chapter
three
Where Prices Come From:
The Interaction of Demand and Supply
Prepared by: Fernando & Yvonn Quijano
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
1 LEARNING OBJECTIVE
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
The Demand of an Individual Buyer
3-1
Plotting a Price-Quantity
Combination on a Graph
Quantity demanded The quantity of a good or service that a
consumer is willing and able to purchase at a given price.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
2 of 40
The Demand Side of the Market
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
Demand Schedules and Demand Curves
3-2
Kate’s Demand Schedule and
Demand Curve
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
3 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
Demand Schedules and Demand Curves
Demand curve A curve that shows the
relationship between the price of a product and the
quantity of the product demanded.
Demand schedule A table showing the
relationship between the price of a product and the
quantity of the product demanded.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
4 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
Individual Demand and Market Demand
Market demand The demand by all the consumers
of a given good or service.
The Law of Demand
The Law of Demand Holding everything else
constant, when the price of a product falls, the quantity
demanded of the product will increase, and when the
price of a product rises, the quantity demanded of the
product will decrease.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
5 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
What Explains the Law of Demand?
Substitution effect The change in the
quantity demanded of a good that results from a
change in price making the good more or less
expensive relative to other goods that are
substitutes.
Income effect The change in the quantity
demanded of a good that results from the effect
of a change in the good’s price on consumer
purchasing power.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
6 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
Holding Everything Else Constant:
The Ceteris Paribus Condition
Ceteris paribus (“all else equal”) The
requirement that when analyzing the
relationship between two variables—such as
price and quantity demanded—other variables
must be held constant.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
7 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
Holding Everything Else Constant:
The Ceteris Paribus Condition
3-4
Shifting the Demand Curve
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
8 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
Variables That Shift Market Demand
 Price of related goods
Substitutes Goods and services that can be used for the
same purpose.
Complements Goods that are used together.
 Income
Normal good A good for which the demand increases as
income rises and decreases as income falls.
Inferior good A good for which the demand increases as
income falls, and decreases as income rises.
 Tastes
 Population and demographics
Demographics The characteristics of a population with
respect to age, race, and gender.
 Expected future prices
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
9 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
Variables That Shift Market Demand
3-1
Variables That Shift Market
Demand Curves
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
10 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
Variables That Shift Market Demand
3 - 1 (continued)
Variables That Shift Market
Demand Curves
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
11 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Demand Side of the Market
A Change in Demand versus a Change in Quantity
Demanded
3-5
A Change in Demand versus a
Change in the Quantity Demanded
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
12 of 40
2 LEARNING OBJECTIVE
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Supply Side of the Market
Quantity supplied The quantity of a good or
service that a firm is willing and able to supply at a
given price.
Supply Schedules and Supply Curves
Supply schedule A table that shows the
relationship between the price of a product and the
quantity of the product supplied.
Supply curve A curve that shows the relationship
between the price of a product and the quantity of the
product demanded.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
13 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Supply Side of the Market
Supply Schedules and Supply Curves
3-6
Hewlett-Packard’s Supply
Schedule and Supply Curve
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
14 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Supply Side of the Market
The Law of Supply
Law of supply Holding everything
else constant, increases in price cause
increases in the quantity supplied, and
decreases in price cause decreases in
the quantity supplied.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
15 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Supply Side of the Market
Variables That Shift Supply
3-8
Shifting the Supply Curve
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
16 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Supply Side of the Market
Variables That Shift Supply
 Price of inputs
 Technological change
A positive or negative change in the ability of a
firm to produce a given level of output with a
given amount of inputs.
 Prices of substitutes in production
 Expected future prices
 Number of firms in the market
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
17 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Supply Side of the Market
Variables That Shift Supply
3-2
Variables That Shift Market
Supply Curves
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
18 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Supply Side of the Market
Variables That Shift Supply
3 - 2 (continued)
Variables That Shift Market
Supply Curves
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
19 of 40
The Supply Side of the Market
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
A Change in Supply versus a Change in Quantity Supplied
3-9
A Change in Supply versus a
Change in the Quantity Supplied
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
20 of 40
3 LEARNING OBJECTIVE
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
Market Equilibrium: Putting Demand and Supply Together
3 - 10
Market Equilibrium
Market equilibrium
A situation in which
quantity demanded
equals quantity
supplied.
Competitive market
equilibrium A
market equilibrium
with many buyers and
many sellers.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
21 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
Market Equilibrium: Putting Demand and Supply Together
How Markets Eliminate Surpluses and Shortages
3 - 11
Surplus A situation in
which the quantity supplied is
greater than the quantity
demanded.
The Effect of Surpluses and
Shortages on the Market Price
Shortage A situation in
which the quantity demanded
is greater than the quantity
supplied.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
22 of 40
4 LEARNING OBJECTIVE
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Supply on Equilibrium
3 - 12
The Effect of a Decrease
in Supply on Equilibrium
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
23 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
3-4
The Falling Price of Large
Flat-Screen Televisions
Corning’s breakthrough
spurred the manufacture of
LCD televisions in Taiwan,
South Korea, and Japan,
and an eventual decline in
price.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
24 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
The Effect of Demand and Supply Shifts on Equilibrium
The Effect of Shifts in Demand on Equilibrium
3 - 13
The Effect of an Increase in
Demand on Equilibrium
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
25 of 40
3-2
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
4 LEARNING OBJECTIVE
High Demand and Low Prices in the Lobster Market?
Supply and demand for lobster both increase during the summer, but the increase
in supply is greater than the increase in demand, therefore, equilibrium price falls.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
26 of 40
CHAPTER 3: Where Prices Come From:
The Interaction of Demand and Supply
Ceteris paribus (“all else
equal”)
Competitive market
equilibrium
Complements
Demand curve
Demand schedule
Demographics
Income effect
Inferior good
Law of demand
Law of supply
Market demand
Market equilibrium
Normal good
Quantity demanded
Quantity supplied
Shortage
Substitutes
Substitution effect
Supply curve
Supply schedule
Surplus
Technological change
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
27 of 40