Mini-Unit Demand and Supply And other crap I missed Introduction They are small, thin and lightweight… Some are not aware of their existence, while others allocate a lot of time and effort in obtaining them. What are they? They are sports trading cards. Most can be purchased for a few dollars or less, but many cost much more—up to thousands of dollars each! In this chapter you will learn why the prices of different sports trading cards can vary so widely. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-2 Supply and Demand The average price of an apartment-sized condominium has often exceeded the average price of a standalone house? The relative physical size of items does not determine the prices at which people exchange them for? By using demand and supply you can develop a better understanding of why relative size of an item typically has little to do with the price at which it sells? Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-3 Markets Markets ◦ Arrangements that individuals have for exchanging with one another ◦ Represent the interaction of buyers and sellers for goods and services ◦ Markets set the prices we pay and receive. Automobile market Health care market Labor market Stock market Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-4 The Law of Demand Demand ◦ A schedule showing how much of a good or service people will purchase at any price during a specified time period, other things being constant Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-5 The Law of Demand Law of Demand ◦ Quantity demanded is inversely related to price, holding other factors constant. Price # Qd $ Price $ Qd # Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-6 The Law of Demand (cont'd) What are we holding constant? ◦ Income ◦ Tastes and preferences ◦ Price of other goods ◦ Many other factors If any of these change, then the demand schedule will shift. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-7 The Demand Schedule The demand schedule ◦ Table relating prices to quantity demanded Demand Curve ◦ A graphical representation of the demand schedule ◦ Negatively sloped line showing inverse relationship between price and quantity demanded, all else equal Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-8 Figure 3-1 The Individual Demand Schedule and the Individual Demand Curve, Panel (a) Combination Price per Starbucks coffee Quantity of Starbucks Coffees consumed/year A $5 10 B $4 20 C $3 30 D $2 40 E $1 50 Copyright © 2008 Pearson Addison Wesley. All rights reserved. 3-9 Price per coffee Figure 3-1 The Individual Demand Schedule and the Individual Demand Curve, Panel (b) Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 310 The Demand Schedule Individual versus market demand curves Market Demand ◦ The demand of all consumers in the marketplace for a particular good or service ◦ Summation at each price of the quantity demanded by each individual Copyright © 2008 Pearson Addison Wesley. All rights reserved. 311 Figure 3-2 The Horizontal Summation of Two Demand Curves, Panel (a) Combinati on Price per Starbucks coffee Quantity of Starbucks Coffees consumed/ year (me) Quantity of Starbucks Coffees consumed/ year (wife) Total Quantity consumed A $5 10 10 20 B $4 20 20 40 C $3 30 40 70 D $2 40 50 90 E $1 50 60 110 Copyright © 2008 Pearson Addison Wesley. All rights reserved. 312 Figure 3-2 The Horizontal Summation of Two Demand Curves, Panels (b), (c), (d) Copyright © 2008 Pearson Addison Wesley. All rights reserved. 313 Figure 3-3 The Market Demand Schedule for Flash Memory Pen Drives, Panel (a) Combination Price per Starbucks coffee Quantity of Starbucks Coffees consumed/year in millions (total population) A $5 2 B $4 4 C $3 6 D $2 8 E $1 10 Copyright © 2008 Pearson Addison Wesley. All rights reserved. 314 Price per coffee Figure 3-3 The Market Demand Schedule for Flash Memory Pen Drives, Panel (b) Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 315 Shifts in Demand Scenario ◦ Imagine a news story runs on all networks claiming that Starbucks coffee is the only safe coffee shop open and all others have health care issues If some factor other than price changes, we can show its effect by moving the entire demand curve, shifting the curve left or right. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 316 Figure 3-4 A Shift in the Demand Curve Suppose Starbucks has major health code violations Price per coffee Suppose the news runs a story on other unsafe coffee shops Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 317 Shifts in Demand Determinants of demand ◦ Income ◦ Tastes and preferences ◦ The prices of related goods Substitutes Complements Copyright © 2008 Pearson Addison Wesley. All rights reserved. 318 Shifts in Demand (cont'd) Substitutes ◦ Two goods are substitutes when a change in the price of one causes a shift in demand for the other in the same direction as the price change. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 319 Shifts in Demand (cont'd) Complements ◦ Two goods are complements when a change in the price of one causes an opposite shift in the demand curve for the other. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 320 Shifts in Demand (cont'd) Determinants of demand ◦ Expectations Future prices Income Product availability ◦ Market size (number of buyers) Copyright © 2008 Pearson Addison Wesley. All rights reserved. 321 Normal and Inferior Goods & Income Normal Goods ◦ Goods for which demand rises as income rises, most goods are normal goods Inferior Goods ◦ Goods for which demand falls as income rises Copyright © 2008 Pearson Addison Wesley. All rights reserved. 322 Shifts in Demand (cont'd) The Determinants of Demand Income: Normal Good Price Increase in income increases demand Decrease in income decreases demand D3 D1 D2 Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 323 Shifts in Demand (cont'd) The Determinants of Demand Income: Inferior Good Price Decrease in income increases demand Increase in income decreases demand D3 D1 D2 Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 324 Shifts in Demand (cont'd) The Determinants of Demand Tastes and Preferences Price Hybrid vehicles • Increase in demand SUVs • Decrease in demand D3 D1 D2 Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 325 Shifts in Demand (cont'd) The Determinants of Demand Price of Related Goods: Substitutes Price Butter and Margarine • Price of both = $2/lb • Price of margarine increases to $3/lb • Demand for butter increases D1 D2 Q/Butter Copyright © 2008 Pearson Addison Wesley. All rights reserved. 326 Shifts in Demand (cont'd) The Determinants of Demand Price of Related Goods: Complements Price Speakers and Amplifiers • Decrease the relative price of amplifiers • Demand for speakers increases Speakers and Amplifiers • Increase the relative price of amplifiers • Demand for speakers decreases D3 D1 D2 Q/Speakers Copyright © 2008 Pearson Addison Wesley. All rights reserved. 327 Shifts in Demand (cont'd) The Determinants of Demand Expectations: Income, Future Prices Price A higher income or expectations of a higher future price will increase demand A lower income or expectations of a lower future price will decrease demand D3 D1 D2 Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 328 Shifts in Demand (cont'd) The Determinants of Demand Market Size (Number of Buyers) Price Increase in the number of buyers increases demand Decrease in the number of buyers decreases demand D3 D1 D2 Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 329 Shifts in Demand (cont'd) Changes in demand versus changes in quantity demanded ◦ A change in one or more of the non-price determinants (income, tastes, etc.) will lead to a change in demand. This is a shift of the whole curve. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 330 Shifts in Demand (cont'd) Changes in demand versus changes in quantity demanded ◦ A change in a good’s own price leads to a change in quantity demanded. This is a movement along the same curve. ∆D is not the same as ∆Qd. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 331 Figure 3-5 Movement Along a Given Demand Curve Price per coffee A change in the price changes the quantity of a good demanded, movement along the curve Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 332 The Law of Supply Supply ◦ Schedule showing relationship between price and quantity supplied for a specified time period, other things being equal ◦ The amount of a product or service that firms are willing to sell at alternative prices Copyright © 2008 Pearson Addison Wesley. All rights reserved. 333 The Law of Supply (cont'd) Law of Supply ◦ The price of a product or service and the quantity supplied are directly related. P# Qs # P$ Qs $ Copyright © 2008 Pearson Addison Wesley. All rights reserved. 334 The Supply Schedule The supply schedule is a table relating prices to quantity supplied at each price. Supply Curve ◦ A graphical representation of the supply schedule ◦ Positively sloped line showing direct relationship between price and quantity supplied, all else equal Copyright © 2008 Pearson Addison Wesley. All rights reserved. 335 Figure 3-6 The Individual Producer’s Supply Schedule and Supply Curve for Starbucks Coffee Combination Price of Starbucks Coffee Quantity of Starbucks Coffee Supplied F $5 55 G 4 40 H 3 35 I 2 25 J 1 20 Copyright © 2008 Pearson Addison Wesley. All rights reserved. 336 Price per coffee Figure 3-6 The Individual Producer’s Supply Schedule and Supply Curve for Flash Memory Pen Drives, Panel (b) Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 337 Figure 3-7 Horizontal Summation of Supply Curves, Panel (a) Price per cup of Starbucks #501 Starbucks coffee Starbucks #233 Combined Quantity Supplied per year $5 55 35 90 4 40 30 70 3 35 20 55 2 25 15 40 1 20 10 30 Copyright © 2008 Pearson Addison Wesley. All rights reserved. 338 Number of coffees per year Price per coffee Price per coffee Price per coffee Figure 3-7 Horizontal Summation of Supply Curves, Panels (b), (c), (d) Number of coffees per year Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 339 Figure 3-8 The Market Supply Schedule and the Market Supply Curve for Starbucks Coffee Price Quantity of Starbucks Coffee Supplies $5 10 $4 8 $3 6 $2 4 $1 2 Copyright © 2008 Pearson Addison Wesley. All rights reserved. 340 Price per coffee Figure 3-8 The Market Supply Schedule and the Market Supply Curve for Flash Memory Pen Drives, Panel (b) Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 341 Shifts in Supply Scenario ◦ A new method of manufacturing flash memory pen drives reduces the cost of production dramatically. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 342 Figure 3-9 A Shift in the Supply Curve If some other factor than price changes, the only way we can show its effect is by moving the entire supply curve If costs increase, supply decreases Price per coffee If costs decrease, supply increases Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 343 Price per coffee Price per Flash Memory Pen Drive ($) Figure 3-9 A Shift in the Supply Curve (cont'd) 5 a 4 c 3 S2 S1 When supply increases the quantity supplied will be greater at each price 2 1 0 2 4 6 8 10 12 14 Quantity Memory Pen Drives Supplied Number of ofFlash coffees per year (millions of constant-quality units per year) Copyright © 2008 Pearson Addison Wesley. All rights reserved. 344 Price per coffee Price per Flash Memory Pen Drive ($) Figure 3-9 A Shift in the Supply Curve (cont'd) 5 a 4 b c 3 S2 S1 d When supply increases the quantity supplied will be greater at each price 2 1 0 2 4 6 8 10 12 14 Quantity of of coffees Flash Memory Pen Drives Supplied Number per year (millions of constant-quality units per year) Copyright © 2008 Pearson Addison Wesley. All rights reserved. 345 Flash Memory Pen Drive ($) percoffee Price per Price Figure 3-9 A Shift in the Supply Curve (cont'd) S3 5 b 4 d 3 a c S1 When supply decreases the quantity supplied will be less at each price 2 1 0 2 4 6 8 10 12 14 Number ofofcoffees per year Pen Drives Supplied Quantity Flash Memory (millions of constant-quality units per year) Copyright © 2008 Pearson Addison Wesley. All rights reserved. 346 Shifts in Supply (cont'd) Determinants of supply ◦ Cost of inputs ◦ Technology and productivity ◦ Taxes and subsidies ◦ Price expectations ◦ Number of firms in industry Copyright © 2008 Pearson Addison Wesley. All rights reserved. 347 Shifts in Supply (cont'd) The Determinants of Supply Cost of Inputs Price Increase in cost decreases supply S3 S1 S2 Decrease in cost increases supply Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 348 Shifts in Supply (cont'd) The Determinants of Supply Technology and Productivity Price S3 S1 S2 Decreases in productivity decrease supply Improvements in technology or increases in productivity increase supply Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 349 Shifts in Supply (cont'd) The Determinants of Supply Taxes and Subsidies Price S3 S1 S2 Increases in taxes or decreases in subsidies decrease supply Decreases in taxes or increases in subsidies increase supply Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 350 Policy Example: Import Restrictions Reduce the Supply of Cement U.S. cement manufacturers produce more than 80 million metric tons of cement per year. The rest of the cement supplied—15 to 20 million metric tons—is imported, much of it from Mexico. During the 1990s the U.S. government began imposing an import duty on Mexican cement. The continuation of this tariff during the 2000s caused Mexican producers to limit sales to the United States at any given price, reducing the U.S. supply of cement. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 351 Shifts in Supply The Determinants of Supply Price Expectations* Price S3 S1 S2 Expectations of lower prices decrease supply Expectations of higher future prices decrease supply Expectations of lower future prices increase supply Expectations of increase in price increases supply Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 352 Shifts in Supply (cont'd) The Determinants of Supply Number of Firms in Industry Price Decrease in the number of firms decreases supply S3 S1 S2 Increase in the number of firms increases supply Q/Units Copyright © 2008 Pearson Addison Wesley. All rights reserved. 353 Shifts in Supply (cont'd) Changes in supply versus changes in quantity supplied ◦ A change in one or more of the non-price determinants will lead to a change in supply. This is a shift of the whole curve. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 354 Shifts in Supply (cont'd) Changes in supply versus changes in quantity supplied ◦ A change in a good’s own price leads to a change in quantity supplied. This is a movement along the same curve. ∆S is not the same as ∆Qs. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 355 Putting Demand and Supply Together Putting demand and supply together Equilibrium (Market Clearing) Price ◦ The price that clears the market ◦ The price at which quantity demanded equals quantity supplied ◦ The price where the demand curve intersects the supply curve Copyright © 2008 Pearson Addison Wesley. All rights reserved. 356 Figure 3-10 Putting Demand and Supply Together, Panel (a) Price of Coffee Quantity Supplied in millions Quantity demanded in millions Difference Condition $5 10 2 8 million Excess quantity (surplus) 4 8 4 4 million Excess quantity (surplus) 3 6 6 0 Market clearing (equilibrium) 2 4 8 -4 million Excess demand (shortage) 1 2 10 -8 million Excess demand Copyright © 2008 Pearson Addison Wesley. 3(shortage) 57 All rights reserved. Price per coffee Figure 3-10 Putting Demand and Supply Together, Panel (b) Number of coffees per year Copyright © 2008 Pearson Addison Wesley. All rights reserved. 358 Putting Demand and Supply Together (cont'd) Equilibrium ◦ The situation when quantity supplied equals quantity demanded at a particular price Copyright © 2008 Pearson Addison Wesley. All rights reserved. 359 Putting Demand and Supply Together (cont'd) Shortages ◦ The situation when quantity demanded is greater than quantity supplied Q d > Qs ◦ Exist at any price below the market clearing price Copyright © 2008 Pearson Addison Wesley. All rights reserved. 360 Putting Demand and Supply Together (cont'd) Surpluses ◦ The situation when quantity supplied is greater than quantity demanded Q d < Qs ◦ Exist at any price above the market clearing price Copyright © 2008 Pearson Addison Wesley. All rights reserved. 361 Policy Example: Should Shortages in the Ticket Market Be Solved by Scalpers? If you’ve ever tried to get tickets to the big game you know all about “shortages.” Since the quantity of tickets is fixed, the price can go pretty high. Enter the scalper. Copyright © 2008 Pearson Addison Wesley. All rights reserved. 362 Figure 3-11 Shortages of Super Bowl Tickets Copyright © 2008 Pearson Addison Wesley. All rights reserved. 363 Issues and Applications: The Market Clearing Prices of Baseball Cards Various companies, such as Topps and Upper Deck, print sports trading cards that provide photos and stats on pro athletes. Why are some of the market clearing prices so high? The answer has to do with demand and supply. (A relatively low supply helps explain the relatively high market clearing price.) You can buy a “Shoeless” Joe Jackson card for up to $9,000! Copyright © 2008 Pearson Addison Wesley. All rights reserved. 364 Table 3-2 Baseball Cards with the Highest Market Clearing Prices Copyright © 2008 Pearson Addison Wesley. All rights reserved. 365