4: Chapter Market Forces of Supply and Demand Demand Imagine that authorities announce that a hurricane is going to hit College Station in 3 days and our city need to be evacuated. Authorities established that the destiny of all flights leaving C.S. is the closest safe city. You have the option of drive to a safe location. In this case you will find a huge line when you go to buy gas. Also, because so many people are leaving the city, you expect to spend something between 15 to 24 hours in the traffic but you are not sure about this time interval. In a context like that, HOW MUCH WOULD YOU PAY FOR ONE FLIGHT TICKET? Before you answer that, think about your financial restrictions and your preferences about driving and flying in the described context. If we ask that question to everybody that is possibly interested in buy a flight ticket and repeat the above procedure we have what economists call the demand schedule. The demand schedule is a table that shows the relationship between the price of the good and the quantity demanded. Here, we are assuming that all other things (that are not the price of the good or service in consideration) that can affect the quantity demanded remain constant. Imagine we asked this question to everybody that can possibly be interested in buy a flight ticket and we observed a demand schedule like the one bellow. DEMAND SCHEDULE FOR TICKETS Price of flight Quantity of flight tickets in tickets demanded dollars 1500 2500 1000 3000 750 4000 500 5500 250 7500 100 10000 We can represent the demand schedule in a graph. The demand curve is a graph of the relationship between the price of a good and the quantity demanded.
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Quantity demanded is the amount of a good that buyers are willing and able to purchase. In our example, as the price rises, the quantity demanded of flight tickets falls. The cases in which we could possibility observe an upward slope of the demand curve are so rare that in practice we can ignore them. The law of demand states that, other things equal, the quantity demanded of a good falls when the price of the good rises. Would you change your answer about the maximum price you would pay for a flight ticket if recent updates about the hurricane inform that it is going to hit C.S. in 1 day and not in 3 days as they expected? Probably more people would buy flight tickets at any given price. Imagine that after this new information the demand schedule is now DEMAND SCHEDULE FOR TICKETS Quantity of flight tickets demanded Price of flight tickets in dollar 1500 1000 750 500 250 100 before the change in forecast 2500 3000 4000 5500 7500 10000 after the change in forecast 5000 6000 8000 11000 15000 20000
For each price, now more people would buy flight tickets. The demand is greater for any given price. After the change in expectations we have now a new demand curve. This shift in the demand curve shows the change in the demand at any given price. This can be represented graphically with a change in the demand curve from D1 to D2.
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1)The negative relationship between price and quantity demanded a. applies to most goods in the economy. b. is represented by a downward-sloping demand curve. c. is referred to as the law of demand. d. All of the above are correct.
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We need to have a clear distinction between shifts in the demand curve and movement along the demand curve. Change in price of a good or service leads to Change in quantity demanded (movement along the demand curve). Change in income, preferences, expectations, or prices of other goods or services leads to Change in demand (shift of the demand curve). A curve shifts when there is a change in a relevant variable that is not measured on either axis. Because the price is on the vertical axis, a change in price represents a movement along the demand curve. By contrast, income, price of related goods etc are not measured on either axis, so a change in one of these variables shifts the demand curve.
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In our example a change in expectations shift the demand curve. But other factors can change it. What if you need a professional to check your car before your trip and all garages in C.S. are now charging 10 times more for this service? Does it change your answer about the maximum price you would pay for a flight ticket? There are many variables that can shift the demand curve. Here are some of the most important. (a) Change in prices of related goods. Examples: Toshiba and HP notebooks, notebooks and notebook cases (b) Change in income Examples: Oliver Garden (# times in a year) (c) Change in tastes Examples: Scientists find that eating yogurt reduces fat around belly. (d) Change in expectations Examples: In our example, 1 day instead of 3 days for the hurricane to hit C.S.. (e) Change in the number of buyers
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(a) Change in prices of related goods Two goods are substitutes if a fall in the price of one good reduces the demand for the other good. Examples: Toshiba and HP notebooks; Pepsi and Coke Two goods are complements if a fall in the price of one good increases the demand for the other good. Examples: Notebooks and cases. (b) Change in income A rise in consumers' income causes an increase in the demand for most goods. A good is called a normal good if a raise in income increase the demand for that good. Example: almost every good and service available. Oliver Garden (# times in a year). A good is called an inferior good if a raise in income decrease the demand for that good. Example: Higher-income people are probably less likely to consumer instantaneous macaroni than lower-income people. Market demand: The sum of all the quantities of a good or service demanded by all the consumers in the market for that good or service. Market demand is the sum of all individual demands for a particular good or service. Graphically, individual demand curves are summed horizontally to obtain the market demand curve.
2) If a good is normal, then an increase in income will result in a. an increase in the demand for the good. b. a decrease in the demand for the good. c. a movement down and to the right along the demand curve for the good. d. a movement up and to the left along the demand curve for the good. 3) Currently you purchase 6 packages of hot dogs a month. You will graduate from college in December and you will start a new job in January. You have no plans to purchase hot dogs in January. For you, hot dogs are a. a substitute good. b. a normal good. c. an inferior good. d. a law-of-demand good.
4) Refer to Figure 4-2. The movement from D to D1 could be caused by a. an increase in price. b. a decrease in the price of a complement. c. a technological advance. d. a decrease in the price of a substitute.
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5) When quantity demanded has increased at every price, it might be because a. the number of buyers in the market has decreased. b. income has increased and the good is an inferior good. c. the costs incurred by sellers in producing the good have decreased. d. the price of a complementary good has decreased. 6) Ford Motor Company announces that it will offer $3,000 rebates on new Mustangs starting next month. As a result of this information, today's demand curve for Mustangs a. shifts to the right. b. shifts to the left. c. shifts either to the right or to the left, but we cannot determine the direction of the shift from the given information. d. will not shift; rather, the demand curve for Mustangs will shift to the right next month.
7) Refer to Figure 4-1. It is apparent from the figure that a. the good is inferior. b. the demand for the good decreases as income increases. c. the demand for the good conforms to the law of demand. d. All of the above are correct. 8) When the number of buyers in a market increases, a. the market demand curve shifts to the right. b. the demand curves of the individual demanders in the market are unaffected. c. the market demand the for good in question increases. d. Al of the above are correct.
9) Refer to Table 4-1. When the price of the good is $1.00, the quantity demanded in this market would be a. 42 units. b. 31 units. c. 24 units. d. 14 units.
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10) Refer to Table 4-1. If the price increases from $1.00 to $1.50, a. the market demand decreases by 20 units. b. individual demand curves, when drawn, will shift to the left. c. the quantity demanded in the market decreases by 2 units. d. the quantity demanded in the market decreases by 7 units. Supply Suppose that in the beginning of every semester, the students enrolled in 203 in the previous semester can sell their textbooks for the students taking 203 in the current semester. Supply schedule is a table showing how much of a product firms will sell at different prices. Here, we are assuming that all other things (that are not the price of the good or service in consideration) that can affect the quantity supplied remain constant. SUPPLY SCHEDULE FOR SECOND HAND TEXTBOOKS Quantity of used books Price of used books in supplied in the dollars beginning of the semester 5 0 10 2 15 4 20 8 25 16 30 28 35 50 We can represent the supply schedule in a graph. The supply curve is the graph of the relationship between the price of a good and the quantity supplied.
Price of used books in dollar
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Quantity supplied is the amount of a good that sellers are willing and able to sell. The law of supply states that, other things equal, the quantity supplied of a good rises when the price of the good rises. There are many variables that can shift the demand curve. Here are some of the most important. (a) The cost of producing the product, which in turn depends on The price of required inputs (labor, capital, and land) The technologies that can be used to produce the product (b)The prices of related products (c) number of sellers (d) expectation Shift of supply versus movement along a supply curve Change in price of a good or service leads to Change in quantity supplied (movement along a supply curve). Change in costs (input prices, technology) or prices of related goods and services leads to Change in supply (shift of a supply curve).
P Change in Supply P Change in the Quantity Supplied
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Market supply is the sum of all individual supplies for all sellers of a particular good or service. Graphically, individual supply curves are summed horizontally to obtain the market supply curve. 11) According to the law of supply, a. the quantity supplied of a good is negatively related to the price of the good. b. when the price of a good falls, the quantity supplied of the good rises. c. the supply curve for a good is upward-sloping. d. All of the above are correct. 12) A market supply curve is determined by a. vertically summing individual supply curves. b. horizontally summing individual supply curves. c. finding the average quantity supplied by sellers at each possible price. d. finding the average price at which sellers are willing and able to sell a particular quantity of the good.
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13) A decrease in the number of sellers in the market causes a. the supply curve to shift to the left. b. the supply curve to shift to the right. c. a movement up and to the right along a stationary supply curve. d. a movement downward and to the left along a stationary supply curve. 14) Suppose you make jewelry. If the price of gold falls, we would expect you to a. be willing and able to produce less jewelry than before at each possible price. b. be willing and able to produce more jewelry than before at each possible price. c. face a greater demand for your jewelry. d. face a weaker demand for your jewelry.
15) Refer to Figure 4-6. The movement from S to S1 is called a. a decrease in supply. b. a decrease in quantity supplied. c. an increase in supply. d. an increase in quantity supplied. 16) Refer to Figure 4-6. The movement from S to S1 could be caused by a. a decrease in the price of the good. b. an improvement in technology. c. an increase in income. d. an increase in input prices.
Market Equilibrium A market is a group of buyers and sellers of a particular good or service. Market equilibrium occurs when the quantity demanded is equal to the quantity supplied. Equilibrium Price The price that balances quantity supplied and quantity demanded. On a graph, it is the price at which the supply and demand curves intersect. Equilibrium Quantity The quantity supplied and the quantity demanded at the equilibrium price. On a graph it is the quantity at which the supply and demand curves intersect.
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At equilibrium, there is no tendency for price to change. Excess demand or shortage: The condition that exists when quantity demanded exceeds quantity supplied at the current price. Excess supply or surplus: The condition that exists when quantity supplied exceeds quantity demanded at the current price.
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Changes in Equilibrium When supply and demand curves shift, the equilibrium price and quantity change. 17) Researchers find that calcium supplements are more efficient when combined with vitamin D. After the discovery many women over 40 stops consuming the calcium-supplement-withoutvitamin-D and starts consuming the calcium-supplement-with-vitamin-D. Assume that the calcium-supplement-with-vitamin-D is a substitute in production for the calcium-supplementwithout-vitamin-D. The figure below shows the demand and supply curves for calcium-supplement-without-vitaminD. In the figure, draw a possible new supply curve and demand curve for calcium-supplementwithout-vitamin-D. Label the new equilibrium point with the letter B.
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From Point A to B, there has been a(n) ____________ [increase/decrease] in ________ _______________ [demand/quantity demanded] and a(n) _____________ [increase/decrease] in _________________________ [supply/quantity supplied]. The new equilibrium quantity is ________________ [lower than /higher than /the same as] the previous one.
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18) Many students buy books in the beginning of the semester expecting to sell them when the semester ends. If a student buy a new book in the beginning of the semester for $100,00 and sell it in the end of the semester for $60,00, the cost of having the book during the semester is only $40,00 (neglecting discount rates). Assume the figure below shows today's demand and supply curves for the book "Principles of Macroeconomics" by Mankiw, 4 th edition (new copies or not previously used). Now suppose the publisher announces that the 5th edition will be available soon. Students considering to buy the book today know that next semester professors will probably require the new edition from their students. In the figure, draw a possible new demand curve for the book. Label the new equilibrium point with the letter B.
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From Point A to B, there has been a(n) ____________ [increase/decrease] in ________ _______________ [demand/quantity demanded] and a(n) _____________ [increase/decrease] in _________________________ [supply/quantity supplied]. Assume the demand for hair cuts in College Station in a given year is given by the equation Qd=500,000-10,000P and the supply curve is given by the equation Qs= - 100,000+20,000P, where P is the price of a hair cut, is Qd the quantity demanded and Qs is the quantity supplied. Use this information to answer question 7, 8 and 9. 19) In the market of hair cuts in College Station, the equilibrium quantity is equal to _________________ and the equilibrium price is equal to $_____________. 20) Draw the supply and demand curve for hair cuts in College Station. In your graph indicate the equilibrium price and quantity. A competitive market is a market in which there are many buyers and sellers so that each has a negligible impact on the market price. Perfect Competition Products are the same Numerous buyers and sellers so that each has no influence over price Buyers and Sellers are price takers Monopoly One seller, and seller controls price Oligopoly Few sellers Not always aggressive competition Monopolistic Competition Many sellers Slightly differentiated products Each seller may set price for its own product
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