (S1Æ S2) ¾changes in S3) expectations.
What causes a supply curve to shift? ¾
Changes in Input Prices ¾
An input is a good that is used to produce another good.
Changes in Technology
Changes in Income
Changes in Expectations
Supply, Demand, and Equilibrium Equilibrium in a competitive market: when the quantity demanded of a good equals the quantity supplied of that good.
The price at which this takes place is the equilibrium price (a.k.a market-clearing price): ¾ Every
buyer finds a seller and vice versa.
The quantity of the good bought and sold at that price is the equilibrium quantity.
Finding the Equilibrium Price and Quantity ¾ this market Market In equilibrium ¾In Let’s put the the
equilibrium price equilibrium the quantity occurs supply curve and is $250 at point demanded E, where iscurve the demand the equal supply tomarket thecurve ¾ And the for that on equilibrium and quantity the demand supplied. the sameisdiagram. quantity 8,000 curve intersect. tickets.
Why does the market price fall if it is above the equilibrium price? ¾Let’s say the market
price of $350 is above the equilibrium price of $250
creates a surplus
surplus will push the price down until it reaches the equilibrium price of $250.
There is a surplus of a good when the quantity supplied exceeds the quantity demanded. Surpluses occur when the price is above its equilibrium level.
Why does the market price rise if it is below the equilibrium price? ¾Let’s say the market
price of $150 is below the equilibrium price of $250.
creates a shortage.
shortage will push the price up until it reaches the equilibrium price of $250.
There is a shortage of a good when the quantity demanded exceeds the quantity supplied. Shortages occur when the price is below its equilibrium level.
Changes in Supply and Demand ¾
What happens when the demand curve shifts?
Coffee and tea are substitutes: if the price of tea rises (falls), the demand for coffee will increase (decrease). But how does the price of tea affect the market for coffee? When E A new : The A rise equilibrium demand inexists the original 2 1shortage at is for price reached the a of good original tea,atinaEthe equilibrium 2, ,for socoffee price with aP1higher price increases, substitute, shifts the market rises equilibrium price equilibrium the curve is atdemand Eand the 1, atthe quantity P a supplied higher price rightward tothe itsthe intersection of 2 andand increases, a S equilibrium equilibrium new position atand supply curve movement quantity Qof quantity D2. original the the 2.along the supply curve. good both rise. demand curve D1.
Changes in Supply and Demand (continued) ¾
What happens when the supply curve shifts?
Technological innovation: In the early 1970s, engineers learned how to put microscopic electronic components onto a silicon chip; progress in the technique has allowed ever more components to be put on each chip. original When The A E : The Ashift: new supply exists After of aat 1surplus 2 the the a technological equilibrium good original in is price market for P increases, change reached increases at silicon Efalls the 1, so price 2, with chips is equilibrium at Eof1, at equilibrium the supply and a lower the quantity the intersection price silicon chips, theatheof demanded price Pof and 2 the demand curve good supply falls curve shifts increases, aand higher equilibrium D and the right equilibrium tothe its new quantity Q2original movement .along supply curve quantity position atrises. S2curve. the demand .S1.
Simultaneous Shifts in Supply and Demand ¾
What happens when the both supply and demand curves shift simultaneously?
The increase There is a in demand is relatively simultaneous larger than shift the of rightward decrease in supply, the demand curve so the equilibrium and leftward shift price rises and the of the supply equilibrium quantity curve. increases.
Simultaneous Shifts in Supply and Demand ¾
What happens when the both supply and demand curves shift simultaneously? (another scenario)
The decrease There is a in supply is relatively simultaneous larger than shift the of rightward increase in demand, the demand curve so the equilibrium and leftward shift price rises and the of the supply equilibrium quantity curve. decreases.
Simultaneous Shifts in Supply and Demand We can make the following predictions about the outcome when the supply and demand curves shift simultaneously: Supply Increases
Price: ? Price: up Quantity: up Quantity: ?
Price: down Quantity: ?
Price: ? Quantity: down
For Inquiring Minds Supply, Demand, and Controlled Substances However, we can see The equilibrium by comparing thefrom price has risen original P1 to P2equilibrium , and this E1 with the new The “war on drugs” induces suppliers to equilibrium E2 that shifts thedrugs supply provide the actual reduction curve tothe despite therisks. left. in the quantity of drugs supplied is much smaller than the shift of the supply curve.
The End of Chapter 3 coming attraction: Chapter 4: The Market Strikes Back