Ch 3 Demand and Supply
Outline
I.
Markets and Prices
A. A market is any arrangement that enables buyers and sellers to get information and do
business with each other.
B. A competitive market is a market that has many buyers and many sellers so no single
buyer or seller can influence the price.
C. The money price of a good is the amount of money needed to buy it. The relative price
of a good is the ratio of its money price to the money price of another good or a market
basket of goods. A relative price is an opportunity cost.
II. Demand
A. Wants are the unlimited desires or wishes people have for goods and services. Demand
reflects a decision about which wants to satisfy. The quantity demanded of a good or
service is the amount that consumers plan to buy during a particular time period, and at a
particular price.
B. The Law of Demand
1.
The law of demand states: Other things remaining the same, the higher the price of a
good, the smaller is the quantity demanded; and the lower the price of a good, the
greater is the quantity demanded.
2.
The law of demand results from:
a)
the substitution effect—when the relative price (opportunity cost) of a good or
service rises, people seek substitutes for it—and
b) the income effect—when the price of a good or service rises relative to income,
people cannot afford all the
things they previously bought.
C. Demand Curve and Demand Schedule
1.
The term demand refers to the
entire relationship between the
price of the good and quantity
demanded of the good.
a)
The demand curve shows
the relationship between the
quantity demanded of a good
and its price, holding all other
influences constant. Figure 3.1
shows a demand curve for
recordable compact discs (CDRs).
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b) A demand curve is also a willingness-and-ability-to-pay curve, which means that
a demand curve is a marginal benefit curve.
D. A Change in Demand
1.
When any factor that influences buying plans other than the price of the good changes,
there is a change in demand for that good. The quantity of the good that people
plan to buy changes at each and every price, so there is a new demand curve.
a)
When demand increases, the quantity that people plan to buy increases at each and
every price. The demand curve shifts rightward.
b) When demand decreases, the quantity that people plan to buy decreases at each
and every price. The demand curve shifts leftward.
DEMAND AND SUPPLY
2.
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The factors that change demand (summarized in Table 3.1 page 62) are:
a)
Prices of related goods: A
substitute is a good that
can be used in place of
another good. A
complement is a good that
is used in conjunction with
another good. Using the CDR example, the demand for
CD-Rs increases (decreases)
and its demand curve shifts
rightward (leftward) if the
price of a substitute for a
CD-R rises (falls) or if the
price of a complement of a
CD-R falls (rises). Figure 3.2
shows the shift in the
demand curve for CD-Rs
when the price of CD-R
burners—a complement—
falls.
b) Expected future prices: If
the price of a good is
expected to rise (fall) in the
future, current demand
increases (decreases) and the
demand curve shifts
rightward (leftward).
c)
Income: When income
increases (decreases),
consumers buy more (less)
of most goods and the
demand curve shifts rightward (leftward). A normal good is one for which
demand increases as income increases. An inferior good is one for which
demand decreases as income increases.
d) Expected future income: When expected future income increases, demand might
increase.
e)
Population: The larger (smaller) the population, the greater (smaller) is the
demand for all goods.
f)
Preferences: People with the same income have different demands if they have
different preferences.
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CHAPTER 3
E. A Change in the Quantity Demanded Versus a Change in Demand
Figure 3.3 illustrates the distinction
between a change in demand and a change
in the quantity demanded.
1.
When the price of the good changes
and everything else remains the same,
there is a movement along the
demand curve and a change in the
quantity demanded.
2.
When any other influence on buyers’
plans changes, there is a shift of the
demand curve and a change in
demand.
III. Supply
A. Resources and technology determine what
it is possible to produce. Supply reflects a
decision about which technologically
feasible items to produce. The quantity
supplied of a good or service is the amount that producers plan to sell during a given time
period at a particular price.
B. The Law of Supply
1.
The law of supply states: “Other things remaining the same, the higher the price of a
good, the greater is the quantity supplied; and the lower the price of a good, the
smaller is the quantity supplied.”
2.
The law of supply results because the marginal cost of producing a good or service
increases as the quantity produced increases (Chapter 2, page 35).
3.
Producers are willing to supply a good only if the price at least covers the marginal
cost of producing the good.
C. Supply Curve and Supply Schedule
1.
The term supply refers to the entire relationship between the quantity supplied and
the price of a good.
2
The supply curve shows the relationship
between the quantity supplied of a good and its price when
all other influences on producers’ planned sales remain the
same. Figure 3.4 shows the supply curve for CD-Rs.
3. The supply curve also shows the
producers’ minimum-supply price
for an additional unit to be
supplied. It shows the lowest
price at which someone is willing
to sell another unit.
D. A Change in Supply
1.
When any factor that influences
selling plans other than the price
of the good changes, there is a
DEMAND AND SUPPLY
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change in supply of that good. The quantity of the good that producers plan to sell
changes at each and every price, so there is a new supply curve.
a)
When supply increases, the quantity that producers plan to sell increases at each
and every price. The supply curve shifts rightward.
b) When supply decreases, the quantity that producers plan to sell decreases at each
and every price. The supply curve shifts leftward.
2.
The factors that change supply (summarized in Table 3.2 page 67) are:
a)
Prices of productive resources: If the price of resource used to produce a good
rises (falls), the minimum price that a supplier is willing to accept for producing
each quantity of that good rises (falls). So a rise (fall) in the price of productive
resources decreases (increases) supply and shifts the supply curve leftward
(rightward).
b) Prices of related goods produced: A substitute in production for a good is
another good that can be produced using the same resources. Goods are
compliments in production if they must be produced together. The supply of a
good increases (decreases) and its supply curve shifts rightward (leftward) if the
price of a substitute in production falls (rises) or if the price of a complement in
production rises (falls).
c)
Expected future prices: If the price of a good is expected to fall (rise) in the
future, current supply increases (decreases) and the supply curve shifts rightward
(leftward).
d) The number of suppliers: The larger the number of suppliers of a good, the greater
is the supply of the good. An increase (decrease) in the number of suppliers shifts
the supply curve rightward (leftward).
e)
Technology: Advances in technology create new products and lower the cost of
producing existing products, so they increase supply and shift the supply curve
rightward.
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CHAPTER 3
E. A Change in the Quantity Supplied Versus a Change in Supply
Figure 3.6 illustrates the distinction between
a change in supply and a change in the
quantity supplied.
1.
When the price of the good changes and
everything else remains the same, there
is a movement along the supply curve
and a change in the quantity
supplied.
2.
When one of the other factors that
influence selling plans changes, there is
a shift of the supply curve and a change
in supply.
IV. Market Equilibrium
A. Equilibrium is a situation in which opposing
forces balance each other. Equilibrium in a
market occurs when the price balances the
plans of buyers and sellers.
1.
The equilibrium price is the price at which the quantity demanded equals the
quantity supplied.
2.
The equilibrium quantity is the
quantity bought and sold at the
equilibrium price.
B. Price as a Regulator
1.
A market moves toward its
equilibrium because the price
regulates buying and selling plans
and the price adjusts when plans
don’t match.
2.
Figure 3.7 illustrates the equilibrium price and
equilibrium quantity in the market for CD-Rs.
C. Price Adjustments
1.
At prices below the equilibrium price, a shortage
arises, which forces the price up.
2. At prices above the equilibrium
price, a surplus arises, which
forces the price down.
3.
At the equilibrium price, buying
plans and selling plans agree, so
the price doesn’t change.
4.
The price coordinates the plans of
buyers and sellers, and at the
equilibrium price no one has an
incentive to change it.
DEMAND AND SUPPLY
V. Predicting Changes in Price and Quantity
A. A change in demand or a change in supply changes the equilibrium price and the
equilibrium quantity in a predictable way.
B. A Change in Demand
1.
Figure 3.8 shows the effect of
a change in demand.
2.
An increase in demand raises
the equilibrium price and
increases the equilibrium
quantity.
3.
A decrease in demand lowers
the equilibrium price and
decreases the equilibrium
quantity.
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CHAPTER 3
C. A Change in Supply
1.
Figure 3.9 shows the effect of a
change in supply.
2.
An increase in supply lowers
the equilibrium price and
increases the equilibrium
quantity.
3.
A decrease in supply raises the
equilibrium price and
decreases the equilibrium
quantity.
DEMAND AND SUPPLY
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D. A Change in Both Demand and Supply
A change both demand and supply changes the equilibrium price and the equilibrium
quantity but we need to know the relative magnitudes of the changes to predict some of the
consequences.
1.
Figure 3.10 shows the effects
of an increase in both demand
and supply. An increase
(decrease) in both demand
and supply increases
(decreases) the equilibrium
quantity but has an uncertain
effect on the equilibrium
price. If the increase
(decrease) in demand exceeds
the increase (decrease) in
supply, the price rises (falls).
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CHAPTER 3
2.
Figure 3.11 shows the effects
of a decrease in demand and an
increase in supply. An increase
(decrease) in supply and a
decrease (increase) in demand
lowers (raises) the equilibrium
price but has an uncertain
effect on the equilibrium
quantity. If the increase
(decrease) in supply exceeds
the decrease (increase) in
demand, the quantity increases
(decreases).