Chapter 3
MARKETS, DEMAND AND SUPPLY,
AND THE PRICE SYSTEM
Economics, 8th Edition
Boyes/Melvin
1
MARKETS AND EXCHANGE

Allocation Systems determine who gets goods and
services and who does not.

A market is a place or service that enables buyers and
sellers to exchange goods and services.

Barter is the exchange of goods and services directly,
without the involvement of money.

Monetary exchanges involve exchanging money for
goods and services.
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2
ALLOCATION SYSTEMS

Who gets the goods and services?
Government determined
 First come first served
 Lottery System—random
 The Market System—income earners buy goods
and services

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3
WHICH SYSTEM WORKS?

Fairness--none of the systems are fair, scarcity
means someone gets left out.

Incentives increase supplies and raise
standards of living in a market system.
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4
MARKETS

Markets enable the
exchange of goods
and services.
Service
NYSE
eBay
Place
Supermarket
The Mall
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5
HOW MUCH?
HOW COME HE RECEIVED MORE SCHOLARSHIP
MONEY THAN ME??!!
STOCK MARKET
WHY DOES KOBE MAKE MORE THAN A
DOCTOR?
DEMAND

The desire, ability, and willingness to buy a
product.
DEMAND
Demand Schedule - The listing (table) that
shows the various quantities (amounts)
demanded of a particular product at
different prices.
 Demand Curve - Graph showing the
quantity demanded at each and every
price that the
product may have.
Shows us how price
affects demand.

LAW OF DEMAND
When a product’s price is lower, consumers
will buy more of it.
 When a product’s price is higher, consumers
will buy less of it.

Price
Demand
Inverse
Relationship
Price
Demand
DEMAND CURVE


Change in quantity demanded
- Movement along the curve
that shows the change in the
amount purchased in response
to different prices.
Change in demand - When
things other than price affect
demand. The graph will shift
to the right if there is more
demand or shift to the left if
there is less demand.
REASONS A DEMAND CURVE WILL SHIFT

Consumer Income: Income increases curve shifts right; Income decreases curve shifts left

Consumer Tastes: Good advertisement
or celebrity endorsement - curve shifts
right; Product goes out of style - curve
shifts left

Substitutes: Price of substitute goes up
- curve shifts right; Price of substitute
goes down - curve shifts left
REASONS A DEMAND CURVE WILL SHIFT



Complements: related goods, use of one
increases the use of the other
Price of complement goes up - curve shifts left;
Price of complement goes down - curve shifts
right
Change in Expectations: If you expect something
better to come out - curve shifts left; If you expect
something to be scarce in the future - curve
shifts right
Number of Consumers: More consumers - curve
shifts right; Less consumers - curve shifts left
WHICH DETERMINATE OF DEMAND
EXPLAINS THE CHANGE IN DEMAND.





There are negative reports in the news about the
safety ratings on Chevrolet vehicles.
If personal income tax rates increase, the
demand for most normal goods will decrease.
An increase in the price of ice cream will cause
consumers to buy fewer ice cream cones.
A famous athlete advertises the product.
As the birth rate decreases, the number of people
in the market for diapers and other baby items
decreases.
LAW OF SUPPLY
Suppliers offer more for sale at high prices.
 Supplier offer less for sale at low prices.

SUPPLY
Supply Schedule - listing of the various
quantities (amounts) of a particular product
supplied at all possible prices in the market
 Supply Curve - graph showing the various
quantities supplied at each and every price
that a product might have in the market

SUPPLY


Change in quantity
supplied - the
amount offered for
sale in response to
a change in price.
Causes movement
along the supply
curve


Change in supply is
when suppliers offer
different amounts of
products for sale at
all possible prices in
the market
Cause the curve to
shift
FACTORS THAT CAUSE THE SUPPLY CURVE
TO SHIFT
Cost of inputs: Cost of inputs (such as
labor or packaging) drops, producers are
willing to supply more, and the curve shifts to
the right
 Cost of inputs rises, producers offer fewer
products for sale and the curve shifts to the
left.

FACTORS THAT CAUSE THE SUPPLY CURVE
TO SHIFT
Productivity: Workers are more productive,
more of a product will be produced at every
price, curve will shift right.
 When workers are unproductive, less of a
product will be produced, the curve will shift
left.

FACTORS THAT CAUSE THE
SUPPLY CURVE TO SHIFT

Technology: New technology lowers the
cost of production and increases productivity,
which shifts the curve to the right.
Sometimes the equipment breaks down
which causes a business to be less
productive, and the supply curve shifts to the
left.
FACTORS THAT CAUSE A SUPPLY CURVE TO
SHIFT
Expectations: If a business thinks the price
of a product will go up, then they will
decrease their supply for now and the supply
curve will shift left.
 If a business thinks the price will be lower in
the future, then they will want to produce and
sell as many as they can now, so supply will
increase and the curve will shift to the right

FACTORS THAT CAUSE THE SUPPLY CURVE
TO SHIFT

Government Regulation: When the
government establishes tighter
regulations, less is produced, curve
shifts left
When there is is not much
government regulation, supply
increases, curve shifts right
FACTORS THAT CAUSE THE SUPPLY CURVE
TO SHIFT
Number of Sellers: When a lot of sellers
enter the market, more is supplied, and the
curve shifts to the right
 When sellers exit the market, less is
supplied, and the curve shifts to the left.

The price of wood pulp rises. How does
that affect the supply of paper?
 If Nabisco stopped producing chocolate
chip cookies, what would happen to the
supply of cookies?
 The price of manicures goes up. How
does that affect the supply of
manicures?
 The price of the i-phone 5 will go down
in a year. How does that affect the
supply of the i-phone 5 today?


The use of 360-degree, zero-turn lawn
mowers allows lawn-service providers
to mow twice as many lawns in a given
day. What happens to the supply of
lawn service?
BARTER—CONSIDERATIONS

Barter requires a double coincidence of wants—
each party to the exchange must want what the
other has to trade.
Transactions costs—the costs of making an exchange—
are high in barter exchanges.
 Money reduces the transactions costs because it does
not require a double coincidence of wants.


In barter, the price of one good in terms of the
other is called the relative price. It is the rate of
exchange between the two goods.
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28
BARTERING BOOM

The Internet has reduced the transaction costs
of bartering.

Web sites like BigVine help individuals and
small businesses barter online.

Sites offer a diverse range of products and
services – from accounting to car repair, and
restaurant meals to advertising space.
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29
DEMAND VS. QUANTITY DEMANDED

Demand is the amount of a product that people
are willing and able to purchase at each
possible price during a given period of time.

The quantity demanded is the amount of a
product that people are willing and able to
purchase at one, specific price.
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30
LAW OF DEMAND

Law of Demand
 As
price of a good rises, consumers buy less.
 As price of a good falls, consumers buy more.
 Depicts the inverse quantity-price relationship with
all else assumed to be constant.
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DETERMINANTS OF DEMAND
Number of buyers
Income
Tastes
Expectations
Prices of related goods
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REPRESENTATIONS OF DEMAND

Demand Schedule: A list of prices and
corresponding quantities demanded of a
particular good or service.

Demand Curve: A graph of the demand
schedule with price on the vertical axis and
quantity demanded on the horizontal axis.
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33
DEMAND SCHEDULE AND DEMAND CURVE FOR ACCESS TIME
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34
AGGREGATION OF DEMAND (I)
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35
AGGREGATION OF DEMAND (II)
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36
CHANGES IN DEMAND AND QUANTITY DEMANDED
Change in Demand - shift in entire demand
curve in response to a change in a determinant
of demand (a ceteris paribus variable).
 Change in Quantity Demanded - movement
along the same demand curve in response to a
price change.

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37
CHANGE IN DEMAND VS. CHANGE IN THE QUANTITY DEMANDED
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FACTORS THAT SHIFT DEMAND
Number
Of
Buyers
Consumer
Income
Price of
Related Goods
Demand
Tastes
And
Preferences
Expectations
Demographics
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39
DEMAND SHIFT FOR IPODS
Tastes and preferences for
more mobile and more
powerful music players
resulted in the success of the
iPod and the demise of the
Walkman.
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40
SUPPLY VS. QUANTITY SUPPLIED

Supply is the amount of a good or service that
producers are willing and able to offer for sale at
each possible price during a period of time, all else
constant.

The quantity supplied is the amount sellers are
willing and able to offer for sale during a period of
time at a specific price, all else constant.
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41
LAW OF SUPPLY

Law of Supply



As the price of a product rises, producers will be willing
to supply more, and vice versa.
The height of the supply curve at any quantity shows
the minimum price necessary to induce producers to
supply that next unit to market.
The height of the supply curve at any quantity also
shows the opportunity cost of producing the next unit of
the good.
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REPRESENTATIONS OF SUPPLY

Supply Schedule: A table or list of the prices and
corresponding quantities supplied of a particular
good or service. It is the price-quantity relationship
presented in tabular form.

Supply Curve: A graph of the supply schedule with
price on the vertical axis and quantity demanded
on the horizontal axis.
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43
SUPPLY SCHEDULE AND SUPPLY CURVE FOR ACCESS TIME
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44
AGGREGATION OF SUPPLY (I)
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45
AGGREGATION OF SUPPLY (II)
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46
CHANGES IN SUPPLY AND QUANTITY SUPPLIED
Change in Supply - shift in entire supply
curve.
 Change in Quantity Supplied - movement
along the same supply curve in response to
a price change.

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47
FACTORS THAT SHIFT SUPPLY
Resource
Prices
Technology
And
Productivity
Prices of Related
Goods and Services
Supply
Number
Of
Producers
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Expectations
Of
Producers
48
DECREASE IN SUPPLY
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49
INCREASE IN SUPPLY
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50
CHANGE IN SUPPLY VS. CHANGE IN THE QUANTITY SUPPLIED
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51
EQUILIBRIUM


Equilibrium is the price and quantity at which the
quantity supplied and the quantity demanded are
equal.
A market is said to be in disequilibrium at all
points at which the quantities demanded and
supplied are not equal.



A surplus occurs whenever S>D.
A shortage occurs whenever D>S.
Surpluses and shortages can be resolved with price
changes.
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52
EQUILIBRIUM (TABLE)
Price
Per Hour
Quantity
Demanded
Quantity
Supplied
Status
Price Change
$5
30
102
Surplus of 72
Price Falls
$4
48
84
Surplus of 36
Price Falls
$3
66
66
EQUILIBRIUM
No Change
$2
84
48
Shortage of 36
Price Rises
$1
102
30
Shortage of 72
Price Rises
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53
EQUILIBRIUM (GRAPH)
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54
THE EFFECTS OF A SHIFT OF THE DEMAND CURVE
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55
THE EFFECTS OF A SHIFT OF THE SUPPLY CURVE
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56
PRICE FLOORS AND CEILINGS

Price Floor: price is not allowed to decrease
below a certain level.
Examples: minimum wage, agricultural price
supports.

Price Ceiling: price is not allowed to increase
above a certain level.
Example: rent controls.
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57
A PRICE FLOOR
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58
RENT CONTROLS
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59
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reserved.
BELLWORK #5
Draw demand graphs for the following
scenarios regarding Bartlett
basketball tickets:
A)Price goes from $7-$15
B)Price goes from $7-$2
C)It is the Winterfest game
D)It is Prom night
60
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reserved.
BELLWORK #6
At what price would the market for a
product experience a surplus? At
what price would the market for a
product experience a shortage?
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