© 2014 Pearson Education, Inc. Publishing as Prentice Hall CASE FAIR OSTER PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N PEARSON Prepared

© 2014 Pearson Education, Inc. Publishing as Prentice Hall

CASE FAIR OSTER

PRINCIPLES OF

MICROECONOMICSE L E V E N T H E D I T I O N

PEARSONPrepared by: Fernando Quijano w/Shelly Tefft

2 of 50© 2014 Pearson Education, Inc. Publishing as Prentice Hall

CHAPTER OUTLINE

3Demand, Supply, andMarket Equilibrium

Firms and Households: The Basic Decision-Making Units

Input Markets and Output Markets: The Circular FlowDemand in Product/Output Markets

Changes in Quantity Demanded versus Changes in DemandPrice and Quantity Demanded: The Law of DemandOther Determinants of Household DemandShift of Demand versus Movement Along the Demand CurveFrom Household Demand to Market Demand

Supply in Product/Output MarketsPrice and Quantity Supplied: The Law of SupplyOther Determinants of SupplyShift of Supply versus Movement Along the Supply CurveFrom Individual Supply to Market Supply

Market EquilibriumExcess DemandExcess SupplyChanges in Equilibrium

Demand and Supply in Product Markets: A ReviewLooking Ahead: Markets and the Allocation of Resources


firm An organization that transforms resources (inputs) into products (outputs). Firms are the primary producing units in a market economy.

entrepreneur A person who organizes, manages, and assumes the risks of a firm, taking a new idea or a new product and turning it into a successful business.

households The consuming units in an economy.

Firms and Households: The Basic Decision-Making Units


FIGURE 3.1 The Circular Flow of Economic Activity

Diagrams like this one show the circular flow of economic activity, hence the name circular flow diagram. Here goods and services flow clockwise: Labor services supplied by households flow to firms, and goods and services produced by firms flow to households.Payment (usually money) flows in the opposite (counterclockwise) direction: Payment for goods and services flows from households to firms, and payment for labor services flows from firms to households.Note: Color Guide—In Figure 3.1 households are depicted in blue and firms are depicted in red. From now on all diagrams relating to the behavior of households will be blue or shades of blue and all diagrams relating to the behavior of firms will be red or shades of red. The green color indicates a monetary flow.


product or output markets The markets in which goods and services are exchanged.

input or factor markets The markets in which the resources used to produce goods and services are exchanged.

labor market The input/factor market in which households supply work for wages to firms that demand labor.

capital market The input/factor market in which households supply their savings, for interest or for claims to future profits, to firms that demand funds to buy capital goods.

land market The input/factor market in which households supply land or other real property in exchange for rent.

Input Markets and Output Markets: The Circular Flow


Market◦ A group of buyers and sellers of a particular good

or service Can be highly organized

E.g.: agricultural commodities Can be less organized

E.g.: ice cream, espresso carts, Freemont Sunday market

6


Market Types◦ 1. Perfect Competition

No individual buyer/seller has a significant influence on market price

◦ 2. Monopoly Single producer of good; chooses output (quantity

supplied) that max’es profit◦ 3. Oligopoly

Small number of suppliers; may “collude” to set price like a monopolist

◦ 4. Monopolistic Competition Compete on both price and quality against

several producers

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Perfectly competitive market◦ Each buyer/seller has a negligible impact on

market price◦ Why? (Key assumptions)

Goods offered for sale - exactly the same Buyers and sellers – numerous

No single buyer or seller has any influence over the market price

Must accept the price determined on the market Price takers

At the market price Buyers - buy all they want Sellers - sell all they want

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Basic Vocabulary◦ Quantity demanded

Amount of a good purchased at a given price A point on the demand curve

◦ Demand The entire schedule (curve)

Quantity demanded at various prices

◦ Difference between a change in quantity demanded and demand Movement along the Demand Curve (change in

price) versus movement of the D Curve

9


Demand schedule - a table◦ Relationship between

Price of a good Quantity demanded

Demand curve - a graph◦ Relationship between

Price of a good Quantity demanded

Individual demand vs Market Demand◦ One individual vs all people in buying the good

10


A household’s decision about what quantity of a particular output, or product, to demand depends on a number of factors, including:

The price of the product in question.

The income available to the household.

Normal good – buy/want more as income increases

Inferior good - buy less as income increases

The prices of other products (substitutes or complements) available to the

household.

The household’s expectations about future income and prices.

The household’s tastes and preferences.

Demand in Product/Output Markets


TABLE 3.1 Alex’s Demand Schedulefor Gasoline

Price(per Gallon)

Quantity Demanded(Gallons per Week)

$ 8.00 0

7.00 2

6.00 3

5.00 5

4.00 7

3.00 10

2.00 14

1.00 20

0.00 26

FIGURE 3.2 Alex’s Demand Curve

The relationship between price (P) and quantity demanded (q) presented graphically. •negative slope, lower prices cause quantity demanded to increase.


1. They have a negative slope.

2. They intersect the quantity (X) axis as a result of time limitations and diminishing marginal value of the good.

3. They intersect the price (Y) axis, a result of limited income and wealth.

Other Properties of Demand Curves

The actual shape of an individual household demand curve—whether it is steep or flat, whether it is bowed in or bowed out—depends on the unique tastes and preferences of the household and other factors.


Shifts in demand◦ Increase in demand

Any change that increases the quantity demanded at every price

Demand curve shifts right◦ Decrease in demand

Any change that decreases the quantity demanded at every price

Demand curve shifts left

14


Shifts versus Movement Along a Demand Curve – Change in Price of Related Goods

1. Along the demand curve: • price of hamburger rises, the quantity of hamburger demanded declines

2.Movement of the demand curve: (change in price of substitute or complement)• same price rise for hamburger shifts the demand for chicken (a substitute

for hamburger) to the right and the demand for ketchup (a complement to hamburger) to the left.


TABLE 3.2 Shift of Alex’s Demand Schedule Due to Increase in Income

Schedule D0 Schedule D1

Price(per

Gallon)

Quantity Demanded(Gallons per Week at an

Income of $500 per Week)

Quantity Demanded(Gallons per Week at

an Income of $700 per Week)

$ 8.00 0 3

7.00 2 5

6.00 3 7

5.00 5 10

4.00 7 12

3.00 10 15

2.00 14 19

1.00 20 24

0.00 26 30

Shift of a Demand Curve following a Rise in Income

Increase in income changes the relationship between price and quantity; there is a shift of the demand curve, in this case from D0 to D1. Gasoline is a normal good.

Shift of Demand versus Movement Along a Demand Curve


normal goods Goods for which demand goes up when income is higher and for which demand goes down when income is lower.

inferior goods Goods for which demand tends to fall when income rises.


FIGURE 3.4 Shifts versus Movement Along a Demand Curve

a. When income increases, the demand for inferior goods shifts to the leftand the demand for normal goods shifts to the right.


Variables that can shift the demand curve◦ Prices of related goods (substitutes or

complements)◦ Income◦ Number of buyers(market vs individual

demand)◦ Expectations◦ Individual Tastes and Preferences

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Market demand◦ Sum of all individual demands for a good or

service Market demand curve

◦ Sum - individual demand curves horizontally◦ Total quantity demanded of a good varies

As the price of the good varies All other factors that affect how much consumers

want to buy are hold constant

20


2

21

Price of ice-cream cone

Catherine

Nicholas

Market

$0.000.501.001.502.002.503.00

121086420

+ 7654321

= 19161310741

The quantity demanded in a market is the sum of the quantities demanded by all the

buyers at each price. Thus, the market demand curve is found by adding horizontally

the individual demand curves. At a price of $2.00, Catherine demands 4 ice-cream

cones, and Nicholas demands 3 ice-cream cones. The quantity demanded in the

market at this price is 7 cones.


2

22

DCatherine

0 1210 1191 2 3 4 5 6 7 8

Quantity of Ice-Cream Cones

$3.00

2.50

2.00

1.50

1.00

0.50

Price of

Ice

Cream

Cones

Catherine’s

demand

DNicholas

0 1 2 3 4 5 6 7

Quantity of

Ice-Cream Cones

$3.00

2.50

2.00

1.50

1.00

0.50

Price of

Ice

Cream

Cones

Nicholas’s

demand+ =

DMarket

0 182 4 6 8 10 12 14 16

Quantity of Ice-Cream Cones

$3.00

2.50

2.00

1.50

1.00

0.50

Price of

Ice

Cream

Cones

Market

demand


FIGURE 3.5 Deriving Market Demand from Individual Demand Curves

Total demand in the marketplace is simply the sum of the demands of all the households shopping in a particular market. It is the sum of all the individual demand curves—that is, the sum of all the individual quantities demanded at each price.


What you decide to buy today certainly depends on today’s prices and your current income and wealth.

There are many examples of the ways expectations affect demand.

Increasingly, economic theory has come to recognize the importance of expectations.

It is important to understand that demand depends on more than just current incomes, prices, and tastes.

Expectations


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© 2014 Pearson Education, Inc. Publishing as Prentice Hall CASE FAIR OSTER PRINCIPLES OF MICROECONOMICS E L E V E N T H E D I T I O N PEARSON Prepared