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4 Demand
PRINCIPLES OF
MICROECONOMICS
FOURTH EDITION
N. G R E G O R Y M A N K I W
PowerPoint® Slides
by Ron Cronovich
Price Quantity
Demand schedule: of of lattes
A table that shows the lattes demanded
relationship between the $0.00 16
price of a good and the 1.00 14
quantity demanded. 2.00 12
Example: 3.00 10
Helen’s demand for lattes. 4.00 8
5.00 6
Notice that Helen’s 6.00 4
preferences obey the
Law of Demand.
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 5
Helen’s Demand Schedule & Curve 0
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 11
0
Demand Curve Shifters: income
related
goods
Two goods are substitutes if
an increase in the price of one causes
an increase in demand for the other.
Example: pizza and hamburgers.
An increase in the price of pizza
increases demand for hamburgers,
shifting hamburger demand curve to the right.
Other examples: Coke and Pepsi,
laptops and desktop computers,
compact discs and music downloads
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 13
Demand Curve Shifters: prices of 0
related
goods
Two goods are complements if
an increase in the price of one causes
a fall in demand for the other.
Example: computers and software.
If price of computers rises, people buy fewer
computers, and therefore less software.
Software demand curve shifts left.
Other examples: college tuition and textbooks,
bagels and cream cheese, eggs and bacon
expectations
Expectations affect consumers’ buying
decisions.
Examples:
• If people expect their incomes to rise,
their demand for meals at expensive
restaurants may increase now.
• If the economy turns bad and people worry
about their future job security, demand for
new autos may fall now.
18
ACTIVE LEARNING 1:
A. price of iPods falls
Music downloads
Price of
music and iPods are
down- complements.
loads
A fall in price of
iPods shifts the
P1
demand curve for
music downloads
to the right.
D1 D2
Q1 Q2 Quantity of
music downloads
19
ACTIVE LEARNING 1:
B. price of music downloads falls
Price of
music
down- The D curve
loads does not shift.
P1 Move down along
curve to a point with
P2 lower P, higher Q.
D1
Q1 Q2 Quantity of
music downloads
20
ACTIVE LEARNING 1:
C. price of CDs falls
D2 D1
Q2 Q1 Quantity of
music downloads
21
0
Supply
Supply comes from the behavior of sellers.
The quantity supplied of any good is the
amount that sellers are willing and able to sell.
Law of supply: the claim that the quantity
supplied of a good rises when the price of the
good rises, other things equal
Price Quantity
P of of lattes
$6.00 lattes supplied
$5.00
$0.00 0
1.00 3
$4.00
2.00 6
$3.00 3.00 9
$2.00 4.00 12
5.00 15
$1.00
6.00 18
$0.00 Q
0 5 10 15
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 24
Market Supply versus Individual Supply
0
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 26
0
Supply Curve Shifters
The supply curve shows how price affects
quantity supplied, other things being equal.
These “other things” are non-price determinants
of supply.
Changes in them shift the S curve…
P Suppose the
$6.00 price of milk falls.
$5.00
At each price,
$4.00 the quantity of
$3.00 Lattes supplied
will increase
$2.00 (by 5 in this
$1.00 example).
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 29
0
Supply Curve Shifters: technology
Technology determines how much inputs are
required to produce a unit of output.
A cost-saving technological improvement has
same effect as a fall in input prices,
shifts the S curve to the right.
Supply curve
Draw a supply curve for tax
return preparation software.
Price of
tax return The S curve
S1
software
does not shift.
P1 Move down
along the curve
P2 to a lower P
and lower Q.
Q2 Q1 Quantity of tax
return software
35
ACTIVE LEARNING 2:
B. fall in cost of producing the
software
Price of
tax return
S1
The S curve
software S2
shifts to the
right:
P1
at each price,
Q increases.
Q1 Q2 Quantity of tax
return software
36
ACTIVE LEARNING 2:
C. professional preparers raise their
price
Price of
tax return
S1 This shifts the
software
demand curve for
tax preparation
software, not the
supply curve.
Quantity of tax
return software
37
0
Supply and Demand Together
P
$6.00 D S Equilibrium:
P has reached
$5.00
the level where
$4.00 quantity supplied
$3.00 equals
quantity demanded
$2.00
$1.00
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 38
0
Equilibrium price:
The price that equates quantity supplied
with quantity demanded
P
$6.00 D S D
P Q QS
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 39
0
Equilibrium quantity:
The quantity supplied and quantity demanded
at the equilibrium price
P
$6.00 D S D
P
S
Q Q
$5.00 $0 24 0
$4.00 1 21 5
$3.00 2 18 10
3 15 15
$2.00
4 12 20
$1.00
5 9 25
$0.00 Q 6 6 30
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 40
0
Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Example:
If P = $5,
$5.00
then
$4.00 QD = 9 lattes
$3.00 and
$2.00 QS = 25 lattes
$1.00
resulting in a surplus
of 16 lattes
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 41
0
Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting the price.
$4.00 This causes
$3.00 QD to rise and QS to fall…
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 42
0
Surplus:
when quantity supplied is greater than
quantity demanded
P
$6.00 D Surplus S Facing a surplus,
sellers try to increase
$5.00 sales by cutting the price.
$4.00 Falling prices cause
$3.00 QD to rise and QS to fall.
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 43
0
Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Example:
If P = $1,
$5.00
then
$4.00 QD = 21 lattes
$3.00 and
QS = 5 lattes
$2.00
resulting in a
$1.00 shortage of 16 lattes
$0.00 Shortage Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 44
0
Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise,
$3.00 …which reduces the
shortage.
$2.00
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 45
0
Shortage:
when quantity demanded is greater than
quantity supplied
P
$6.00 D S Facing a shortage,
sellers raise the price,
$5.00
causing QD to fall
$4.00 and QS to rise.
$3.00 Prices continue to rise
$2.00
until market reaches
equilibrium.
$1.00
Shortage
$0.00 Q
0 5 10 15 20 25 30 35
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 46
Three Steps to Analyzing Changes in
Eq’m
P1
D1
Q
Q1
quantity of
hybrid cars
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 48
EXAMPLE 1: A Change in Demand
EVENT TO BE
ANALYZED: P
Increase in price of gas. S1
STEP 1: P2
D curve shifts
because
STEP 2: price of gas P1
affects demand for
D shifts right
hybrids.
because
STEP 3: high gas
S curve
price doeshybrids
makes not D1 D2
The shift
shift, causes
because an
price
more attractive Q
increase
of gas in price
does not cars. Q1 Q2
relative to other
and quantity
affect cost of of
hybrid cars.
producing hybrids.
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 49
EXAMPLE 1: A Change in Demand
Notice: P
When P rises,
S1
producers supply
a larger quantity P2
of hybrids, even
though the S curve P1
has not shifted.
Always be careful
D1 D2
to distinguish b/w
a shift in a curve Q
Q1 Q2
and a movement
along the curve.
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 50
Terms for Shift vs. Movement Along
Curve
Change in supply: a shift in the S curve
• occurs when a non-price determinant of supply
changes (like technology or costs)
Change in the quantity supplied:
a movement along a fixed S curve
• occurs when P changes
Change in demand: a shift in the D curve
• occurs when a non-price determinant of
demand changes (like income or # of buyers)
Change in the quantity demanded:
a movement along a fixed D curve
• occurs when P changes
EXAMPLE 2: A Change in Supply
EVENT: New technology
reduces cost of P
producing hybrid cars. S1 S2
STEP 1:
S curve shifts
because
STEP 2: event affects P1
cost of production.
S shifts right P2
D curve does
because event not
STEPbecause
shift, 3:
reduces cost, D1
The shift causes
production technology
makes production Q
price
is not to
onefallof the Q1 Q2
more profitable at
and quantity
factors that to rise.
affect
any given price.
demand.
CHAPTER 4 THE MARKET FORCES OF SUPPLY AND DEMAND 52
EXAMPLE 3: A Change in Both Supply
STEP 3, cont.
P1
But if supply
increases more P2
than demand,
D1 D2
P falls.
Q
Q1 Q2
55
ACTIVE LEARNING 3:
A. fall in price of CDs
The market for
P music downloads
S1
STEPS
1. D curve shifts P1
2. D shifts left P2
3. P and Q both
fall.
D2 D1
Q
Q2 Q1
56
ACTIVE LEARNING 3:
B. fall in cost of
The market for
royalties music downloads
P
S1 S2
STEPS
1. S curve shifts P1
(royalties are part P2
2. S shifts right
of sellers’ costs)
3. P falls,
Q rises.
D1
Q
Q1 Q2
57
ACTIVE LEARNING 3:
C. fall in price of CDs
AND fall in cost of royalties
STEPS
1. Both curves shift (see parts A & B).
2. D shifts left, S shifts right.
3. P unambiguously falls.
Effect on Q is ambiguous:
The fall in demand reduces Q,
the increase in supply increases Q.
58
CONCLUSION:
How Prices Allocate Resources
One of the Ten Principles from Chapter 1:
Markets are usually a good way
to organize economic activity.
In market economies, prices adjust to balance
supply and demand. These equilibrium prices
are the signals that guide economic decisions
and thereby allocate scarce resources.