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ECON_2306 => Lecture 3 Slides - MARKETS DEFINED L3:...

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Unformatted text preview: MARKETS DEFINED L3: Demand and Supply (Chapter 3) POTENTIAL BUYERS 1 Principles of Microeconomics POTENTIAL SELLERS 2 MARKETS Principles of Microeconomics Markets A market is an institution or mechanism that brings together buyers (demanders) and sellers (suppliers) of particular goods and services. A market may be local, national, or international in scope. Some markets are highly personal, face-to-face exchanges; others are impersonal and remote. This lecture concerns purely competitive markets with a large number of independent buyers and sellers. A product market involves goods and services. A resource market involves factors of production. Demand A. Demand is a schedule that shows the various amounts of a product that consumers are willing and able to buy at each specific price in a series of possible prices during a specified time period. The schedule shows how much buyers are willing and schedule shows how much buyers are willing and able to purchase at five possible prices. The market price depends on demand and supply. To be meaningful, the demand schedule must have a period of time associated with it. The goal of the lecture is to explain the way in which markets adjust to changes and the role of prices in bringing the markets toward equilibrium. 3 Principles of Microeconomics 4 Principles of Microeconomics 1 DEMAND DEFINED DEMAND SCHEDULE $ !" # * ) ' %& '( )( *" "" +( Demand C. The demand curve Illustrates the inverse relationship between price and quantity (see corn example in the following Figure). downward slope indicates lower quantity The downward slope indicates lower quantity (horizontal axis) at higher price (vertical axis) and higher quantity at lower price, reflecting the Law of Demand. Various Amounts A Series of Possible Prices Series of Possible Prices …a specified time period …other things being equal 5 Principles of Microeconomics Principles of Microeconomics 6 GRAPHING DEMAND Price of Corn GRAPHING DEMAND Price of Corn P CORN $5 4 P $ !" # * ) ' %& '( )( *" "" +( Plot the Points CORN $5 4 3 2 1 $ !" # * ) ' %& '( )( *" "" +( Plot the Points 3 2 1 o 10 20 30 40 50 60 70 80 Principles of Microeconomics Q 7 o 10 20 30 40 5055 60 70 80 Principles of Microeconomics Q 8 Quantity of Corn Quantity of Corn 2 GRAPHING DEMAND Price of Corn GRAPHING DEMAND Price of Corn P CORN $5 4 P $ !" # * ) ' %& '( )( *" "" +( Plot the Points CORN $5 4 3 2 1 $ !" # * ) ' %& '( )( *" "" +( Plot the Points 3 2 1 o Principles of Microeconomics 10 20 30 40 50 60 70 80 35 Quantity of Corn Q 9 o 10 20 30 40 50 60 70 80 Principles of Microeconomics Q 10 Quantity of Corn GRAPHING DEMAND Price of Corn GRAPHING DEMAND Price of Corn P CORN $5 4 P $ !" # * ) ' %& '( )( *" "" +( Plot the Points CORN $5 4 3 2 1 $ !" # * ) ' %& '( )( *" "" +( Connect the Points 3 2 1 D 10 20 30 40 50 60 70 80 Principles of Microeconomics o 10 20 30 40 50 60 70 80 Principles of Microeconomics Q 11 o Q 12 Quantity of Corn Quantity of Corn 3 Example Demand Schedules and Demand Curves Demand curve A curve that shows the curve relationship between the price of a product and the quantity of the product demanded. demanded. Demand D. Individual versus market demand Transition from an individual to a market demand schedule is accomplished by summing individual quantities at various price levels. Market curve is horizontal sum of individual curves curve is horizontal sum of individual curves Demand schedule A table table showing the relationship between the price of a product and the quantity of the the product demanded. 13 Principles of Microeconomics Principles of Microeconomics 14 Example Individual Demand and Market Demand Deriving the Market Demand Curve from Individual Demand Curves Market demand The The demand for a product by all all the consumers in a given given geographical area. If If there are three consumers in a market, how can market market demand be obtained? a. By adding the prices that consumers are willing By that consumers to to pay for a given quantity of output. b. By adding the quantities that consumers are By willing to purchase at a given price, for various price price levels. c. By adding both the prices and the quantities By adding both the ices and the quantities that that consumers are willing to pay for and purchase. purchase. d. By dividing the quantity demanded in the By quantity demanded market market by three. 15 Principles of Microeconomics Principles of Microeconomics 16 4 If If there are three consumers in a market, how can market market demand be obtained? a. By adding the prices that consumers are willing By that consumers to to pay for a given quantity of output. b. By adding the quantities that consumers are By willing to purchase at a given price, for various price price levels. c. By adding both the prices and the quantities By rices that consumers are willing to pay for and purchase. purchase. d. By dividing the quantity demanded in the By quantity demanded market market by three. Demand B. Law of demand is a fundamental characteristic of demand behavior. Other things being equal, as price increases, the corresponding quantity demanded falls. is an inverse relationship between price and There is an inverse relationship between price and quantity demanded. The “other-things-equal” assumption refers to consumer income and tastes, prices of related goods, and other things besides the price of the product being discussed. 17 18 Principles of Microeconomics Principles of Microeconomics When When analyzing the relationship between the price of a good and quantity demanded, other variables must be held constant. Which term best describes such such an assumption? a. The law of demand. b. The substitution effect. c. The income effect. d. The term ceteris paribus. The term ceteris paribus When analyzing the relationship between the price of a good and quantity demanded, other variables must be held constant. Which term best describes such such an assumption? a. The law of demand. b. The substitution effect. c. The income effect. d. The term ceteris paribus. The term ceteris paribus 19 Principles of Microeconomics Principles of Microeconomics 20 5 Demand Explanation of the law of demand Diminishing marginal utility: The decrease in added satisfaction that results as one consumes additional units of a good or service, i.e., the second “Big Mac” yields less extra satisfaction (or utility) than the first. Income effect: A lower price increases the purchasing power of money income, enabling the consumer to buy more at a lower price (or less at a higher price). Substitution effect: A lower price gives an incentive to substitute the lower-priced good for now relatively higher-priced goods. 21 Principles of Microeconomics Which Which of the following establishes the inverse relationship between the price of a product and the the quantity of the product demanded? a. The substitution effect. b. The income effect. c. The law of demand. d. The price effect. 22 Principles of Microeconomics Which Which of the following establishes the inverse relationship between the price of a product and the the quantity of the product demanded? a. The substitution effect. b. The income effect. c. The law of demand. d. The price effect. Demand F. There are several determinants of demand or the “other things,” besides price, which affect demand. Changes in determinants cause changes in demand. Tastes—-favorable change leads to an increase in demand; unfavorable change to a decrease. Number of buyers—more buyers lead to an increase in demand; fewer buyers lead to a decrease. Income—more leads to an increase in demand; less leads to a decrease in demand for normal goods. (The rare case of goods whose demand varies inversely with income is called inferior goods) varies inversely with income is called inferior goods). Prices of related goods also affect demand. Substitute goods (those that can be used in place of each other): The price of the substitute good and demand for the other good are directly related. If the price of Coke rises (because of a supply decrease), demand for Pepsi should increase. Complementary goods (those that are used together like tennis balls and rackets): When goods are complements, there is an inverse relationship between the price of one and the demand for the other. Expectations—consumer views about future prices, product 24 availability, and income can shift demand. Principles of Microeconomics 23 Principles of Microeconomics 6 Demand 2. A summary of what can cause an increase in demand. Favorable change in consumer tastes. Increase in the number of buyers. Rising income if product is a normal good. Falling incomes if product is an inferior good. Increase in the price of a substitute good. Decrease in the price of a complementary good. Consumer expectation of higher prices or incomes in the future. Demand 3. A summary of what can cause a decrease in demand. Unfavorable change in consumer tastes. Decrease in number of buyers. Falling income if product is a normal good. Rising income if product is an inferior good. Decrease in price of a substitute good. Increase in price of a complementary good. Consumers expectation of lower prices or incomes in the future. 25 Principles of Microeconomics Principles of Microeconomics 26 BD = Budget Deficit T = Taxes G = Gov't Spending BD (T - G) TD EXP - IMP TD = Trade Deficit EXP = Exports IMP = Imports Ricardian T-G GRAPHING DEMAND Price of Corn GRAPHING DEMAND Price of Corn P CORN $5 4 P $ !" # * ) ' %& '( )( *" "" +( 3 2 1 What if Demand Increases? D 10 20 30 40 50 60 70 80 Principles of Microeconomics CORN $5 4 $ !" # * ) ' Q 27 %& '( *( )( #( *" ,( "" +( +( - Increase in Quantity Demanded Increase in Demand 10 20 30 40 50 60 70 80 Principles of Microeconomics 3 2 1 D’ D Q 28 o o Quantity of Corn Quantity of Corn 7 GRAPHING DEMAND Price of Corn GRAPHING DEMAND Price of Corn P CORN $5 4 P $ !" # * ) ' %& '( )( *" "" +( 3 2 1 What if Demand Decreases? D 10 20 30 40 50 60 70 80 Principles of Microeconomics CORN $5 4 $ !" # * ) ' Q 29 %& '( .. )( '( *" )( "" #( +( ,( Decrease in Quantity Demanded 3 2 1 Decrease in Demand 10 20 30 40 50 60 70 80 Principles of Microeconomics o o D D’ Q 30 Quantity of Corn Quantity of Corn Example Variables That Shift Market Demand Price Price of related goods Substitutes Goods Substitutes Goods and services that can Shifting the Demand Curve be be used for the same purpose. Complements Goods that are used Goods together. together. Normal Normal good A good for which the good demand increases as income rises and decreases decreases as income falls. Inferior good A good for which the good demand increases as income falls, and decreases decreases as income rises. Income When When two goods, X and Y, are complements, complements which which of the following occurs? a. An increase in the price of good X leads to an An increase increase in the price of good Y. b. An increase in the price of good X leads to a An decrease decrease in the quantity demanded of good X. c. An increase in the price of good X leads to a An decrease in the quantity demanded of good Y. dec in the quantity demanded of good d. An increase in the price of good X leads to an An increase increase in the quantity demanded of good Y. Tastes Tastes Population Population and demographics Expected Expected future prices Principles of Microeconomics Demographics The Demographics The characteristics of a population with respect to age, race, and gender. gender. 31 Principles of Microeconomics 32 8 When When two goods, X and Y, are complements, complements which which of the following occurs? a. An increase in the price of good X leads to an An increase increase in the price of good Y. b. An increase in the price of good X leads to a An decrease decrease in the quantity demanded of good X. c. An increase in the price of good X leads to a An decrease decrease in the quantity demanded of good Y. dec d. An increase in the price of good X leads to an An increase increase in the quantity demanded of good Y. Example A Change in Demand versus a Change in Quantity Change Demanded Demanded A Change in Demand versus a Change in the Quantity Demanded 33 Principles of Microeconomics Principles of Microeconomics 34 Refer Refer to the graph below. Which of the following moves best describes what happens when a change in the price of printers affects the market demand demand for printers? a. A move from A to B. b. A move from A to C. c. Either move from A to B or A to C. d. None of the above. of the above Refer Refer to the graph below. Which of the following moves best describes what happens when a change in the price of printers affects the market demand demand for printers? a. A move from A to B. b. A move from A to C. c. Either move from A to B or A to C. d. None of the above. of the above 35 Principles of Microeconomics Principles of Microeconomics 36 9 SUPPLY A. Supply is a schedule that shows amounts of a product a producer is willing and able to produce and sell at each specific price in a series of possible prices during a specified time period. The following supply schedule portrays this in the corn example. A schedule shows what quantities will be offered at various prices or what price will be required to induce various quantities to be offered. SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts CORN $ %/ !' ) * # " " )( *" "( ,( 37 Principles of Microeconomics Principles of Microeconomics 38 SUPPLY DEFINED SUPPLY SCHEDULE Various Amounts A Series of Possible Prices Series of Possible Prices CORN SUPPLY B. Law of supply. Producers will produce and sell more of their product at a high price than at a low price. There is a direct relationship between price and quantity supplied. Explanation: Given product costs, a higher price means greater profits and thus an incentive to increase th the quantity supplied. Beyond some production quantity producers usually encounter increasing costs per added unit of output. $ %/ !' ) * # " " )( *" "( ,( …a specified time period …other things being equal 39 Principles of Microeconomics C. The supply curve. The graph of a supply schedule appears in the following Figure It shows a direct relationship in an upward sloping curve. of Microeconomics Principles 40 10 GRAPHING SUPPLY Price of Corn GRAPHING SUPPLY Price of Corn P Plot the Points CORN $5 4 P Plot the Points CORN $5 4 $ %/ !" # * ) ' 20 30 40 50 60 70 80 Corn $ %/ !" # * ) ' 10 20 30 40 50 60 70 80 Quantity of Principles of Microeconomics Corn 3 2 1 ,( "( *" )( " 3 2 1 ,( "( *" )( " o 5 10 Q 41 o Q 42 Quantity of Principles of Microeconomics GRAPHING SUPPLY Price of Corn GRAPHING SUPPLY Price of Corn P Plot the Points CORN $5 4 P Plot the Points CORN $5 4 $ %/ !" # * ) ' 10 20 3035 40 50 60 70 80 Quantity of Principles of Microeconomics Corn $ %/ !" # * ) ' 10 20 30 40 50 60 70 80 Quantity of Principles of Microeconomics Corn 3 2 1 ,( "( *" )( " 3 2 1 ,( "( *" )( " o Q 43 o Q 44 11 GRAPHING SUPPLY Price of Corn GRAPHING SUPPLY Price of Corn P Plot the Points CORN $5 4 P $5 4 S CORN $ %/ !" # * ) ' 10 20 30 40 50 60 70 80 Quantity of Principles of Microeconomics Corn $ %/ !" # * ) ' ,( "( *" )( " 3 2 1 ,( "( *" )( " 3 2 1 Connect the Points 10 20 30 40 50 60 70 80 Quantity of Principles of Microeconomics Corn o Q 45 o Q 46 Example Hewlett-Packard’s Supply Schedule and Supply Curve Which Which of the following defines a supply schedule? supply a. The quantity of a good or service that a firm is The service willing willing to supply at a given price. b. A table that shows the relationship between the table price of a product and the quantity of the product supplied. supplied. c. A curve that shows the relationship between the curve price of a product and the quantity of the product of and the quantity of the supplied. d. None of the above. 47 Principles of Microeconomics Principles of Microeconomics 48 12 Which Which of the following defines a supply schedule? supply a. The quantity of a good or service that a firm is The service willing willing to supply at a given price. b. A table that shows the relationship between table the price of a product and the quantity of the product product supplied. c. A curve that shows the relationship between the curve price price of a product and the quantity of the product rice roduct roduct supplied. supplied. d. None of the above. Example Individual Supply and Market Supply Deriving the Market Supply Curve from the Individual Supply Curves 49 Principles of Microeconomics Principles of Microeconomics 50 Which of the following procedures is correct? a. Individual supply curves can be obtained from Individual a market supply curve. market b. To derive a market supply curve, we add the To prices that producers must obtain in order to produce produce a given quantity of output. c. To derive a market supply curve, we add To individual supply cu individual supply curves. d. All of the above procedures are correct. Which of the following procedures is correct? a. Individual supply curves can be obtained from Individual a market supply curve. market b. To derive a market supply curve, we add the To prices that producers must obtain in order to produce produce a given quantity of output. c. To derive a market supply curve, we add To individual supply curves. individual supply cu d. All of the above procedures are correct. 51 Principles of Microeconomics Principles of Microeconomics 52 13 SUPPLY D. Determinants of supply. A change in any of the supply determinants causes a change in supply and a shift in the supply curve. An increase in supply involves a rightward shift, and a decrease in supply involves a leftward shift. SUPPLY 2. Six basic determinants of supply, other than price. Resource prices—a rise in resource prices will cause a decrease in supply or leftward shift in supply curve; a decrease in resource prices will cause an increase in supply or rightward shift in the supply curve. Technology—a technological improvement means more efficient production and lower costs, so an increase in supply or rightward shift in the curve results. Taxes and subsidies—a business tax is treated as a cost, so and subsidies business tax is treated as cost so decreases supply; a subsidy lowers cost of production, so increases supply. Prices of related goods—if the price of substitute production good rises, producers might shift production toward the higherpriced good, causing a decrease in supply of the original good. Expectations—expectations about the future price of a product can cause producers to increase or decrease current supply. Number of sellers—generally, the larger the number of sellers the greater the supply. 54 Principles of Microeconomics 53 Principles of Microeconomics GRAPHING SUPPLY Price of Corn GRAPHING SUPPLY Price of Corn P $5 4 S P CORN $5 4 3 2 1 What if Supply Increases? 10 20 30 40 50 60 70 80 Quantity of Principles of Microeconomics Corn $ %/ !" # * ) ' Q 55 ,( "( *" )( " Increase in Supply S S’ CORN $ %/ !" # * Increase ) in Quantity ' Supplied Q 56 3 2 1 ,( +( "( 0( *" ,( )( #" " *( o o 10 20 30 40 50 60 70 80 Quantity of Principles of Microeconomics Corn 14 GRAPHING SUPPLY Price of Corn GRAPHING SUPPLY Price of Corn Decrease P $5 4 S P CORN $5 4 3 2 1 What if Supply Decreases? 10 20 30 40 50 60 70 80 Quantity of Principles of Microeconomics Corn $ %/ !" # * ) ' Q 57 in Supply S’ S CORN $ %/ !" # * Decrease ) in Quantity ' Supplied ,( #" "( *( *" )( )( ( " .. ,( "( *" )( " 3 2 1 o o 10 20 30 40 50 60 70 80 Quantity of Principles of Microeconomics Corn Q 58 The Supply Side of the Market Variables That Shift Supply Price Price of inputs Technological Technological change A positive or negative change in the ability of a firm firm to produce a given level of output with a given amount amount of inputs. Shifting the Supply Curve Refer Refer to the graphs below. Each graph refers to the supply for printers. Which of the graphs best describes the impact of an increase in productivity? productivity? a. The graph on the left. b. The graph on the right. c. Both graphs. d. Neither graph. graph Prices of substitutes in production production Expected Expected future prices Number of firms in the market market 59 Principles of Microeconomics Principles of Microeconomics 60 15 Refer Refer to the graphs below. Each graph refers to the supply for printers. Which of the graphs best describes the impact of an increase in productivity? productivity? a. The graph on the left. b. The graph on the right. c. Both graphs. d. Neither graph. graph The Supply Side of the Market A Change in Supply versus a Change in Quantity Supplied The Difference between a Change in Supply versus a Change in the Quantity Supplied 61 Principles of Microeconomics Principles of Microeconomics 62 DETERMINANTS DETERMINANTS OF SUPPLY SUPPLY Resource Prices Technology Taxes & Subsidies Subsidies Prices of Other Goods Price Expectations Number of Sellers 63 Principles of Microeconomics DETERMINANTS DETERMINANTS OF SUPPLY SUPPLY Resource Prices Technology Combining Taxes & Subsidies Subsidies with Prices of Other Goods Demand Price Expectations Number of Sellers 64 Principles of Microeconomics 16 MARKET MARKET DEMAND & SUPPLY BUSHELS OF CORN MARKET MARKET DEMAND & SUPPLY Price of Corn CORN MARKET $ !" # * ) ' %& '( )( *" "" +( MARKET BUSHELS OF CORN P $5 4 ! 200 DEMAND B U Y E R S $ %/ !" # * ) ' ,( "( *" )( " MARKET S CORN MARKET )1((( #1((( 01((( ''1((( ',1((( ! 200 SUPPLY S E L L E R S ')1((( '(1((( 01((( #1((( '1((( $ %& !" )1((( # #1((( * 01((( ) ''1((( ' ',1((( $% 3 Market / !" ')1((( Clearing # '(1((( Equilibrium 2 1 * 01((( ) #1((( ' '1((( D 2 4 6 EQUILIBRIUM Principles of Microeconomics o 65 78 10 12 14 16 Corn Q 66 Quantity of Principles of Microeconomics MARKET MARKET DEMAND & SUPPLY Price of Corn CORN MARKET P MARKET MARKET DEMAND & SUPPLY Price of Corn CORN MARKET $5 4 $ %& !" )1((( # #1((( * 01((( ) ''1((( ' ',1((( Surplus S At a $4 price more is being CORN MARKET P $5 4 S At a $2 price more is being CORN MARKET $% / ')1((( '(1((( 01((( #1((( '1((( 3 2 1 !" supplied than # li th demanded * ) ' D 2 4 6 $ %& !" )1((( # #1((( * 01((( ) ''1((( ' ',1((( $% / ')1((( '(1((( 01((( #1((( '1((( 3 2 1 !" # demanded than * supplied ) ' Shortage D 2 4 6 o 78 10 12 14 16 Q 67 o 78 101112 14 16 Q 68 Quantity of Principles of Microeconomics Corn Quantity of Principles of Microeconomics Corn 17 MARKET MARKET DEMAND & SUPPLY Price of Corn CORN MARKET P Market Market Equilibrium: Putting Demand and Supply Supply Together Market Equilibrium $5 4 $ %& !" )1((( # #1((( * 01((( ) ''1((( ' ',1((( Surplus S CORN MARKET $% !" # * ) ' D Q 69 3 2 1 Shortage 2 4 6 / ')1((( '(1((( 01((( #1((( '1((( Market equilibrium A situation where quantity demanded equals quantity supplied. Competitive market equilibrium A market equilibrium with many buyers and many sellers. o 78 101112 14 16 Corn Quantity of Principles of Microeconomics 70 Principles of Microeconomics Market Market Equilibrium: Putting Demand and Supply Supply Together How Markets Eliminate Surpluses and Shortages Surplus A situation in which the quantity supplied is greater than the quantity demanded. Shortage A situation in which the quantity demanded is greater than the quantity supplied. The Effect of Surpluses and Shortages on the Market Price The The Effect of Demand and Supply Shifts on Equilibrium Equilibrium The Effect of Shifts in Supply on Equilibrium The Effect of a Decrease in Supply on Equilibrium 71 Principles of Microeconomics Principles of Microeconomics 72 18 The The Effect of Demand and Supply Shifts on Equilibrium Equilibrium The Effect of Shifts in Demand on Equilibrium The Effect of an Increase in Demand on Equilibrium The The Effect of Demand and Supply Shifts on Equilibrium Equilibrium The Effect of Shifts in Demand and Supply over Time Shifts in Demand and Supply over Time 73 Principles of Microeconomics Principles of Microeconomics 74 The The Effect of Demand and Supply Shifts on Equilibrium Equilibrium The Effect of Shifts in Demand and Supply over Time The Demand for Chicken Has Increased More Than the Supply Sources McConnell and Stanley Brue, Microeconomics, 16th edition, 2006. R. Glenn Hubbard and Anthony P. O'Brien, Microeconomics,1st edition 2006. 75 Principles of Microeconomics Principles of Microeconomics 76 19 ...
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This note was uploaded on 04/15/2010 for the course ECON 2306 taught by Professor Bailiff during the Spring '08 term at UT Arlington.

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