c h a p t e r c h a p t e r
threethree
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
Prepared by: Fernando & Yvonn Quijano
Where Prices Come From:The Interaction of Demand and Supply
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
2 of 40
The Demand Side of the Market
The Demand of an Individual Buyer
LEARNING OBJECTIVE
1
Quantity demanded The quantity of a good or service that aconsumer is willing and able to purchase at a given price.
3 - 1
Plotting a Price-QuantityCombination on a Graph
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
3 of 40
The Demand Side of the Market
Demand Schedules and Demand Curves
3 - 2
Kate’s Demand Schedule andDemand Curve
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
4 of 40
The Demand Side of the Market
Demand curve A curve that shows therelationship between the price of a product and thequantity of the product demanded.
Demand schedule A table showing therelationship between the price of a product and thequantity of the product demanded.
Demand Schedules and Demand Curves
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
5 of 40
The Demand Side of the Market
Individual Demand and Market Demand
Market demand The demand by all the consumersof a given good or service.
The Law of Demand
The Law of Demand Holding everything elseconstant, when the price of a product falls, the quantitydemanded of the product will increase, and when theprice of a product rises, the quantity demanded of theproduct will decrease.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
6 of 40
The Demand Side of the Market
What Explains the Law of Demand?
Substitution effect The change in thequantity demanded of a good that results from achange in price making the good more or lessexpensive relative to other goods that aresubstitutes.
Income effect The change in the quantitydemanded of a good that results from the effectof a change in the good’s price on consumerpurchasing power.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
7 of 40
The Demand Side of the Market
Holding Everything Else Constant:The Ceteris Paribus Condition
Ceteris paribus (“all else equal”) Therequirement that when analyzing therelationship between two variables—such asprice and quantity demanded—other variablesmust be held constant.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
8 of 40
The Demand Side of the Market
3 - 4
Shifting the Demand Curve
Holding Everything Else Constant:The Ceteris Paribus Condition
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
9 of 40
The Demand Side of the Market
Price of related goods
Substitutes Goods and services that can be used for thesame purpose.Complements Goods that are used together.
Income
Normal good A good for which the demand increases asincome rises and decreases as income falls.Inferior good A good for which the demand increases asincome falls, and decreases as income rises.
Tastes
Population and demographics
Demographics The characteristics of a population withrespect to age, race, and gender.
Expected future prices
Variables That Shift Market Demand
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
10 of 40
The Demand Side of the Market
Variables That Shift Market Demand
Variables That Shift MarketDemand Curves
3 - 1
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
11 of 40
The Demand Side of the Market
Variables That Shift Market Demand
Variables That Shift MarketDemand Curves
3 - 1 (continued)
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
12 of 40
The Demand Side of the Market
A Change in Demand versus a Change in QuantityDemanded
3 - 5
A Change in Demand versus aChange in the Quantity Demanded
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
13 of 40
The Supply Side of the Market
Quantity supplied The quantity of a good orservice that a firm is willing and able to supply at agiven price.
LEARNING OBJECTIVE
2
Supply schedule A table that shows therelationship between the price of a product and thequantity of the product supplied.
Supply curve A curve that shows the relationshipbetween the price of a product and the quantity of theproduct demanded.
Supply Schedules and Supply Curves
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
14 of 40
The Supply Side of the Market
3 - 6
Hewlett-Packard’s SupplySchedule and Supply Curve
Supply Schedules and Supply Curves
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
15 of 40
The Supply Side of the Market
The Law of Supply
Law of supply Holding everythingelse constant, increases in price causeincreases in the quantity supplied, anddecreases in price cause decreases inthe quantity supplied.
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
16 of 40
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.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
17 of 40
The Supply Side of the Market
Price of inputs
Technological change
A positive or negative change in the ability of afirm to produce a given level of output with agiven amount of inputs.
Prices of substitutes in production
Expected future prices
Number of firms in the market
Variables That Shift Supply
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
18 of 40
The Supply Side of the Market
Variables That Shift Supply
Variables That Shift MarketSupply Curves
3 - 2
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
19 of 40
The Supply Side of the Market
Variables That Shift Supply
Variables That Shift MarketSupply Curves
3 - 2 (continued)
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
20 of 40
The Supply Side of the Market
A Change in Supply versus a Change in Quantity Supplied
A Change in Supply versus aChange in the Quantity Supplied
3 - 9
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
21 of 40
Market Equilibrium: Putting Demand and Supply Together
LEARNING OBJECTIVE
3
Market equilibriumA situation in whichquantity demandedequals quantitysupplied.
Competitive marketequilibrium Amarket equilibriumwith many buyers andmany sellers.
3 - 10
Market Equilibrium
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
22 of 40
Market Equilibrium: Putting Demand and Supply Together
How Markets Eliminate Surpluses and Shortages
Surplus A situation inwhich the quantity supplied isgreater than the quantitydemanded.
Shortage A situation inwhich the quantity demandedis greater than the quantitysupplied.
3 - 11
The Effect of Surpluses andShortages on the Market Price
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
23 of 40
LEARNING OBJECTIVE
4
The Effect of Shifts in Supply on Equilibrium
3 - 12
The Effect of a Decreasein Supply on Equilibrium
The Effect of Demand and Supply Shifts on Equilibrium
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
24 of 40
The Falling Price of LargeFlat-Screen Televisions
Corning’s breakthroughspurred the manufacture ofLCD televisions in Taiwan,South Korea, and Japan,and an eventual decline inprice.
3 - 4
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
25 of 40
The Effect of Shifts in Demand on Equilibrium
3 - 13
The Effect of an Increase inDemand on Equilibrium
The Effect of Demand and Supply Shifts on Equilibrium
© 2006 Prentice Hall Business Publishing Economics R. Glenn Hubbard, Anthony Patrick O’Brien—1st ed.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
26 of 40
High Demand and Low Prices in the Lobster Market?
3 - 2
LEARNING OBJECTIVE
4
Supply and demand for lobster both increase during the summer, but the increasein 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.
CHAPTER 3: Where Prices Come From:The Interaction of Demand and Supply
27 of 40
Ceteris paribus (“all elseequal”)
Competitive marketequilibrium
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