Macroeconomics
ECON 2301
Spring 2009
Marilyn Spencer, Ph.D.
Professor of Economics
Chapter 3
Chapter 3: Supply & Demand
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. Examples:
•
•
•
•
Automobile market
Health care market
Labor market
Stock market
The Law of Demand
 Demand
how much of a good or service people will
purchase at any price during a specified time
period, other things being constant (ceteris
paribus)
The Law of Demand
 Law of Demand
Quantity demanded is inversely related to price,
holding other factors constant.
• Price #
Qd $
• Price $
Qd #
The Demand Schedule
 The demand schedule
Table relating prices to quantity demanded
We must consider
• Time dimension
• Constant-quality units
 Demand Curve
A graphical representation of the demand schedule
Negatively sloped line showing inverse
relationship between price and quantity
demanded, all else equal
Figure 3-1 The Individual Demand Schedule
and the Individual Demand Curve, Panel (b)
The Law of Demand (cont'd)
 What are we holding constant?
Income
Tastes and preferences
Price of other goods
Expectations
Many other factors
Shifts in Demand
 Scenario
Imagine the federal government gives every
student registered in a college, university, or
technical school in the United States a
notebook computer.
• If some factor other than price changes, we can
show its effect by moving the entire demand
curve, shifting the curve left or right.
Figure 3-4 A Shift in the Demand Curve
Suppose universities
prohibit the use of
notebook computers
Suppose the federal
government gives
every student a
notebook computer
Determinants of Demand
 Ceteris-Paribus Conditions
Determinants of the relationship between price
and quantity that are unchanged along a curve
Changes in these factors cause a curve
to shift
Shifts in Demand
 Determinants of market demand
Income
• Normal goods
• Inferior goods
The prices of related goods
• Substitutes
• Complements
Tastes and preferences (including demographics!)
Expectations
Number of buyers
Normal and Inferior Goods
 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
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.
Margarine & butter markets:
Pm down  Qd of margarine up
 D for butter down
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.
Ppc down  Qd of pc up  D for printers up
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.
A change in any determinant OTHER THAN PRICE
shifts the D curve, and we call this a change in demand.
This is not the same as a change in Qd from a change
in the price of the good.
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
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 $
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
Figure 3-8 Market Supply Schedule &Market
Supply Curve for Flash Memory Pen Drives,
Panel (b)
Shifts in Supply (cont'd)
 Determinants of supply
Cost of inputs
Technology and productivity
Taxes and subsidies
Price expectations (AND other expectations)
Number of firms in industry
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
(shifts left)
If costs decrease,
supply increases
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.
A change in a good’s own price leads to a
change in quantity supplied. This is a
movement along the same curve.
Figure 3-10 Putting Demand and
Supply Together, Panel (b)
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
Putting D & S Together (cont'd)
 Shortage
The situation when quantity demanded is
greater than quantity supplied
• Qd > Qs
A shortage exists at any price below the
market clearing price
Putting D & S Together (cont'd)
 Surplus
The situation when quantity supplied is greater
than quantity demanded
• Qd < Qs
A surplus will exist at any price above the
market clearing price
Assignments to be completed
before class February 5:
Read Chapter 4 & also read
Problems 4-1, 4-3 through 4-8,
and 4-11.