princ-ch04-presentation(2010).ppt

TheMarketForcesofSupplyandDemand Economics PRINCIPLESOF N GregoryMankiw PremiumPowerPointSlidesbyRonCronovich 4 Inthischapter lookfortheanswerstothesequestions Whatfactorsaffectbuyers demandforgoods Whatfactorsaffectsellers supplyofgoods Howdosupplyanddemanddeterminethepriceofagoodandthequantitysold Howdochangesinthefactorsthataffectdemandorsupplyaffectthemarketpriceandquantityofagood Howdomarketsallocateresources 1 THEMARKETFORCESOFSUPPLYANDDEMAND 2 MarketsandCompetition Amarketisagroupofbuyersandsellersofaparticularproduct Acompetitivemarketisonewithmanybuyersandsellers eachhasanegligibleeffectonprice Inaperfectlycompetitivemarket AllgoodsexactlythesameBuyers sellerssonumerousthatnoonecanaffectmarketprice eachisa pricetaker Inthischapter weassumemarketsareperfectlycompetitive 0 THEMARKETFORCESOFSUPPLYANDDEMAND 3 Demand Thequantitydemandedofanygoodistheamountofthegoodthatbuyersarewillingandabletopurchase Lawofdemand theclaimthatthequantitydemandedofagoodfallswhenthepriceofthegoodrises otherthingsequal 0 THEMARKETFORCESOFSUPPLYANDDEMAND 4 TheDemandSchedule Demandschedule atablethatshowstherelationshipbetweenthepriceofagoodandthequantitydemandedExample Helen sdemandforlattes NoticethatHelen spreferencesobeytheLawofDemand 0 THEMARKETFORCESOFSUPPLYANDDEMAND 5 Helen sDemandSchedule Curve 0 MarketDemandversusIndividualDemand Thequantitydemandedinthemarketisthesumofthequantitiesdemandedbyallbuyersateachprice SupposeHelenandKenaretheonlytwobuyersintheLattemarket Qd quantitydemanded MarketQd 0 6 THEMARKETFORCESOFSUPPLYANDDEMAND 7 P Q TheMarketDemandCurveforLattes 0 THEMARKETFORCESOFSUPPLYANDDEMAND 8 DemandCurveShifters Thedemandcurveshowshowpriceaffectsquantitydemanded otherthingsbeingequal These otherthings arenon pricedeterminantsofdemand i e thingsthatdeterminebuyers demandforagood otherthanthegood sprice ChangesinthemshifttheDcurve 0 THEMARKETFORCESOFSUPPLYANDDEMAND 9 DemandCurveShifters ofBuyers Increasein ofbuyersincreasesquantitydemandedateachprice shiftsDcurvetotheright 0 THEMARKETFORCESOFSUPPLYANDDEMAND 10 Supposethenumberofbuyersincreases Then ateachP Qdwillincrease by5inthisexample 0 DemandCurveShifters ofBuyers THEMARKETFORCESOFSUPPLYANDDEMAND 11 Demandforanormalgoodispositivelyrelatedtoincome Increaseinincomecausesincreaseinquantitydemandedateachprice shiftsDcurvetotheright Demandforaninferiorgoodisnegativelyrelatedtoincome AnincreaseinincomeshiftsDcurvesforinferiorgoodstotheleft DemandCurveShifters Income 0 THEMARKETFORCESOFSUPPLYANDDEMAND 12 Twogoodsaresubstitutesifanincreaseinthepriceofonecausesanincreaseindemandfortheother Example pizzaandhamburgers Anincreaseinthepriceofpizzaincreasesdemandforhamburgers shiftinghamburgerdemandcurvetotheright Otherexamples CokeandPepsi laptopsanddesktopcomputers CDsandmusicdownloads DemandCurveShifters PricesofRelatedGoods 0 THEMARKETFORCESOFSUPPLYANDDEMAND 13 Twogoodsarecomplementsifanincreaseinthepriceofonecausesafallindemandfortheother Example computersandsoftware Ifpriceofcomputersrises peoplebuyfewercomputers andthereforelesssoftware Softwaredemandcurveshiftsleft Otherexamples collegetuitionandtextbooks bagelsandcreamcheese eggsandbacon DemandCurveShifters PricesofRelatedGoods 0 THEMARKETFORCESOFSUPPLYANDDEMAND 14 AnythingthatcausesashiftintastestowardagoodwillincreasedemandforthatgoodandshiftitsDcurvetotheright Example TheAtkinsdietbecamepopularinthe 90s causedanincreaseindemandforeggs shiftedtheeggdemandcurvetotheright DemandCurveShifters Tastes 0 THEMARKETFORCESOFSUPPLYANDDEMAND 15 Expectationsaffectconsumers buyingdecisions Examples Ifpeopleexpecttheirincomestorise theirdemandformealsatexpensiverestaurantsmayincreasenow Iftheeconomysoursandpeopleworryabouttheirfuturejobsecurity demandfornewautosmayfallnow DemandCurveShifters Expectations 0 THEMARKETFORCESOFSUPPLYANDDEMAND 16 Summary VariablesThatInfluenceBuyers VariableAchangeinthisvariable Price causesamovementalongtheDcurve ofbuyers shiftstheDcurveIncome shiftstheDcurvePriceofrelatedgoods shiftstheDcurveTastes shiftstheDcurveExpectations shiftstheDcurve 0 A ThepriceofiPodsfallsB ThepriceofmusicdownloadsfallsC ThepriceofCDsfalls ACTIVELEARNING1DemandCurve 17 Drawademandcurveformusicdownloads Whathappenstoitineachofthefollowingscenarios Why ACTIVELEARNING1A PriceofiPodsfalls 18 MusicdownloadsandiPodsarecomplements AfallinpriceofiPodsshiftsthedemandcurveformusicdownloadstotheright ACTIVELEARNING1B Priceofmusicdownloadsfalls 19 TheDcurvedoesnotshift MovedownalongcurvetoapointwithlowerP higherQ Priceofmusicdown loads Quantityofmusicdownloads D1 P1 Q1 ACTIVELEARNING1C PriceofCDsfalls 20 CDsandmusicdownloadsaresubstitutes AfallinpriceofCDsshiftsdemandformusicdownloadstotheleft Priceofmusicdown loads Quantityofmusicdownloads THEMARKETFORCESOFSUPPLYANDDEMAND 21 Supply Thequantitysuppliedofanygoodistheamountthatsellersarewillingandabletosell Lawofsupply theclaimthatthequantitysuppliedofagoodriseswhenthepriceofthegoodrises otherthingsequal 0 THEMARKETFORCESOFSUPPLYANDDEMAND 22 TheSupplySchedule Supplyschedule Atablethatshowstherelationshipbetweenthepriceofagoodandthequantitysupplied Example Starbucks supplyoflattes NoticethatStarbucks supplyscheduleobeystheLawofSupply 0 THEMARKETFORCESOFSUPPLYANDDEMAND 23 Starbucks SupplySchedule Curve P Q 0 MarketSupplyversusIndividualSupply Thequantitysuppliedinthemarketisthesumofthequantitiessuppliedbyallsellersateachprice SupposeStarbucksandJittersaretheonlytwosellersinthismarket Qs quantitysupplied MarketQs 0 24 THEMARKETFORCESOFSUPPLYANDDEMAND 25 TheMarketSupplyCurve 0 THEMARKETFORCESOFSUPPLYANDDEMAND 26 SupplyCurveShifters Thesupplycurveshowshowpriceaffectsquantitysupplied otherthingsbeingequal These otherthings arenon pricedeterminantsofsupply ChangesinthemshifttheScurve 0 THEMARKETFORCESOFSUPPLYANDDEMAND 27 SupplyCurveShifters InputPrices Examplesofinputprices wages pricesofrawmaterials Afallininputpricesmakesproductionmoreprofitableateachoutputprice sofirmssupplyalargerquantityateachprice andtheScurveshiftstotheright 0 THEMARKETFORCESOFSUPPLYANDDEMAND 28 Supposethepriceofmilkfalls Ateachprice thequantityofLattessuppliedwillincrease by5inthisexample SupplyCurveShifters InputPrices 0 THEMARKETFORCESOFSUPPLYANDDEMAND 29 SupplyCurveShifters Technology Technologydetermineshowmuchinputsarerequiredtoproduceaunitofoutput Acost savingtechnologicalimprovementhasthesameeffectasafallininputprices shiftsScurvetotheright 0 THEMARKETFORCESOFSUPPLYANDDEMAND 30 SupplyCurveShifters ofSellers Anincreaseinthenumberofsellersincreasesthequantitysuppliedateachprice shiftsScurvetotheright 0 THEMARKETFORCESOFSUPPLYANDDEMAND 31 SupplyCurveShifters Expectations Example EventsintheMiddleEastleadtoexpectationsofhigheroilprices Inresponse ownersofTexasoilfieldsreducesupplynow savesomeinventorytoselllateratthehigherprice Scurveshiftsleft Ingeneral sellersmayadjustsupply whentheirexpectationsoffuturepriceschange Ifgoodnotperishable 0 THEMARKETFORCESOFSUPPLYANDDEMAND 32 Summary VariablesthatInfluenceSellers VariableAchangeinthisvariable Price causesamovementalongtheScurveInputPrices shiftstheScurveTechnology shiftstheScurve ofSellers shiftstheScurveExpectations shiftstheScurve 0 ACTIVELEARNING2SupplyCurve 33 Drawasupplycurvefortaxreturnpreparationsoftware Whathappenstoitineachofthefollowingscenarios A Retailerscutthepriceofthesoftware B Atechnologicaladvanceallowsthesoftwaretobeproducedatlowercost C Professionaltaxreturnpreparersraisethepriceoftheservicestheyprovide ACTIVELEARNING2A Fallinpriceoftaxreturnsoftware 34 Scurvedoesnotshift MovedownalongthecurvetoalowerPandlowerQ ACTIVELEARNING2B Fallincostofproducingthesoftware 35 Scurveshiftstotheright ateachprice Qincreases Priceoftaxreturnsoftware Quantityoftaxreturnsoftware S1 P1 Q1 ACTIVELEARNING3C Professionalpreparersraisetheirprice 36 Thisshiftsthedemandcurvefortaxpreparationsoftware notthesupplycurve THEMARKETFORCESOFSUPPLYANDDEMAND 37 SupplyandDemandTogether Equilibrium Phasreachedthelevelwherequantitysuppliedequalsquantitydemanded 0 THEMARKETFORCESOFSUPPLYANDDEMAND 38 Equilibriumprice thepricethatequatesquantitysuppliedwithquantitydemanded 0 THEMARKETFORCESOFSUPPLYANDDEMAND 39 Equilibriumquantity thequantitysuppliedandquantitydemandedattheequilibriumprice 0 THEMARKETFORCESOFSUPPLYANDDEMAND 40 Surplus a k a excesssupply whenquantitysuppliedisgreaterthanquantitydemanded Surplus Example IfP 5 thenQD 9lattes andQS 25lattes resultinginasurplusof16lattes 0 THEMARKETFORCESOFSUPPLYANDDEMAND 41 Surplus a k a excesssupply whenquantitysuppliedisgreaterthanquantitydemanded Facingasurplus sellerstrytoincreasesalesbycuttingprice ThiscausesQDtorise whichreducesthesurplus andQStofall 0 THEMARKETFORCESOFSUPPLYANDDEMAND 42 Surplus a k a excesssupply whenquantitysuppliedisgreaterthanquantitydemanded Facingasurplus sellerstrytoincreasesalesbycuttingprice ThiscausesQDtoriseandQStofall Surplus Pricescontinuetofalluntilmarketreachesequilibrium 0 THEMARKETFORCESOFSUPPLYANDDEMAND 43 Shortage a k a excessdemand whenquantitydemandedisgreaterthanquantitysupplied Example IfP 1 thenQD 21lattes andQS 5lattes resultinginashortageof16lattes Shortage 0 THEMARKETFORCESOFSUPPLYANDDEMAND 44 Shortage a k a excessdemand whenquantitydemandedisgreaterthanquantitysupplied Facingashortage sellersraisetheprice causingQDtofall whichreducestheshortage andQStorise 0 THEMARKETFORCESOFSUPPLYANDDEMAND 45 Shortage a k a excessdemand whenquantitydemandedisgreaterthanquantitysupplied Facingashortage sellersraisetheprice causingQDtofall andQStorise Shortage Pricescontinuetoriseuntilmarketreachesequilibrium 0 THEMARKETFORCESOFSUPPLYANDDEMAND 46 ThreeStepstoAnalyzingChangesinEq m Todeterminetheeffectsofanyevent 1 DecidewhethereventshiftsScurve Dcurve orboth 2 Decideinwhichdirectioncurveshifts 3 Usesupply demanddiagramtoseehowtheshiftchangeseq mPandQ THEMARKETFORCESOFSUPPLYANDDEMAND 47 EXAMPLE TheMarketforHybridCars THEMARKETFORCESOFSUPPLYANDDEMAND 48 STEP1 Dcurveshiftsbecausepriceofgasaffectsdemandforhybrids Scurvedoesnotshift becausepriceofgasdoesnotaffectcostofproducinghybrids STEP2 Dshiftsrightbecausehighgaspricemakeshybridsmoreattractiverelativetoothercars EXAMPLE1 AShiftinDemand EVENTTOBEANALYZED Increaseinpriceofgas STEP3 Theshiftcausesanincreaseinpriceandquantityofhybridcars THEMARKETFORCESOFSUPPLYANDDEMAND 49 EXAMPLE1 AShiftinDemand P2 Q2 Notice WhenPrises producerssupplyalargerquantityofhybrids eventhoughtheScurvehasnotshifted Alwaysbecarefultodistinguishb washiftinacurveandamovementalongthecurve TermsforShiftvs MovementAlongCurve Changeinsupply ashiftintheScurveoccurswhenanon pricedeterminantofsupplychanges liketechnologyorcosts Changeinthequantitysupplied amovementalongafixedScurveoccurswhenPchangesChangeindemand ashiftintheDcurveoccurswhenanon pricedeterminantofdemandchanges likeincomeor ofbuyers Changeinthequantitydemanded amovementalongafixedDcurveoccurswhenPchanges 50 THEMARKETFORCESOFSUPPLYANDDEMAND 51 STEP1 Scurveshiftsbecauseeventaffectscostofproduction Dcurvedoesnotshift becauseproductiontechnologyisnotoneofthefactorsthataffectdemand STEP2 Sshiftsrightbecauseeventreducescost makesproductionmoreprofitableatanygivenprice EXAMPLE2 AShiftinSupply EVENT Newtechnologyreducescostofproducinghybridcars STEP3 Theshiftcausespricetofallandquantitytorise THEMARKETFORCESOFSUPPLYANDDEMAND 52 EXAMPLE3 AShiftinBothSupplyandDemand EVENTS priceofgasrisesANDnewtechnologyreducesproductioncosts STEP1 Bothcurvesshift STEP2 Bothshifttotheright STEP3 Qrises buteffectonPisambiguous Ifdemandincreasesmorethansupply Prises THEMARKETFORCESOFSUPPLYANDDEMAND 53 EXAMPLE3 AShiftinBothSupplyandDemand STEP3 cont EVENTS priceofgasrisesANDnewtechnologyreducesproductioncosts Butifsupplyincreasesmorethandemand Pfalls ACTIVELEARNING3Shiftsinsupplyanddemand 54 Usethethree stepmethodtoanalyzetheeffectsofeacheventontheequilibriumpriceandquantityofmusicdownloads EventA AfallinthepriceofCDsEventB Sellersofmusicdownloadsnegotiateareductionintheroyaltiestheymustpayforeachsongtheysell EventC EventsAandBbothoccur ACTIVELEARNING3A FallinpriceofCDs 55 2 Dshiftsleft Themarketformusicdownloads 1 Dcurveshifts 3 PandQbothfall STEPS ACTIVELEARNING3B Fallincostofroyalties 56 Themarketformusicdownloads 1 Scurveshifts 2 Sshiftsright 3 Pfalls Qrises STEPS Royaltiesarepartofsellers costs ACTIVELEARNING3C FallinpriceofCDsandfallincostofroyalties 57 STEPS1 Bothcurvesshift seepartsA B 2 Dshiftsleft Sshiftsright 3 Punambiguouslyfalls EffectonQisambiguous ThefallindemandreducesQ theincreaseinsupplyincreasesQ THEMARKETFORCESOFSUPPLYANDDEMAND 58 CONCLUSION HowPricesAllocateResources OneoftheTenPrinciplesfromChapter1 Marketsareusuallyagoodwaytoorganizeeconomicactivity Inmarketeconomies pricesadjusttobalancesupplyanddemand Theseequilibriumpricesare