Case Econ08 Ab.az.Ppt 03

7/17/2019 Case Econ08 Ab.az.Ppt 03

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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

Prepared by:

Fernando & YvonnQuijano

3

Chapter

Demand, Supply,and Market Equilibrium


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CHAPTER

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MarketE

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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

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CHAPTER

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Chapter Outline3

Demand, Supply,and Market Equilibrium

Firms and Households:The Basic Decision-Making UnitsInput Markets and Output Markets:

The Circular FlowDemand in Product/Output MarketsChanges in Quantity Demanded versusChanges in DemandPrice and Quantity Demanded: The Law of DemandOther Determinants of Household DemandShift of Demand versus Movementalong a Demand CurveFrom Household Demand to Market DemandSupply in Product/Output MarketsPrice and Quantity Supplied: The Law of SupplyOther Determinants of SupplyShift of Supply versus Movementalong a Supply CurveFrom Individual Supply to Market SupplyMarket EquilibriumExcess DemandExcess SupplyChanges in EquilibriumDemand and Supply in Product Markets:A Review

Looking Ahead: Markets andthe Allocation of Resources


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FIRMS AND HOUSEHOLDS:THE BASIC DECISION-MAKING UNITS

firmAn organization that transformsresources (inputs) into products(outputs). Firms are the primaryproducing units in a market economy.

entrepreneurA person who organizes,manages, and assumes the risks of afirm, taking a new idea or a new product

and turning it into a successful business.

householdsThe consuming units in aneconomy.


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INPUT MARKETS AND OUTPUT MARKETS:THE CIRCULAR FLOW

product or output marketsThemarkets in which goods and servicesare exchanged.

input or factor marketsThe markets inwhich the resources used to produceproducts are exchanged.


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FIGURE 3.1The Circular Flow of Economic Activity


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labor marketThe input/factor marketin which households supply work forwages to firms that demand labor.

capital marketThe input/factor marketin which households supply theirsavings, for interest or for claims tofuture profits, to firms that demand funds

to buy capital goods.


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land marketThe input/factor market inwhich households supply land or otherreal property in exchange for rent.

factors of productionThe inputs intothe production process. Land, labor, andcapital are the three key factors ofproduction.

Input and output markets are connected through the behavior of both firms and

households. Firms determine the quantities and character of outputs produced and the

types of quantities of inputs demanded. Households determine the types and quantities of

products demanded and the quantities and types of inputs supplied.


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DEMAND IN PRODUCT/OUTPUT MARKETS

% household&s decision about 'hat (uantity of a

particular output) or product) to demand depends on a

number of factors including*

+ ,heprice of the productin (uestion+ ,he income availableto the household

+ ,he household&s amount of accumulated

wealth

+ ,heprices of other productsa-ailable to the

household

+ ,he household&s tastes and preferences

+ ,he household&s expectations about future

income) 'ealth) and prices


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quantity demandedThe amount(number of units) of a product that a

household would buy in a given period ifit could buy all it wanted at the currentmarket price.


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The most important relationship in

individual markets is that betweenmarket price and quantity demanded.

CHANGES IN QUANTITY DEMANDEDVERSUS CHANGES IN DEMAND

Changes in the price of a product affect the quantity demandedper period. Changes in any

other factor, such as income or preferences, affect demand. Thus, we say that an increase

in the price of CocaCola is likely to cause a decrease in the quantity of Coca-Cola

demanded. However, we say that an increase in income is likely to cause an increase in

the demand for most goods.


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PRICE AND QUANTITY DEMANDED:THE LAW OF DEMAND

demand schedule

A table showing howmuch of a givenproduct a householdwould be willing to

buy at differentprices.

TABLE 3.1 Annas Demand Schedule

for Telephone Calls

PRICE (PER CALL)

QUANTITY DEMANDED

(CALLS PER MONTH)

$ 0 30

.50 25

3.50 7

7.00 3

10.00 1

15.00 0


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demand curveA graph illustrating howmuch of a given product a householdwould be willing to buy at different prices.

FIGURE 3.2Annas Demand Curve


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law of demandThe negativerelationship between price and quantity

demanded: As price rises, quantitydemanded decreases. As price falls,quantity demanded increases.

Demand Curves Slope Downward

It is reasonable to e!pect quantity demanded to fall when price rises, ceteris paribus,

and to e!pect quantity demanded to rise when price falls, ceteris paribus. "emand

curves have a negative slope.


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Other Properties of Demand Curves

#s long as households have limited incomes and wealth, all demand curves will intersect

the price a!is. For any commodity, there is always a price above which a household

will not, or cannot, pay. $ven if the good or service is very important, all households

are ultimately constrained, or limited, by income and wealth.

That demand curves intersect the quantity a!is is a matter of common sense. "emand

in a given period of time is limited, if only by time, even at a %ero price.

Two additional things are notable aboutAnnas demand curve.


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To summarize what we know about the shape ofdemand curves:

1.They have a negative slope. An increase inprice is likely to lead to a decrease inquantity demanded, and a decrease in priceis likely to lead to an increase in quantitydemanded.

2.They intersect the quantity (X-) axis, a resultof time limitations and diminishing marginalutility.

3.They intersect the price (Y-) axis, a result oflimited incomes and wealth.


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OTHER DETERMINANTS OF HOUSEHOLD DEMAND

incomeThe sum of all a households

wages, salaries, profits, interest payments,rents, and other forms of earnings in agiven period of time. It is a flow measure.

Income and Wealth

wealth or net worthThe total value ofwhat a household owns minus what itowes. It is a stock measure.


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normal goodsGoods for which demandgoes up when income is higher and forwhich demand goes down when income

is lower.

inferior goodsGoods for which demandtends to fall when income rises.


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Prices of Other Goods and Services

substitutesGoods that can serve asreplacements for one another: when the

price of one increases, demand for theother goes up.

perfect substitutesIdentical products.

complements, complementary goodsGoods that go together: a decrease inthe price of one results in an increase indemand for the other, and vice versa.


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Tastes and Preferences

Perfect substitutes? On a hotday in the desert, one brand is

as good as another.

Expectations


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SHIFT OF DEMAND VERSUS MOVEMENT ALONG

A DEMAND CURVE

TABLE 3.2 Shift of Annas Demand Schedule

Due to increase in Income

SCHEDULE D0 SCHEDULE D1

Price

(Per Call)

Quantity

Demanded

(Calls Per Month

at an Income of

$300 Per Month)

Quantity

Demanded

(Calls Per Month

at an Income of

$600 Per Month)$ 0 30 35

.50 25 33

3.50 7 18

7.00 3 12

10.00 1 7

15.00 0 2

20.00 0 0

FIGURE 3.3Shift of a Demand Curve

Following a Rise in Income


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shift of a demand curveThe change thattakes place in a demand curve correspondingto a new relationship between quantitydemanded of a good and price of that good.

The shift is brought about by a change in theoriginal conditions.

movement along a demand curveThe changein quantity demanded brought about by a change

in price.Change in price of a good or service

leads to

Change in quantity demanded&movement along the demand curve'.

Change in income, preferences, or prices of other goods or services

leads to

Change in demand &shift of the demand curve'.


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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2" of !


FIGURE 3.4Shifts versus Movementalong a Demand Curve


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FROM HOUSEHOLD DEMAND TOMARKET DEMAND

market demandThe sum of all the

quantities of a good or service demandedper period by all the households buying inthe market for that good or service.


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FIGURE 3.5Deriving Market Demand from Individual Demand Curves


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SUPPLY IN PRODUCT/OUTPUT MARKETS

profitThe difference between revenuesand costs.

Successful firms make profits because theyare able to sell their products for more than itcosts to produce them.


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PRICE AND QUANTITY SUPPLIED:THE LAW OF SUPPLY

quantity suppliedThe amount of aparticular product that a firm would be

willing and able to offer for sale at aparticular price during a given time period.


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TABLE 3.3 Clarence Browns Supply Schedule

for Soybeans

PRICE (PER BUSHEL)

QUANTITY SUPPLIED

(BUSHELS PER MONTH)

$1.50 0

1.75 10,000

2.25 20,000

3.00 30,000

4.00 45,000

5.00 45,000

supply scheduleA table showing howmuch of a product firms will sell at differentprices.


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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 2$ of !


law of supplyThe positive relationshipbetween price and quantity of a goodsupplied: An increase in market price will

lead to an increase in quantity supplied,and a decrease in market price will lead toa decrease in quantity supplied.


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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair "0 of !


supply curveA graph illustrating howmuch of a product a firm will sell atdifferent prices.

FIGURE 3.6Clarence BrownsIndividual Supply Curve


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OTHER DETERMINANTS OF SUPPLY

The Cost of Production

Regardless of the price that a firm cancommand for its product, revenue mustexceed the cost of producing the output for thefirm to make a profit.


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The Prices of Related Products

A soybean farm is a producer

that supplies soybeans to themarket.

#ssuming that its ob(ective is to ma!imi%e profits, a firm)s decision about what quantity

of output, or product, to supply depends on

*. The price of the good or service

+. The cost of producing the product, which in turn depends on

The price of required inputs &labor, capital, and land'

The technologies that can be used to produce the product

-. The prices of related products


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SHIFT OF SUPPLY VERSUS MOVEMENT ALONGA SUPPLY CURVE

movement along a supply curveThechange in quantity supplied brought about

by a change in price.

shift of a supply curveThe change thattakes place in a supply curve corresponding

to a new relationship between quantitysupplied of a good and the price of thatgood. The shift is brought about by achange in the original conditions.


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TABLE 3.4Shift of Supply Schedule for Soybeans

Following Development of a New

Disease-Resistant Seed Strain

SCHEDULE D0 SCHEDULE D1

Price

(Per Bushel)

Quantity Supplied

(Bushels Per Year

Using Old Seed)

Quantity Supplied

(Bushels Per Year

Using New Seed)$1.50 0 5,000

1.75 10,000 23,000

2.25 20,000 33,000

3.00 30,000 40,000

4.00 45,000 54,000

5.00 45,000 54,000

FIGURE 3.7Shift of Supply Curve for SoybeansFollowing Development of a NewSeed Strain


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Change in price of a good or service

leads to

Change in quantity supplied&movement along a supply curve'.

Change in total cost, technology, or prices of other goods or services

leads to

Change in supply &shift of a supply curve'.

As with demand, it is very important todistinguish between movements along supply

curves (changes in quantity supplied) andshifts in supply curves (changes in supply):


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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair "! of !


FROM INDIVIDUAL SUPPLY TO MARKET SUPPLY

market supplyThe sum of all that is

supplied each period by all producers of asingle product.


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FIGURE 3.8Deriving Market Supply from Individual Firm Supply Curves


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MARKET EQUILIBRIUM

equilibriumThe condition that existswhen quantity supplied and quantity

demanded are equal. At equilibrium, thereis no tendency for price to change.


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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair "$ of !

MARKET EQUILIBRIUM

EXCESS DEMANDexcess demand or shortageThe conditionthat exists when quantity demanded exceedsquantity supplied at the current price.

Bidding at an auction starts

with excess demand and endsup with quantity demanded andquantity supplied equal.


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MARKET EQUILIBRIUM

FIGURE 3.9Excess Demand, or Shortage

hen quantity demanded e!ceeds quantity supplied, price tends to rise. hen the price in

a market rises, quantity demanded falls and quantity supplied rises until an equilibrium is

reached at which quantity demanded and quantity supplied are equal.


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2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair . of !

MARKET EQUILIBRIUM

EXCESS SUPPLY

excess supply or surplusThe conditionthat exists when quantity supplied exceeds

quantity demanded at the current price.


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MARKET EQUILIBRIUM

FIGURE 3.10Excess Supply, or Surplus

hen quantity supplied e!ceeds quantity demanded at the current price, the price tends to

fall. hen price falls, quantity supplied is likely to decrease and quantity demanded is

likely to increase until an equilibrium price is reached where quantity supplied and quantity

demanded are equal.


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MARKET EQUILIBRIUM

CHANGES IN EQUILIBRIUM

When supply and demand curves shift, theequilibrium price and quantity change.

FIGURE 3.11The Coffee Market: A Shiftof Supply and Subsequent

Price Adjustment


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MARKET EQUILIBRIUM

FIGURE 3.12Examples of Supply

and Demand Shiftsfor Product X

DEMANDANDSUPPLYINPRODUCTMARKETS:


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Market

Equilibrium

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair # of !

DEMAND AND SUPPLY IN PRODUCT MARKETS:A REVIEW

*. # demand curve shows how much of a product a household would buy if it could buy

all it wanted at the given price. # supply curve shows how much of a product a firm

would supply if it could sell all it wanted at the given price.

+. /uantity demanded and quantity supplied are always per time period0that is, per day,

per month, or per year.

-. The demand for a good is determined by price, household income and wealth, prices

of other goods and services, tastes and preferences, and e!pectations.

1. The supply of a good is determined by price, costs of production, and prices of related

products. Costs of production are determined by available technologies of production

and input prices.

2. 3e careful to distinguish between movements along supply and demand curves and

shifts of these curves. hen the price of a good changes, the quantity of that good

demanded or supplied changes0that is, a movement occurs along the curve. hen

any other factor changes, the curve shifts, or changes position.

4. 5arket equilibrium e!ists only when quantity supplied equals quantity demanded at

the current price.

Here are some important points to remember about the mechanics

of supply and demand in product markets:

LOOKINGAHEAD:MARKETSANDTHE


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Market

Equilibrium

2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair ! of !

LOOKING AHEAD: MARKETS AND THEALLOCATION OF RESOURCES

You can already begin to see how marketsanswer the basic economic questions of whatis produced, how it is produced, and who getswhat is produced.

+ /emand cur-es reflect 'hat people are'illing and able to pay for products they areinfluenced by incomes) 'ealth) preferences)prices of other goods) and e1pectations

+ Firms in business to ma3e a profit ha-e agood reason to choose the best a-ailable

technology4lo'er costs mean higherprofits

+ 5hen a good is in short supply) price rises%s it does) those 'ho are 'illing and able tocontinue buying do so others stop buying


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Market

Equilibrium

capital marketcomplements, complementary

goods

demand curve

demand schedule

entrepreneur

equilibriumexcess demand or shortage

excess supply or surplus

factors of production

firm

households

incomeinferior goodsinput or factor marketslabor marketland marketlaw of demand

law of supplymarket demand

market supply

movement along a demand curve

movement along a supply curve

normal goods

perfect substitutesproduct or output markets

profit

quantity demanded

quantity supplied

shift of a demand curve

shift of a supply curve

substitutes

supply curve

supply schedule

wealth or net worth

REVIEW TERMS AND CONCEPTS

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Case Econ08 Ab.az.Ppt 03